-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ItKLEmoz0yDflfxk2gTlqntYDaV0rFOzd8SiyFvB8EOa/OUMl0DJQrpDMc96aICk u2/+V3DOcRODi3kyH/XC0g== 0000950133-98-001312.txt : 19980408 0000950133-98-001312.hdr.sgml : 19980408 ACCESSION NUMBER: 0000950133-98-001312 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980407 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVALON PROPERTIES INC CENTRAL INDEX KEY: 0000911536 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 061379111 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-12452 FILM NUMBER: 98589077 BUSINESS ADDRESS: STREET 1: 15 RIVER ROAD STREET 2: SUITE 210 CITY: WILTON STATE: CT ZIP: 06897 BUSINESS PHONE: 2037616500 MAIL ADDRESS: STREET 1: 15 RIVER ROAD STREET 2: SUITE 210 CITY: WILTON STATE: CT ZIP: 06897 10-K/A 1 AVALON PROPERTIES, INC. FORM 10-K, AMENDMENT NO. 1 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K/A AMENDMENT NO. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission file number 1-12452 AVALON PROPERTIES, INC. (Exact name of registrant as specified in its charter) ---------------------- Maryland 06-1379111 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15 River Road Wilton, Connecticut 06897 (Address of principal executive offices) (203) 761-6500 (Registrant's telephone number, including area code) ---------------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share New York Stock Exchange (Title of each class) (Name of each exchange on which registered) 9% Series A Cumulative Redeemable Preferred Stock, New York Stock Exchange par value $.01 per share (Name of each exchange on which registered) (Title of each class) 8.96% Series B Cumulative Redeemable Preferred Stock, New York Stock Exchange par value $.01 per share (Name of each exchange on which registered) (Title of each class)
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant, as of March 16, 1998, was $1,207,907,652. The number of shares of the Registrant's Common Stock, par value $.01 per share, outstanding as of March 16, 1998 was 43,139,559. Documents Incorporated by Reference ----------------------------------- None ================================================================================ 2 Note: This amendment is filed to correct certain typographical errors contained in the Issuer's Annual Report on Form 10-K filed on March 30, 1998, and amends and restates that filing in its entirety. This amended and restated Annual Report on Form 10-K does not reflect any change in the Issuer's reported consolidated financial condition or results of operations. 3 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 2. COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . 42 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT . . . . . . . . . . . . . . . . . . . 43 ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
4 PART I This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statement. Certain factors that might cause such a difference are discussed in the section entitled "Forward-Looking Statements" on page 26 of this Form 10-K. ITEM 1. BUSINESS Geographic Expansion and Merger The Company continuously evaluates distinct geographical regions in the U.S. for attractive investment opportunities. After careful analysis, the Company has determined that selected markets in the Midwest region of the U.S. have similar high barrier-to-entry characteristics similar to those experienced in the Mid-Atlantic and Northeast markets. As a result, the Company has expanded into the Midwest with the purchase of a portion of the Trammell Crow Residential - Midwest ("TCR/MW") portfolio and has separately identified and acquired four additional communities in the Midwest unrelated to the TCR/MW portfolio. On December 22, 1997, the Company and Avalon DownREIT V, L.P., a limited partnership formed by the Company (the "Operating Partnership"), completed the principal phase of the acquisitions contemplated by a Contribution and Exchange Agreement (the "Contribution Agreement") with TCR/MW, pursuant to which the Company acquired six apartment communities (the "TCR Communities") containing a total of 1,625 apartment homes for approximately $137,117,000 and the Company expects to acquire two additional apartment communities (these two apartment communities are referred to as the "Pending Midwest Communities," and, together with the TCR Communities, are referred to as the "New Communities") containing a total of 704 apartment homes. In connection with the acquisition of the TCR Communities, the Company assumed tax-exempt floating rate debt with an outstanding principal balance of approximately $27,305,000 maturing on December 1, 2025. The New Communities are located in the Chicago, Cincinnati, Indianapolis, Minneapolis and St. Louis metropolitan areas. The Company expects to acquire one of the Pending Midwest Communities during the second quarter of 1998 and to acquire the other Pending Midwest Community currently under construction in 1999. The Company also acquired certain third-party management contracts and the right to acquire from an unrelated third-party an undeveloped parcel of land on which the Company expects to build one apartment community. In addition to the acquisition of the TCR Communities, the Company has separately identified and purchased four additional communities in the Midwest containing a total of 1,383 apartment homes for an aggregate purchase price of $84,392,000. Management believes the Midwest acquisitions will facilitate the following goals: - establish a growth platform in the high barrier-to-entry markets of the Midwest at a lower cost than could be achieved in such markets through single property acquisitions or development; - allow the Company to enter markets in the Midwest with a critical mass of apartment communities that have internal earnings growth potential consistent with the Company's existing portfolio; - provide important economic diversification of the Company's portfolio of apartment communities; - generate a pipeline of acquisition and development communities; and - produce immediate earnings growth and accelerate long-term earnings growth. On March 9, 1998, the Company announced that it has entered into a definitive strategic merger agreement with Bay Apartment Communities, Inc. ("Bay"), pursuant to which the Company will be merged into Bay, the surviving entity (the "Merger"). Under the terms of the agreement, each outstanding common share of the Company will be exchanged for 0.7683 shares of common stock of Bay. The Merger will be structured as a purchase of the Company by Bay for accounting purposes. The Merger is expected to close in June 1998 and is subject to the approval of both companies' shareholders and other customary regulatory conditions and there can be no assurance that the Merger will be consummated or that the required conditions 1 5 to closing will be met. The surviving company, to be named Avalon Bay Communities, Inc. (the "New Company"), will own 140 apartment communities containing 40,506 apartment homes in 29 markets in 15 states and the District of Columbia. On March 9, 1998, the Company announced that it has entered into a definitive agreement to acquire selected assets on a presale basis from Trammell Crow Residential - Pacific Northwest ("TCR-NW"). The presale acquisitions are expected to be completed during the next 24 to 36 months. The acquisitions include seven communities in the Seattle, Washington market and one community in the Portland, Oregon market for a total investment by the Company of up to $279 million. Together, these eight communities are expected to contain 2,411 apartment homes when completed. The Company will manage these communities after acquiring ownership. Management believes the Northwest markets of Seattle and Portland will enhance the Company's established development strategy of operating in regions and markets where significant new economic growth is expected and future multifamily housing supply is constrained. This expansion is consistent with the Company's strategy to achieve long term earnings growth by providing a high quality platform for expansion while also providing additional economic and geographic diversity. General Avalon Properties, Inc. ("Avalon" or the "Company") is an integrated real estate operating company concentrating exclusively on apartment community acquisition, construction, development and management in the high barrier-to-entry markets of the United States. The Company was incorporated under the laws of the State of Maryland in August 1993 and was formed to continue and expand the multifamily apartment community acquisition, construction, development and management operations of the Trammell Crow Residential Mid-Atlantic and Northeast Groups (collectively, the "Predecessor"). Avalon is a self-administered and self-managed equity Real Estate Investment Trust ("REIT"). As of March 16, 1998, the Company's portfolio includes 22,549 Class A, institutional-quality apartment homes including 2,825 apartment homes under construction (see "Communities") and the Company manages 1,970 apartment homes for unaffiliated institutional owners. The Company's apartment communities are conveniently located in areas within close proximity to recreational amenities, schools, entertainment and dining, and easy access to employment. The Company currently employs approximately 970 people. A principal operating objective of the Company's management ("Management") is to increase both operating cash flow growth and long-term stockholder value. Management's strategies to achieve this objective include (i) generating consistent, sustained earnings growth at each community through increased revenue (from high occupancy and targeted value pricing) and increased operating margins (from aggressive expense management); (ii) selective investment in new acquisition and development communities in the Company's targeted geographical areas; and (iii) the use of a conservative capital structure to provide continued access to capital markets at the lowest possible cost. Management believes that these strategies are generally best implemented by building and acquiring institutional-quality assets in supply-constrained markets where new household formations have out-paced multifamily permit activity. Management actively seeks opportunities to acquire individual communities or portfolios of communities, which may include entry into new supply-constrained markets, and enters into negotiations concerning potential acquisitions. Management believes that its business strategy will lead to higher occupancy levels, increased rental rates and predictable and growing cash flow. There can be no assurance that any negotiations will be successful and result in future acquisitions or that the Company's business strategy will have its intended results. The following business discussion relates to the Company's pre-merger. Because the Company and Bay have similar strategies, markets and operations, the Company expects that the combined entity will conduct its business in a substantially similar manner after the Merger. OPERATING STRATEGIES: Intense focus on the operations of the existing portfolio is an important strategy necessary to realize consistent, sustained earnings growth. Management believes that such focus is best achieved when operating only one type of real estate. To this end, the Company concentrates exclusively on apartment community acquisition, construction, development and management. The Company intends to increase earnings through focused on-site property management that is expected to result in higher revenue from Company-owned communities and operating cost containment. Ensuring resident satisfaction by 2 6 providing service that exceeds the resident's expectations, increasing rents as market conditions allow, maximizing rent collections and maintaining community occupancy at optimal levels comprise the principal strategies to maximize revenue. Lease terms are generally staggered based on vacancy exposure by apartment type so that lease expirations are better matched to each community's rental patterns. On-site property management teams receive bonuses based largely upon the net operating income produced at their community as well as rental rate increases achieved and lease renewals (which implicitly measure resident satisfaction). Controlling and leveraging operating expenses also contributes to earnings growth. High occupancy through resident retention is a principal strategy. High resident retention eliminates the cost of preparing an apartment home for a new resident and reduces marketing and other costs. The Company also aggressively pursues real estate tax appeals and scrutinizes operating costs. Invoices are recorded on-site to ensure the careful monitoring of budgeted versus actual expenses; supplies are purchased in bulk and directly from manufacturers where possible; vendor contracts are bid on a volume basis; turnover work is performed in-house or by third parties depending upon the least costly alternative; and preventive maintenance is undertaken regularly to maximize resident satisfaction and property and equipment life. Growth in the portfolio and the resulting increase in revenue allows the Company to spread fixed operating costs over a larger volume of revenue, thereby increasing operating margins. The Company has enjoyed significant operating cost leverage in recent years as operating costs, including write-off of deferred development costs, as a percentage of total revenues have declined from 46% in 1991 to 36.1% in 1997. INVESTMENT STRATEGIES: SELECTIVE ACQUISITIONS AND DEVELOPMENT IN FAVORABLE MARKETS. Management believes that apartment communities present an attractive investment opportunity compared to other real estate investments because a broad potential resident base results in relatively stable demand during all phases of a real estate cycle. The Company intends to pursue appropriate new investments (both acquisitions of new communities and new developments) where constraints to new supply exist and where new household formations have out-paced multifamily permit activity in recent years. Acquisitions. Management has targeted certain high barrier-to-entry markets in the Northeast, Mid-Atlantic and Midwest regions of the United States for acquisition opportunities. Recently, the company has begun expanding into selected Pacific Northwest markets and entered into a merger agreement with Bay that will add Bay's current markets in California to the Company's markets. The Company will continue to diversify its investments within these regions, not just geographically, but also by the number of apartment homes and features offered. Each acquisition candidate must have the potential to deliver sustained earnings growth over time that meets or exceeds the current portfolio growth rate. Additionally, the following criteria are important in an acquisition community: i) the community must have been completed after 1984 or, if older, must be in a non-duplicable in-fill location and be able to support the capital investment required for a significant renovation; ii) the community has existing tax-exempt debt financing; and iii) the community has adjacent zoned land that can be acquired with the community and be developed. One of the characteristics of the Company's markets is the presence of older apartment communities (often 10 to 30 years old or older) that are currently attractive acquisition targets for the Company. In many cases, these communities are in attractive in-fill locations, but are poorly maintained and marketed, inefficiently managed and are challenging to renovate. Improvements to landscaping amenities and the physical structure of the buildings, coupled with more effective management and marketing, may result in attractive yields on these communities. Management believes that many of these older communities can support the capital investment required to bring the community up to institutional-quality condition while delivering attractive post-renovation yields. The financial position of the Company continues to support the ability to make selective acquisitions, and Management expects to continue its acquisition efforts into 1998, both before and after the Merger. Management's discipline to be selective in its acquisition candidates is strengthened by the presence of a strong development capability that is an important alternative source of portfolio growth. Beyond 1998, Management anticipates that attractive acquisition opportunities may diminish as the current real estate recovery progresses. Given a competitive acquisition environment, Management believes that the Company enjoys an advantage over other real estate investors in the following areas: - - The Company maintains seven offices throughout the Northeast, Mid-Atlantic and Midwest regions and has substantial knowledge of local markets which facilitates the acquisition process. 3 7 - - The Company maintains a development capacity that lessens the dependence on acquisitions for external earnings growth. The Company also expects to add offices in the Pacific Northwest and (after the Merger) in Northern and Southern California, and believes that it will continue to benefit from these advantages. Management also expects to divest communities to help ensure that the overall portfolio can meet earnings growth targets. One community in Frederick, Maryland was sold during 1997 pursuant to this strategy. Further, as acquisition opportunities diminish due to the strengthening real estate market, the reduced supply of acquisition candidates may provide a favorable environment for the Company to sell assets. Accordingly, Management anticipates additional dispositions will occur over the next several years. New Developments. Management anticipates that selective development of new apartment communities in the Company's supply-constrained markets will remain an important component of portfolio growth for the next several years. Because of its experience, Management believes that it understands and appreciates the risks associated with development and that, generally, the risks presented by development are justified by higher potential yields and the ability to develop attractive new communities in locations where the opportunity to acquire existing communities is limited. Generally, Management believes that the long-term potential offered by a new development opportunity will exceed the long-term potential offered by an acquisition opportunity primarily because well executed, up-to-date, newly developed communities generally attract greater demand at higher rents than an existing apartment community. Management has significant experience developing apartment communities in its principal markets, as well as managing the unique development risks presented by these markets. Since 1980, Management has developed approximately 19,400 apartment homes. Since the Company's initial pubic offering ("Initial Offering"), Management has developed 17 communities, totaling 4,301 apartment homes. The development of each of these communities is managed by an experienced development vice president, who operates out of the local development office, under the supervision of senior Management. The combined years of experience for officers principally involved in construction and development matters exceeds 100 years. As a developer of real estate, the Company enjoys opportunities that are not available to companies that strictly acquire existing developed real estate. There are risks, however, to developing real estate, including risk of zoning changes and unforeseen conditions (such as unforeseen problems presented by soils or environmental conditions). Further, there is the possibility that a Development Right (as hereinafter defined) could proceed to development based on certain assumptions concerning economic conditions that may not be realized due to subsequent unforeseen changes in economic conditions. These development risks, however, are not dissimilar to the risks of acquiring real estate, and Management believes that the Company's internal due diligence and financial analysis procedures mitigate these risks. The following is a summary of how the internal development process functions and how the Company mitigates risk. Initial Financial Feasibility Projections. Before significant time and money is incurred on a new development opportunity, a financial feasibility review is performed. In preparing the financial projections for a proposed new community, Management relies upon the rents in today's marketplace, and no inflation of rent is assumed in the projections. A minimum 6% economic vacancy rate is assumed in preparing these projections, even though the Company's stabilized portfolio has historically operated at vacancy rates of 4% to 5%. The operating budget is derived from analysis of anticipated costs, from utility rates and estimated taxes in the local community to the staffing demands independently estimated by both development and property operations teams. The compensation of development, construction and operations personnel have significant components tied to the reliability of each team's forecasts. Historically, actual operating results of communities that proceeded to development have generally met or exceeded the initial operating projections developed during the financial feasibility phase. Once a development opportunity is determined to meet the Company's financial feasibility guidelines, the Company begins the process of obtaining entitlements. 4 8 Entitlements Process. The Company operates in markets dominated by no-growth attitudes and where little-to-no multifamily zoning is readily available. The limited supply of zoned multifamily land often requires the Company to "manufacture" the entitlements necessary to develop a parcel by working through the local entitlements process for extended periods of time, in most cases for several years. There can be no assurance that the necessary entitlements will be obtained. Because of these risks, the Company's general policy is to acquire an option to purchase land, as opposed to buying it, until zoning and related entitlements are in place. The financial exposure associated with the entitlements process is largely limited to overhead costs, third-party consultant costs and non-refundable deposits, if any, should the zoning and site plan approval process be unsuccessful. The Company's approach in measuring and dealing with this risk is to provide a reserve that is increased each quarter through a charge to earnings. Currently, this quarterly charge is $200,000. In accordance with generally accepted accounting principles ("GAAP"), the salaries (and related costs) of all persons who spend substantially all of their time in development and construction activities are capitalized into the cost of that development. If a development opportunity does not proceed to development, the accumulated capitalized direct costs, including payroll and third-party costs for unsuccessful efforts, are written-off against the established reserve. Communities Under Construction. Once the entitlement process is complete and permits are obtained, the option to acquire the land is exercised and construction begins. In the development and construction budget, a contingency for possible cost overruns exists throughout construction. However, this contingency is adjusted during planning and construction. The remaining contingency, if any, is removed only after the job is completed. Management believes that, by adhering to these principles, zoning, site planning and construction risks as well as the risk of not achieving projected yields are significantly reduced. The success of the Company's development and acquisition strategies depends upon trends in the economy as a whole, including interest rates, income tax laws, governmental regulations, legislation, and population and demographic trends. See "Communities." Also, as an owner of real estate, the Company is subject to risks arising in connection with the availability of financing on acceptable terms, as well as other risks relating to the real estate investment, including environmental matters and changes in real estate and zoning laws. CAPITAL STRATEGIES: Maintaining a conservative capital structure that allows the Company continuous, uninterrupted and cost-effective access to capital markets has been, and continues to be, an important element of Management's earnings growth strategy. The use of conservative financial policies is illustrated by the investing and financing activities employed by the Company since its Initial Offering. Since the Company's Initial Offering, real estate investments have been made totaling approximately $1.2 billion. These investments were financed primarily from proceeds drawn under the Company's revolving unsecured credit facility (the "Unsecured Facility") and the supplemental revolving unsecured credit facility (the "Supplemental Unsecured Facility" and together with the Unsecured Facility, the "Unsecured Facilities"). The Unsecured Facilities were subsequently repaid from capital market offerings totaling $996.7 million through December 31, 1997. During this period, the Company maintained a conservative capital structure, as total debt to total market capitalization (calculated on a weighted average basis) was 25.8%. The Company's financial position as of December 31, 1997 demonstrates Management's continued discipline in applying conservative capital policies: 5 9 - Total debt to total market capitalization totaled 25%. - Long-term floating rate debt was only 2.6% of total market capitalization. Management intends to limit the use of long-term floating rate debt to no more than 10% of total market capitalization. - Debt service coverage for the year ended December 31, 1997 was 3.01x. - At December 31, 1997, long-term debt maturities over the next 10 years total $284.7 million, or approximately 14% of the Company's total market capitalization. Long-term debt maturities over the next five years represents less than 5% of the Company's total market capitalization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." This history demonstrates Management's discipline to maintain a conservative capital structure and the Company's historical ability to cost-effectively access capital markets to maintain this conservative structure. At December 31, 1997, 47.5% of outstanding long-term debt is tax-exempt debt and is generally collateralized by liens on certain Current Communities (as hereinafter defined). Of the 66 Current Communities, 15 are currently subject to mortgages that collateralize tax-exempt debt. As of December 31, 1997, the ratio of collateralized debt to undepreciated book value of real estate assets was 20.8%. Although the use of tax-exempt debt generally encumbers the related property with a lien, the positive effect of the lower tax-exempt interest rate (compared to conventional debt) is a lower cost capital structure and higher debt service coverage levels. Although Management will continue the selective use of tax-exempt debt financing, tax law changes that took effect in 1986 combined with attractive unsecured debt alternatives from improved ratings will likely result in a decline in the use of tax-exempt financing. Another important element in delivering consistent earnings growth relative to financial structure is managing exposure to floating rate debt. Exposure to variable interest rates on outstanding balances under the Unsecured Facilities is generally managed with interest rate protection agreements, although no such agreements are currently in place. Further, the Company has retained a consultant to help manage interest rate risk. Management believes these policies reduce the risk of eroding earnings growth as a result of higher interest rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for an expanded discussion of current financing strategies. Inflation and Tax Matters Substantially all of the leases at the Current Communities are for a term of one year or less, which may enable the Company to realize increased rents upon renewal of existing leases or commencement of new leases. Such short-term leases generally minimize the risk to the Company of the adverse effects of inflation, although as a general rule these leases permit residents to leave at the end of the lease term without penalty. The Company's current policy is to permit residents to terminate leases upon a 60-day written notice and payment of one month's rental as compensation for early termination. Short-term leases combined with relatively consistent demand allow rents, and therefore, cash flow from the portfolio to provide an attractive inflation hedge. The Company filed an election with its initial Federal income tax return to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and intends to maintain its qualification as a REIT in the future. As a qualified REIT, with limited exceptions, the Company will not be taxed under Federal and certain state income tax laws at the corporate level on its net income. In addition, due to non-cash charges such as depreciation and amortization, the cash available for distribution is expected to exceed net income. Under current tax law, this excess will be treated by stockholders as a non-taxable return of capital that will reduce the stockholders' basis in the shares of the Company's Common Stock. 6 10 Environmental Matters The Company's assessments of the Current Communities and Development Communities (as hereinafter defined) have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets or results of operations, nor is the Company aware of any such material environmental liability. Nevertheless, it is possible that the Company's assessments did not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Further, because the Company does not routinely update environment assessments on Current Communities, it is possible that conditions have occurred since the most recent environmental assessment that could result in potentially material environmental liability. The Company believes that the Current and Development Communities are in compliance in all material respects with all Federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of its Current or Development Communities. The Company does not believe that the cost of continued compliance with applicable environmental laws or regulations will have a material adverse effect on the Company or its financial condition or results of operations. There can be no assurance, however, that future environmental laws, regulations or ordinances will not require additional remediation of existing conditions that are not currently actionable, or impose additional or more stringent requirements on the Current and Development Communities, the costs of compliance with which would have a material adverse effect on the Company or its financial condition. ITEM 2. COMMUNITIES The Company's real estate holdings consist of apartment communities in various stages of the development cycle and can be divided into three categories: "Current Communities" are apartment communities where construction is complete and the community has either reached stabilized occupancy or is in the initial lease-up process. A "Stabilized Community" is a Current Community that has completed its initial lease-up and has attained a physical occupancy level of 94% or has been completed for one year, whichever occurs earlier. An "Established Community" is a Current Community that has been a Stabilized Community with stabilized operating costs during both the current year and the beginning of the previous calendar year such that its year-to-date operating results are comparable between periods. "Development Communities" are communities that are under construction and may be partially complete and operating and for which a final certificate of occupancy has not been received. "Development Rights" are development opportunities in the very earliest phase of the development process for which the Company has an option to acquire land or owns land to develop a new community and where related pre-development costs have been incurred and capitalized in pursuit of these new developments. The Company's holdings under each of the above categories are discussed in the following paragraphs. 7 11 Current Communities The Current Communities are primarily garden-style apartment communities consisting of two-and three-story buildings in landscaped settings. The Current Communities, as of March 16, 1998, include eight high-rise apartment communities, two four-story mid-rise apartment communities and one six-story mid-rise apartment community. The Current Communities offer many attractive amenities designed to enhance their market appeal to discriminating residents who are willing to pay premium rental rates to live in these apartment communities. Such amenities include vaulted ceilings, lofts, fireplaces, patios/decks and modern appliances. Other features include swimming pools, fitness centers, tennis courts and business centers. Management has an extensive and ongoing maintenance program to keep all communities and apartment homes free of deferred maintenance and, where vacant, available for immediate occupancy. As of March 16, 1998, there were 66 Current Communities. These Current Communities are institutional-quality multifamily apartment communities located in the following areas:
NUMBER OF NUMBER OF PERCENTAGE OF TOTAL COMMUNITIES AT APARTMENT HOMES AT APARTMENT HOMES AT ---------------------- ---------------------- ---------------------- 1-1-97 3-16-98 1-1-97 3-16-98 1-1-97 3-16-98 ------ ------- ------ ------- ------ ------- Virginia 15 18 4,269 5,421 31.9% 27.5% Connecticut 4 7 1,934 2,778 14.5% 14.1% Maryland 13 12 3,736 3,430 27.9% 17.4% New Jersey 4 5 1,504 2,008 11.3% 10.2% Massachusetts 5 5 1,115 1,172 8.3% 5.9% Washington, D.C. 1 1 308 308 2.3% 1.6% New York 3 5 502 968 3.8% 4.9% Ohio -- 1 -- 264 0.0% 1.3% Indiana -- 2 -- 376 0.0% 1.9% Minnesota -- 3 -- 904 0.0% 4.6% Illinois -- 3 -- 887 0.0% 4.5% Michigan -- 3 -- 983 0.0% 5.0% Rhode Island -- 1 -- 225 0.0% 1.1% -- -- ------ ------ ----- ------ 45 66 13,368 19,724 100.0% 100.0% == == ====== ====== ===== ======
All of the Current Communities are managed and operated by the Company. During the year ended December 31, 1997, the Company completed construction of 2,372 apartment homes in seven communities for a capitalized cost of $302.4 million. Forty-eight of the Current Communities have more than 200 apartment homes, with the largest having 932 apartment homes. The average age of 64 of the Current Communities, weighted according to number of apartment homes, is approximately eight years. The remaining Current Communities (Falkland Chase and Longwood Towers) are older communities that were acquired by the Company. Falkland Chase underwent extensive renovation in 1987. Longwood Towers is currently under substantial renovation, which is scheduled to be completed by the end of the second quarter of 1998. To comply with the requirements of lenders and tax-exempt credit enhancers, the Company holds 19 Current Communities and one Development Community in 10 qualified REIT subsidiaries. The Company owns general partnership interests in three Current Communities (a 50% interest in Falkland Chase, a 49% equity interest in Avalon Run and a 50% interest in Avalon Grove), a 99% general partnership interest in two partnerships structured as DownREITs that owns a total of 8 Current Communities, a 100% interest in a senior participating mortgage note secured by another Current Community (Avalon Arbor) which is accounted for as an investment in real estate, a 100% partnership interest in 4100 Massachusetts Avenue, Avalon at Lake Arbor, Avalon at Decoverly, Avalon Commons and Avalon at Fairway Hills II and holds direct fee simple interests in the remaining Current Communities. 8 12 PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES (DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
---------------------- -------------------------------- ----------- --------------- Number Approximate Year of Rentable Area Built or City and State Homes (Sq. Ft.) Acres Acquired -------------------------------- ---------------------- ---------- ----------------- ----------- --------------- 1 Avalon Walk I Hamden, CT 430 433,010 23.3 1992 2 Avalon Walk II Hamden, CT 334 327,730 15.1 1994 3 Avalon Pavilions Manchester, CT 932 849,700 46.3 1990/92 4 Avalon Glen Stamford, CT 238 221,685 4.1 1991/95 5 Avalon Grove (4) Stamford, CT 402 402,970 4.0 1997 6 Avalon Gates Trumbull, CT 340 373,032 37.0 1997 7 Avalon Springs Wilton, CT 102 180,720 12.0 1997 8 4100 Massachusetts Avenue Washington, D.C. 308 298,345 2.7 1994 9 Avalon at Stratford Green Blommingdale, IL 192 237,204 12.7 1997 10 Village Park of Westmont Westmont, IL 400 388,400 17.4 1997 11 Avalon at Danada Wheaton, IL 295 350,581 19.2 1997 12 Avalon at Willow Lake Indianapolis, IN 230 228,708 20.0 1997 13 Avalon at Geist Lawrence, IN 146 160,554 18.0 1997 14 Longwood Towers Brookline, MA 307 226,000 4.2 1993 15 Avalon at Lexington Lexington, MA 198 226,830 18.0 1994 16 Avalon Summit Quincy, MA 245 194,063 9.1 1995/96 17 Avalon Arbor (6) Shrewsbury, MA 302 297,772 25.0 1991 18 Avalon West Westborough, MA 120 159,900 10.1 1996 19 Avalon Landing Annapolis, MD 158 117,078 13.8 1995 20 Avalon at Fairway Hills I Columbia, MD 192 193,728 10.1 1987 21 Avalon at Fairway Hills II Columbia, MD 527 529,727 32.0 1996 22 Avalon at Symphony Glen Columbia, MD 174 178,350 10.0 1986 23 Avalon Fields Gaithersburg, MD 192 202,100 5.7 1996 24 Avalon Knoll Germantown, MD 300 290,400 26.7 1985 25 Avalon at Lake Arbor Mitchellville, MD 209 170,052 18.0 1995 26 Avalon Lea Owings Mills, MD 296 300,440 15.7 1988 27 Avalon at Decoverly Rockville, MD 368 368,446 25.0 1995 28 Avalon Crossing Rockville, MD 132 154,488 5.0 1996 29 Avalon Ridge Silver Spring, MD 432 432,000 25.7 1988 30 Falkland Chase (7) Silver Spring, MD 450 346,500 22.3 1988 31 Avalon Heights Madison Heights, MI 225 206,970 17.1 1997 32 Aspen Meadows Rochester Hills, MI 214 202,390 35.0 1997 33 Village Park of Troy Troy, MI 544 522,250 84.0 1997 34 Avalon Devonshire Bloomington, MN 498 470,774 42.0 1997 35 Carriage Green (9) Eagan, MN 246 233,562 18.7 1998 36 Summer Place (9) Plymouth, MN 160 144,026 8.3 1998 37 Avalon Cove Jersey City, NJ 504 546,390 11.1 1997 38 Avalon Run (8) Lawrenceville, NJ 426 438,370 19.6 1994 39 Avalon Run East Lawrenceville, NJ 206 260,670 27.0 1996 40 Avalon Watch Lawrenceville, NJ 512 487,424 64.0 1988 41 Avalon Chase Marlton, NJ 360 312,840 58.5 1996 42 Avalon View Fishkill, NY 288 286,560 41.0 1993 43 Avalon Green Greenburgh, NY 105 115,930 16.9 1995 44 Avalon Towers Long Beach, NY 109 124,805 1.3 1995 45 Avalon Court Melville, NY 154 190,576 10.8 1997
---------------------------------------- ------------ ---------- Average Economic Average Physical Occupancy Size Occupancy --------------------------- (Sq. Ft.) at 12/31/97 1997 1996 -------------------------------- ------------- ---------------- ------------ ---------- 1 Avalon Walk I 1,007 96.3% 95.4% 94.6% 2 Avalon Walk II 981 97.6% 95.9% 94.4% 3 Avalon Pavilions 912 94.6% 95.1% 93.6% 4 Avalon Glen 931 97.1% 95.5% 95.7% 5 Avalon Grove (4) 1,002 99.3% Lease-up N/A 6 Avalon Gates 1,097 98.2% Lease-up N/A 7 Avalon Springs 1,772 99.0% Lease-up N/A 8 4100 Massachusetts Avenue 969 96.4% 96.4% 96.0% 9 Avalon at Stratford Green 1,235 Lease-up Lease-up N/A 10 Village Park of Westmont 971 93.3% 94.5% N/A 11 Avalon at Danada 1,188 Lease-up Lease-up N/A 12 Avalon at Willow Lake 994 97.0% 96.7% N/A 13 Avalon at Geist 1,100 90.4% 90.2% N/A 14 Longwood Towers 736 91.3% 87.7%(5) 98.8% 15 Avalon at Lexington 1,146 97.0% 96.6% 98.5% 16 Avalon Summit 792 95.5% 97.8% 88.3% 17 Avalon Arbor (6) 986 94.7% 97.2% 96.6% 18 Avalon West 1,333 94.2% 96.3% Lease-up 19 Avalon Landing 741 98.7% 95.5% 95.3% 20 Avalon at Fairway Hills I 1,009 94.3% 95.9% 96.5% 21 Avalon at Fairway Hills II 1,005 92.8% 94.2% 94.2% 22 Avalon at Symphony Glen 1,025 96.0% 96.2% 95.2% 23 Avalon Fields 1,053 95.3% 96.0% 93.7% 24 Avalon Knoll 968 98.3% 96.5% 95.5% 25 Avalon at Lake Arbor 814 95.7% 94.4% 94.5% 26 Avalon Lea 1,015 98.7% 97.1% 96.0% 27 Avalon at Decoverly 1,001 95.4% 96.7% 96.7% 28 Avalon Crossing 1,170 97.7% 97.1% Lease-up 29 Avalon Ridge 1,000 98.2% 95.7% 94.9% 30 Falkland Chase (7) 770 96.0% 96.0% 96.8% 31 Avalon Heights 920 95.1% 94.4% N/A 32 Aspen Meadows 946 94.9% 95.6% N/A 33 Village Park of Troy 960 95.8% 95.2% N/A 34 Avalon Devonshire 945 97.6% 96.8% N/A 35 Carriage Green (9) 949 N/A N/A N/A 36 Summer Place (9) 900 N/A N/A N/A 37 Avalon Cove 1,084 97.2% 95.3% N/A 38 Avalon Run (8) 1,029 97.2% 96.1% 94.8% 39 Avalon Run East 1,265 99.0% 96.8% Lease-up 40 Avalon Watch 952 96.5% 97.6% 96.0% 41 Avalon Chase 869 93.6% 96.4% 95.8% 42 Avalon View 995 98.3% 97.1% 97.6% 43 Avalon Green 1,104 97.1% 96.3% 97.2% 44 Avalon Towers 1,145 93.6% 95.4% 96.7% 45 Avalon Court 1,238 98.1% Lease-up N/A
------------------------------------------------------------------------ Avg. Rental Rate (1) --------------------------------- Financial $ Per $ Per Property (2) Reporting Apt. Sq. Ft. EBITDA Cost (3) -------------------------------- --------- ----------- -------------- --------------- 1 Avalon Walk I $1,014 $1.01 $3,638 $34,587 2 Avalon Walk II 992 1.01 2,755 23,740 3 Avalon Pavilions 840 0.92 6,249 56,693 4 Avalon Glen 1,567 1.68 3,092 30,244 5 Avalon Grove (4) N/A N/A 4,916 N/A 6 Avalon Gates 1,190 1.08 2,556 35,369 7 Avalon Springs 2,063 N/A 1,893 15,775 8 4100 Massachusetts Avenue 1,357 1.40 3,244 34,931 9 Avalon at Stratford Green N/A N/A 42 21,572 10 Village Park of Westmont 790 0.81 276 25,743 11 Avalon at Danada N/A N/A 47 37,571 12 Avalon at Willow Lake 681 0.69 36 14,944 13 Avalon at Geist 723 0.66 27 12,080 14 Longwood Towers 1,611 2.19 2,472 37,377 15 Avalon at Lexington 1,563 1.36 2,692 14,325 16 Avalon Summit 938 1.18 1,945 16,289 17 Avalon Arbor (6) 937 0.95 2,187 28,461 18 Avalon West 1,227 0.92 1,233 10,810 19 Avalon Landing 757 1.02 853 9,303 20 Avalon at Fairway Hills I 857 0.85 1,265 9,454 21 Avalon at Fairway Hills II 832 0.83 3,354 33,924 22 Avalon at Symphony Glen 829 0.81 1,057 8,166 23 Avalon Fields 978 0.93 1,564 14,298 24 Avalon Knoll 806 0.83 1,823 8,067 25 Avalon at Lake Arbor 852 1.05 1,091 11,950 26 Avalon Lea 737 0.73 1,656 16,130 27 Avalon at Decoverly 1,008 1.01 3,223 31,151 28 Avalon Crossing 1,333 1.14 1,609 13,778 29 Avalon Ridge 844 0.84 2,785 25,269 30 Falkland Chase (7) 790 1.03 N/A N/A 31 Avalon Heights 786 0.85 177 15,308 32 Aspen Meadows 657 0.69 85 12,435 33 Village Park of Troy 698 0.73 432 31,290 34 Avalon Devonshire 820 0.87 80 36,143 35 Carriage Green (9) N/A N/A N/A N/A 36 Summer Place (9) N/A N/A N/A N/A 37 Avalon Cove 2,232 2.06 8,570 90,291 38 Avalon Run (8) 1,029 1.00 N/A N/A 39 Avalon Run East 1,235 0.98 1,910 16,233 40 Avalon Watch 1,024 1.08 4,340 28,423 41 Avalon Chase 918 1.06 2,430 23,661 42 Avalon View 940 0.94 2,000 17,812 43 Avalon Green 1,817 1.65 1,468 12,439 44 Avalon Towers 2,293 2.00 1,504 15,943 45 Avalon Court 1,458 1.18 490 17,231
9 13 PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES (DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
---------------------------------------- ----------------- ------------------------------ Number Approximate Year of Rentable Area Built or City and State Homes (Sq. Ft.) Acres Acquired -------------------------------- ---------------------- ---------- ----------------- ----------- --------------- 46 Avalon Commons Smithtown, NY 312 374,360 20.6 1997 47 Avalon at Montgomery Cincinnati, OH 264 231,800 17.0 1997 48 Avalon at Center Place Providence, RI 225 222,750 1.2 1997 49 Avalon at Park Center Alexandria, VA 492 382,200 8.5 1994 50 Avalon at Ballston- Quincy and Vermont Towers Arlington, VA 454 420,908 2.3 1997 51 Avalon at Ballston- Washington Towers Arlington, VA 344 294,808 4.1 1990 52 Avalon Birches Chesapeake, VA 312 262,920 20.9 1995 53 AutumnWoods Fairfax, VA 420 355,320 24.2 1996 54 Avalon at Providence Park Fairfax, VA 140 147,472 4.0 1997 55 Avalon Station Fredericksburg, VA 223 210,331 15.9 1994/96 56 Avalon at Hampton I Hampton, VA 186 178,932 8.5 1985 57 Avalon at Hampton II Hampton, VA 231 227,535 11.3 1986 58 Avalon Park Manassas, VA 372 302,808 26.0 1988 59 Avalon at Carter Lake Reston, VA 259 225,848 47.6 1994 60 Avalon at Gayton Richmond, VA 328 282,408 27.6 1984 61 Avalon at Boulders Richmond, VA 284 313,782 32.1 1996 62 Avalon Woods Richmond, VA 268 158,669 18.5 1994 63 Avalon Pointe Stafford, VA 140 119,272 20.2 1994 64 Avalon at Dulles Sterling, VA 236 231,752 15.7 1986 65 Avalon Crescent Tysons Corner, VA 558 623,270 19.1 1997 66 Avalon Pines Virginia Beach, VA 174 142,854 9.7 1996 ---------- ----------------- ----------- 19,724 19,094,049 N/A ---------- ----------------- ----------- DEVELOPMENT COMMUNITIES ------------------------ 67 Avalon at Faxon Park Quincy, MA 171 176,130 8.3 N/A 68 Avalon Fields II Gaithersburg, MD 96 100,704 3.5 N/A 69 Avalon Crest Fort Lee, NJ 351 367,692 13.1 N/A 70 Avalon Cove South Jersey City, NJ 269 243,445 2.8 N/A 71 Avalon Gardens Nanuet, NY 504 647,778 54.4 N/A 72 Avalon Willow Mamaroneck, NY 227 213,009 4.0 N/A 73 Avalon at Bronxville Bronxville, NY 110 119,350 1.5 N/A 74 Avalon at Cameron Court Alexandria, VA 460 488,496 16 N/A 75 Avalon at Fair Lakes Fairfax, VA 234 288,225 10 N/A 76 Avalon Valley (11) Danbury, CT 268 286,760 17 N/A 77 Avalon Lake (11) Danbury, CT 135 159,804 32 N/A ---------- ----------------- ----------- 2,825 3,091,393 N/A ---------- ----------------- ----------- TOTAL: 22,549 22,185,442 N/A ========== ================= ===========
-------------------- ---------------- ----------- ---------- Average Economic Average Physical Occupancy Size Occupancy --------------------------- (Sq. Ft.) at 12/31/97 1997 1996 ------------------------------ --------------- ---------------- ------------ ---------- 46 Avalon Commons 1,200 99.7% 98.6% N/A 47 Avalon at Montgomery 878 95.1% 96.1% N/A 48 Avalon at Center Place 990 96.1% 96.2% N/A 49 Avalon at Park Center 777 95.7% 95.4% 96.2% 50 Avalon at Ballston- Quincy and Vermont Towers 927 97.4% 95.6% N/A 51 Avalon at Ballston- Washington Towers 857 95.9% 96.8% (10) 96.7% (11) 52 Avalon Birches 843 93.9% 96.0% 97.0% 53 AutumnWoods 846 95.0% 96.7% 99.0% 54 Avalon at Providence Park 1,139 95.7% 94.9% N/A 55 Avalon Station 943 96.4% 95.0% 81.1% 56 Avalon at Hampton I 962 90.3% 95.2% 94.9% 57 Avalon at Hampton II 985 94.4% 94.8% 95.5% 58 Avalon Park 814 96.2% 96.9% 96.6% 59 Avalon at Carter Lake 872 96.5% 97.3% 97.6% 60 Avalon at Gayton 861 96.3% 95.8% 93.5% 61 Avalon at Boulders 1,105 96.1% 94.7% 95.3% 62 Avalon Woods 592 97.8% 96.1% 96.1% 63 Avalon Pointe 852 99.3% 96.2% 96.3% 64 Avalon at Dulles 982 96.6% 97.8% 96.4% 65 Avalon Crescent 1,117 97.7% Lease-up N/A 66 Avalon Pines 821 93.1% 95.0% 95.9% --------------- ---------------- ------------ ---------- 968 95.9% 95.9% 95.2% --------------- ---------------- ------------ ---------- DEVELOPMENT COMMUNITIES ----------------------- 67 Avalon at Faxon Park 1,030 N/A N/A N/A 68 Avalon Fields II 1,049 N/A N/A N/A 69 Avalon Crest 1,048 N/A N/A N/A 70 Avalon Cove South 905 N/A N/A N/A 71 Avalon Gardens 1,285 N/A N/A N/A 72 Avalon Willow 938 N/A N/A N/A 73 Avalon at Bronxville 1,085 N/A N/A N/A 74 Avalon at Cameron Court 1,062 N/A N/A N/A 75 Avalon at Fair Lakes 1,232 N/A N/A N/A 76 Avalon Valley (11) 1,070 N/A N/A N/A 77 Avalon Lake (11) 1,184 N/A N/A N/A --------------- ---------------- ------------ ---------- 1,094 N/A N/A N/A --------------- ---------------- ------------ ---------- TOTAL: 984 95.9% 95.9% 95.2% =============== ================ ============ ==========
------------------------------------------------------------------------ Avg. Rental Rate (1) --------------------------------- Financial $ Per $ Per Property (2) Reporting Apt. Sq. Ft. EBITDA Cost (3) ------------------------------ --------- ----------- -------------- --------------- 46 Avalon Commons 1,361 1.13 1,779 31,732 47 Avalon at Montgomery 640 0.73 46 15,153 48 Avalon at Center Place 1,579 1.59 1,610 26,424 49 Avalon at Park Center 922 1.19 3,596 37,658 50 Avalon at Ballston- Quincy and Vermont Towers 1,077 1.16 3,860 46,722 51 Avalon at Ballston- Washington Towers 1,110 1.30 2,989 36,893 52 Avalon Birches 693 0.82 1,692 13,461 53 AutumnWoods 870 1.03 2,969 30,631 54 Avalon at Providence Park 978 0.86 483 11,066 55 Avalon Station 705 0.75 1,209 12,001 56 Avalon at Hampton I 644 0.67 778 3,764 57 Avalon at Hampton II 659 0.67 1,065 8,229 58 Avalon Park 705 0.87 1,914 19,948 59 Avalon at Carter Lake 747 0.86 1,372 11,560 60 Avalon at Gayton 680 0.79 1,725 9,945 61 Avalon at Boulders 718 0.65 1,513 16,087 62 Avalon Woods 554 0.94 1,096 8,319 63 Avalon Pointe 744 0.87 781 7,841 64 Avalon at Dulles 836 0.85 1,547 11,706 65 Avalon Crescent 1,272 1.14 3,205 56,625 66 Avalon Pines 656 0.80 833 8,659 --------- ----------- -------------- --------------- 964 1.03 119,128 1,373,634 ========= =========== ============== =============== DEVELOPMENT COMMUNITIES ----------------------- 67 Avalon at Faxon Park N/A N/A N/A 10,780 68 Avalon Fields II N/A N/A N/A 2,997 69 Avalon Crest N/A N/A N/A 14,678 70 Avalon Cove South N/A N/A N/A 5,685 71 Avalon Gardens N/A N/A N/A 45,980 72 Avalon Willow 681 N/A N/A 12,714 73 Avalon at Bronxville N/A N/A N/A 3,767 74 Avalon at Cameron Court N/A N/A N/A 25,108 75 Avalon at Fair Lakes N/A N/A N/A 17,494 76 Avalon Valley (11) N/A N/A N/A N/A 77 Avalon Lake (11) N/A N/A N/A N/A --------- ----------- -------------- --------------- N/A N/A N/A 139,203 --------- ----------- -------------- --------------- TOTAL: $964 $1.03 $119,128 $1,512,837 ========= =========== ============== ===============
See Page 15 for notes. 10 14 LIST OF FEATURES - CURRENT AND DEVELOPMENT COMMUNITIES
1BR/2BR 2BR/3BR Parking Mini- 1 Bath 2 Bath Other Spaces Blinds Carpeting - ------------------------------------- ------------- ------------ ----------- ----------- ------------ ------------- CURRENT COMMUNITIES - ------------------- 1 Avalon Walk I 192/76 88/74 0 802 All All 2 Avalon Walk II 194/56 84/0 0 571 All All 3 Avalon Pavilions 472/168 220/72 0 1,696 All All 4 Avalon Glen 107/0 117/0 14 (12) 370 All All 5 Avalon Grove 246/0 144/12 0 549 All All 6 Avalon Gates 122/0 168/50 0 784 All All 7 Avalon Springs 0/0 70/32 0 162 All All 8 4100 Massachusetts Avenue 161/16 101/3 27 (13) 357 None All 9 Avalon at Stratford Green 63/0 108/9 12 (14) 437 All All 10 Village Park of Westmont 200/200 0 0 650 All All 11 Avalon at Danada 132/0 148/0 15 (15) 195 All All 12 Avalon at Willow Lake 72/32 94/32 321 All All 13 Avalon at Geist 40/16 68/22 59 All All 14 Longwood Towers 127/48 19/21 92 (16) 210 None All 15 Avalon at Lexington 28/24 90/56 0 364 All All 16 Avalon Summit 153/62 28/2 0 435 Some All 17 Avalon Arbor 83/106 59/51 3 (17) 561 All All 18 Avalon West 40/0 55/25 0 289 All All 19 Avalon Landing 83/18 57/0 0 257 All All 20 Avalon at Fairway Hills I 88/14 66/24 0 307 All All 21 Avalon at Fairway Hills II 180/223 88/36 0 830 All All 22 Avalon at Symphony Glen 86/14 54/20 0 279 Some All 23 Avalon Fields 80/32 80/0 0 285 All All 24 Avalon Knoll 136/56 80/28 0 510 Some All 25 Avalon at Lake Arbor 110/0 87/0 12 (18) 312 All All 26 Avalon Lea 130/28 108/30 0 518 All All 27 Avalon at Decoverly 102/0 104/0 162 (19) 550 All All 28 Avalon Crossing 0/54 60/0 18 (20) 224 All All 29 Avalon Ridge 188/42 146/56 0 691 All All 30 Falkland Chase 228/152 0/0 70 (21) 439 All Few 31 Avalon Heights 90/62 44/0 29 (22) 534 All All 32 Aspen Meadows 64/40 110/0 0 375 All All 33 Village Park of Troy 238/306 0 0 1,001 All All 34 Avalon Devonshire 194/0 304/0 0 824 All All 35 Carriage Green 102/0 111/33 0 496 All All 36 Summer Place 80/0 68/12 0 310 All All 37 Avalon Cove 238/0 240/26 0 568 All All 38 Avalon Run 144/90 108/84 0 709 All All 39 Avalon Run East 64/11 95/36 0 345 All All 40 Avalon Watch 251/0 179/82 0 768 All All 41 Avalon Chase 132/48 156/24 0 726 All All 42 Avalon View 112/48 64/64 0 614 All All 43 Avalon Green 25/24 56/0 0 218 All All 44 Avalon Towers 0/0 37/0 72 (23) 196 None All 45 Avalon Court 34/24 52/44 0 367 All All 46 Avalon Commons 128/40 112/32 0 568 All All 47 Arbors of Montgomery 176/0 88/0 0 557 All All 48 Avalon at Center Place 103/0 112/4 6 (13) 400 All All
Large Washer & Vaulted Storage or Patio Deck Dryer Hook-Ups Ceilings Walk-in Balcony or or Units and/or Lofts Fireplace Closet Sunroom - ------------------------------------- ---------------- -------------- ------------- ------------- ------------ CURRENT COMMUNITIES - ------------------- 1 Avalon Walk I All Some Some All All 2 Avalon Walk II All Some Some All All 3 Avalon Pavilions All Some Some All All 4 Avalon Glen All Some Some All All 5 Avalon Grove All Some Some All All 6 Avalon Gates All Some Some All All 7 Avalon Springs All All All All All 8 4100 Massachusetts Avenue All Some Some Some All 9 Avalon at Stratford Green All None Some All All 10 Village Park of Westmont None None None Some All 11 Avalon at Danada All None Some Some Some 12 Avalon at Willow Lake All Some Some All All 13 Avalon at Geist All None All All All 14 Longwood Towers Some None Some All No 15 Avalon at Lexington All Some Some All All 16 Avalon Summit None None None Some All 17 Avalon Arbor All Some Some All All 18 Avalon West All Some Some All All 19 Avalon Landing All None Some All All 20 Avalon at Fairway Hills I All Some Some All All 21 Avalon at Fairway Hills II All Some Some Some All 22 Avalon at Symphony Glen All Some Some All All 23 Avalon Fields All Some Some All All 24 Avalon Knoll All Some Some All All 25 Avalon at Lake Arbor All Some None All All 26 Avalon Lea All Some Some All All 27 Avalon at Decoverly All Some Some Some All 28 Avalon Crossing All Some Some All All 29 Avalon Ridge All Some Some All All 30 Falkland Chase Few None Some Some Some 31 Avalon Heights Most Some Some All All 32 Aspen Meadows All Some None All All 33 Village Park of Troy None Some None All Some 34 Avalon Devonshire Some Some Some Some Some 35 Carriage Green All Some Some Some All 36 Summer Place All Some Some All All 37 Avalon Cove All Some Some All Most 38 Avalon Run All Some Some All All 39 Avalon Run East All Some Some All All 40 Avalon Watch All Some Some All All 41 Avalon Chase All None Some All All 42 Avalon View All Some Some All All 43 Avalon Green All Some Some All All 44 Avalon Towers All None None All All 45 Avalon Court All Some Some All All 46 Avalon Commons All Some Some All All 47 Arbors of Montgomery All Some Some All All 48 Avalon at Center Place All None None Some Some
Other - ----------------------------------- --------------------------------------------------------------------------------------- CURRENT COMMUNITIES - ------------------- 1 Avalon Walk I Double thermal pane windows, optional carports 2 Avalon Walk II Optional carports 3 Avalon Pavilions Double thermal pane windows, optional garages 4 Avalon Glen Controlled-access building entrances, outside storage, optional underground garage and carports 5 Avalon Grove Security systems, controlled-access building entrances 6 Avalon Gates Reading room, security systems 7 Avalon Springs Mail area, trash recycling building, security system 8 4100 Massachusetts Avenue Hardwood entry floors, controlled-access entry, 24-hour front desk, underground parking 9 Avalon at Stratford Green All homes have full-sized washers and dryers and most homes have attached direct access garages. 10 Village Park of Westmont Business center, some ceiling fans 11 Avalon at Danada Attached garages, oversized windows 12 Avalon at Willow Lake Garages with electric openers, private entrances, garbage disposal, large pantries 13 Avalon at Geist All homes have detached or direct access attached garages and floor-to-ceiling windows, private entrances, and garbage disposals 14 Longwood Towers Garage with valet parking, grand lobby, central laundry, across street from rapid transit stop 15 Avalon at Lexington Optional carports 16 Avalon Summit Garbage disposals, laundry rooms, detached garages, storage 17 Avalon Arbor Optional carports 18 Avalon West Security systems, ceiling fans in some apartments, attached garages 19 Avalon Landing Optional carports, bay windows, storm windows 20 Avalon at Fairway Hills I Some apartments have built-in bookcases 21 Avalon at Fairway Hills II Optional bay windows, some apartments have built-in bookcases 22 Avalon at Symphony Glen Double thermal pane windows, outside storage, central laundry, some apartments have built-in bookcases 23 Avalon Fields Ceiling fan hook-ups, pantries, security systems, detached garages 24 Avalon Knoll Controlled-access building entrances, central laundry, some apartments have built-in bookcases 25 Avalon at Lake Arbor Thermal pane windows, energy-saving appliances, controlled access, microwaves, garbage disposal, some lake views, sprinkler system 26 Avalon Lea Some apartments have built-in bookcases 27 Avalon at Decoverly Thermal pane windows, ice makers, garbage disposals, gas utilities 28 Avalon Crossing Attached/detached garages, security systems, pantries, ceiling fan hookups, 9' ceilings, 6' windows 29 Avalon Ridge Central laundry, some apartments have built-in bookcases, car wash 30 Falkland Chase Laundry rooms, optional storage and garage parking, controlled-access intercom systems, most apartments have hardwood floors 31 Avalon Heights Business center, security system 32 Aspen Meadows Garbage disposals 33 Village Park of Troy Laundry rooms, garbage disposal, microwaves 34 Avalon Devonshire Covered parking and attached garages 35 Carriage Green Underground parking, microwave 36 Summer Place Control-access building entrances, garbage disposals 37 Avalon Cove Security systems, controlled-access building entrances 38 Avalon Run Optional carports 39 Avalon Run East Security system with available 24-hour monitoring, icemakers 40 Avalon Watch Garages 41 Avalon Chase Some carports, some bay windows 42 Avalon View Optional carports 43 Avalon Green Security systems, central air conditioning, ceiling fans in some apartments 44 Avalon Towers Alarm systems, jacuzzi tubs, ceramic tile/granite backsplash in kitchens, microwaves, self-clean ovens, some marble foyers in entrance area 45 Avalon Court Direct access garages, security systems 46 Avalon Commons Security system 47 Arbors of Montgomery Lake and wood views, ceiling fans, wallpaper 48 Avalon at Center Place Garage, control access, double pane windows
11 15 LIST OF FEATURES - CURRENT AND DEVELOPMENT COMMUNITIES
1BR/2BR 2BR/3BR Parking Mini- 1 Bath 2 Bath Other Spaces Blinds Carpeting - ------------------------------------- ------------- ------------ ----------- ----------- ------------ ------------- 49 Avalon at Park Center 384/0 108/0 0 684 All All 50 Avalon at Ballston- Quincy and Vermont Towers 370/0 84/0 0 498 All All 51 Avalon at Ballston- Washington Towers 205/31 108/0 0 471 All All 52 Avalon Birches 120/0 192/0 0 562 All All 53 AutumnWoods 252/72 96/0 0 727 All All 54 Avalon at Providence Park 24/0 108/0 8 (24) 296 All All 55 Avalon Station 68/31 100/24 0 682 All All 56 Avalon at Hampton I 82/22 64/18 0 276 All All 57 Avalon at Hampton II 95/44 56/36 0 350 All All 58 Avalon Park 140/40 138/0 54 (25) 784 All All 59 Avalon at Carter Lake 91/21 0/0 147 (20) 403 All Some 60 Avalon at Gayton 156/54 88/30 0 518 All All 61 Avalon at Boulders 90/0 179/15 0 571 All All 62 Avalon Woods 200/0 48/0 20 (13) 434 All All 63 Avalon Pointe 44/66 30/0 0 297 All All 64 Avalon at Dulles 104/40 76/16 0 464 All All 65 Avalon Crescent 186/24 312/0 36 (27) 977 All All 66 Avalon Pines 90/24 60/0 0 308 All All ------------- ------------ ----------- ----------- 8719/2599 6374/1235 797 32,892 ------------- ------------ ----------- ----------- DEVELOPMENT COMMUNITIES* - ------------------------ 67 Avalon at Faxon Park 68/0 75/28 0 330 All All 68 Avalon Fields II 32/0 32/32 0 466 All All 69 Avalon Crest 132/0 152/67 0 631 All All 70 Avalon Cove South 171/0 98/0 0 285 All All 71 Avalon Gardens 208/48 144/104 0 1,210 All All 72 Avalon Willow 151/0 76/0 0 379 All All 73 Avalon at Bronxville 58/0 52/0 0 167 All All 74 Avalon at Cameron Court 208/0 252/0 0 860 All All 75 Avalon at Fair Lakes 45/0 163/0 26 (27) 505 All All 76 Avalon Valley 106/0 134/28 0 572 All All 77 Avalon Lake 60/0 75/0 0 274 All All ------------- ------------ ----------- ----------- Subtotals 1239/48 1253/259 26 5,679 ------------- ------------ ----------- ----------- TOTAL: 9958/2647 7627/1494 823 38,571 ============= ============ =========== ===========
Large Washer & Vaulted Storage or Patio Deck Dryer Hook-Ups Ceilings Walk-in Balcony or or Units and/or Lofts Fireplace Closet Sunroom - ---------------------------------- ---------------- -------------- ------------- ------------- ------------ 49 Avalon at Park Center All Some Some All All 50 Avalon at Ballston- Quincy and Vermont Towers All None Some All All 51 Avalon at Ballston- Washington Towers All None Some Some All 52 Avalon Birches All Some All All All 53 AutumnWoods All Some Some All All 54 Avalon at Providence Park All None Some All All 55 Avalon Station All Some Some All All 56 Avalon at Hampton I All Some Some All All 57 Avalon at Hampton II All Some Some All All 58 Avalon Park All Some Some All All 59 Avalon at Carter Lake None None None Some All 60 Avalon at Gayton All Some Some All All 61 Avalon at Boulders All None All All All 62 Avalon Woods All Some None Some Some 63 Avalon Pointe All Some None All All 64 Avalon at Dulles All Some Some All All 65 Avalon Crescent All Some Some All All 66 Avalon Pines All Some All All All DEVELOPMENT COMMUNITIES* - ------------------------ 67 Avalon at Faxon Park All Some Some Some All 68 Avalon Fields II All Some Some All All 69 Avalon Crest All Some Some All All 70 Avalon Cove South All None None All Some 71 Avalon Gardens All Some Some All All 72 Avalon Willow All Some Some All All 73 Avalon at Bronxville All Some Some All All 74 Avalon at Cameron Court All Some Some All All 75 Avalon at Fair Lakes All Some Some Some All 76 Avalon Valley All Some Some All All 77 Avalon Lake All Some Some All All Subtotals TOTAL:
Other - ------------------------------------- ------------------------------------------------------------------------------------------- 49 Avalon at Park Center Optional sunrooms, wallpaper in kitchens and baths, ceiling fans, controlled access in mid-rise buildings, security systems in garden apartments, controlled-access gates at communit 50 Avalon at Ballston- Quincy and Vermont Towers Optional ceiling fans, optional garages 51 Avalon at Ballston- Washington Towers Controlled-access building entrances 52 Avalon Birches Garbage disposals, ceiling fans, ice makers, double sinks, storage 53 AutumnWoods Optional bay windows, optional storage, some apartments have built-in bookcases 54 Avalon at Providence Park Garbage disposals, double pane windows, reading room 55 Avalon Station Garbage disposals, bay windows, 11 ft. ceilings in dens 56 Avalon at Hampton I Double thermal pane windows, central laundry, some apartments have built-in bookcases 57 Avalon at Hampton II Double thermal pane windows, central laundry, some apartments have built-in bookcases 58 Avalon Park Microwave ovens, all apartments have custom bookshelves and ceiling fans 59 Avalon at Carter Lake Garbage disposals, storm windows, laundry facilities 60 Avalon at Gayton Double thermal pane windows, some apartments have built-in bookshelves, wet bars and controlled-access building entrances, optional storage units 61 Avalon at Boulders Optional storage closets, garbage disposals, ceiling fans 62 Avalon Woods Private entrances, ceiling fans, sun rooms in some units 63 Avalon Pointe Garbage disposals, vaulted ceilings 64 Avalon at Dulles Some apartments have built-in bookcases, pantries, optional bay windows 65 Avalon Crescent Pantries, icemakers, garbage disposals, security alarms, sprinkler system, walk-in showers, ceramic tile entry foyer, breakfast bars 66 Avalon Pines Garages, ceiling fans, garbage disposals DEVELOPMENT COMMUNITIES* - ------------------------ 67 Avalon at Faxon Park Security systems, garges 68 Avalon Fields II Pantries, ice makers, continious cleaning ovens, garbage disposals, breakfast bars 69 Avalon Crest Controlled access building entrance 70 Avalon Cove South Security system , some homes with bay windows 71 Avalon Gardens Security system, garages 72 Avalon Willow Security system, garages 73 Avalon at Bronxville Security system , some homes with bay windows 74 Avalon at Cameron Court Direct access garages, intrusion alarms, microwaves, garbage disposals, pantries, breakfast bars 75 Avalon at Fair Lakes Controlled access building entrance, garbage disposals, direct access garages, pantries, breakfast bars 76 Avalon Valley Garages, carports, game room 77 Avalon Lake Some garage parking Subtotals TOTAL:
All apartment homes contain refrigerators and dishwashers and all homes are cable TV ready. * See page 15 for notes. 12 16 RECREATIONAL AMENITIES - CURRENT AND DEVELOPMENT COMMUNITIES
Indoor/ Outdoor Clubhouse/ Fitness Tennis Racquet- Basket- Clubroom Center Pool Court ball ball - ------------------------------ ----------- ---------- -------- ---------- ----------- ----------- CURRENT COMMUNITIES - ------------------- 1 Avalon Walk I Yes Yes Yes No Yes Yes 2 Avalon Walk II Yes Yes Yes Yes Yes Yes 3 Avalon Pavilions Yes Yes Yes Yes Yes Yes 4 Avalon Glen Yes Yes Yes No Yes No 5 Avalon Grove Yes Yes Yes No Yes Yes 6 Avalon Gates Yes Yes Yes Yes Yes Yes 7 Avalon Springs Yes Yes Yes No No No 8 4100 Massachusetts Avenue Yes Yes Yes No No No 9 Avalon at Stratford Green Yes No Yes No No No 10 Village Park of Westmont Yes Yes Yes No Yes Yes 11 Avalon at Danada Yes Yes Yes No No No 12 Avalon at Willow Lake Yes Yes Yes Yes No No 13 Avalon at Geist Yes Yes Yes No No No 14 Longwood Towers Yes No No No No No 15 Avalon at Lexington Yes Yes Yes No No Yes 16 Avalon Summit No Yes Yes No No No 17 Avalon Arbor Yes Yes Yes Yes No Yes 18 Avalon West Yes No Yes No No Yes 19 Avalon Landing Yes Yes Yes No No No 20 Avalon at Fairway Hills I Yes Yes Yes Yes No No 21 Avalon at Fairway Hills II Yes Yes Yes Yes Yes No 22 Avalon at Symphony Glen No No Yes No No No 23 Avalon Fields Yes Yes Yes No No No 24 Avalon Knoll Yes Yes Yes Yes No Yes 25 Avalon at Lake Arbor Yes Yes Yes No No No 26 Avalon Lea Yes Yes Yes Yes No No 27 Avalon at Decoverly Yes Yes Yes Yes Yes Yes 28 Avalon Crossing Yes Yes Yes No No No 29 Avalon Ridge Yes Yes Yes Yes Yes Yes 30 Falkland Chase Yes Yes No No No No 31 Avalon Heights Yes Yes Yes Yes Yes No 32 Aspen Meadows Yes No Yes Yes No No 33 Village Park of Troy Yes Yes Yes Yes Yes Yes 34 Avalon Devonshire Yes Yes Yes Yes No No 35 Carriage Green Yes Yes Yes Yes No No 36 Summer Place Yes Yes Yes Yes No No 37 Avalon Cove Yes Yes Yes No Yes Yes 38 Avalon Run Yes Yes Yes Yes Yes Yes 39 Avalon Run East Yes No Yes No No No 40 Avalon Watch Yes Yes Yes Yes Yes Yes 41 Avalon Chase Yes Yes Yes Yes No No 42 Avalon View Yes Yes Yes Yes No Yes 43 Avalon Green Yes No Yes No No No 44 Avalon Towers Yes Yes Yes No No No 45 Avalon Court Yes Yes Yes No No No 46 Avalon Commons Yes Yes Yes No No Yes 47 Arbors of Montgomery Yes Yes Yes Yes Yes Yes 48 Avalon at Center Place Yes Yes Yes No No No 49 Avalon at Park Center Yes Yes Yes No No Yes 50 Avalon at Ballston- Quincy & Vermont Towers Yes Yes Yes Yes No No 51 Avalon at Ballston-
Tot Lot/ Sauna or Tot Pool Whirlpool Other - ------------------------------ ---------- ------------ --------------------------------------------------------- CURRENT COMMUNITIES - ------------------- 1 Avalon Walk I Yes No Heated pool, media room, ping-pong room 2 Avalon Walk II Yes Yes Aerobics studio, library 3 Avalon Pavilions Yes No Picnic area, media room, ping-pong room, heated pool, sports court 4 Avalon Glen No No Heated pool, picnic area with barbecue grills 5 Avalon Grove Yes No 6 Avalon Gates Yes No Game room, picnic area 7 Avalon Springs Yes No Nature trail 8 4100 Massachusetts Avenue No No Rooftop pool, nearby parks 9 Avalon at Stratford Green No No Gazebos, prairie reserve, concierge services 10 Village Park of Westmont Yes Yes Billards 11 Avalon at Danada No No Conference room, concierge services 12 Avalon at Willow Lake No No Picnic areas with barbeque grills, covered car wash 13 Avalon at Geist No No Wooded picnic areas with barbeque grills 14 Longwood Towers No No Restaurant, ballroom, concierge 15 Avalon at Lexington Yes No Picnic area, heated pool, media room 16 Avalon Summit No No 17 Avalon Arbor Yes No Heated pool, lighted tennis courts 18 Avalon West Yes No 19 Avalon Landing No Yes Sauna, 14-acre wooded setting 20 Avalon at Fairway Hills I Yes No Picnic area, lighted tennis court 21 Avalon at Fairway Hills II Yes No Car wash area, tanning bed 22 Avalon at Symphony Glen Yes No Picnic area with barbecue grills 23 Avalon Fields Yes No Picnic/sitting areas, pool with landscaped deck, car wash area 24 Avalon Knoll Yes Yes Lighted tennis courts, picnic area with barbecue grills 25 Avalon at Lake Arbor No Yes Jogging trail 26 Avalon Lea No Yes Lighted tennis court, English garden with gazebo 27 Avalon at Decoverly Yes Yes Lap pool & cocktail pool, car wash area, croquet court 28 Avalon Crossing Yes No Picnic/sitting area, walking path, play area 29 Avalon Ridge Yes Yes Walk and bike trails, picnic area with barbecue grills, volleyball court 30 Falkland Chase Yes No Picnic area with barbecue grills and picnic tables, community room 31 Avalon Heights Yes Yes Sand volleyball, jogging trails, jacuzzi 32 Aspen Meadows Yes No Sand volleyball, picnic area with barbecue grills 33 Village Park of Troy No Yes Sand volleyball, picnic area with barbecue grills 34 Avalon Devonshire No Yes Gazebos, picnic areas with barbecue grills, jogging trails, billiards, large screen TV 35 Carriage Green Yes Yes Community rooms, sauna, picnic area, sand volleyball 36 Summer Place No Yes Sand volleyball, billiard table, tanning table 37 Avalon Cove Yes No 38 Avalon Run Yes No Media room, library, sport lawn 39 Avalon Run East Yes No Walking/jogging trail 40 Avalon Watch Yes Yes Lighted tennis courts, picnic areas 41 Avalon Chase No Yes Volleyball court, car wash area, picnic area with barbecues 42 Avalon View Yes No Library, ping-pong room 43 Avalon Green No No Picnic area 44 Avalon Towers Yes Yes Adjacent to ocean boardwalk, enclosed garage with carwash, 24-hour concierge, billiard room 45 Avalon Court Yes No 46 Avalon Commons Yes No 47 Arbors of Montgomery No Yes Car wash, sand volleyball court 48 Avalon at Center Place No No Conference room, storage facility, bicycle storage, car wash area 49 Avalon at Park Center Yes Yes Sand volleyball court, walking trail 50 Avalon at Ballston- Quincy & Vermont Towers No Yes 51 Avalon at Ballston-
13 17
Indoor/ Outdoor Clubhouse/ Fitness Tennis Racquet- Basket- Clubroom Center Pool Court ball ball - -------------------------- ----------- ---------- -------- ---------- ----------- ----------- Washington Towers Yes Yes Yes Yes No No 52 Avalon Birches Yes Yes Yes Yes No No 53 AutumnWoods Yes Yes Yes Yes No Yes 54 Avalon at Providence Park Yes No Yes No No No 55 Avalon Station Yes Yes Yes No No No 56 Avalon at Hampton I No Yes Yes Yes No No 57 Avalon at Hampton II Yes Yes Yes Yes No No 58 Avalon Park Yes Yes Yes Yes Yes No 59 Avalon at Carter Lake No No Yes Yes No No 60 Avalon at Gayton Yes Yes Yes Yes No No 61 Avalon at Boulders Yes Yes Yes Yes No No 62 Avalon Woods Yes Yes Yes Yes Yes No 63 Avalon Pointe Yes No Yes Yes No No 64 Avalon at Dulles Yes Yes Yes Yes No No 65 Avalon Crescent Yes Yes Yes No No Yes 66 Avalon Pines Yes Yes Yes No Yes Yes DEVELOPMENT COMMUNITIES - ----------------------- 67 Avalon at Faxon Park Yes Yes Yes No No No 68 Avalon Fields II Yes Yes Yes No No No 69 Avalon Crest Yes Yes Yes No No Yes 70 Avalon Cove South Yes Yes Yes No No No 71 Avalon Gardens Yes Yes Yes Yes Yes Yes 72 Avalon Willow Yes Yes Yes No Yes No 73 Avalon at Bronxville Yes Yes No No No No 74 Avalon at Cameron Court Yes Yes Yes No No Yes 75 Avalon at Fair Lakes Yes Yes Yes Yes No No 76 Avalon Valley Yes Yes Yes No No No 77 Avalon Lake Yes Yes Yes No No Yes
Tot Lot/ Sauna or Tot Pool Whirlpool Other - -------------------------- ---------- ------------ --------------------------------------------------------- Washington Towers No No Lighted tennis court, community room 52 Avalon Birches Yes Yes Tanning bed, guest suite, 24-hour fitness center, sand volleyball, lighted tennis courts, picnic area 53 AutumnWoods Yes Yes Sand volleyball court, car wash area, barbecue facilities, community bicyles 54 Avalon at Providence Park No No Car wash area, business center 55 Avalon Station No No Volleyball court 56 Avalon at Hampton I Yes Yes Lighted tennis court, car wash 57 Avalon at Hampton II No Yes Picnic area, volleyball court, lighted tennis court 58 Avalon Park Yes Yes Lighted tennis courts 59 Avalon at Carter Lake Yes No Lighted tennis courts, volleyball, picnic area, lake view 60 Avalon at Gayton No Yes Lighted tennis courts, volleyball court, picnic area, sauna, car wash 61 Avalon at Boulders No Yes Car wash area, picnic areas, jogging trails 62 Avalon Woods No Yes Tanning bed, dry sauna, boat storage area, car wash area 63 Avalon Pointe No Yes Picnic area, car wash area 64 Avalon at Dulles No Yes Lighted tennis court 65 Avalon Crescent Yes Resident business office and media/conference room, sand volleyball court, walking/fitness trails, picnic area, landscaped pond, perimeter fencing & gate 66 Avalon Pines No Yes Car wash area DEVELOPMENT COMMUNITIES - ----------------------- 67 Avalon at Faxon Park Yes Yes Barbecue areas, community garden, putting green, gazebo and a library at the leasing office. 68 Avalon Fields II Yes No Car wash area, picnic/sitting area with Barbecue grills, pedestrian path 69 Avalon Crest No No Residents business center, childrens' play room off fitnes center, irrigation system 70 Avalon Cove South No No Resident business center 71 Avalon Gardens Yes No Barbecue pavilions, resident business center 72 Avalon Willow No No Dance studio 73 Avalon at Bronxville No No Resident business center 74 Avalon at Cameron Court No Yes Resident business center, sand volleyball court, picnic areas 75 Avalon at Fair Lakes No No Picnic area, resident business center 76 Avalon Valley Yes No Picnic areas with grills 77 Avalon Lake No No Game room, picnic areas with grills
14 18 Notes to Community Information tables on pages 9 through 14 (1) Represents the average rental revenue per occupied apartment home. (2) Property EBITDA is defined as property earnings before interest, income taxes, depreciation, amortization, extraordinary items, gain/(loss) on sale of a community, minority interest and before considering corporate general and administrative expenses and central property management overhead. Gross EBITDA discussed in Note (4) to the Selected Financial Data represents consolidated earnings (net of general and administrative expenses and central property management overhead), and including minority interests, but before depreciation and amortization. (3) Costs are presented in accordance with GAAP and exclude the step-up in basis attributed to continuing investors. For Development Communities, cost represents total costs incurred through December 31, 1997. (4) Owned by a joint venture in which the Company has a 50% equity and 50% cash flow interest with the remaining 50% interest held by an institutional investor. (5) Community under renovation in 1997. (6) Ownership through ownership of the Avalon Arbor note. See Note 5 to consolidated financial statements. (7) Owned by a partnership in which the Company has a 50% ownership interest. Extensive renovation completed in 1987. (8) Owned by a joint venture in which the Company has a 49% equity and 40% cash flow interest with the remaining 51% equity and 60% cash flow interest held by an institutional investor. (9) Communities acquired on 1-7-98. See "Acquisition Activities and Other Recent Developments." (10) Excludes corporate apartment homes. (11) Construction commenced in 1998. (12) Seven 1BR/1.5BA, three 2BR/1.5BA and four 2BR/2.5BA. (13) Efficiencies. (14) Twelve 3BR/2.5BA. (15) Fifteen 3BR w/den/3-1/2BA. (16) 7 guest rooms, 75 studio apartments, 10 3BR/3BA apartments. (17) 3 apartment homes with 4BR. (18) 2BR and 1-1/2BA. (19) Fifty-four 1BR/1.5BA, sixty-four 2BR/3BA and forty-four 3BR/2BA. (20) 2BR and 2-1/2BA. (21) 35 2BR town homes and 35 3BR town homes. (22) 24 efficiencies and five 2BR/1BA townhouse. (23) Comprised of 1 studio, 1 2BR/3BA, 3 3BR/3BA and 67 1BR/2BA. (24) 4 2BR town homes and 4 3BR town homes. (25) Comprised of 40 efficiencies and 14 2BR town homes. (26) 3BR and 3BA. (27) Comprised of 36 2BR/2-1/2BA + loft apartments. 15 19 Development Communities As of March 16, 1998, 11 Development Communities were under construction which, when completed, will add a total of 2,825 apartment homes to the Company's portfolio. Subsequent to year end, the Company commenced construction on two of the Development Rights (Avalon Valley and Avalon Lake) which had a capitalized cost at December 31, 1997 of approximately $786,000. The Development Communities will resemble the Current Communities and have been designed to offer similar amenities. The total capitalized cost of these Development Communities, when completed, is expected to be approximately $367.3 million. The following is a summary of the Development Communities: DEVELOPMENT COMMUNITIES SUMMARY
NUMBER OF BUDGETED ESTIMATED ESTIMATED EBITDA AS % APARTMENT COST CONSTRUCTION INITIAL COMPLETION STABILIZATION OF TOTAL HOMES ($ MILLIONS) START OCCUPANCY DATE DATE(1) BUDGETED COST(2) --------- ------------ ------------ --------- ---------- ------------- ---------------- CONVENTIONALLY FINANCED - ------------------------ Avalon at Fair Lakes Fairfax, VA 234 $ 23.2 Q1 1997 Q4 1997 Q2 1998 Q4 1998 10.5% Avalon at Faxon Park Quincy, MA 171 15.8 Q1 1997 Q4 1997 Q3 1998 Q4 1998 13.2% Avalon Gardens Nanuet, NY 504 53.8 Q3 1996 Q2 1997 Q4 1998 Q1 1999 11.3% Avalon at Cameron Court Alexandria, VA 460 44.7 Q2 1997 Q1 1998 Q4 1998 Q1 1999 11.0% Avalon Willow Mamaroneck, NY 227 41.8 Q2 1997 Q3 1998 Q1 1999 Q2 1999 9.2% Avalon Fields II Gaithersburg, MD 96 9.2 Q3 1997 Q2 1998 Q4 1998 Q1 1999 10.2% Avalon Bronxville Bronxville, NY 110 26.4 Q1 1998 Q2 1999 Q3 1999 Q4 1999 9.7% Avalon Crest Fort Lee, NJ 351 57.5 Q4 1997 Q2 1999 Q4 1999 Q1 2000 10.1% Avalon Cove South Jersey City, NJ 269 51.8 Q1 1998 Q2 1999 Q3 1999 Q4 1999 10.0% Avalon Valley Danbury, CT 268 26.1 Q2 1998 Q1 1999 Q3 1999 Q4 1999 10.4% Avalon Lake Danbury, CT 135 17.0 Q1 1998 Q1 1999 Q2 1999 Q3 1999 9.6% ----- ------ ----- 2,825 $367.3 10.4% ===== ====== =====
- ------------ (1) Stabilized occupancy is defined as the first full quarter of 94% or greater occupancy. (2) Projected EBITDA represents gross potential earnings projected to be achieved based on current rents prevailing in the respective community's local market (without adjustment for potential growth factors) and before interest, income taxes, depreciation, amortization and extraordinary items, minus (a) economic vacancy and (b) projected stabilized operating expenses. Total budgeted cost includes all capitalized costs projected to be incurred to develop the respective Development Community, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees. EBITDA is relevant to an understanding of the economics of the Company because it indicates cash flow available from Company operations to service fixed obligations. EBITDA should not be considered as an alternative to operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. EBITDA as disclosed by other REITs may not be comparable to the Company's calculation of EBITDA. 16 20 The Company intends to periodically update the projections in the table on the preceding page to the extent Management believes there may be or has been a material change in these projections on an aggregate basis. There can be no assurance that the Company will complete the Development Communities, that the Company's budgeted costs, leasing, start dates, completion dates, occupancy or estimates of "EBITDA as % of Total Budgeted Cost" will be realized or that future developments will realize comparable returns. In accordance with GAAP, the Company capitalizes interest expense during construction until each building obtains a certificate of occupancy; thereafter, interest for each completed building is expensed. Capitalized interest during the years ended December 31, 1997, 1996 and 1995 totaled $9.0 million, $12.2 million and $6.0 million, respectively. Development Rights As of March 16, 1998, the Company was pursuing the development of 18 new apartment communities. The status of these new communities ranges from land owned or under option for which design and architectural planning has just commenced to land under contract or owned by the Company with completed site plans and drawings where construction can commence almost immediately. Although there is no assurance that all or any of these communities will proceed to development, the successful completion of all of these communities would ultimately add 4,900 institutional-quality apartment homes to the Company's portfolio. Many of these apartment homes will offer features similar to those offered by the Current Communities, including vaulted ceilings, lofts, fireplaces, dishwashers, disposals, washer/dryer connections, ice-makers, patios and decks. Recreational facilities may include swimming pools, fitness facilities, playgrounds, picnic areas, tennis courts, racquetball courts or indoor basketball courts. Direct-access garages are also planned for certain Development Rights. The Company generally holds Development Rights through options to acquire land, although one development right is controlled through a joint venture partnership that owns land (New Canaan, CT). As of December 31, 1997, the cumulative capitalized costs for the 18 current Development Rights is approximately $11.9 million including the capitalized cost of $7.3 million related to the purchase of land in New Canaan, Connecticut. The properties that comprise the Development Rights are located in Massachusetts, New Jersey, New York, Illinois, Virginia and Connecticut and are in different stages of the due diligence and regulatory approval process. The decisions as to which of the Development Rights to pursue, if any, or to continue to pursue once an investment in a Development Right is made are business judgments to be made by Management after financial, demographic and other analysis is performed. There can be no assurance that the Company will succeed in obtaining zoning and other necessary governmental approvals or the financing required to develop these communities, or that the Company will decide to develop any particular community. Further, there can be no assurance that construction of any particular community will be undertaken or, if undertaken, will begin at the expected times assumed in the financial projections or be completed at the total budgeted costs assumed in the financial projections. Finally, Management intends to limit the percentage of debt used to finance new developments and acquisitions. To comply with Management's self-imposed limitation in the use of debt, future equity offerings may be required to finance the development of those Development Rights scheduled to start construction after 1998. Notwithstanding the lack of assurance with respect to the prospective development of any particular community that is the subject of the Development Rights, Management believes that the Development Rights, in the aggregate, present attractive potential opportunities for future development and growth of the Company's Funds from Operations (as hereinafter defined). Historically, Management has been successful in controlling land through option agreements prior to commencing construction. Generally, this allowed the Company to limit exposure to development risks by purchasing land only when the entitlement process was complete and when construction could commence immediately after the purchase of the land. Accordingly, at March 16, 1998, the Company did not directly own any unentitled and undeveloped land. The Company, however, holds an 86.5% non-recourse joint venture partnership interest in a partnership that owns undeveloped land. The Company may purchase undeveloped land before development and financing plans are complete if, in Management's judgment, controlling the land through an option agreement is not viable, the land can be acquired under attractive terms, is in the advanced 17 21 stages of the entitlement process and can proceed to development within a medium-term planning and marketing horizon. The current inventory of Development Rights is summarized in the following table:
TOTAL ESTIMATED BUDGETED NUMBER OF COST LOCATION HOMES ($ MILLIONS) -------- --------- ------------ 1. Darien, CT 172 $ 25.8 2. New Canaan, CT(1) 104 23.8 3. Orange, CT 172 15.5 4. Ridgefield, CT 240 30.2 5. Stamford, CT 195 30.5 6. Naperville, IL 200 20.5 7. Hull, MA 162 17.0 8. Peabody, MA 434 35.9 9. Wilmington, MA 204 21.2 10. Florham Park, NJ 270 37.5 11. Freehold, NJ 452 38.5 12. Westbury, NY 360 47.6 13. Greenburgh - II, NY 500 74.0 14. Greenburgh - III, NY 266 39.3 15. Melville - II, NY 340 40.0 16. New Rochelle, NY 408 62.7 17. Yonkers, NY 256 33.7 18. Herndon, VA 165 19.5 ----- ------ Total 4,900 $613.2 ===== ======
(1) Currently anticipated that the land seller will retain a minority limited partnership interest. 18 22 Acquisition Activities and Other Recent Developments Acquisitions of Existing Communities. In 1997, the Company acquired 15 communities that total 3,884 apartment homes, and through March 16, 1998, two additional communities were acquired. These communities are summarized as follows: On January 11, 1997, the Company purchased Avalon at Ballston - Vermont/Quincy, two luxury high-rise communities located in Arlington, Virginia for approximately $45,698,000. These communities contain a total of 454 apartment homes. On May 16, 1997, the Company purchased Avalon at Center Place, a 225 apartment home, luxury high-rise community located in Providence, Rhode Island for approximately $26,000,000. This community was managed by the Company prior to its acquisition and is subject to a 149 year land lease expiring in September 2092. On June 27, 1997, the Company purchased Avalon at Providence Park, a 140 apartment home, luxury garden-style apartment community located in Fairfax City, Virginia for approximately $10,750,000. On October 1, 1997, the Company purchased Avalon Colchester, a 57 apartment home community in Brookline, Massachusetts for approximately $4,500,000. This community is near an existing community, Longwood Towers, and the Company has combined the operations of these two communities. On November 13, 1997, the Company purchased Avalon Heights (formerly Village Green of Madison Heights), a 225 apartment home, garden-style community located in Madison Heights, Michigan (metro Detroit) for approximately $15,215,000. On November 13, 1997, the Company purchased Village Park of Troy, a 544 apartment home, garden-style community located in Troy, Michigan (metro Detroit) for approximately $31,120,000. On November 26, 1997, the Company, through the Operating Partnership, acquired a fee simple interest in Village Park of Westmont, a 400 apartment home, garden-style community located in Westmont, Illinois (metro Chicago) for approximately $25,695,000 including $23,695,000 in cash and Units of the Operating Partnership valued at $2,000,000. On December 11, 1997, the Company purchased Aspen Meadows, a 214 apartment home, garden-style community located in Rochester Hills, Michigan for approximately $12,362,000. On December 22, 1997, the Company and the Operating Partnership completed the principal phase of the acquisitions contemplated by the Contribution Agreement with TCR/MW, pursuant to which the Company acquired six apartment communities containing a total of 1,625 apartment homes for approximately $137,117,000 and expects to acquire two additional apartment communities containing a total of 704 apartment homes. The Company also acquired certain third-party management contracts and the right to acquire from an unrelated third-party an undeveloped parcel of land on which the Company expects to build one apartment community. On January 7, 1998, the Company purchased two apartment communities located in the Minneapolis metropolitan area. Carriage Green, a 246 apartment home community located in Eagan, Minnesota, and Summer Place, a 160 apartment home community located in Plymouth, Minnesota, were acquired for $27,625,000. Sale of Existing Community. On July 18, 1997, the Company sold a garden-style apartment community, Avalon Farm, located in Frederick, Maryland, to a single buyer for a total sales price of $17,047,000. The net proceeds from the sale of approximately $16,500,000 from the sale were used for reinvestment in a new acquisition community. 19 23 Land Acquisitions for New Developments. On March 12, 1997, the Company purchased 8.29 acres of land in Quincy, Massachusetts for $950,000. Construction of a new 171 apartment home community, Avalon at Faxon Park, commenced in the first quarter of 1997. On April 15, 1997, the Company purchased the remaining nine acres of land relating to the development of Avalon at Cameron Court in Alexandria, Virginia for $5,714,000. On April 18, 1997, the Company purchased the remaining 1.7 acres of land relating to the Avalon Willow development in Mamaroneck, New York for $2,300,000. This land is adjacent to a 2.3 acre parcel purchased in December 1996. Construction of a 227 apartment home community (Avalon Willow) on the combined four acre site commenced in the second quarter of 1997. The first 2.3 acres of land were acquired in December 1996. On August 18, 1997, the Company purchased a 3.54 acre tract of land adjacent to an existing community, Avalon Fields, in Gaithersburg, Maryland, for $1,400,000 for the purpose of expanding the existing community. Construction of a new 96 apartment home community, Avalon Fields II, has started and is expected to be completed in the fourth quarter of 1998. On December 10, 1997, the Company purchased a 1.5 acres of land in Bronxville, New York for $2,050,000. Construction of a new 110 apartment home community, Avalon Bronxville, started in the first quarter of 1998. On December 18, 1997, the Company purchased a 13 acre tract of land in Fort Lee, New Jersey, for $11,000,000. Construction of a new apartment community, Avalon Crest, started in the fourth quarter of 1997. Construction of this 351 apartment home community is scheduled for completion in the fourth quarter of 1999. On December 19, 1997, the Company completed the purchase of 2.75 acres of land adjacent to an existing community, Avalon Cove, in Jersey City, New Jersey, for $4,100,000 for the purpose of expanding the existing community. Construction of this 269 apartment home community, Avalon Cove South, started in the first quarter of 1998. On February 26, 1998, the Company purchased a 17.1 acre tract of land in Danbury, Connecticut for $2,100,000. A new 268 apartment community, Avalon Valley, is expected to commence construction in the second quarter of 1998. On February 27, 1998, the Company purchased a 32 acre tract of land in Danbury, Connecticut for $3,271,000. Construction of a new 135 apartment home community, Avalon Lake, commenced in the first quarter of 1998. On March 25, 1998, the Company purchased a 22.5 acre tract of land in Wilmington, Massachusetts for $1,500,000. Construction of a new 204 apartment home community, Avalon Oaks, will commence in the second quarter of 1998. 20 24 ITEM 3. LEGAL PROCEEDINGS Neither the Company nor any of the communities is presently subject to any material litigation nor, to the Company's knowledge, is any litigation threatened against the Company or any of the communities, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the business or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS No matters were submitted to a vote of stockholders during the fourth quarter of the year ended December 31, 1997. 21 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange (the "NYSE") under the ticker symbol "AVN." The following table sets forth the quarterly high and low closing prices per share of the Company's Common Stock on the NYSE for the years ended December 31, 1997 and 1996, as reported by the NYSE. On March 16, 1998, there were 361 holders of record of 43,139,559 shares of the Company's Common Stock.
1997 1996 ------------------------------- ------------------------------- CLOSING PRICE CLOSING PRICE ------------------- DIVIDENDS ------------------- DIVIDENDS QUARTER ENDED HIGH LOW PAID HIGH LOW PAID - ------------- -------- -------- --------- -------- -------- --------- March 31 $29.250 $26.750 $0.38 $23.000 $20.875 $0.37 June 30 $28.625 $26.250 $0.38 $22.125 $20.375 $0.37 September 30 $29.750 $27.438 $0.38 $23.750 $21.500 $0.37 December 31 $31.250 $28.938 $0.39 $29.000 $23.125 $0.38
On January 22, 1998, the Company declared a cash dividend on its Common Stock of $.39 per share for the fourth quarter of 1997. The dividend was paid on February 17, 1998 to all stockholders of record as of February 6, 1998. The Company expects to continue its policy of paying regular quarterly cash dividends. However, dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual Funds from Operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors may deem relevant. The Board of Directors may modify the Company's dividend policy from time-to-time. The Company has an optional Dividend Reinvestment and Stock Purchase Plan (the "Plan") which allows holders of Common Stock to acquire additional stock by automatically reinvesting dividends. Common Stock is acquired pursuant to the Plan at a price equal to 98% of the market price of such stock, without payment of any brokerage commission or service charge on such purchases. The Plan also allows stockholders to purchase a limited amount of additional stock at 100% of the market price of such stock by making optional cash payments without payment of any brokerage commission or service charge on such purchases. Stockholders who do not participate in the Plan continue to receive cash dividends as declared. On December 16, 1996, the Company entered into an Agreement of Limited Partnership of Avalon Ballston Associates L.P. (the "Ballston Partnership"), the general partner of which is Avalon Ballston II, Inc. a wholly owned subsidiary of the Company for the purpose of acquiring the Avalon at Ballston - Quincy and Vermont community. In connection with the formation of the Ballston Partnership, 25,271 units of limited partnership interest ("Ballston OP Units") were issued to the existing partners of the contributor of the community. On November 7, 1997 the Company entered into an Agreement of Limited Partnership of Avalon DownREIT V, L.P. (the "DownREIT V Partnership"), the general partner of which is Avalon DownREIT V, Inc., a wholly-owned subsidiary of the Company, for the purpose of acquiring certain communities. On November 26, 1997 the limited partnership agreement was amended and 68,608 units of limited partnership interest (the "DownREIT V OP Units") were issued to the existing partners of the contributor of the Avalon at Westmont acquisition. The limited partnership agreement was amended on December 22, 1997 to provide for the issuance of 511,309 DownREIT V OP Units to existing partners of the contributor of the TCR Communities. 22 26 All Ballston OP Units and DownREIT V OP Units (collectively, the "OP Units") were issued pursuant to an exemption from registration provided in Rule 506 of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). Under the terms of the limited partnership agreements, holders of the OP Units have the right to require the partnerships to redeem their OP Units for cash, subject to certain conditions. The Company may, however, elect to deliver an equivalent number of shares of common stock to the holders of OP Units in satisfaction of the partnership obligation to redeem the OP Units for cash. As of December 31, 1997, no OP Units have been redeemed by the Company ITEM 6. SELECTED FINANCIAL DATA The following table below provides historical consolidated financial, operating and other data for the Company and the Predecessor. The table should be read with the consolidated financial statements of the Company and the notes included in this report.
COMPANY(1) PREDECESSOR(1) -------------------------------------------------------------- -------------- YEARS ENDED 11-18-93 1-1-93 ------------------------------------------------- THROUGH THROUGH 12-31-97 12-31-96 12-31-95 12-31-94 12-31-93 11-17-93 ---------- ---------- ---------- ---------- ---------- -------------- (Dollars in thousands, except per share information) OPERATING INFORMATION: Revenue: Rental income $ 169,442 $ 123,354 $ 94,821 $ 71,756 $ 7,241 $ 50,102 Management fees 1,029 1,439 1,926 2,077 211 1,344 Other income 633 420 466 468 21 410 ---------- ---------- ---------- ---------- ---------- -------- Total revenue 171,104 125,213 97,213 74,301 7,473 51,856 ---------- ---------- ---------- ---------- ---------- -------- Expenses: Operating expenses 61,058 47,074 35,998 27,808 2,770 21,620 Interest expense 16,977 9,545 11,056 5,687 632 24,557 Depreciation and amortization 29,113 20,956 16,558 12,342 1,247 10,851 General and administrative 5,093 3,438 3,132 2,354 200 1,341 Development costs write-off 650 450 400 400 47 -- ---------- ---------- ---------- ---------- ---------- -------- Total expenses 112,891 81,463 67,144 48,591 4,896 58,369 ---------- ---------- ---------- ---------- ---------- -------- Equity in income of unconsolidated joint ventures 5,689 1,025 440 701 44 344 Interest income 1,346 887 953 872 118 599 Investment interest expense -- -- -- -- -- (204) Minority interest 174 495 633 733 44 -- ---------- ---------- ---------- ---------- ---------- -------- Income (loss) before gain on sale of communities and extraordinary items 65,422 46,157 32,095 28,016 2,783 (5,774) Gain on sale of communities 677 7,850 -- -- -- -- ---------- ---------- ---------- ---------- ---------- -------- Income (loss) before extraordinary items 66,099 54,007 32,095 28,016 2,783 (5,774) Extraordinary items (1,183) (2,356) (1,158) -- -- 10,194 ---------- ---------- ---------- ---------- ---------- -------- Net income 64,916 51,651 30,937 28,016 2,783 4,420 Dividends attributable to preferred stock (19,656) (10,422) -- -- -- -- ---------- ---------- ---------- ---------- ---------- -------- Net income available to common stockholders $ 45,260 $ 41,229 $ 30,937 $ 28,016 $ 2,783 $ 4,420 ========== ========== ========== ========== ========== ======== PER COMMON SHARE AND SHARE INFORMATION: Income before extraordinary items -- basic(2) $ 1.26 $ 1.42 $ 1.13 $ 1.10 $ 0.12 $ -- Income before extraordinary items -- diluted(2) $ 1.26 $ 1.41 $ 1.13 $ 1.09 $ 0.12 $ -- Net income -- basic(2) $ 1.23 $ 1.34 $ 1.09 $ 1.10 $ 0.12 $ -- Net income -- diluted(2) $ 1.22 $ 1.34 $ 1.09 $ 1.09 $ 0.12 $ -- Cash dividends paid(2) $ 1.53 $ 1.49 $ 1.46 $ 1.08 $ 0.17 $ -- Weighted average shares outstanding -- basic(2) 36,762,781 30,739,504 28,365,427 25,486,932 22,432,494 N/A Weighted average shares outstanding -- diluted(2) 37,006,148 30,836,193 28,410,803 25,602,032 22,432,494 N/A
23 27
COMPANY(1) PREDECESSOR(1) -------------------------------------------------------------- -------------- YEARS ENDED 11-18-93 1-1-93 ------------------------------------------------- THROUGH THROUGH 12-31-97 12-31-96 12-31-95 12-31-94 12-31-93 11-17-93 ---------- ---------- ---------- ---------- ---------- -------------- (Dollars in thousands, except per share information) OTHER INFORMATION: Funds from Operations(3) $ 73,525 $ 54,622 $ 46,879 $ 39,485 $ 3,943 $ 4,588 Gross EBITDA(4) $ 110,166 $ 75,771 $ 58,756 $ 45,173 $ 4,544 $ 29,239 Total apartment communities(5) 64 45 38 31 22 21 Total number of apartment homes(5) 19,318 13,368 11,255 9,847 7,294 7,044 Development Starts: Communities 6 4 7 4 -- -- Apartment Homes 1,539 1,528 1,178 1,141 -- -- Developments Completed: Communities 7 6 1 3 -- -- Apartment Homes 1,985 1,390 246 958 -- -- Acquisitions Completed: Communities 15 6 7 6 1 -- Apartment Homes 3,884 1,765 1,304 1,594 250 -- Dispositions Completed: Communities 1 2 -- -- -- -- Apartment Homes 306 518 -- -- -- -- BALANCE SHEET INFORMATION: Real estate, before accumulated depreciation $1,534,986 $1,081,906 $ 782,433 $ 593,632 $ 426,570 $ -- Total assets $1,529,703 $1,082,771 $ 786,711 $ 602,558 $ 451,851 $ -- Notes payable and Unsecured Facilities $ 506,129 $ 310,606 $ 340,686 $ 162,265 $ 94,648 $ -- CASH FLOW INFORMATION: Net cash provided by operating activities $ 93,649 $ 65,841 $ 56,314 $ 36,453 $ 4,426 $ 6,984 Net cash used in investing activities $ (421,420) $ (261,033) $ (189,582) $ (154,252) $ (168,915) $(28,971) Net cash provided by financing activities $ 320,252 $ 207,632 $ 132,207 $ 114,304 $ 170,846 $ 11,901
24 28 Notes to Selected Financial Data (1) See consolidated financial statements of the Company and the related notes included in this report. (2) Share and per share information is only presented for the Company because no common stock was outstanding during periods presented for the Predecessor. The first full year operating as a public company was 1994 and the timing of dividend declarations and payments was such that only three dividends were paid in 1994. (3) Management generally considers Funds from Operations ("FFO") to be an appropriate measure of the operating performance of the Company because it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. The Company believes that in order to facilitate a clear understanding of the operating results of the Company, FFO should be examined in conjunction with net income in the consolidated financial data presented herein. FFO is determined in accordance with a resolution adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), and is defined as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income an indication of the Company's performance, or to net cash flows from operating activities as determined by GAAP as a measure of liquidity, and is not necessarily indicative of cash available to fund cash needs. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. The calculation of FFO for the periods presented is reflected in the following table: SUMMARY CALCULATION OF FUNDS FROM OPERATIONS
COMPANY PREDECESSOR -------------------------------------------------------------- ----------- YEARS ENDED 11-18-93 1-1-93 ------------------------------------------------- THROUGH THROUGH 12-31-97 12-31-96 12-31-95 12-31-94 12-31-93 11-17-93 -------- -------- -------- -------- -------- -------- Net income $ 64,916 $ 51,651 $ 30,937 $ 28,016 $ 2,783 $ 4,420 Depreciation (real estate related) 27,360 18,566 14,468 11,153 1,122 10,083 Joint venture adjustments 399 321 316 316 38 279 Preferred stock dividends (19,656) (10,422) -- -- -- -- Gain on sale of communities (677) (7,850) -- -- -- -- Extraordinary items 1,183 2,356 1,158 -- -- (10,194) ---------- ---------- ---------- ---------- ---------- ---------- Funds from Operating $ 73,525 $ 54,622 $ 46,879 $ 39,485 $ 3,943 $ 4,588 ========== ========== ========== ========== ========== ========== Weighted average shares outstanding-basic 36,762,781 30,739,504 28,365,427 25,486,932 22,432,494 -- ========== ========== ========== ========== ========== ==========
(4) Gross EBITDA represents earnings before interest, income taxes, depreciation and amortization, gain on sale of communities and extraordinary items. Gross EBITDA is relevant to an understanding of the economics of the Company because it indicates cash flow available from Company operations to service fixed obligations. Gross EBITDA should not be considered as an alternative to operating income, as determined in accordance with GAAP, as an indicator of the Company's operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. See "Communities" for property EBITDA and the related definition. (5) These amounts include communities and apartment homes only after stabilized occupancy has occurred. A community is considered by the Company to have achieved stabilized occupancy on the earlier of (i) the first day of any month in which the community reaches 94% physical occupancy or (ii) one year after completion of construction. These amounts also include Falkland Chase, which has 450 apartment homes, Avalon Run, which has 426 apartment homes and Avalon Grove, which has 402 apartment homes, all of which are joint venture investments. 25 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-K constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The words "believe," "expect," "anticipate," "intend," "estimate", "assume" and other similar expressions which are predictions of or indicate future events and trends and which do not relate solely to historical matters identify forward-looking statements. In addition, information concerning construction, occupancy and completion of Development Communities and Development Rights and related cost and EBITDA estimates are forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the control of the Company and may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the following: the Company may not be successful in managing its current growth in the number of apartment communities and the related growth of its business operations; the Company's expansion into new geographic market areas may not produce financial results that are consistent with its historical performance; acquisitions of portfolios of apartment communities may result in the Company acquiring communities that are more expensive to manage and portfolio acquisitions may not be successfully completed, resulting in charges to earnings; the Company may fail to secure or may abandon development opportunities; construction costs of a community may exceed original estimates; construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs and reduced rental revenues; occupancy rates and market rents may be adversely affected by local economic and market conditions which are beyond management's control; financing may not be available on favorable terms; the Company's cash flow may be insufficient to meet required payments of principal and interest; and existing indebtedness may not be able to be refinanced or the terms of such refinancing may not be as favorable as the terms of existing indebtedness. OVERVIEW The following discussion should be read in conjunction with the consolidated financial statements and related notes included in this report. The Company's operations consist of the development, construction, acquisition and operation of apartment communities in the Mid-Atlantic, Northeast and the Midwest regions of the United States. The Company also recently announced plans to expand to certain high barrier-to-entry markets of the West Coast. As of December 31, 1997, the Company held a fee simple ownership interest in 52 operating communities (one of which, Avalon at Center Place, is on land subject to a 149 year land lease), a general partnership interest in three other operating communities (a 50% interest in Falkland Chase, a 49% interest in Avalon Run, and a 50% interest in Avalon Grove), a 99% general partner interest in two partnerships structured as DownREITs (Avalon at Ballston Quincy and Avalon at Ballston Vermont, which are operated as a single community, six communities acquired from Trammell Crow Residential - Midwest and a single community located in Westmont, Illinois) and a 100% interest in a senior participating mortgage note secured by another operating community (Avalon Arbor) which is accounted for as an investment in real estate. The Company also holds a fee simple ownership interest in nine Development Communities. The existing DownREITs have been structured so that substantially all of the economic interests of these partnerships accrue to the benefit of the Company. The Company believes that it is unlikely that the limited partners in these partnerships will receive any financial return on their limited partnership interests other than the stated distributions on their Units of the Operating Partnerships ("Units") or as a result of the possible future conversion of their Units into shares of Common Stock. The DownREIT partnerships are consolidated for financial reporting purposes. On March 9, 1998, the Company announced that it has entered into a definitive strategic merger agreement with Bay Apartment Communities, Inc. ("Bay"), pursuant to which the Company will be merged into Bay, the surviving entity (the "Merger"). Under the terms of the agreement, each outstanding common share of the Company will be exchanged for 0.7683 shares of common stock of Bay. The Merger will be structured as a purchase of the Company by Bay for accounting purposes. The Merger is expected to close in June 1998 and is 26 30 subject to the approval of both companies' shareholders and other customary regulatory conditions. There can be no assurance that the Merger will be consummated, that the required conditions to closing will be met, or that the Merger will be not terminated. The surviving company, to be named Avalon Bay Communities, Inc. (the "New Company"), will own 140 apartment communities containing 40,506 apartment homes in 29 markets in 15 states and the District of Columbia, based on each company's current portfolio and assuming the scheduled completion of 16 apartment communities under development. On March 9, 1998, the Company announced that it has entered into a definitive agreement to acquire selected assets on a presale basis from Trammell Crow Residential - Pacific Northwest (TCR-NW). The presale acquisitions are expected to be completed during the next 24 to 36 months. The acquisitions include seven communities in the Seattle, Washington market and one community in the Portland, Oregon market for a total investment by the Company of up to $279 million. Together, these eight communities contain 2,411 apartment homes. The Company will manage these communities after acquiring ownership. RESULTS OF OPERATIONS The changes in operating results from period-to-period are primarily the result of increases in the number of apartment homes owned due to the development and acquisition of additional communities. Where appropriate, comparisons are made on a weighted average basis for the number of occupied apartment homes in order to adjust for such changes in the number of apartment homes. For Stabilized Communities, all occupied apartment homes owned are included in the calculation of weighted average occupied apartment homes for each comparable reporting period. For communities in the initial lease-up phase, only apartment homes that are completed and occupied are included in the weighted average number of occupied apartment homes calculation for each reporting period. COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996 The Company's principal markets are characterized by high barriers-to-entry and restrictive zoning regulations, and it often requires several years to obtain entitlements to build an apartment community. At December 31, 1997, Management had positioned the Company's portfolio of Stabilized Communities to a physical occupancy level of 95.9%. For the year ended December 31, 1997, these communities achieved an average economic occupancy of 95.9% compared to 95.2% for 1996. This high occupancy was achieved through aggressive marketing efforts combined with limited and targeted pricing adjustments. It is Management's strategy to maximize total rental revenue through management of rental rates and occupancy levels. If market and economic conditions change, Management may adopt a strategy of maximizing rental rates, which could lead to lower occupancy levels, if Management believes that this strategy will maximize rental revenue. Given the currently high occupancy level of the portfolio, Management anticipates that, for the foreseeable future, rental revenue and net income gains from Stabilized Communities will continue primarily through higher rental rates and enhanced operating cost leverage provided by high occupancy, rather than through occupancy gains. Although Management believes the current occupancy levels can be sustained for the foreseeable future at current rental rates, no assurance can be given in this regard. Income before gain on sale of communities and extraordinary items increased $19,265,000 (41.7%) to $65,422,000 in 1997 from $46,157,000 in 1996. The principal reasons for this increase are additional operating income from communities developed or acquired during 1996 and 1997 as well as growth in operating income from existing communities resulting principally from increases in rental revenue. The notable reasons for these increases are discussed in the following paragraphs. Rental income increased $46,088,000 (37.4%) to $169,442,000 in 1997 from $123,354,000 in 1996. Of this increase, $3,766,000 relates to rental revenue increases from Established Communities and $42,322,000 is attributable to the addition of newly completed or acquired apartment homes. Overall Portfolio - The $46,088,000 increase in rental income is primarily due to increases in the weighted average number of occupied apartment homes as well as an increase in the weighted average monthly rental income per occupied apartment home. The weighted average number of occupied apartment homes increased from 11,043 apartment homes during 1996 to 14,450 apartment homes during 1997 as a result of the development and acquisition of new communities and an increase in overall occupancy of Established Communities. Weighted average monthly 27 31 revenue per occupied apartment home increased $71 (8.0%) from $893 in 1996 to $964 in 1997. Average economic occupancy increased .7% from 95.2% in 1996 to 95.9% in 1997. Established Communities - Rental revenue increased $3,766,000 (3.9%) due to strengthening market conditions and the resulting impact on rents. Weighted average monthly revenue per occupied apartment home increased $31 (3.4%) from $899 in 1996 to $930 in 1997. Average economic occupancy increased .5% from 95.7% to 96.2%. When combined with a slight decline in other income, total revenue increased $3,744,000 (3.8%) from $97,360,000 in 1996 to $101,104,000 in 1997. Management fees decreased $410,000 (28.5%) to $1,029,000 in 1997 from $1,439,000 in 1996. The decrease is primarily due to a decline in the number of apartment homes managed for third-party owners during 1997. This decline is due to the cancellation of management contracts of some third-party communities in 1996 and 1997 as well as the acquisition of one Current Community in the second quarter of 1996 and another Current Community in the second quarter of 1997 that were previously managed by the Company for third-party owners. Operating expenses (including write-off of deferred development costs) increased $14,184,000 (29.8%) to $61,708,000 in 1997 from $47,524,000 in 1996. Overall Portfolio - This increase is primarily due to the acquisition of new communities as well as the completion of Development Communities whereby maintenance, property taxes, insurance and other costs are expensed as such communities move from the initial construction and lease-up phase to the stabilized operating phase. Established Communities - Operating expenses increased $713,000 (2.2%) to $33,173,000 in 1997 from $32,460,000 in 1996. This increase was concentrated in the marketing, maintenance, and insurance categories, partially offset by lower snow removal costs as a result of the mild winter throughout the Northeast and Mid-Atlantic regions during the first quarter of 1997 as compared to the severe winter weather experienced during the first quarter of 1996. Interest expense increased $7,432,000 (77.9%) to $16,977,000 in 1997 from $9,545,000 in 1996. This increase is primarily attributable to higher average outstanding balances under the Company's Unsecured Facilities in 1997 compared to 1996. In addition, the Company assumed approximately $29,900,000 of conventional debt resulting from the acquisitions of two communities in 1996 and completed the loan closings related to the tax-exempt financing for the Avalon West and Avalon Fields communities in December 1996 and April 1997, respectively. These increases were offset by lower interest and credit enhancement costs in connection with the completion of the tax-exempt credit enhancement facility with the Federal National Mortgage Association ("Fannie Mae") in the third quarter of 1996 and lower pricing under the Unsecured Facilities. Depreciation and amortization increased $8,157,000 (38.9%) to $29,113,000 in 1997 from $20,956,000 in 1996. This increase reflects additional depreciation expense for the increased number of acquired and developed communities. General and administrative increased $1,655,000 (48.1%) to $5,093,000 in 1997 from $3,438,000 in 1996. The increase is primarily due to higher telecommunication costs and staff additions related to the implementation of the company-wide systems enhancement program, as well as higher compensation expense under the restricted stock grant program. Costs related to positioning the Company for further geographic expansion are also present in 1997 expenses and not in 1996. Equity in income of unconsolidated joint ventures increased $4,664,000 to $5,689,000 in 1997 from $1,025,000 in 1996. This increase is principally the result of non-recurring income from the Avalon Grove joint venture in which the Company was allocated 100% of the lease-up period income in 1997. Gain on sale of communities totaled $677,000 during 1997 as a result of the sale of one apartment community in Frederick, Maryland compared to the gain of $7,850,000 on the sale of two communities in 1996. 28 32 Extraordinary items totaled $1,183,000 during 1997 and reflect the write-off of unamortized deferred financing costs associated with the early retirement of the Company's previous $165,000,000 unsecured credit facility. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 Income before gain on sale of communities and extraordinary items increased $14,062,000 (43.8%) to $46,157,000 in 1996 from $32,095,000 in 1995. The principal reasons for this increase are additional operating income from newly completed and acquired communities during 1995 and 1996 as well as growth in operating income from Established Communities resulting principally from increases in rental revenue. The notable reasons for these increases are discussed in the following paragraphs. Rental income increased $28,533,000 (30.1%) to $123,354,000 in 1996 from $94,821,000 in 1995. Of this increase, $3,591,000 relates to rental revenue increases from Established Communities and $24,942,000 is attributable to the addition of newly completed or acquired apartment homes. Overall Portfolio - The $28,533,000 increase in rental income is primarily due to increases in the weighted average number of occupied apartment homes as well as an increase in the weighted average monthly rental income per occupied apartment home. The weighted average number of occupied apartment homes increased from 9,304 apartment homes during 1995 to 11,043 apartment homes during 1996 as a result of the development and acquisition of new communities. Weighted average monthly revenue per occupied apartment home increased $47 (5.5%) from $846 in 1995 to $893 in 1996. Average economic occupancy decreased .6% from 95.8% in 1995 to 95.2% in 1996. Established Communities - Rental revenue increased $3,591,000 (4.4%) due to strengthening market conditions and the resulting impact on rents and occupancy. Weighted average monthly revenue per occupied apartment home increased $41 (4.8%) from $849 in 1995 to $890 in 1996. Average economic occupancy decreased .4% from 96.3% to 95.9%. When combined with a slight decline in other income, total revenue increased by $3,553,000 in 1996, a 4.3% increase from 1995. Management fees decreased $487,000 (25.3%) to $1,439,000 in 1996 from $1,926,000 in 1995. The decrease is primarily due to a decline in the number of apartment homes managed for third-party owners in 1996. This decline is due to the sale and cancellation of management contracts of some third-party communities in 1995 and 1996 as well as the acquisition of two Current Communities in the third quarter of 1995 and one Current Community in the second quarter of 1996 that were previously managed by the Company for third-party owners prior to their acquisition. Operating expenses (including write-off of deferred development costs) increased $11,126,000 (30.6%) to $47,524,000 in 1996 from $36,398,000 in 1995. Overall Portfolio - This increase is primarily due to the acquisition of new communities as well as the completion of Development Communities whereby maintenance, property taxes, insurance and other costs are expensed as such communities move from the initial construction and lease-up phase to the operating phase. The increased costs of snow removal and other weather related expenses as a result of the severe winter during the first quarter of 1996 also contributed to the increase. Established Communities - Operating expenses increased $1,202,000 (4.4%) to $28,438,000 from $27,236,000 in 1995. This increase was concentrated in the maintenance category principally due to the severe winter weather throughout the Northeast and Mid-Atlantic regions during the first quarter of 1996 as well as increases in the property taxes for newly stabilized development communities and marketing expenses. Interest expense decreased $1,511,000 (13.7%) to $9,545,000 in 1996 from $11,056,000 in 1995. This decrease is primarily attributable to the sale of 4,872,000 shares of the Company's Common Stock, the sale of 4,455,000 shares of the Company's Series A Cumulative Redeemable Preferred Stock and the sale of 4,300,000 shares of the Company's Series B Cumulative Redeemable Preferred Stock in 1996, as the net cash proceeds from the sales were used principally to retire indebtedness under the Company's Unsecured Facilities and variable rate construction loans and to repay the mortgage note encumbering the Avalon at Carter Lake community. Lower 29 33 short-term interest rates under the Unsecured Facilities due to negotiated rate reductions as well as lower market interest rates also contributed to the decline. Finally, an increase in capitalized interest expense due to an increase in the number of apartment homes under construction and lower interest and credit enhancement costs in connection with the completion of the tax-exempt, credit enhancement facility with Fannie Mae are other reasons for the overall decline. Depreciation and amortization increased $4,398,000 (26.6%) to $20,956,000 in 1996 from $16,558,000 in 1995. This increase reflects additional depreciation expense for recently acquired and developed communities and the amortization of the costs related to the issuance of tax-exempt custodial receipts in May 1995 as well as the costs related to the closing of the Unsecured Facility and the issuance of $100,000,000 of unsecured senior notes in September 1995. General and administrative increased $306,000 (9.8%) to $3,438,000 in 1996 from $3,132,000 in 1995. This increase is primarily due to increased compensation expense from the introduction of the restricted stock grant program under the Amended and Restated 1995 Equity Incentive Plan (and related legal and proxy costs) as well as staff additions related to growth in the Company's portfolio and the implementation of the company-wide systems enhancement program. Equity in income of unconsolidated joint ventures increased $585,000 to $1,025,000 in 1996 from $440,000 in 1995. This increase is principally the result of non-recurring income from the anticipated Avalon Grove joint venture in which the Company is allocated 100% of the lease-up period income. Increased net income from the Falkland Partners joint venture due to an increase in rental revenue as well as the income from the Town Close Associates joint venture that was formed in June 1995 also contributed to the increase. Gain on sale of communities totaled $7,850,000 during 1996 as a result of the sale of two apartment communities near Hartford, Connecticut. Extraordinary items totaled $2,356,000 during 1996 and reflect the write-off of unamortized deferred financing costs associated with the refinancing of tax-exempt bonds in conjunction with the completion of the new credit enhancement facility with Fannie Mae. 30 34 DISCUSSION OF CAPITALIZED COMMUNITY IMPROVEMENTS AND EXPENSED TURNOVER ("MAKE READY") COSTS The Company maintains a policy with respect to capital expenditures that generally provides that only non-recurring expenditures are capitalized. Improvements and upgrades are capitalized only if the item exceeds $15,000, extends the useful life of the asset and is not related to making an apartment home ready for the next resident. Under this policy, virtually all capitalized costs are non-recurring, as recurring make ready costs are expensed as incurred, including costs of carpet and appliance replacements, floor coverings, interior painting and other redecorating costs. Purchases of personal property (such as computers and furniture) are capitalized only if the item is a new addition (i.e., not a replacement) and only if the item exceeds $2,500. The application of these policies in 1997 resulted in capitalized expenditures for Stabilized Communities of approximately $2,286,000 or $155 per apartment home. For the year ended December 31, 1997, the Company charged to maintenance expense, including carpet and appliance replacements, a total of approximately $12,700,000 for Stabilized Communities or $863 per apartment home. Management anticipates that capitalized costs per home will gradually rise as the Company's portfolio of communities matures. The table on the following page is a summary of expenditures for both recurring maintenance costs (expensed) and community upgrades (capitalized) for 1997. 31 35 EXPENDITURES FOR COMMUNITY AND CORPORATE UPGRADES (CAPITALIZED) AND COMMUNITY MAINTENANCE (EXPENSED) (Dollars in thousands, except per home data)
1997 Capitalized Costs ----------------------------------------- Acquisitions, Non-Revenue Construction Generating Capx Number Balance at Balance at and Revenue ------------------- Community of Homes 12-31-96 (1) 12-31-97 (1) Generating Costs Total Per Home - ----------------------------- ------------ -------------- -------------- -------------------- ------- ---------- STABILIZED - ---------- Avalon Watch 512 $ 28,340 $ 28,423 $ -- $ 83 $ 162 Avalon Pavilions 932 56,523 56,693 -- 170 182 Avalon Glen 238 30,077 30,244 32 135 567 Avalon Walk I 430 34,505 34,587 26 56 130 Avalon Walk II 334 23,597 23,740 -- 143 428 Avalon View 288 17,773 17,812 -- 39 135 Avalon Park 372 19,717 19,948 118 113 304 Avalon at Ballston - Washington Towers 344 36,797 36,893 -- 96 279 Avalon at Gayton 328 9,830 9,945 35 80 244 Avalon at Hampton I 186 3,702 3,764 26 36 194 Avalon at Hampton II 231 8,144 8,229 -- 85 368 Avalon at Dulles 236 11,599 11,706 74 33 140 Avalon Knoll 300 7,905 8,067 114 48 160 Avalon Lea 296 16,101 16,130 -- 29 98 Avalon at Fairway Hills I 192 9,368 9,454 53 33 172 Avalon Ridge 432 25,030 25,269 156 83 192 Avalon at Symphony Glen 174 8,079 8,166 53 34 195 Avalon at Park Center 492 37,337 37,658 142 179 364 4100 Mass. Avenue 308 34,879 34,931 15 37 120 Avalon Woods 268 8,235 8,319 -- 84 313 Avalon at Carter Lake 259 11,502 11,560 -- 58 224 Avalon Pointe 140 7,748 7,841 45 48 343 Avalon Landing 158 9,261 9,303 -- 42 266 Avalon Birches 312 13,419 13,461 3 39 125 Avalon at Lake Arbor 209 11,900 11,950 1 49 234 Avalon at Decoverly 368 30,978 31,151 109 64 174 Avalon Summit 245 16,152 16,289 128 9 37 Avalon Towers 109 15,826 15,943 -- 117 1,073 Longwood Towers 307 16,620 21,501 4,868 13 42 Avalon Fields 192 14,262 14,298 -- 36 188 Avalon West 120 10,624 10,810 173 13 108 Avalon Chase 360 23,615 23,661 -- 46 128 Avalon Pines 174 8,578 8,659 54 27 155 Avalon at Fairway Hills II 527 33,807 33,924 94 23 44 Avalon at Boulders 284 16,038 16,087 -- 49 173 AutumnWoods 420 30,474 30,631 149 8 19 Avalon Run East 206 16,002 16,233 231 -- -- Avalon Station 223 11,838 12,001 163 -- -- Avalon Cove 504 85,831 90,291 4,460 -- -- Avalon Crossing 132 13,387 13,778 391 -- -- Avalon Springs 102 13,628 15,775 2,147 -- -- Avalon at Ballston - Vermont/Quincy (2) 454 -- 46,722 46,707 15 33 Avalon at Center Place (2) 225 -- 26,424 26,415 9 40 Avalon at Providence Park (2) 140 -- 11,066 11,056 10 71 Avalon Gates 340 30,348 35,369 5,021 -- -- Avalon at Lexington 198 14,117 14,784 667 -- -- Avalon Green 105 12,294 12,439 130 15 -- Avalon Commons 312 17,603 31,732 14,129 -- -- Avalon Crescent 558 36,883 56,625 19,742 -- -- Avalon Court 154 5,048 17,231 12,183 -- -- ------------ ----------- ----------- ------------ ------- -------- 14,730 955,321 1,107,517 149,910 2,286 155 ============ =========== =========== ============ ======= ======== 1997 Maintenance Expensed ---------------------- Community Total Per Home - ----------------------------- -------- ------------ STABILIZED - ---------- Avalon Watch $ 423 $ 826 Avalon Pavilions 532 571 Avalon Glen 304 1,277 Avalon Walk I 285 663 Avalon Walk II 234 701 Avalon View 365 1,267 Avalon Park 410 1,102 Avalon at Ballston - Washington Towers 348 1,012 Avalon at Gayton 313 954 Avalon at Hampton I 215 1,156 Avalon at Hampton II 232 1,004 Avalon at Dulles 279 1,182 Avalon Knoll 312 1,040 Avalon Lea 300 1,014 Avalon at Fairway Hills I 194 1,010 Avalon Ridge 412 954 Avalon at Symphony Glen 217 1,247 Avalon at Park Center 382 776 4100 Mass. Avenue 383 1,244 Avalon Woods 207 772 Avalon at Carter Lake 285 1,100 Avalon Pointe 159 1,136 Avalon Landing 205 1,297 Avalon Birches 223 715 Avalon at Lake Arbor 306 1,464 Avalon at Decoverly 257 698 Avalon Summit 223 910 Avalon Towers 235 2,156 Longwood Towers 378 1,231 Avalon Fields 148 771 Avalon West 107 892 Avalon Chase 372 1,033 Avalon Pines 116 667 Avalon at Fairway Hills II 472 896 Avalon at Boulders 275 968 AutumnWoods 330 786 Avalon Run East 122 592 Avalon Station 165 740 Avalon Cove 282 560 Avalon Crossing 130 985 Avalon Springs 79 775 Avalon at Ballston - Vermont/Quincy (2) 433 954 Avalon at Center Place (2) 142 631 Avalon at Providence Park (2) 110 786 Avalon Gates 135 397 Avalon at Lexington 212 1,071 Avalon Green 187 1,781 Avalon Commons 104 333 Avalon Crescent 156 280 Avalon Court 19 123 -------- ------ 12,714 863 ======== ======
32 36 EXPENDITURES FOR COMMUNITY AND CORPORATE UPGRADES (CAPITALIZED) AND COMMUNITY MAINTENANCE (EXPENSED) - CONTINUED (Dollars in thousands, except per home data)
Number Balance at Balance at Community of Homes 12-31-96 (1) 12-31-97 (1) - ------------------------------------------ ------------ -------------- -------------- NEWLY ACQUIRED - -------------- Village Park of Westmont (2) 400 -- 25,743 Village Park of Troy (2) 544 -- 31,290 Avalon Heights (2) 225 -- 15,308 Avalon at Willow Lake (2) 230 -- 14,944 Avalon at Geist (2) 146 -- 12,080 Avalon at Montgomery (2) 264 -- 15,153 Avalon Devonshire (2) 498 -- 36,143 Avalon at Danada Farms (2) 295 -- 37,571 Avalon at Stratford Green (2) 192 -- 21,572 Aspen Meadows (2) 214 -- 12,435 ----------- ------------- ----------- 3,008 -- 222,239 ----------- ------------- ----------- NEW DEVELOPMENTS 2,422 70,678 154,762 - ---------------- ----------- ------------- ----------- OTHER - ----- Longwood Towers - Renovation -- 6,829 15,876 Avalon Arbor (4) 302 27,822 28,461 Avalon Farm (5) -- 17,332 -- Corporate Level Expenditures -- 3,924 6,131 ----------- ------------- ----------- Grand Total 20,462 (6) 1,081,906 1,534,986 =========== ============= =========== 1997 Capitalized Costs ----------------------------------------- Acquisitions, Non-Revenue 1997 Construction Generating Capx Maintenance Expensed and Revenue ------------------- ---------------------- Community Generating Costs Total Per Home Total Per Home - ------------------------------------------ -------------------- ------- ---------- -------- ------------ NEWLY ACQUIRED - -------------- Village Park of Westmont (2) 25,743 -- -- -- -- Village Park of Troy (2) 31,290 -- -- -- -- Village Green of Madison Heights (2) 15,308 -- -- -- -- Avalon at Willow Lake (2) 14,944 -- -- -- -- Avalon at Geist (2) 12,080 -- -- -- -- Avalon at Montgomery (2) 15,153 -- -- -- -- Avalon Devonshire (2) 36,143 -- -- -- -- Avalon at Danada Farms (2) 37,571 -- -- -- -- Avalon at Stratford Green (2) 21,572 -- -- -- -- Aspen Meadows (2) 12,435 -- -- -- -- ------------ -------- -------- --------- ------- 222,239 -- -- -- -- ------------ -------- -------- --------- ------- NEW DEVELOPMENTS 84,084 -- -- 63 N/A - ---------------- ------------ -------- -------- --------- ------- OTHER - ----- Longwood Towers - Renovation 9,047 (3) -- -- -- -- Avalon Arbor (4) 639 -- N/A 349 1,156 Avalon Farm (5) -- 36 N/A 166 N/A Corporate Level Expenditures 2,207 -- N/A -- -- ------------ ------- -------- --------- ------- Grand Total 468,126 2,322 N/A 13,292 N/A ============ ======== ======== ========= =======
(1) Costs are presented in accordance with GAAP and exclude the step-up in basis attributed to continuing investors. (2) Acquired in 1997. (3) Represents renovation costs incurred. (4) Ownership through ownership of the Avalon Arbor mortgage note. See Note 5 to the consolidated financial statements. Increase in capitalized value relates primarily to accrued interest and does not reflect capitalized community upgrades. (5) Sold in 1997. (6) Excludes Falkland Chase, Avalon Run and Avalon Grove, a total of 1,278 apartment homes owned by joint ventures in which the Company holds a 50% interest, 49% interest and 50% interest, respectively. 33 37 LIQUIDITY AND CAPITAL RESOURCES Liquidity. A primary source of liquidity to the Company is cash flows from operations. Operating cash flows have historically been determined by the number of apartment homes, rental rates, occupancy levels and the Company's expenses with respect to such apartment homes. The Company regularly reviews short-term liquidity needs and the adequacy of Funds from Operations and other expected liquidity sources to meet these needs. The Company believes that its principal short-term liquidity needs are to fund normal recurring operating expenses, debt service requirements and the minimum distribution required to maintain the Company's REIT qualification under the Code. The Company anticipates that these needs will be fully funded from cash flows provided by operating activities. Any short-term liquidity needs not provided by current operating cash flows would be funded from the Company's Unsecured Facilities. Cash flows used in investing activities and provided by financing activities have historically been dependent on the number of apartment homes under active development and construction during any given period. Cash and cash equivalents decreased $7,519,000 from $14,241,000 at December 31, 1996 to $6,722,000 at December 31, 1997 due to the excess of cash flow used in investing activities over cash provided by financing and operating activities._ Net cash provided by operating activities increased $27,808,000 from $65,841,000 to $93,649,000 primarily due to an increase in operating income from newly developed and acquired communities and Established Communities and improved operating margins from the absence in 1997 of severe winter weather. Net cash flows used in investing activities increased $160,387,000 from $261,033,000 to $421,420,000, primarily due to the acquisition of fifteen communities for $310,917,000 in 1997, offset by the net proceeds of $16,577,000 from the sale of one apartment community in 1997 compared to the acquisition of six communities for $112,512,000 in 1996, offset by the net proceeds of $31,663,000 from the sale of two apartment communities in 1996. Net cash provided by financing activities increased $112,620,000 from $207,632,000 to $320,252,000, primarily due to the net proceeds received from the completion of the sale of 8,403,000 shares of Common Stock and the issuance of $110,000,000 unsecured senior notes and increased borrowings under the Unsecured Facilities in 1997, offset by an increase in dividends paid. Cash and cash equivalents increased $12,440,000 from $1,801,000 at December 31, 1995 to $14,241,000 at December 31, 1996 due to the excess of cash provided by financing and operating activities over cash flow used in investing activities, primarily due to the issuance of $351,000,000 of equity and debt securities in 1996 and the sale of two communities in the fourth quarter of 1996. Net cash provided by operating activities increased $9,527,000 from $56,314,000 to $65,841,000 primarily due to an increase in operating income from newly developed and acquired communities and Established Communities, offset by a decline in margins due to severe winter weather in 1996. Net cash flows used in investing activities increased $71,451,000 from $189,582,000 to $261,033,000, due to an increase in the number of apartment homes under development from an average of 2,030 in 1995 to 2,910 in 1996 and the acquisition of six communities for $109,025,000 in 1996 compared to the acquisition of seven communities for $87,958,000 in 1995, offset by the net proceeds of $31,663,000 from the sale of two apartment communities in 1996. Net cash provided by financing activities increased $75,425,000 from $132,207,000 to $207,632,000, primarily due to the net proceeds received from the completion of the sale of 4,872,000 shares of the Company's Common Stock and the sale of 8,755,000 shares of the Company's Series A and Series B Cumulative Redeemable Preferred Stock in 1996 and increased borrowings under the Unsecured Facilities, offset by an increase in dividends paid. 34 38 The Company's 7-3/8%, 6-7/8% and 6-5/8% unsecured senior notes will mature in 2002, 2007 and 2005, respectively. Additionally, mortgage indebtedness on the Avalon Pines and Avalon Walk II apartment communities will mature in 2003 and 2004, respectively. Since Management anticipates that no significant portion of the principal of such indebtedness will be repaid prior to maturity and the Company may not have funds on hand sufficient to repay such indebtedness, it will be necessary for the Company to refinance this debt. Such refinancing could be accomplished through additional debt financing, which may be collateralized by mortgages on individual communities or groups of communities, by uncollateralized private or public debt offerings or by additional equity offerings. There can be no assurance that such additional debt financing or debt offerings will be available on terms satisfactory to the Company. Currently, no other permanent indebtedness will require balloon payments prior to the year 2005. Capital Resources. To sustain the Company's active development and acquisitions program, continuous access to the capital markets is required. Management intends to match the long-term nature of its real estate assets with long-term cost effective capital. The Company has demonstrated regular and continuous access to the capital markets since its initial public offering, raising approximately $1.1 billion. Approximately $366.0 million was raised in capital markets offerings in 1997. These offerings include:
Date Description of Offerings ---- ------------------------ July 1994 $33.7 million tax-exempt bond offering August 1994 $102 million public offering of Common Stock May 1995 $50.6 million tax-exempt unsecured custodial receipts offering September 1995 $100 million unsecured senior notes offering January 1996 $47.3 million direct placement of Common Stock to institutional investors February 1996 $111.4 million 9% Series A Cumulative Redeemable Preferred Stock offering October 1996 $107.5 million 8.96% Series B Cumulative Redeemable Preferred Stock offering December 1996 $69.4 million public offering of Common Stock December 1996 $8.8 million tax-exempt bond offering April 1997 $75 million direct placement of Common Stock to an institutional investor April 1997 $12.1 million tax-exempt bond offering July 1997 $60.7 million public offering of Common Stock December 1997 $108.2 million public offering of Common Stock December 1997 $110 million unsecured senior notes offering January 1998 $100 million unsecured senior notes offering January 1998 $26.9 million direct placement of Common Stock to an institutional investor
Management follows a focused strategy to help facilitate uninterrupted access to capital. This strategy includes: 1. Hire, train and retain associates with a strong resident service focus, which should lead to higher rents, lower turnover and reduced operating costs; 2. Manage, acquire and develop institutional quality communities with in-fill locations that should provide consistent, sustained earnings growth; 3. Operate in markets with growing demand (as measured by household formation and job growth) and high barriers-to-entry. These characteristics combine to provide a favorable demand-supply balance, which the Company believes will create a favorable environment for future rental rate growth while protecting existing and new communities from new supply. This strategy is expected to result in a high level of quality to the revenue stream; 4. Maintain a conservative capital structure largely comprised of equity and with modest, cost-effective leverage. Secured debt will generally be avoided and used primarily to secure low cost, tax-exempt debt. Such a structure should promote an environment for ratings upgrades that can lead to a lower cost of capital; 5. Accounting practices that provide a high level of quality to reported earnings; and 6. Timely, accurate and detailed disclosures to the investment community. Management believes that these strategies provide a disciplined approach to capital access that is expected to help ensure that capital resources are available to fund portfolio growth. 35 39 The following is a discussion of specific capital transactions, arrangements and agreements that are important to the capital resources of the Company. Unsecured Facilities On March 31, 1997, the Company obtained a new unsecured credit facility (the "Unsecured Facility") for $175,000,000. This new facility replaced the previous $165,000,000 unsecured credit facility. The new Unsecured Facility is provided by a consortium of banks and is subject to an annual facility fee of $262,500. The Unsecured Facility expires in March 2000. Borrowings under the new facility bear an interest rate of .80% over LIBOR. A competitive bid option is available for up to $75,000,000 which may result in lower pricing if market conditions allow. At December 31, 1997, $50,000,000 was borrowed, $16,167,000 was used to provide letters of credit and $108,833,000 was available for borrowing under the Unsecured Facility. The Company will use borrowings under the Unsecured Facility for capital expenditures, acquisitions of developed or undeveloped communities, construction, development and renovation costs, credit enhancement for tax-exempt bonds and for working capital purposes. The Company's Supplemental Unsecured Facility is provided by First Union National Bank in the amount of $50,000,000 and is subject to an annual facility fee of $75,000. The Supplemental Unsecured Facility expires in March 2000 and bears an interest rate of LIBOR plus .80%. At December 31, 1997, $3,214,000 of available capacity was used to provide letters of credit and $21,500,000 was borrowed under the Supplemental Unsecured Facility. Accordingly, the balance that remains available at December 31, 1997 to be drawn under the Supplemental Unsecured Facility is $25,286,000. Interest Rate Protection Agreements On October 8, 1997, the Company purchased interest rate protection for a notional amount of $75,000,000. The Company realized a loss of $1,763,672 related to this interest rate protection that will be amortized as additional interest expense over the term of the $110 million, 10-year senior note offering completed on December 16, 1997, thereby increasing the effective rate for the notes to 7.035% (see "Financing Transactions Completed"). In connection with the refinancing of the tax-exempt bonds related to the Avalon Lea and Avalon Ridge communities, the Company purchased an interest rate cap agreement for $101,000. This agreement terminates October 31, 2002 and serves to place a ceiling on the interest rate on the bonds at 6.9% (see "Financing Transactions Completed"). The Company is not a party to any long-term interest rate agreements, other than the interest rate protection agreements described above. The Company intends, however, to evaluate the need for long-term interest rate protection agreements as interest rate market conditions dictate and has engaged a consultant to assist in managing the Company's interest rate risks and exposure. Financing Transactions Completed On April 17, 1997, the Company completed a direct placement of 2,740,000 shares of its Common Stock to an institutional investor under its existing shelf registration statement at a gross sales price of $27.375 per share. Net cash proceeds of approximately $73,500,000 were used to retire indebtedness under the Unsecured Facilities. On April 28, 1997, the Company completed the loan closing related to the tax-exempt financing for the Avalon Fields apartment community. The Community Development Administration of Maryland issued $12,088,000 of thirty-year, fixed-rate bonds at an all-in rate of 7.57%. The net cash proceeds from the loan closing (approximately $11,565,000) were used to repay amounts outstanding under the Unsecured Facilities. On July 1, 1997, the Company completed a public offering of 2,163,000 shares of common stock at a gross sales price of $28.0625 per share. The net cash proceeds from the offering of approximately $57,671,000 were used primarily to repay amounts outstanding under the Unsecured Facilities. On October 30, 1997, the Company completed a refinancing of approximately $44,000,000 of tax-exempt bonds related to the Avalon Ridge and Avalon Lea communities. These variable-rate bonds will mature on June 15, 2026 and are credit enhanced by the Company's credit enhancement facility with Fannie Mae. 36 40 On December 9, 1997, the Company completed a public offering of 3,591,500 shares of common stock at a gross sales price of $30.125 per share. The net cash proceeds from the offering of approximately $102,771,000 were used primarily to repay amounts outstanding under the Unsecured Facilities. On December 16, 1997, the Company completed a $110,000,000 offering of unsecured senior notes. The notes bear an interest rate at 6.875% payable semi-annually on June 15 and December 15 and will mature on December 15, 2007. The notes were sold at a price of 99.821% par value to yield 6.9% to maturity or a 110 basis point spread over the 10-year U.S. Treasury Note rate. The Company used the net proceeds to repay amounts outstanding under the Unsecured Facilities, and to purchase and develop additional apartment communities. On January 22, 1998, the Company completed a $100,000,000 offering of unsecured senior notes. The notes bear an interest rate at 6.625% payable semi-annually on January 15 and July 15 and will mature on January 15, 2005. The notes were sold at a price of 99.976% par value to yield 6.629% to maturity or a 111 basis point spread over the 7-year U.S. Treasury Note rate. The Company used the net proceeds of approximately $99,400,000 to repay amounts outstanding under the Unsecured Facilities. On January 27, 1998, the Company completed the sale of 923,856 shares of Common Stock to The Prudential Insurance Company of America under its existing shelf registration statement at a net purchase price of $29.09 per share. The net proceeds of approximately $26,872,000 were used to retire indebtedness under the Unsecured Facilities. Registration Statements Filed in Connection with Financings On February 24, 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission covering up to $350,000,000 of securities. The registration statement provides for the issuance of Common Stock, Preferred Stock, debt securities and warrants to purchase Common Stock. This registration statement was used in connection with the April 28, 1997, July 1, 1997 and December 9, 1997 offerings of Common Stock and the December 16, 1997 offering of unsecured senior notes and accordingly, no capacity remains under this registration statement. On December 17, 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission covering up to $400,000,000 of securities. The registration statement provides for the issuance of Common Stock, Preferred Stock, debt securities and warrants to purchase Common Stock. Year 2000 Compliance The Year 2000 compliance issue concerns the inability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and all organizations. The Company has conducted an assessment of its core internal and external computer information systems and is taking the further necessary steps to understand the nature and extent of the work required to make its systems, in those situations in which the Company is required to do so, Year 2000 compliant. These steps may require the Company to modify, upgrade or replace some of its internal financial and operational systems. The total cost of bringing all internal systems, equipment and operations into Year 2000 compliance has not been fully quantified. The Company continues to evaluate the estimated costs associated with these compliance efforts. While these efforts involve additional costs, the Company believes, based on available information, that these costs will not have a material adverse effect on its business, financial condition or results of operations. While the Company believes it will be Year 2000 compliant by December 31, 1999, if these efforts are not completed on time or if the cost of updating or replacing the Company's information systems exceeds the Company's current estimates, the Year 2000 issue could have a material adverse impact on the Company's ability to meet its financial and reporting requirements. Further, no estimates can be made as to any potential adverse impact resulting from the failure of third-party service providers and vendors to prepare for the Year 2000. The Company is attempting to identify those risks as well as to receive compliance certificates from all third parties that have a material impact on the Company's operations, but the cost and timing of third party Year 2000 compliance is not within the Company's control and no assurance can be given with respect to the cost or timing of such efforts or the potential effects of any failure to comply. 37 41 Future Financing Needs Substantially all of the capital expenditures to complete the communities currently under construction will be funded from the Unsecured Facilities and/or issuance of debt or equity securities. Except for Longwood Towers, the Company has no present plans for any major capital improvements to any of the Current Communities. The renovation of Longwood Towers is expected to be completed by the end of the second quarter of 1998 and is being funded by advances under the Unsecured Facilities, operating cash flow or other financing sources. Management expects to continue to fund deferred development costs related to future developments from Funds from Operations and advances under the Unsecured Facilities. The Company believes that these sources of capital are adequate to take each of the proposed communities to the point in the development cycle where construction can commence. Management anticipates that available borrowing capacity under the Unsecured Facilities and Funds from Operations will be adequate to meet future expenditures required to commence construction of each of the current Development Rights. In addition, the Company currently anticipates funding construction of some (but not all) of the Development Rights under the expected remaining capacity of the Unsecured Facilities. However, before the construction of a Development Right commences, the Company intends, as appropriate and as market conditions permit, to issue additional equity or debt securities, arrange additional capacity under the Unsecured Facilities or future credit facilities or obtain additional construction loan commitments not currently in place to ensure that adequate liquidity sources are in place to fund the construction of the Development Right, although no assurance can be given in this regard. The table on the following page summarizes debt maturities for the next five years (excluding the Unsecured Facilities): 38 42 AVALON PROPERTIES, INC. DEBT MATURITY SCHEDULE (Dollars in thousands)
Balance Outstanding at -------------------------- Community All-in Interest Rate Maturity Date 12-31-96 12-31-97 - ------------------------------------------ ------------------------- --------------- ------------ ---------- Tax-Exempt Bonds: Fixed Rate * Avalon Lea 8.02% Jun-2026 $ 16,782 $ 16,835 * Avalon Ridge 8.00% Jun-2026 26,724 26,815 * Avalon at Dulles 7.04% Jul-2024 12,360 12,360 * Avalon Hampton II 7.04% Jul-2024 11,550 11,550 * Avalon at Symphony Glen 7.06% Jul-2024 9,780 9,780 * Avalon View 7.55% Aug-2024 19,487 19,315 * Avalon at Lexington 6.56% Feb-2025 15,284 15,071 * Avalon Knoll 6.95% Jun-2026 14,070 13,917 * Avalon Landing 6.85% Jun-2026 6,969 6,892 * Avalon West 7.73% Dec-2036 8,771 8,731 * Avalon Fields 7.57% May-2027 -- 12,019 --------- --------- 141,777 153,285 Variable Rate * Avalon at Fairway Hills I Jun-2026 11,500 11,500 * Avalon at Hampton I Jun-2026 8,060 8,060 * Avalon Pointe Jun-2026 6,387 6,387 * Avalon Devonshire Dec-2025 -- 27,305 --------- --------- 25,947 53,252 Conventional Loans: Fixed Rate * AutumnWoods (1) 9.25% Nov-1997 24,335 -- Unsecured Senior Notes 7.375% Sep-2002 99,869 99,892 Unsecured Senior Notes 7.035% Dec-2007 -- 109,803 * Avalon Pines 8.00% Dec-2003 5,529 5,433 * Avalon Walk II 8.93% Nov-2004 13,149 12,964 --------- --------- 142,882 228,092 Variable Rate-None -- -- --------- --------- Total indebtedness - excluding Unsecured Facilities $ 310,606 $ 434,629 ========= ========= Total Maturities ------------------------------------------------------------------ Community 1998 1999 2000 2001 2002 THEREAFTER - ------------------------------------------ -------- ---------- --------- -------- -------- ------------ Tax-Exempt Bonds: Fixed Rate * Avalon Lea $ -- $ -- $ -- $ -- $ -- $ 16,835 * Avalon Ridge -- -- -- -- -- 26,815 * Avalon at Dulles -- -- -- -- -- 12,360 * Avalon Hampton II -- -- -- -- -- 11,550 * Avalon at Symphony Glen -- -- -- -- -- 9,780 * Avalon View 230 290 330 350 373 17,742 * Avalon at Lexington 226 240 255 271 288 13,791 * Avalon Knoll 163 175 187 200 214 12,978 * Avalon Landing 83 89 95 101 108 6,416 * Avalon West 46 50 53 57 61 8,464 * Avalon Fields 127 137 147 157 169 11,282 ------- ------- ------- ------- -------- --------- 875 981 1,067 1,136 1,213 148,013 Variable Rate * Avalon at Fairway Hills I -- -- -- -- -- 11,500 * Avalon at Hampton I -- -- -- -- -- 8,060 * Avalon Pointe -- -- -- -- -- 6,387 * Avalon Devonshire -- -- -- -- -- 27,305 ------- ------- ------- ------- -------- --------- -- -- -- -- -- 53,252 Conventional Loans: Fixed Rate * AutumnWoods (1) -- -- -- -- -- -- Unsecured Senior Notes -- -- -- -- 99,892 -- Unsecured Senior Notes -- -- -- -- -- 109,803 * Avalon Pines 103 112 121 131 142 4,824 * Avalon Walk II 202 221 241 264 288 11,748 ------- ------- ------- ------- -------- --------- 305 333 362 395 100,322 126,375 Variable Rate-None -- -- -- -- -- -- ------- ------- ------- ------- -------- --------- Total indebtedness - excluding Unsecured Facilities $ 1,180 $ 1,314 $ 1,429 $ 1,531 $101,535 $ 327,640 ======= ======= ======= ======= ======== =========
* Indicates loan is collateralized. (1) Note repaid August 1997 39 43 FUNDS FROM OPERATIONS Management generally considers FFO to be an appropriate measure of the operating performance of the Company because it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. The Company believes that in order to facilitate a clear understanding of the operating results of the Company, FFO should be examined in conjunction with the net income as presented in the consolidated financial statements included elsewhere in this report. FFO is determined in accordance with a resolution adopted by the Board of Governors of NAREIT, and is defined as net income (loss) (computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. The following table presents an analysis of Funds from Operations for the periods presented (dollars in thousands): 40 44 ANALYSIS OF 1997 AND 1996 FUNDS FROM OPERATIONS
Three months ended Years ended -------------------------------- --------------------------- 12-31-97 12-31-96 12-31-97 12-31-96 --------------- -------------- ------------ ------------ NET INCOME $ 18,121 $ 21,348 $ 64,916 $ 51,651 Depreciation (real estate related): 7,542 5,319 27,360 18,566 Joint venture adjustment 121 81 399 321 Gain on sale of communities -- (7,850) (677) (7,850) Extraordinary items -- -- 1,183 2,356 Preferred stock dividends (4,914) (4,352) (19,656) (10,422) --------------- -------------- ------------ ------------ FUNDS FROM OPERATIONS $ 20,870 $ 14,546 $ 73,525 $ 54,622 =============== ============== ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 39,326,420 31,268,140 36,762,781 30,739,504 =============== ============== ============ ============ OTHER CAPITALIZED EXPENDITURES AND OTHER INFORMATION Capital expenditures: Community level (1) $ 565 $ 521 $ 2,286 $ 1,731 Corporate level (2) $ 1,549 $ 277 $ 2,207 $ 2,087 Loan principal amortization payments $ 315 $ 211 $ 1,261 $ 634 Capitalized deferred financing costs (3) $ 2,890 $ 293 $ 3,901 $ 2,346
-------------------- Footnotes to Funds from Operations (1) The Company expenses all recurring non-revenue generating community expenditures, including carpet and appliance replacements. See "Discussion of Capitalized Community Improvements and Expensed Turnover ("Make Ready") Costs." (2) Represents the cost of new office equipment and costs related to the implementation of the company-wide systems enhancement plan. (3) Substantially all of the deferred financing costs incurred during the year ended December 31, 1997 relate to the costs incurred on the closing of the Avalon Fields tax-exempt bonds, the closing of the new $175 million unsecured credit facility and the refinancing of the tax-exempt bonds related to the Avalon Lea and Avalon Ridge Communities as well as the closing of the $110 million unsecured senior notes. 41 45 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item 8 is included as a separate section of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 42 46 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The following are the biographical descriptions of the Directors and executive officers of the Company as of March 16, 1998. Directors Richard L. Michaux. Mr. Michaux, 53, has been a director and the Chief Executive Officer of the Company since its formation in August 1993. He had previously been a partner of Trammell Crow Residential ("TCR"), which he joined in 1980 and served as one of the three Group Managing Partners of Trammell Crow Residential from 1986 to 1993. In that capacity, he was responsible for residential development in the Mid-Atlantic, Northeastern and Midwestern states. In previous positions, Mr. Michaux was in finance and general management with Sea Pines Company on Hilton Head Island, South Carolina from 1973 to 1975, a Division Manager of Ryan Homes in Virginia from 1975 to 1978 and Marketing Director for the Burke Centre, a 6,000 unit development in Fairfax, Virginia from 1978 to 1980. Mr. Michaux graduated from the United States Naval Academy with distinction and holds a Masters degree in Business Administration from the University of North Carolina at Chapel Hill where he was a Morehead Fellow and a Dean's Scholar. Mr. Michaux's professional affiliations include: past Chairman of the National Multi Housing Council; member of the Gold Flight Council of Urban Land Institute (the "ULI"); Vice President/Treasurer of the United States Naval Academy Class of 1966 Foundation; and founding Board member of the D.C. Early Child Care Collaborative. Charles H. Berman. Mr. Berman, 44, has been a director and the President and Chief Operating Officer of the Company since its formation in August 1993. He previously served as Divisional Partner of the Northeast Group of TCR from 1986 to 1993, where he was responsible for overseeing the development, management and construction operations of the Northeast Group of TCR. Mr. Berman served on the Management Board of TCR from 1992 to 1993. Prior to joining TCR, Mr. Berman was a partner at American Realty Capital, Inc., where he managed equity syndications and joint venture financing for several national development companies. He also held the position of Vice President of Eastdil Equities, Inc., a subsidiary of Eastdil Realty, Inc. He is a 1979 graduate of the Harvard Business School with an undergraduate degree from Amherst College. Mr. Berman's professional affiliations include membership in the Silver Flight Council of the ULI; Advisory Board of REF Fairchester; and Advisory Board of ULI Fairchester. He is also a member of the Board of Directors of Fairfield 2000 Homes Corporation, a non-profit housing organization. Michael A. Futterman. Mr. Futterman, 55, has been a director of the Company since December 1993. He has been Chairman of American Realty Capital from 1983 to the present. American Reality is a closely held real estate company which has arranged investments for its partners and shareholders in approximately $1.6 billion of property. From 1988 to 1992, he also held the position of President of Elders American Realty Capital, Inc., a participating mortgage lender subsidiary of Elders IXL, an Australian public company. Prior to joining American Realty Capital, Inc., Mr. Futterman was employed by Eastdil Realty, Inc. from 1969 to 1983, where he was most recently Executive Vice President and a Director. Mr. Futterman also served as Director of Dollar Dry Dock Savings Bank, July 1989 to March 1990, and Trustee of the International Center of Photography, 1986 to 1992. Mr. Futterman graduated from the Carnegie Institute of Technology and Georgetown University Law School. Christopher B. Leinberger. Mr. Leinberger, 47, has been a director of the Company since December 1993. He has been Managing Director and co-owner of Robert Charles Lesser & Co. since 1982, where he specializes in metropolitan development trends and strategic planning for cities and real estate companies. Robert Charles Lesser & Co. is one of the largest independent real estate advisory firms in the country, working on over 400 projects a year throughout North America. Mr. Leinberger has written many articles on strategic planning for real estate which have appeared in trade magazines such as Builder, Urban Land and National Real Estate Investor. He is also the author of Strategy for Real Estate Companies: Marketing, Finance, 43 47 PART III Organization, jointly published by the ULI and NAIOP. Mr. Leinberger is a member of the Board of Directors of Realen Homes (named 1993's "Builder of the Year" by Professional Builder magazine), is Chairman of the Metropolitan Redevelopment Commission (City of Santa Fe) and Chairman of the Board of Trustees of the College of Santa Fe. He is a graduate of Swarthmore College and the Harvard Business School. Richard W. Miller. Mr. Miller, 57, has been a director of the Company since May 1997. He served as Senior Executive Vice President and Chief Financial Officer of AT&T from 1993 to 1997 and was a member of AT&T's Chairman's Office. Prior to joining AT&T, he held a number of operating management and chief financial officer positions in high technology and consumer companies. For the three years prior to joining AT&T, Mr. Miller led a reorganization of Wang Laboratories, Inc., where he was Chairman, President and CEO. From 1982-1988, he was with RCA Corporation and the General Electric Company which acquired RCA in 1986, first as CFO then as Executive Vice President--Consumer Products and Entertainment, overseeing what was then the largest consumer electronics business in the U.S. From 1970 to 1982, Mr. Miller was with Penn Central Corporation, holding positions such as the CFO of the parent company and Executive Vice President of its principal real estate subsidiary, Arvida Corporation. Mr. Miller holds a BBA degree in economics from Case Western Reserve University and an MBA in finance from Harvard Business School. Mr. Miller also serves as a Director of Closure Medical Corporation and SBA, Inc. Allan D. Schuster. Mr. Schuster, 56, has been a director of the Company since December 1993. He has been a private investor since June 1993. From April 1988 until June 1993, he was Chairman and Chief Executive Officer of the Travelers Realty Investment Company, where he directed that Company's investment activities in commercial and agricultural real estate. During Mr. Schuster's tenure, Travelers' portfolio of mortgages, equities and joint ventures ranged between $12 billion and $20 billion. During this same period, Mr. Schuster was Chairman and Chief Executive Officer of Prospect Company, a $2 billion real estate development company. From December 1972 to September 1987, Mr. Schuster was with Citibank, N.A., where during the last five years he was Managing Director of Citicorp Real Estate, Inc. He is a Member of the Appraisal Institute and the ULI. 44 48 PART III Executive Officers Who Are Not Directors Bryce Blair. Mr. Blair, 39, has been Senior Vice President--Development/Acquisitions of the Company since its formation. Mr. Blair oversees development, construction, and acquisition activity throughout the Company's markets. Mr. Blair joined the Northeast Group of TCR in 1985 and was the partner responsible for overseeing development and acquisition of multifamily opportunities throughout Massachusetts, Rhode Island and Long Island, New York. Prior to joining the Northeast Group of TCR in 1985, he was a Project Manager with the Exxon Corporation responsible for managing the design, development and construction of capital improvement properties. Mr. Blair is a 1985 graduate of the Harvard Business School. He graduated magna cum laude with an undergraduate degree in Civil Engineering from the University of New Hampshire. He is a member of the ULI, the Real Estate Finance Association of Greater Boston Real Estate Board, and the Real Estate Investment Advisory Council. Robert H. Slater. Mr. Slater, 44, has been Senior Vice President--Property Operations of the Company since its formation. He served previously as Chief Operating Officer of Trammell Crow Residential Services for the Mid-Atlantic region. Mr. Slater was responsible for opening and managing the Raleigh, North Carolina TCR office and was responsible for the development of several multifamily apartment communities. His responsibilities included all aspects of property management including property operations, marketing, training, human resources, risk management, resident services, engineering services, and business development. Prior to joining TCR in 1988, Mr. Slater served as law clerk to (now Chief) Justice James G. Exum, Jr. of the Supreme Court of North Carolina and, thereafter, engaged in the private practice of law. Mr. Slater is a 1980 graduate of the University of Virginia School of Law with an undergraduate degree, cum laude, from Vanderbilt University. Thomas J. Sargeant. Mr. Sargeant, 39, became Chief Financial Officer and Secretary of the Company in March 1995 and has been Treasurer of the Company since its formation. He is responsible for all of the financial operations, including capital markets/finance, financial reporting and financial services of Avalon as well as information technologies. He previously served as Group Financial Officer for the Northeast Group of TCR, the Mid-Atlantic Group of TCR and the Midwest Group of TCR and oversaw the financial services operations (including accounting and financial reporting, cash management, payroll, information systems and internal audit) as well as project finance for the Midwest Group of TCR. Mr. Sargeant joined TCR in 1986 as Controller and was promoted to Chief Financial Officer in 1989 and to Group Financial Officer in 1992. Prior to joining TCR, Mr. Sargeant was with Arthur Andersen & Co., where he specialized in the construction and real estate industries, serving both private and publicly held clients. Mr. Sargeant, a certified public accountant, is a magna cum laude graduate of the University of South Carolina where he was elected to Phi Beta Kappa and the Honors College. Henry G. Irwig. Dr. Irwig, 54, has been Senior Vice President--Construction of the Company since January 1998. He oversees all construction activity throughout Avalon's markets. Prior to joining Avalon, Dr. Irwig spent 13 years with the Beacon group of companies, most recently as Executive Vice President--Management for Beacon Properties Corporation, a real estate investment trust listed on the New York Stock Exchange. In this capacity he played a critical role in developing a team-oriented organization, geared to the requirements of the public market, which extended it's scope of operations from 5 million square feet in the Northeast to 20 million square feet nationally. Prior to this, as an executive at Beacon Construction Company, Dr. Irwig was responsible for developing and implementing company-wide procedures and systems for improved planning, control and monitoring of projects. Before joining Beacon, Dr. Irwig was Winslow Associate Professor of Civil Engineering at the Massachusetts Institute of Technology where he pursued teaching and research in the fields of construction management and organization while playing a key role in the development of the Center for Real Estate and the Center for Construction Research and Education. Dr. Irwig received Bachelor of Architecture as well as Doctor of Philosophy degrees from the University of Witwatersrand, South Africa. He is a member of the American Institute of Architects and the American Society of Civil Engineers. Jeffrey B. Albert. Mr. Albert, 43, has been Vice President--Development since the Company's formation with responsibility for development in the states of New Jersey and Pennsylvania. Previously, Mr. Albert joined the Northeast Group of TCR as a City Partner in 1989 to oversee community development, 45 49 PART III apartment development and acquisition activities in eastern Pennsylvania and New Jersey. From 1978 to 1980, Mr. Albert spent two years with W.R. Grace & Company in Philadelphia in its Land Development Division as project coordinator of a planned unit development. In this capacity, he was responsible for the planning, marketing and development of residential communities and non-residential developments. Mr. Albert joined Eastern Properties, Inc. in Cranbury, New Jersey as a project manager in 1980, became a Vice President of that company in 1982 and remained with Eastern Properties until 1989. Mr. Albert is a 1976 Phi Beta Kappa graduate of Clark University with an AB degree with highest honors in Philosophy. In 1978, he received a Master of City Planning MCP degree from the University of Pennsylvania. David W. Bellman. Mr. Bellman, 41, has been Vice President--Mid/High Rise Construction for all of Avalon's markets since January 1998. Prior to joining Avalon, Mr. Bellman spent 16 years with Boston Properties, most recently as Senior Vice President--Construction. He was responsible for all New York City construction, overseeing the building of the $125 million 599 Lexington Avenue (a 1 million square foot 50-story office tower), the Mercer Hotel (an historic rehabilitation of a landmark property) and the $550 million Columbus Center (a 3.3 million square foot 68-story office, retail and residential building). Prior to moving to New York, Mr. Bellman oversaw the construction of four office parks aggregating to over 1 million square feet in metropolitan Washington, DC. Mr. Bellman studied Engineering Administration at George Washington University and is a member of the New York City Builders Congress. Samuel B. Fuller. Mr. Fuller, 36, has been Vice President--Development since the Company's formation with responsibility for development in the states of Connecticut and New York (excluding New York City and Long Island). Mr. Fuller has managed the development activities for five communities totaling 1,456 apartment homes that are completed and stabilized. He currently oversees the development of 1,814 apartment homes in five communities under construction and manages the development of 1,726 homes in six communities in Avalon's development pipelines. Previously, Mr. Fuller joined the Northeast Group of TCR in 1989 as a Development Associate. In 1992, he was promoted to Development Partner. Before joining TCR, Mr. Fuller was a Project Manager at Texas Instruments, Inc., where he managed the design, development and construction of large scale, automated assembly lines for the company's facilities worldwide. Mr. Fuller is a 1989 Harvard Business School graduate, with an undergraduate degree in Mechanical Engineering from the University of New Hampshire. David J. Hubbard. Mr. Hubbard, 41, has been Vice President--Development since December 1997, joining Avalon as part of its acquisition of the Midwestern Division of Trammell Crow Residential. He is responsible for development and acquisition in several Midwestern markets, including Chicago, Minneapolis, St. Louis, and Indianapolis. Prior to joining Avalon, he was Division Partner for Trammell Crow Residential--Midwest, where he was responsible for the development, acquisition, construction and asset management of multifamily rental communities throughout the greater Midwest. Prior to joining Trammell Crow Residential in 1985, Mr. Hubbard developed a variety of properties for the John F. Denney Company in suburban Atlanta, Georgia. Mr. Hubbard is a 1983 graduate of the Harvard Business School. Prior to attending graduate school, he was a Pipeline Engineer with Exxon Pipeline Company responsible for managing the design and construction of capital improvement projects for the company. He earned his undergraduate degree in Civil Engineering from the Georgia Institute of Technology, where he graduated with High Honors in 1978. His professional affiliations include membership in the Real Estate Investment Advisory Council and past membership in the Apartment Association of Indiana where he served as a Member of the Board of Directors. Timothy J. Naughton. Mr. Naughton, 36, has been Vice President--Development of the Company since its formation with responsibility for development in the metropolitan Washington/Baltimore region. He joined the Mid-Atlantic Group of TCR in 1989 and had development responsibilities for multifamily rental communities in Delaware, Virginia and Maryland. He had been a Development Partner since 1993. From 1987 to 1989, Mr. Naughton was a Development Officer for Bourque/Perez Group in Lexington, Massachusetts, where he directed the development of townhouses and multifamily communities. Mr. Naughton received his Masters degree in Business Administration from the Harvard Business School in 1987. He earned his undergraduate degree in Economics from the University of Virginia, where he was elected to Phi Beta Kappa and graduated with high distinction in 1983. 46 50 PART III Alexander C. Twining. Mr. Twining, 44, has been Vice President--Development of the Company since February 1995 with responsibility for the mid/high-rise development group throughout Avalon's markets. From 1990 until 1995, Mr. Twining was Director of Real Estate Development for Colgate - Palmolive Company, directing development of an eight million square foot planned community, including 1,000 apartments and office, retail and hotel buildings in the New York metropolitan area. From 1986 to 1990, Mr. Twining was Senior Vice President and Regional Partner for the Boston office of F.D. Rich Company, where he directed acquisition, financing and development activities, including over 20 acquisitions, a 300-apartment waterfront community and a two million square foot mixed-use development. Before moving to Boston, he was Vice President with B.F. Saul Company directing development of an apartment, hotel, and office company in downtown Washington, D.C. Mr. Twining is a 1977 graduate of the Yale School of Architecture and completed his undergraduate degree at Yale University in 1974. He has taught at the New York University Real Estate Institute and Yale University and is a licensed real estate broker and architect. He is a member of the Urban Development/Mixed Use Council of the ULI, the American Institute of Architects, and a former member of the Washington Board of Realtors, Greater Boston Real Estate Board and the Real Estate Board of New York. Leo S. Horey. Mr. Horey, 35, has been Vice President--Property Operations since August 1994. Mr. Horey is responsible for the management of numerous communities in Virginia, Maryland, the District of Columbia, Indiana, Ohio, Michigan and Minnesota. Mr. Horey previously served as Regional Manager--Property Operations for both Avalon Properties, Inc. and Trammell Crow Residential Services. In this capacity, he directed property operations for numerous communities in the Washington, D.C. metropolitan area and coordinated the real estate tax appeal process throughout the Mid-Atlantic region. Prior to Avalon's formation, Mr. Horey worked as a financial manager focusing on asset management and property disposition for the Mid-Atlantic regions of TCR. Mr. Horey began his career with Trammell Crow Residential in 1989 in the community development area in Princeton, New Jersey. Mr. Horey received his Masters of Business Administration from The Kenan-Flagler Business School at the University of North Carolina at Chapel Hill where he was a Richard H. Jenrette Fellow. He also holds a Bachelor of Science degree in Computer Science and Economics from Duke University. Gwyneth J. Cote. Ms. Cote, 35, has been Vice President--Property Operations since August 1994. Ms. Cote is responsible for the management of all communities in the New Jersey, Connecticut, Massachusetts, Rhode Island, Illinois and New York markets. Prior to Avalon's formation, Ms. Cote served in numerous capacities with TCR. Ms. Cote began her career with TCR in 1989 as a Development Associate for Trammell Crow Residential in New Jersey. In this capacity, she was responsible for the development of multifamily apartment communities and targeting potential site acquisitions. In 1990, she joined the management group as a Divisional Manager, responsible for the operation of eight properties in the Chicago and Kansas City markets. In 1992, Ms. Cote relocated to Alexandria to become the Regional Manager for the mid-Atlantic region of TCR. In this capacity, Ms. Cote oversaw property operations for numerous Northern Virginia and Maryland properties. Just prior to the formation of Avalon, Ms. Cote assumed additional operational responsibilities when she added New Jersey to her portfolio. Shortly after Avalon was formed, Ms. Cote relocated to the Northeast to assume all property operational responsibilities for communities in New Jersey, New York, and Connecticut. Ms. Cote received her Master of Business Administration degree from the Wharton School of the University of Pennsylvania in 1989. She earned her undergraduate degree in Liberal Arts from Swarthmore College. Lili F. Dunn. Ms. Dunn, 29, has been Vice President--Acquisitions and Dispositions since January 1996. Ms. Dunn has been responsible for acquisitions and dispositions of apartment communities since the inception of the Company. Prior to the Company's formation, Ms. Dunn served as the Operations Analyst for the Northeast and Midwest regions of TCR. In that capacity, she was responsible for completing asset management analyses and property repositioning recommendations as well as designing and implementing computer applications for on-site use. In 1992, Ms. Dunn relocated to Alexandria, Virginia to become Director of Business Development and Market Research for the Mid-Atlantic region of Trammell Crow Residential. In this role, she secured third-party management contracts, maintained the Company's market research database and published market information. Ms. Dunn is a magna cum laude graduate of the University of Michigan where she earned a Bachelor of Business Administration degree. 47 51 PART III James L. Liberty. Mr. Liberty, 58, has been Vice President--Construction Operations since May 1997. Mr. Liberty manages construction operations from Virginia to Massachusetts, the "Northeast Region." From 1993 to 1996 he was Regional Manager for The Baker Companies, where he was responsible for large condominium developments in New Jersey. His experience before joining The Baker Companies includes officerships in several prominent real estate development companies from the 1960s to the present. His management responsibilities have included high volume multi-family housing and mid and high rise office building complexes in New York, New Jersey, Washington, D.C., Chicago and Detroit. His corporate clients have included General Motors Corporation, E.D.S., and Fairchild Industries. Mr. Liberty's duties have included the entire development spectrum from land acquisition, land development, design and engineering to construction. He is a graduate of Rochester Institute of Technology and a licensed real estate broker. Joanne M. Lockridge. Ms. Lockridge, 38, has been Vice President--Finance since November 1997. Ms. Lockridge has been responsible for financial forecasting as well as secured and unsecured financing activity in various positions since the Company's formation. Prior to the Company's formation, Ms. Lockridge was the Financial Manager for the Northeast Group of TCR and had responsibility for budgeting, development project analysis and project financings. Ms. Lockridge joined TCR as a Financial Analyst in 1989 and was promoted to Financial Manager in 1991. Before joining TCR, Ms. Lockridge was a Financial Analyst for Xerox Realty Corporation, where she was responsible for the analysis and asset management of commercial real estate property. Ms. Lockridge received her Masters in Finance degree from Fairfield University. She earned her undergraduate degree, magna cum laude, from St. Anselm College. William M. McLaughlin. Mr. McLaughlin, 33, has been Vice President--Development since May 1997. He joined Avalon in 1994. He is responsible for all new development activity in the greater Boston region. Prior to joining Avalon, Mr. McLaughlin was Vice President of Lincoln Property Company, responsible for multifamily acquisitions, development and management in eastern New England involving approximately 1,000 multifamily homes. He joined Lincoln Property Company in 1987, starting as an Assistant Vice President and becoming a Vice President in 1991. Prior to that, Mr. McLaughlin was a broker with Coldwell Banker Commercial's downtown Boston office and a principal with McShea Realty, a small residential development entity. Mr. McLaughlin received his Bachelor of Arts in Economics from Harvard University. He has been a licensed real estate broker for 12 years, is a member of the Greater Boston Real Estate Board and a Corporator of Mount Auburn Hospital in Cambridge, Massachusetts. ITEM 11. EXECUTIVE COMPENSATION DIRECTOR COMPENSATION Directors of the Company who are also employees receive no additional compensation for their services as director. Non-employee directors of the Company receive an annual director's fee for all services in such capacity, including all meetings of the Board of Directors and its committees, in the form of 2,500 shares of restricted Common Stock that vest twenty percent (20%) on the date of grant and twenty percent (20%) on each of the following four anniversaries of the date of grant. Under the 1995 Equity Incentive Plan, following each annual meeting of stockholders, each of the Company's non-employee directors also receives an option to purchase 10,000 shares of Common Stock at the market price of the Common Stock on the date of grant. All stock options granted to non-employee directors vest one year after the date of grant and terminate ten years from the date of grant, except in cases where directors are removed for Cause (as defined). Upon removal for Cause, a director's stock options terminate immediately on the date he ceases to be a director. EXECUTIVE COMPENSATION The following table sets forth the base compensation awarded to the Company's Chief Executive Officer and four other most highly compensated executive officers of the Company whose salary and bonus exceeded $100,000 during the fiscal year ended December 31, 1997 (the "Named Executive Officers"). 48 52 PART III SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS --------------------------- ANNUAL COMPENSATION RESTRICTED SHARES ALL --------------------------- STOCK UNDERLYING OTHER SALARY BONUS AWARD(S)(4) AWARD(S) COMPENSATION(5) NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($) - -------------------------------------------- -------- ------------ ----------- ------------ ------------ --------------- Richard L. Michaux 1997 246,359 306,375 (1) 535,500 250,000 68,858 Chairman of the Board and Chief 1996 221,880 280,938 (2) 483,750 0 68,771 Executive Officer 1995 217,124 219,688 (3) 386,750 0 4,500 Charles H. Berman 1997 241,267 306,375 (1) 535,500 250,000 50,698 President and Chief Operating Officer 1996 217,220 280,938 (2) 483,750 0 50,183 1995 213,019 219,688 (3) 386,750 0 4,500 Bryce Blair 1997 185,000 243,229 (1) 286,195 110,000 27,817 Senior Vice President -- 1996 160,961 209,813 (2) 257,140 0 27,078 Development / Acqusitions 1995 159,008 157,946 (3) 201,110 0 4,464 Robert H. Slater 1997 185,000 216,549 (1) 286,195 110,000 32,932 Senior Vice President -- 1996 160,000 206,127 (2) 257,140 0 32,201 Property Operations 1995 159,608 154,031 (3) 201,110 0 4,248 Thomas J. Sargeant 1997 170,000 194,294 (1) 217,175 100,000 27,817 Chief Financial Officer, Treasurer 1996 150,000 185,178 (2) 195,113 0 26,530 and Secretary 1995 140,769 117,287 (3) 116,025 0 4,500
- ------------------------- (1) Included in this amount is the value of the 20% of each executive officer's restricted stock grant made on February 3, 1998that vested immediately upon grant, as follows: Mr. Michaux, $133,875 (4,500 shares); Mr. Berman,$133,875 (4,500 shares); Mr. Blair, $71,549 (2,405 shares); Mr. Slater, $71,549 (2,405 shares); Mr. Sargeant, $54,294 (1,825 shares). (2) Included in this amount is the value of the 20% of each executive officer's restricted stock grant made on January 22, 1997 to each executive officer that vested immediately upon grant, as follows: Mr. Michaux, $120,938 (4,500 shares); Mr. Berman,$120,938 (4,500 shares); Mr. Blair, $64,285 (2,392 shares); Mr. Slater, $64,285 (2,392 shares); Mr. Sargeant, $48,778 (1,815 shares). (3) Included in this amount is the value of the 20% of each executive officer's restricted stock grant made on February 6, 1996 that vested immediately upon grant, as follows: Mr. Michaux, $96,688 (4,250 shares); Mr. Berman, $96,688 (4,250 shares); Mr. Blair, $50,278 (2,210 shares); Mr. Slater, $50,278 (2,210 shares); Mr. Sargeant, $29,006 (1,275 shares). (4) The number of shares of unvested restricted stock and the aggregate market value at December 31, 1997 of such shares were as follows: Mr. Michaux, $556,875 (18,000 shares); Mr. Berman, $556,875 (18,000 shares); Mr. Blair, $297,619 (9,620 shares); Mr. Slater, $297,619 (9,620 shares); Mr. Sargeant, $225,844 (7,300 shares). Restricted stock awards were granted on February 3, 1998 and vest twenty percent (20%) on each of the first four anniversaries of such date. Dividends will be paid on these shares of restricted stock. (5) The amounts shown include the dollar value of the benefit of premiums paid for the whole-life portion of split-dollar life insurance polices for each executive. and the Company's 401(k) contribution for the calendar year. Premium amounts included for the year ended December 31, 1997 are as follows: Mr. Michaux, $64,358, Mr. Berman, $46,198, Mr. Blair, $23,317, Mr. Slater, $28,432 and Mr. Sargeant, $23,317. Amounts included for Company's 401(k) contribution for the same period are as follows: Mr. Michaux, $4,500, Mr. Berman, $4,500, Mr. Blair $4,500, Mr. Slater, $4,500 and Mr. Sargeant, $4,500. Option Grants in Fiscal Year 1997. The following table sets forth the options granted with respect to the fiscal year ended December 31, 1997 to Avalon's Named Executive Officers.
INDIVIDUAL GRANTS POTENTIAL ------------------------------------------------------------------------------ REALIZABLE VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF SHARES TOTAL OPTIONS STOCK PRICE UNDERLYING GRANTED TO APPRECIATION OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM GRANTED FOR FISCAL PRICE EXPIRATION ---------------------------- NAME (#) (1) YEAR 1997 (2) ($ / SHARE) DATE 5% ($) 10% ($) ---- ---------------- -------------------- ----------------- ----------------- ------------- ------------ Richard L. Michaux 250,000 21.35% $ 29.3125 10/29/07 4,608,618 11,679,144 Charles H. Berman 250,000 21.35% $ 29.3125 10/29/07 4,608,618 11,679,144 Bryce Blair 110,000 9.39% $ 29.3125 10/29/07 2,027,792 5,138,823 Robert H. Slater 110,000 9.39% $ 29.3125 10/29/07 2,027,792 5,138,823 Thomas J. Sargeant 100,000 (3) 8.54% $ 29.3125 10/29/07 1,843,447 4,671,658
- --------- (1) Unless otherwise noted, all options will vest in three equal installments on the first, second and third anniversaries of the date of grant. The date of grant of all of these options was October 29, 1997. (2) A total of 1,171,000 options were granted to employees of Avalon with respect to the fiscal year ended December 31, 1997. (3) Mr. Sargeant's options vest in five equal installments on the first five anniversaries of the date of grant. Option Exercises and Year-End Holdings. The following table sets forth the aggregate number of options exercised in 1997 and the value of options held at the end of 1997 by the Company's Named Executive Officers. 49 53 PART III AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR-END 1997 OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FISCAL AT FISCAL SHARES YEAR-END (#) YEAR-END ($) ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE(1) - ----------------------- ---------------- -------------- ----------------- ----------------- Richard L. Michaux . . 0 0 150,000 / 250,000 1,565,625 / 406,250 Charles H. Berman . . . 0 0 150,000 / 250,000 1,565,625 / 406,250 Bryce Blair . . . . . . 0 0 65,000 / 110,000 678,438 / 178,750 Robert H. Slater . . . 0 0 65,000 / 110,000 678,438 / 178,750 Thomas J. Sargeant . . 0 0 45,000 / 100,000 469,688 / 162,500
(1) Value of unexercised in the money options was calculated using the difference between the market price at December 31, 1997 and the option strike price of $20.50 per share for exercisable options and $29.3125 for unexercisable options. EMPLOYMENT AGREEMENTS The Company entered into employment agreements (each an "Employment Agreement") with each of Messrs. Michaux, Berman, Slater, Blair, and Sargeant (each an "Executive ") that continue in effect until December 31, 1999 (the "Initial Term") and are automatically renewed for successive one year terms, unless otherwise terminated. Each Employment Agreement sets forth the title and annual minimum Base Salary of the relevant Executive as follows:
Base Salary Base Salary Base Salary Name Title 1997 1998 1999 - ---- ----- ---- ---- ---- Mr. Michaux Chairman of the Board, CEO $230,000 $265,000 $300,000 Mr. Berman President, COO $230,000 $265,000 $300,000 Mr. Slater Senior V.P. - Property Operations $185,000 $210,000 $240,000 Mr. Blair Senior V.P. Development/ $185,000 $210,000 $240,000 Acquisitions Mr. Sargeant CFO/Treasurer/Secretary $170,000 $195,000 $225,000
Each Employment Agreement provides that the Compensation Committee of the Board of Directors may award cash bonuses should it be determined, in its discretion based on the performance of the Company and the individual during the prior fiscal year, that such compensation is appropriate. Each Employment Agreement also provides for annual minimum Base Salary increases based on the greater of 5% or increases in the Consumer Price Index for years after the Initial Term. The Company maintains a comprehensive medical plan for the benefit of the Executives and their immediate families and pays the premiums on split-dollar life insurance policies for their benefit ("Insurance Premiums"). The Company provides an allowance for each of Messrs. Michaux, Berman and Blair for the cost of an automobile and reimburses Messrs. Michaux and Berman for the dues of a club membership. The Executives are also eligible to participate in benefit plans (except for severance plans), including the 401(k) plan, made available generally to employees. If an Executive's Employment Agreement is not renewed at any time after the Initial Term, unless the nonrenewal is within 2 years following a Change in Control (defined below), the Executive will be entitled to receive, for twelve consecutive months, a monthly amount equal to the result obtained by dividing the Covered Average Compensation (the average of Base Salary, cash bonus, and the value of all stock and other 50 54 PART III equity-based compensation awards made to the Executive for the year during which the termination occurs and the preceding 2 years) by 12. The Executive will also be entitled to benefits comparable to the medical and disability benefits currently provided to such Executive for a period of 24 months following termination (such medical and disability benefits, together, the "Termination Benefits"). In addition, the Company will pay the Insurance Premiums as long as such payments are due, and all equity-based awards shall become fully vested and exercisable. If such nonrenewal occurs within two (2) years following a change in control, the Executive is entitled to the same payments and benefits ("Severance Payments") as if the Executive were terminated without cause after a Change in Control. If an Executive's employment with the Company is terminated by the Company without Cause (as defined in the Employment Agreement; for this section, all capitalized and undefined terms shall have the meanings as set forth in the relevant Employment Agreement) either prior to the occurrence of a Change in Control or more than two years following a Change in Control, such Executive will be entitled to receive, for twelve consecutive months, a monthly amount equal to the result obtained by dividing two times the Covered Average Compensation by twelve and will be entitled to receive Termination Benefits. In addition, the Company will continue to pay the Insurance Premiums, and all equity-based awards shall become fully vested and exercisable. A Change in Control primarily refers to the following situations: (i) any Person, (any individual, entity or group), other than the Company, one of the Company's Subsidiaries or an Affiliate, becomes the Beneficial Owner of securities representing 30% or more of the combined voting power of the Company's then outstanding securities having the right to vote in an election of the Company's Board of Directors ("Voting Securities"); (ii) individuals who currently compose the Company's Board of Directors cease for any reason to constitute at least a majority of the Board unless such persons were elected or approved by a majority of the currently existing Board of Directors; (iii) approval by the shareholders of the Company of a reorganization, merger of consolidation of the Company; (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company; or (v) the sale, lease, exchange or other disposition of all or substantially all of the assets of the Company. However, a Change in Control does not occur if a reorganization, merger or consolidation is the result of an acquisition of securities directly from the Company or a Subsidiary thereof or an acquisition by any corporation pursuant to a reorganization, consolidation, merger or sale of substantially all of the Company's assets if all of the following are true: (1) more than 50% of the then outstanding shares of Company common stock resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding Voting Securities is then Beneficially Owned, directly or indirectly, by all or substantially all of the persons and entities prior to such reorganization, merger, consolidation or sale; (2) no Person (excluding the Company and its Subsidiaries) who did not Beneficially Own 30% or more of the outstanding voting securities before the reorganization, merger, consolidation or sale Beneficially Owns 30% or more of the outstanding Voting Securities resulting from such reorganization, merger or consolidation; and (3) at least a majority of the members of the resulting board of directors were members of the Board of Directors at the time of the execution of the initial agreement providing for such reorganization, merger, consolidation or sale. If an Executive's employment is terminated without Cause by the Company or any of its successors within 2 years after a Change in Control, or if an Executive terminates his employment (i) within 2 years of a Change in Control in a Constructive Termination Without Cause (in general, a failure by the Company, after a Change in Control, to continue in effect any material compensation plan for the Executive, a reduction in such Executive's Base Salary or the failure to pay any bonus when due, a material diminution of Executive's responsibilities, or the failure of the Company to obtain the assumption in writing of its obligations to perform this Agreement by any successor to all or substantially all of the assets of the Company within 15 days after such Change in Control) or (ii) for any reason within one year after a Complete Change in Control (a Change in Control other than one occurring by the acquisition of 30% of the combined voting power of the Company's then outstanding Voting Securities as defined in (i) of the previous paragraph), the Executive is entitled to receive a lump sum payment equal to three times the Covered Average Compensation. In addition, the Executive is entitled to receive Termination Benefits for a period of 36 months following the date of termination, the Company will continue to pay Insurance Premiums, and all equity-based awards shall become fully vested and exercisable. If an Executive terminates his employment more than 2 years after a Change in 51 55 PART III Control in a Constructive Termination Without Cause, he is entitled to the same benefits as if he were terminated by the Company without Cause within 2 years of a Change in Control (including payment of Insurance Premiums), except that the lump sum payment will be equal to 2 times the Covered Average Compensation, and the Termination Benefits will be continued by the Company for 24 months. If an Executive is terminated by the Company for Cause or voluntarily terminates his employment during the term of the Employment Agreement, the Executive shall be paid the amounts of earned but unpaid Base Salary and cash incentive compensation earned through the date of termination in satisfaction of all of his entitlements from the Company, and all equity-based awards not vested as of the date of termination shall terminate. If any of the Severance Payments would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, and any Executive incurs any interest or penalties thereby (the excise tax, penalties and interest, collectively, the "Excise Tax"), such Executive shall be entitled to receive an additional payment so that the net amount retained by the Executive after accrual or payment of such Excise Tax (but before accrual or payment of applicable income and employment taxes) is equal to the Excise Tax on the Severance Payments. Each Employment Agreement contains noncompetition and nondisclosure covenants and also provides for the indemnification and advancement of expenses to the Executive by the Company, to the fullest extent permitted by applicable law, with respect to any actions commenced against the Executive in his capacity as an officer or director of the Company or an affiliate thereof for which he is rendering service on behalf of the Company, the shareholders, or third parties. Each Employment Agreement also entitles the Executive to reimbursement, or in some cases advancement, of legal costs in certain circumstances in connection with enforcement of the Executive's rights under the Employment Agreement. The following table presents certain information as to directors and executive officers of the Company on March 16, 1998, based on representations of officers and directors of the Company. All such information was provided by the stockholders listed and reflects their beneficial ownership as of March 16, 1998, unless otherwise noted. 52 56 PART III
No. of Shares Beneficially Percent Name Owned (1) of Class ----------------- ------------- ---------------- Richard L. Michaux 707,939 (2) (3) (4) (7) 1.7% Charles H. Berman 522,213 (2) (3) (4) (8) 1.2% Michael A. Futterman 53,000 (5) (6) (9) * Christopher B. Leinberger 46,000 (5) (6) * Richard W. Miller 14,500 (6) * Allan D. Schuster 48,000 (5) (6) * Bryce Blair 153,421 (2) (3) (4) * Robert H. Slater 174,662 (2) (3) (4) (10) * Thomas J. Sargeant 83,975 (2) (3) (4) (11) * Jeffrey B. Albert 91,261 (2) (3) (4) * David W. Bellman (hired 1/98) 0 * Gwyneth J. Cote 34,162 (2) (3) (4) * Lili F. Dunn 21,100 (3) (4) * Samuel B. Fuller 82,731 (2) (3) (4) * Leo S. Horey 34,912 (2) (3) (4) * David J. Hubbard (hired 12/97) 0 * Henry G. Irwig (hired 1/98) 0 * James R. Liberty 1,231 (4) * Joanne M. Lockridge 11,238 (3) (4) * William McLaughlin 8,533 (3) (4) (12) * Timothy J. Naughton 73,881 (2) (3) (4) * Alexander C. Twining 12,275 (2) (3) (4) * All directors and executive officers as a group (22 persons) 2,175,034 5.1%
------------------------ * Less than one percent (1) Except as otherwise noted, each individual in the table above has sole voting and investment power over the shares listed. Includes shares subject to stock options presently exercisable or exercisable within 60 days as follows: Mr. Michaux, 150,000; Mr. Berman, 150,000; Mr. Futterman;38,000, Mr. Leinberger, 38,000; Mr. Miller, 10,000; Mr. Schuster, 38,000; Mr. Blair, 65,000; Mr. Slater, 65,000; Mr. Sargeant, 45,000; Mr. Albert, 40,000; Ms. Cote, 15,000; Ms. Dunn, 12,500; Mr. Fuller, 40,000; Mr. Horey, 15,000; Ms. Lockridge, 8,500; Mr. McLaughlin, 5,000; Mr. Naughton, 35,000 and all executive officers as a group, 646,000. (2) Includes shares of restricted Common Stock that vested twenty percent (20%) on February 6, 1996, 1997 and 1998 and will vest twenty percent (20%) on each of the next two anniversaries of such date as follows: Mr. Michaux, 21,250; Mr. Berman, 21,250; Mr. Blair, 11,050; Mr. Slater, 11,050; Mr. Sargeant, 6,375; Mr. Albert, 5,100; Ms. Cote, 4,250; Mr. Fuller, 5,100; Mr. Horey, 4,250; Mr. Naughton, 4,250; Mr. Twining, 2,125. (3) Includes shares of restricted Common Stock that vested twenty percent (20%) on January 22, 1997 and 1998 and will vest twenty percent (20%) on each of the next three anniversaries of such date as follows: Mr. Michaux, 22,500; Mr. Berman, 22,500; Mr. Blair, 11,960; Mr. Slater 11,960; Mr. Sargeant, 9,075; Mr. Albert, 5,520; Ms. Cote, 4,600; Ms. Dunn 3,800; Mr. Fuller, 5,520; Mr. Horey, 4,600; Ms. Lockridge, 1,368; Mr. McLaughlin, 920; Mr. Naughton, 5,520; Mr. Twining, 4,600. 53 57 PART III (4) Includes shares of restricted Common Stock that vested twenty percent (20%) on February 3, 1998 and will vest twenty percent (20%) on each of the next four anniversaries of such date as follows: Mr. Michaux, 22,500; Mr. Berman, 22,500; Mr. Blair, 12,025; Mr. Slater 12,025; Mr. Sargeant, 9,125; Mr. Albert, 5,550; Ms. Cote, 5,550; Ms. Dunn 4,700; Mr. Fuller, 7,050; Mr. Horey, 5,550; Ms. Lockridge, 1,370; Mr. Liberty, 1,231; Mr. McLaughlin, 2,313; Mr. Naughton, 5,550 and Mr. Twining, 5,550. (5) Includes shares of restricted Common Stock that vested twenty percent (20%) on July 3, 1996 and 1997 and will vest twenty percent (20%) on each of the next three anniversaries of such date as follows: Mr. Futterman, 2,500; Mr. Leinberger, 2,500; and Mr. Schuster, 2,500. (6) Includes shares of restricted Common Stock that vested twenty percent (20%) on May 14, 1997 and will vest twenty percent (20%) on each of the next four anniversaries of such date as follows: Mr. Futterman, 2,500; Mr. Leinberger, 2,500; Mr. Miller, 2,500 and Mr. Schuster, 2,500. (7) Voting and investment power shared with spouse (509,257 shares); sole voting and investment power (45,853 shares). Includes 2,829 shares owned by Mr. Michaux's spouse as to which Mr. Michaux has neither voting nor investment power and disclaims beneficial ownership. (8) Includes 1,800 shares held by Mr. Berman in trust for his minor children. (9) Includes 10,000 shares held by Mr. Futterman's wife for which voting and investment power is shared. Mr. Futterman disclaims beneficial ownership of these shares. Includes 38,000 exercisable option shares for which the economic interest has been assigned to trusts for his two minor children. Mr. Futterman retains voting power for these shares. (10) Includes 1,500 shares held by Mr. Slater's spouse for the benefit of their minor children. Voting and and investment power is shared for all shares owned. (11) Voting and investment power shared with spouse (11,830 shares); sole voting and investment power (25,385 shares). Includes 1,800 shares held by Mr. Sargeant in a trust for his minor children. Also includes 1,760 shares owned by Mr. Sargeant's spouse for which he disclaims beneficial ownership. Includes 10,000 shares of restricted Common Stock of which 3,300 shares vested on November 14, 1995, 3,300 shares vested on November 14, 1996 and 3,400 shares vested on November 14, 1997. (12) Includes 300 shares for which voting and investment powers are shared with Mr. McLaughlin's spouse. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") requires the Company's executive officers and directors and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the SEC and the New York Stock Exchange. Officers, directors and greater than 10% stockholders are required to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended December 31, 1997, all Section 16(a) filing requirements applicable to its executive officers, directors and greater than 10% beneficial owners were satisfied, except that one report for each of Messrs. Michaux, Berman, Blair, Slater, Sargeant, Albert, Fuller, Naughton, Horey, Twining, McLaughlin, Liberty, Ms. Cote, Ms. Dunn and Ms. Lockridge, reporting the award of stock options in October 1997 were inadvertently filed five months late. One report for the same individuals reporting the award of Common Stock in February 1998 was inadvertently filed one month late. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table presents certain information about persons or entities believed by the Company to own, directly or beneficially, more than five percent of the Company's outstanding Common Stock on March 16, 1998. The following information is based solely upon copies of filings on Schedule 13D and Schedule 13G received by the Company pursuant to the rules of the SEC. 54 58 PART III
NO. OF SHARES NAME AND ADDRESS BENEFICIALLY PERCENT OF BENEFICIAL OWNER OWNED OF CLASS ------------------- ------ -------- Bay Apartments Communities, Inc.(1) 8,584,000 16.6% 4340 Stevens Creek Boulevard Suite 275 San Jose, CA 95129 Cohen & Steers Capital Management, Inc. (2) 4,576,100 10.6% 757 Third Avenue New York, New York 10017 Merrill Lynch & Co., Inc. (3) 2,725,000 6.3% World Financial Center, North Tower 250 Vesey Street New York, New York 10281 LaSalle Advisors Capital Management, Inc. (4) 2,511,428 5.8% 200 East Randolph Drive Chicago, IL 60601 Stichting Pensioenfonds ABP (5) 2,740,000 6.4% Oude Lindestraat 70 Postbus 2889, 6401 DL Heerlen, The Netherlands
- ---------------- (1) Information reported is based upon a Schedule 13D filed with SEC on March 19, 1998. Beneficial ownership of all of such shares was reported as a result of an option granted by Avalon to purchase 19.9% (determined as a percentage of the outstanding shares of Avalon common stock immediately prior to the exercise of this option) of the outstanding number of shares of Avalon common stock, as represented to Bay in the Merger Agreement. Since the option has yet become exercisable, Bay disclaims beneficial owners of such shares. The inclusion of such securities in the table shall not be deemed an admission that Bay is the beneficial owner of such securities for any purposes. (2) Information reported is based upon a Schedule 13G filed with the SEC on February 12, 1998 reporting beneficial ownership as of December 31, 1997. This Schedule 13G indicates that the reporting entity is an Investment Advisor registered under Section 203 of the Investment Advisors Act of 1940. The Schedule 13G also indicates that the reporting entity has sole dispositive power with respect to all of the shares reported and sole voting power with respect to 3,971,500 of the shares reported. (3) Information reported is based upon a Schedule 13G filed with the SEC on February 3, 1998 reporting beneficial ownership as of December 31, 1997. The information reported includes 2,725,000 shares beneficially owned by Princeton Services Inc. ("PSI"), a wholly owned subsidiary of Merrill Lynch Group, Inc. ("ML Group"). PSI acts as the general partner of Merrill Lynch Asset Management, L.P. (d/b/a) Merrill Lynch Asset Management, L.P. ("MLAM") and Fund Asset Management, L.P. (d/b/a) Fund Asset Management ("FAM"), each of which is an Investment Adviser registered under section 203 of the Investment Advisers Act of 1940 (the "Advisers Act") and acts as an investment adviser to investment companies registered under Section 8 of the Investment Company Act of 1940 (the "Investment Company Act") and/or to private accounts. With respect to securities held by those investment companies and private accounts, several persons have the right to receive, or the power to direct the receipt of dividends from or the proceeds from the sale of, such securities. (4) The information reported includes 772,450 shares beneficially owned by LaSalle Advisors Capital Management, Inc. ("LaSalle") and 1,738,978 shares beneficially owned by ABKB/LaSalle Securities Limited Partnership ("ABKB/LaSalle"), a limited partnership controlled by LaSalle. Information reported is based upon an amendment to a Schedule 13G filed with the SEC on February 13, 1998 reporting beneficial ownership as of December 31, 1997. The Schedule 13G indicates that the reporting entities are Investment Advisors registered under Section 203 of the Investment Advisers Act of 1940. The Schedule 13G also indicates that LaSalle has sole dispositive and voting power with respect to 398,150 shares, shared dispositive power with respect to 374,300 shares, while ABKB/LaSalle has sole dispositive and voting power with respect to 388,800 shares, shared dispositive power with respect to 1,350,178 shares and shared voting power with respect to 1,293,903 shares. (5) Information reported is based upon a Schedule 13D filed with the SEC on April 25, 1997 by Stichting Pensioenfonds ABP, an entity established under the laws of The Kingdom of the Netherlands (the "Fund"), whose principal business is investing funds held on behalf of public sector employees of The Kingdom of the Netherlands. The Schedule 13D reports that the Fund beneficially owns and has the sole power to vote and dispose of 2,740,000 shares and has shared power to dispose of an additional 359,200 shares of common stock held by the Fund in securities accounts with ABN AMRO Bank N.V. managed by ABKB/LaSalle Securities and Cohen & Steers Capital Management, respectively. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Loans Related to Restricted Stock Grants to Officers and Employees. On January 22, 1997, the Board of Directors of the Company approved and the Company instituted a loan program under which the Company may make loans to or on behalf of the Company's employees in amounts equivalent to the employees' tax liability stemming from grants of restricted stock (the "Loan") made to the employees under the Company's 1995 Equity Incentive Plan (the "Grant Award"). The amount of each advance extended to an employee of the Company under a Loan shall be determined on the date or dates on which the Grant Award vests and shall be 55 59 PART III equal to the amount of the tax liability related to the portion of the Grant Award then vesting, calculated using the employee's actual blended state, local and Federal tax rate up to a maximum rate of 40% plus the tax liability related to the then current projected annual dividend income generated by the Grant Award calculated at a 40% tax rate (Federal, state and local combined). Each employee receiving such Loan shall execute a promissory note payable to the Company (the "Note"). Each advance under the Note will bear interest at the Short Term Applicable Federal Rate (6.42% for Loans made by the Company in 1997) in effect on the date of the Note (the "Interest Rate"), and such rate shall be fixed until the fifth anniversary of the Note, at which date the Note shall become immediately due and payable upon the fifth anniversary of the Note or any date thereafter at the option of and upon demand by the Company (the "Maturity Date"). After the fifth anniversary of the Note and until the Maturity Date, interest shall continue to accrue at either the Interest Rate or, if the prevailing Short Term Applicable Federal Rate is greater or less than the Interest Rate by an increment of 4.0%, at the then prevailing Short Term Applicable Federal Rate. Vested shares of the Grant Award serve as collateral (the "Pledged Stock") for the Note until such time as the Note has been paid in full. All dividends related to the employee's Grant Award (not just the vested portion) will be applied to the outstanding Loan balance, first to interest, then to outstanding principal. If the market value of the Pledged Stock declines such that the Loan exceeds 50% of the value of the Pledged Stock (the "LTV ratio") the Company may require the employee to make a cash payment sufficient to bring the LTV ratio below 50%, or the Company may sell or otherwise dispose of the amount of Pledged Stock needed to bring the LTV ratio below 50%. The Company's recourse against an employee under a Note for satisfaction of the Loan and all other amounts due is limited to the Company's rights in the Pledged Stock. As of March 16, 1998, the Company had extended Loans totaling $936,012 to its employees, including the amounts of $203,433 and $195,431 which were extended to Messrs. Michaux and Berman, respectively. Option to Acquire Property. The Company holds a right of first refusal with respect to approximately three and one-half acres in Gaithersburg, Maryland owned by an entity in which Mr. Michaux has an ownership interest. This arrangement was described under "Reorganization Transactions" on page 86 of the Company's prospectus dated November 11, 1993 relating to the initial public offering. Loans to Directors and Executive Officers. Messrs. Michaux, Berman and Blair are partners of an entity that is the general partner of Arbor Commons Associates Limited Partnership ("Arbor Commons Associates"). Concurrently with the Company's Offering, the Company purchased an existing participating mortgage loan made to Arbor Commons Associates, which was originated by CIGNA Investments, Inc. The mortgage loan is secured by the borrower's interests in the Avalon Arbor community. The Company purchased the mortgage loan, rather than the Avalon Arbor community, to avoid the current recapture of certain low income housing tax credits by certain unaffiliated third-party investors. This loan has an outstanding principal amount of $28.4 million and accrues interest at a fixed rate of 10.2% per annum, payable at 9% per annum. Under the terms of the loan, the Company receives (as contingent interest) 50% of the cash flow after the 10.2% accrual rate is paid and 50% of the residual profits upon the sale of the community. 56 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS Consolidated Financial Statements and Financial Statement Schedule: Report of Independent Accountants F-1 Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-5 Notes to Consolidated Financial Statements F-6 2. Financial Statement Schedule Schedule III - Real Estate and Accumulated Depreciation F-20 3. Exhibits The exhibits listed on the accompanying Index to Exhibits are filed as a part of this report. F-23 (b) Reports on Form 8-K
On October 15, 1997, the Company filed a Current Report on Form 8-K, reporting under item (5) the acquisitions of Avalon at Ballston - Vermont and Quincy Towers, Avalon at Center Place and Avalon at Providence Park in unrelated transactions for an aggregate contract purchase price of approximately $82,448,000 on January 9, 1997, May 16, 1997 and June 27, 1997, respectively. Historical and pro forma financial information concerning the communities acquired and included in such filing are as set forth below: 1. Report of Independent Accountants 2. Combined Statement of Revenue and Certain Operating Expenses for the Year Ended December 31, 1996 3. Notes to combined Statement of Revenue and Certain Operating Expenses 4. Estimates of Net Income and Funds from Operations of Certain Acquired Communities 5. Notes to Estimates of Net Income and Funds from Operations of Certain Acquired Communities 6. Pro Forma Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 1997 and for the Year Ended December 31, 1996 7. Notes to Pro Forma Condensed Consolidated Statement of Operations On November 24, 1997, the Company filed a Current Report on Form 8-K, reporting under item (5) the acquisition of a portion of the Trammell Crow Residential - Midwest portfolio for an aggregate contract purchase price of approximately $196,000,000. 57 61 Historical and pro forma financial information concerning the communities acquired and included in such filing are as set forth below: 1. Report of Independent Accountants 2. Combined Statement of Revenue and Certain Operating Expenses for the Year Ended December 31, 1996 3. Notes to combined Statement of Revenue and Certain Operating Expenses 4. Estimates of Net Income and Funds from Operations of Certain Acquired Communities 5. Notes to Estimates of Net Income and Funds from Operations of Certain Acquired Communities 6. Pro Forma Condensed Consolidated Balance Sheet 7. Notes to Pro Forma Condensed Consolidated Balance Sheet 8. Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 1997 and for the Year Ended December 31, 1996 9. Notes to Pro Forma Condensed Consolidated Statements of Operations On December 12, 1997, the Company filed a Current Report on Form 8-K relating to offering and sale of the Company's Common Stock. On December 22, 1997, the Company filed a Current Report on Form 8-K relating to the offering and sale of $100,000,000 aggregate principal amount of the Company's 6 7/8% Senior Notes due 2007. 58 62 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION 3.1(i)(a) -- Amended and Restated Articles of Incorporation of the Company (1) 3.1(i)(b) -- Articles Supplementary to Amended and Restated Articles of Incorporation Establishing Series A Cumulative Redeemable Preferred Stock (5) 3.1(i)(c) -- Articles Supplementary to Amended and Restated Articles of Incorporation Establishing Series B Cumulative Redeemable Preferred Stock (6) 3.1(i)(d) -- Rights Agreement, dated as of March 9, 1998, between Avalon Properties, Inc. And First Union National Bank, including the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (16) 3.1(ii)(a) -- Amended and Restated Bylaws of the Company (2) 3.1(ii)(b) -- Amendment to Amended and Restated Bylaws of the Company (15) 4.1 -- Avalon Properties, Inc. 7-3/8% Senior Notes due 2002 (3) 4.1(a) -- Avalon Properties, Inc. 6-7/8% Notes due 2007 (13) 4.1(b) -- Avalon Properties, Inc. 6-5/8% Notes due 2005 (3) 4.2 -- Indenture dated as of September 18, 1995 (14) 4.3 -- First Supplemental Indenture dated as of September 18, 1995 (3) 4.4 -- Second Supplemental Indenture dated as of December 16, 1997 (13) 4.5 -- Third Supplemental Indenture dated as of January 22, 1998 (14) 10.1+ -- 1995 Equity Incentive Plan (4) 10.3 -- Management Registration Rights Agreement between the Company and certain Management stockholders (1) 10.6 -- Form of Indemnification Agreement (1) 10.7 -- Swap Agreement with JP Morgan (7) 10.12 -- Master Reimbursement Agreement with Federal National Mortgage Association 10.13 -- Amended and Restated Revolving Credit Agreement with Fleet Bank, National Association dated as of March 31, 1997 (9) 10.14 -- Amended and Restated Revolving Credit Agreement with First Union National Bank of Virginia dated as of May 30, 1997 (10) 10.15 -- Employment Agreement between the Company and Richard L. Michaux dated July 15, 1997 (11) 10.16 -- Employment Agreement between the Company and Charles H. Berman dated July 15, 1997 (11) 10.17 -- Employment Agreement between the Company and Bryce Blair dated August 4, 1997 (17) 10.18 -- Employment Agreement between the Company and Robert H. Slater dated July 17, 1997 (17) 10.19 -- Employment Agreement between the Company and Thomas J. Sargeant dated August 4, 1997 (17) 10.20 -- Contribution and Exchange Agreement Dated November 7, 1997 (12) 12.1 -- Calculation of Ratios of Earnings to Fixed Charges (8) 12.2 -- Calculation of Ratios of Earnings to Combined Fixed Charges (8) 21.1 -- Schedule of Subsidiaries of the Company 23.1 -- Consent of Coopers & Lybrand L.L.P. (17) 27.1 -- Financial Data Schedule (17) 99.1 -- Merger Agreement, dated as of March 9, 1998, by and between Avalon Properties, Inc. and Bay Apartment Communities, Inc. (15)
+ Management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 59 63 (1) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1993. (2) Incorporated by reference from the Company's Form 8-K Current Report dated December 4, 1996. (3) Incorporated by reference from the Company's Form 8-K Current Report dated September 18, 1995. (4) Incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 9, 1995. (5) Incorporated by reference from the Company's Registration Statement on Form 8-A filed on February 15, 1996. (6) Incorporated by reference from the Company's Current Report on Form 8-K filed on October 23, 1996. (8) Incorporated by reference from the Company's Registration Statement in Form S-3 filed on February 24, 1997, Registration No. 333-22281. (9) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (12) Incorporated by reference from the Company's Current Report on Form 8-K filed on November 24, 1997. (13) Incorporated by reference from the Company's Current Report on Form 8-K filed on December 22, 1997. (14) Incorporated by reference from the Company's Current Report on Form 8-K filed on January 26, 1998. (15) Incorporated by reference from the Company's Current Report on Form 8-K filed on March 10, 1998. (16) Incorporated by reference from the Company's Amended Current Report on Form 8-K/A, dated March 12, 1998. (17) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997 filed on March 30, 1998. 60 64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. AVALON PROPERTIES, INC. Date: April 6, 1998 By /s/ RICHARD L. MICHAUX --------------------------- Richard L. Michaux, Chairman of the Board Chief Executive Officer and Director (Principal Executive Officer) Date: April 6, 1998 By /s/ CHARLES H. BERMAN -------------------------- Charles H. Berman, President, Chief Operating Officer and Director Date: April 6, 1998 By /s/ THOMAS J. SARGEANT --------------------------- Thomas J. Sargeant, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 61 65 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Avalon Properties, Inc.: We have audited the consolidated balance sheets of Avalon Properties, Inc. (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1997. We have also audited the financial statement schedule included on pages F-20, F-21 and F-22 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avalon Properties, Inc. as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. New York, New York January 13, 1998, except for Note 14, as to which the date is March 25, 1998. COOPERS & LYBRAND L.L.P. F-1 66 AVALON PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data)
ASSETS 12-31-97 12-31-96 ------------ ----------- Real estate Land $ 247,613 $ 169,079 Buildings and improvements 1,120,505 754,545 Furniture, fixtures and equipment 39,830 27,455 ------------ ----------- 1,407,948 951,079 Less: accumulated depreciation (69,932) (44,547) ------------ ----------- Net operating real estate 1,338,016 906,532 Construction in progress (including land) 127,038 130,827 ------------ ----------- TOTAL REAL ESTATE, NET 1,465,054 1,037,359 Cash and cash equivalents 6,722 14,241 Cash in escrow 4,109 3,945 Resident security deposits 7,812 5,995 Investments in unconsolidated joint ventures 18,315 2,573 Deferred financing costs, net of accumulated amortization of $1,873 and $2,113 at December 31, 1997 and 1996, respectively 10,022 7,702 Deferred development costs 7,207 5,179 Prepaid expenses and other assets 10,462 5,777 ------------ ----------- TOTAL ASSETS $ 1,529,703 $ 1,082,771 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Unsecured Facilities $ 71,500 $ -- Unsecured senior notes, 7-3/8% due 2002, net of unamortized discount 99,892 99,869 Unsecured senior notes, 6-7/8% due 2007, net of unamortized discount 109,803 -- Notes payable 224,934 210,737 Payables for construction 16,311 12,613 Accrued expenses and other liabilities 15,466 10,580 Accrued interest payable 3,041 4,342 Resident security deposits 9,589 6,642 ------------ ----------- TOTAL LIABILITIES 550,536 344,783 ------------ ----------- Minority interest of unitholders in consolidated operating partneships 18,157 -- ============ =========== Commitments and contingencies Stockholders' equity Preferred Stock, $.01 par value; 20,000,000 shares authorized; 4,455,000 shares of 9% Series A Cumulative Redeemable Preferred Stock issued and outstanding (aggregate liquidation preference of $111,375) 45 45 4,300,000 shares of 8.96% Series B Cumulative Redeemable Preferred Stock issued and outstanding (aggregate liquidation preference of $107,500) 43 43 Common Stock, $.01 par value; 80,000,000 shares authorized; 41,975,240 and 33,391,992 shares issued and outstanding at December 31, 1997 and 1996, respectively 420 334 Additional paid-in capital 987,540 752,159 Deferred compensation (3,265) (1,699) Dividends in excess of accumulated earnings (23,773) (12,894) ------------ ----------- TOTAL STOCKHOLDERS' EQUITY 961,010 737,988 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,529,703 $ 1,082,771 ============ ===========
See accompanying notes to consolidated financial statements. F-2 67 AVALON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share data)
Year ended ----------------------------------------------------------- 12-31-97 12-31-96 12-31-95 -------------- ---------------- -------------- Revenue: Rental income $ 169,442 $ 123,354 $ 94,821 Management fees 1,029 1,439 1,926 Other income 633 420 466 ---------- ---------- --------- Total revenue 171,104 125,213 97,213 ---------- ---------- --------- Expenses: Operating expenses 61,058 47,074 35,998 Interest expense 16,977 9,545 11,056 Depreciation and amortization 29,113 20,956 16,558 General and administrative 5,093 3,438 3,132 Write-off of deferred development costs 650 450 400 ---------- ---------- --------- Total expenses 112,891 81,463 67,144 ---------- ---------- --------- Equity in income of unconsolidated joint ventures 5,689 1,025 440 Interest income 1,346 887 953 Minority interest 174 495 633 ---------- ---------- --------- Income before gain on sale of communities and extraordinary items 65,422 46,157 32,095 Gain on sale of communities 677 7,850 -- ---------- ---------- --------- Income before extraordinary items 66,099 54,007 32,095 Extraordinary items (1,183) (2,356) (1,158) ---------- ---------- --------- Net income 64,916 51,651 30,937 Dividends attributable to preferred stock (19,656) (10,422) -- ---------- ---------- --------- Net income available to common stockholders $ 45,260 $ 41,229 $ 30,937 ========== ========== ========= Per common share: Income before extraordinary items - basic $ 1.26 $ 1.42 $ 1.13 ========== ========== ========= Income before extraordinary items - diluted $ 1.26 $ 1.41 $ 1.13 ========== ========== ========= Net income - basic $ 1.23 $ 1.34 $ 1.09 ========== ========== ========= Net income - diluted $ 1.22 $ 1.34 $ 1.09 ========== ========== =========
See accompanying notes to consolidated financial statements. F-3 68 AVALON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands, except per share data)
Shares Issued Amount ---------------------------------- ----------------------------- Additional Common Preferred Common Preferred Paid-in Stock Stock Stock Stock Capital --------------- ------------------ -------------- -------------- ----------------- Balance at 12-31-94 28,356,639 -- $ 284 $ -- $425,611 Net income -- -- -- -- -- Dividends declared ($1.46 per share) -- -- -- -- -- Issuance of Common Stock, net of offering costs 16,426 -- -- -- 335 ------------ --------- ----- ---- -------- Balance at 12-31-95 28,373,065 -- 284 -- 425,946 Net income -- -- -- -- -- Dividends declared to common stockholders ($1.49 per share) -- -- -- -- -- Dividends declared to preferred stockholders -- -- -- -- -- Issuance of Common Stock, net of offering costs 4,910,064 -- 49 -- 112,496 Issuance of Restricted Common Stock 108,863 -- 1 -- 2,468 Deferred Compensation, net of amortization -- -- -- -- -- Issuance of Series A Preferred Stock, net of offering costs -- 4,455,000 -- 45 107,536 Issuance of Series B Preferred Stock, net of offering costs -- 4,300,000 -- 43 103,713 ------------ --------- ----- ---- -------- Balance at 12-31-96 33,391,992 8,755,000 334 88 752,159 Net income -- -- -- -- -- Dividends declared to common stockholders ($1.53 per share) -- -- -- -- -- Dividends declared to preferred stockholders -- -- -- -- -- Issuance of Common Stock, net of offering costs 8,450,474 -- 85 -- 231,813 Issuance of Restricted Common Stock 132,774 -- 1 -- 3,568 Deferred Compensation, net of amortization -- -- -- -- -- ------------ --------- ----- ---- -------- Balance at 12-31-97 41,975,240 8,755,000 $ 420 $ 88 $987,540 ============ ========= ===== ==== ======== Dividends in Excess of Deferred Accumulated Stockholders' Compensation Earnings Equity ---------------- ----------------- ---------------- Balance at 12-31-94 $ -- $ (357) $ 425,538 Net income -- 30,937 30,937 Dividends declared ($1.46 per share) -- (41,413) (41,413) Issuance of Common Stock, net of offering costs -- -- 335 --------- --------- --------- Balance at 12-31-95 -- (10,833) 415,397 Net income -- 51,651 51,651 Dividends declared to common stockholders ($1.49 per share) -- (45,774) (45,774) Dividends declared to preferred stockholders -- (7,938) (7,938) Issuance of Common Stock, net of offering costs -- -- 112,545 Issuance of Restricted Common Stock -- -- 2,469 Deferred Compensation, net of amortization (1,699) -- (1,699) Issuance of Series A Preferred Stock, net of offering costs -- -- 107,581 Issuance of Series B Preferred Stock, net of offering costs -- -- 103,756 --------- --------- --------- Balance at 12-31-96 (1,699) (12,894) 737,988 Net income -- 64,916 64,916 Dividends declared to common stockholders ($1.53 per share) -- (56,139) (56,139) Dividends declared to preferred stockholders -- (19,656) (19,656) Issuance of Common Stock, net of offering costs -- -- 231,898 Issuance of Restricted Common Stock -- -- 3,569 Deferred Compensation, net of amortization (1,566) -- (1,566) -------- --------- --------- Balance at 12-31-97 $ (3,265) $ (23,773) $ 961,010 ========= ========= =========
See accompanying notes to consolidated financial statements. F-4 69 AVALON PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year ended --------------------------------------------------------- 12-31-97 12-31-96 12-31-95 -------------- ---------------- ----------------- Cash flows from operating activities: Net income $ 64,916 $ 51,651 $ 30,937 Items not requiring (providing) cash: Depreciation and amortization 29,113 20,956 16,558 Equity in income of unconsolidated joint ventures 65 (258) (754) Amortization of deferred compensation 967 427 -- Gain on sale of communities (677) (7,850) -- Extraordinary items 1,183 2,356 1,158 Decrease (increase) in cash in escrow, net 966 (84) 703 Increase in prepaids and other assets (6,713) (270) (1,945) Increase (decrease) in other operating liabilities 3,829 (1,087) 9,657 -------- ------- ------- Net cash provided by operating activities 93,649 65,841 56,314 -------- ------- ------- Cash flows used in investing activities: Investments in unconsolidated joint ventures (7,980) (580) (4,986) Proceeds received from JV Partner, net 37,700 -- -- Increase in construction payables 3,698 2,903 5,544 Purchase and development of real estate (471,415) (295,019) (190,140) Proceeds from the sale of communities, net of selling costs 16,577 31,663 -- -------- ------- ------- Net cash used in investing activities (421,420) (261,033) (189,582) -------- ------- ------- Cash flows from financing activities: Issuance of Common Stock, net of offering costs 231,898 112,545 335 Issuance of Preferred Stock, net of offering costs -- 211,337 -- Dividends paid (75,795) (53,712) (41,413) Borrowings under Unsecured Facilities 626,000 265,000 235,625 Repayments of Unsecured Facilities (554,500) (323,000) (207,395) Borrowings under notes payable 121,891 15,771 150,179 Repayments of notes payable (25,341) (7,486) (8,908) Borrowings under construction notes -- 31 14,091 Repayments of construction notes -- (10,508) (5,171) Payment of deferred financing costs (3,901) (2,346) (5,136) -------- ------- ------- Net cash provided by financing activities 320,252 207,632 132,207 -------- ------- ------- Net increase (decrease) in cash (7,519) 12,440 (1,061) Cash and cash equivalents, beginning of year 14,241 1,801 2,862 -------- ------- ------- Cash and cash equivalents, end of year $ 6,722 $14,241 $ 1,801 ======== ======= ======= Cash paid for interest, net of amount capitalized $ 17,371 $ 8,723 $ 7,043 ======== ======= =======
Non-cash investing and financing activities: In 1997, $27,305 of debt was assumed in connection with the Avalon Devonshire acquisition. In 1996, $5,581 and $24,335 of debt was assumed in connection with the Avalon Pines and AutumnWoods acquisitions, respectively. See accompanying notes to consolidated financial statements. F-5 70 AVALON PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 1. Organization and Formation of the Company Avalon Properties, Inc. (the "Company") is a self-administered and self-managed Real Estate Investment Trust ("REIT"), as defined under the Internal Revenue Code of 1986, as amended, (the "Code") and was incorporated under the General Corporation Law of Maryland on August 24, 1993. The Company began operations on November 18, 1993 upon the completion of its initial public offering. The Company is engaged principally in the development, construction, acquisition and operation of residential apartment communities, which currently include the Mid-Atlantic, Northeast and Midwest regions of the United States. Additionally, the Company provides management services for communities owned by unrelated parties. At December 31, 1997, the Company's portfolio included 64 apartment communities with 19,318 apartment homes and nine apartment communities with 2,422 apartment homes were under construction. 2. Acquisitions During the period January 1, 1995 through December 31, 1996, the Company acquired thirteen existing operating communities containing a total of 3,069 apartment homes from unrelated third parties for an aggregate contract acquisition price of approximately $196,986 (cumulative capitalized cost of $202,545). For the year ended December 31, 1997, the Company acquired fifteen existing operating communities containing a total of 3,884 apartment homes for an aggregate contract acquisition price of approximately $308,456 (cumulative capitalized cost of $310,917). These acquisitions have been accounted for as purchases of real estate and operating results for those communities are reflected in the accompanying consolidated financial statements from their respective dates of acquisition. These communities were acquired with cash proceeds drawn under the Company's Unsecured Facilities (as hereinafter defined - - see Note 6), through the issuance of new operating partnership units of DownREIT partnerships ($18,157) and through the assumption of debt ($27,305). In connection with the purchase of a portion of the Trammell Crow Residential - Midwest portfolio on December 22, 1997, the Company expects to acquire two additional apartment communities containing a total of 704 apartment homes. The Company also acquired certain third-party management contracts and the right to acquire from an unrelated third-party an undeveloped parcel of land on which the Company expects to build one apartment community. The following pro forma operating results for the Company have been prepared as if the 1997 acquisitions had occurred on January 1, 1996. Unaudited pro forma financial information is presented for informational purposes only and may not be indicative of what the actual results of operations of the Company would have been had the events occurred as of January 1, 1996, and may not be indicative of the results of operations for future periods. F-6 71
Pro Forma ----------------------------------------- Year ended Year ended 12-31-97 12-31-96 (Unaudited) (Unaudited) ------------------ ------------------ Revenue $ 196,248 $ 157,439 ================== ================== Income before extraordinary items $ 65,876 $ 53,740 ================== ================== Net income $ 64,692 $ 51,384 ================== ================== Per common share: Income before extraordinary items- basic $ 1.26 $ 1.41 ================== ================== Income before extraordinary items- diluted $ 1.25 $ 1.40 ================== ================== Net income- basic $ 1.23 $ 1.33 ================== ================== Net income- diluted $ 1.22 $ 1.33 ================== ==================
3. Summary of Significant Accounting Policies Principles of Consolidation of the Company The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned partnerships and subsidiaries and the operating partnerships structured as DownREITs. All significant intercompany balances and transactions have been eliminated in consolidation. Estimates The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Geographical Concentration The Company develops and operates residential apartment communities located in the Northeast, Mid-Atlantic and Midwest regions of the United States. This concentration imposes on the Company certain risks, which include local economic conditions, that are not within management's control. See Note 14 regarding the Company's geographical expansion to the Pacific Northwest region. Recently Issued Accounting Pronouncements During 1997, the Financial Accounting Standard Board issued Statements of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), No. 129 "Disclosure of Information About Capital Structure" ("SFAS 129"), No. 130 "Reporting Comprehensive Income" ("SFAS 130") and No. 131 "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 128 simplifies existing computational guidelines, revises disclosure requirements and increases the comparability of earnings per share data. This statement is effective for financial statements for periods F-7 72 ending after December 15, 1997 and requires restatement of all prior period earnings per share data presented. SFAS 129 establishes standards for disclosing information about an entity's capital structure such as information about securities, liquidation preference of preferred stock and redeemable stock. SFAS 130 specifies the presentation and disclosure requirement for reporting comprehensive income which includes those items which have been formerly reported as a component of shareholders' equity. SFAS 131 establishes standards for disclosing information about an entity's operating segments and related information in interim and annual financial statements. The Company has adopted SFAS 128 and SFAS 129 effective with the December 31, 1997 reporting period. The adoption of SFAS 130 and SFAS 131 is not expected to have a material impact on the Company's financial condition or results of operations. Real Estate Buildings and improvements are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives of 40 years and 7 years, respectively. If there is an event or change in circumstance that indicates an impairment in the value of a community has occurred, the Company's policy is to assess any impairment in value by making a comparison of the current and projected operating cash flows of each of its communities over its remaining useful life, on an undiscounted basis, to the carrying amount of the community. If such carrying amounts are in excess of the estimated projected operating cash flows of the community, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value. The cost of buildings and improvements include capitalized interest, property taxes and insurance incurred during the construction period. Furniture and fixtures are stated at cost and depreciated over their estimated useful lives of seven years. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations or betterments which extend the economic useful life of the assets are capitalized. The Company does not actively market any of its communities for sale. In the event the Company decides to sell a community, it will be reclassified as "held for sale" when the Company's Board of Directors approves the decision to sell. Investments in Unconsolidated Joint Ventures Investments in real estate joint ventures are accounted for under the equity method as the Company does not control the operating and financial policies of the joint ventures. The joint venture agreements require that a majority voting interest of the partners approve potential sales, liquidations, significant refinancings as well as operating budgets and capital and financing plans. Cash Equivalents Cash equivalents consist of highly liquid assets with original maturities of three months or less from the date of purchase. The majority of the Company's cash, cash equivalents and cash in escrow is held at major commercial banks. F-8 73 Deferred Financing and Development Costs Deferred financing costs include fees and costs incurred to obtain debt financings and are amortized on a straight-line basis over the shorter of the term of the loan or the related credit enhancement facility, if applicable. Unamortized financing costs are written-off when debt is retired before the maturity date (see Note 12). Fees and other incremental costs incurred in developing new communities are capitalized as deferred development costs and are included in the cost of the community when construction commences. The accompanying consolidated financial statements include a charge to expense for unrecoverable deferred development costs related to pre-development communities that may not proceed to development. Revenue Recognition Apartment homes are leased to individual residents on a short-term basis. Rental revenue is recognized monthly as earned. Fees for management of communities owned by unrelated parties are also recognized monthly as earned. Reclassifications Certain reclassifications have been made to amounts in prior years' financial statements to conform with current year presentations. Specifically, overhead expense related to acquisitions previously classified as general and administrative is now included in operating expenses. Income Taxes The Company elected to be taxed as a REIT under the Code commencing with the taxable year ended December 31, 1993. To qualify as a REIT, the Company must, along with other requirements, distribute dividends to its stockholders in an amount equal to at least 95% of the Company's taxable income, as defined in the Code. As long as the Company qualifies for taxation as a REIT, the Company will not be subject to Federal corporate income taxes. Accordingly, no provision for Federal income taxes has been made for any period of the Company. However, the Company may be subject to certain state and local income, excise or franchise taxes. The total of the four dividends paid in 1997 exceeds the net income available to common stockholders for the year ended December 31, 1997 computed in accordance with Federal income tax regulations. Accordingly, the Company determined that 80% of the $1.53 per common share dividend paid and declared in 1997 represented ordinary dividend income, 17% is a non-taxable return of capital, 2% is unrecaptured section 1250 capital gain and the remaining 1% is 20 percent long-term capital gain. The Company determined that 97% of the $2.25 and $2.24 per share dividend paid and declared on the Series A Preferred Stock and the Series B Preferred Stock, respectively, in 1997 represented ordinary dividend income, 2% is unrecaptured section 1250 capital gain and the remaining 1% is 20 percent long-term capital gain. Per Common Share Disclosures Per common share disclosures for the years ended December 31, 1997, 1996 and 1995 are based upon the following basic and diluted weighted average number of shares of common stock outstanding. F-9 74
Year ended -------------------------------------------------------------- 12-31-97 12-31-96 12-31-95 ------------------- ------------------- ------------------ Weighted average common shares outstanding- basic 36,762,781 30,739,504 28,365,427 Shares issuable from assumed conversion of: Common stock options 242,756 96,689 45,376 Operating partnership units 611 -- -- ------------------- ------------------- ------------------ Weighted average common shares outstanding- diluted 37,006,148 30,836,193 28,410,803 =================== =================== ==================
4. Stockholders' Equity Dividends on the Series A and Series B Cumulative Redeemable Preferred Stock are cumulative from the date of original issue and are payable quarterly on or about the fifteenth day of February, May, August and November of each year, at the annual rate of 9% and 8.96% of the liquidation preference of $25 per share, respectively. The Series A Preferred Stock is not redeemable prior to February 15, 2001. On or after February 15, 2001, the Series A Preferred Stock may be redeemed for cash at the option of the Company in whole or in part, at a redemption price of $25 per share, plus all accrued and unpaid dividends, if any. The Series B Preferred Stock is not redeemable prior to October 15, 2001. On or after October 15, 2001, the Series B Preferred Stock may be redeemed for cash at the option of the Company in whole or in part, at a redemption price of $25 per share, plus all accrued and unpaid dividends, if any. The Series A Preferred Stock and the Series B Preferred Stock have no stated maturity, are not subject to any sinking fund or mandatory redemption, are not convertible into any other securities of the Company and may be redeemed solely from proceeds of other capital stock of the Company, which include shares of other series of preferred stock. During 1997, the Company completed three separate offerings of Common Stock totaling 8,403,000 shares. The net proceeds of approximately $231,324 from these offerings were used to retire indebtedness under the Company's Unsecured Facilities. On December 17, 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission covering up to $400,000 of securities. The registration statement provides for the issuance of Common Stock, Preferred Stock, debt securities and warrants to purchase Common Stock. 5. Senior Participating Mortgage Note The Company's ownership of the senior participating mortgage note related to the Town Arbor Partnership ("Avalon Arbor") has been accounted for as an investment in real estate. Minority interest represents the excess of the interest income at the pay rate on the mortgage loan over the cash flow from operations generated by the community. This excess is funded from payments drawn from an escrow account established from contributions by the minority partners. At December 31, 1997, the partnership had $2,898 of cash from these contributions available to fund interest payments. The note bears interest at 10.2%. Upon acquisition, the note was restructured to provide for a 9% pay rate. The difference between the stated interest and the pay rate is deferred interest and is added to the principal. The loan also provides for contingent interest of 50% of gross revenues, as defined, and is payable prior to any payments to the partners. No contingent interest has been paid through December 31, 1997. The note entitles the holder to a 50% net residual value of the property at maturity or upon prior disposition of the property. The note may be prepaid subject to stipulated penalties. 6. Unsecured Facilities The Company's unsecured credit facility (the "Unsecured Facility") is provided by a consortium of banks that provides for $175,000 in short-term credit and is subject to an annual fee of $263. The Unsecured Facility expires in March 2000. As of December 31, 1997, approximately $16,167 of available capacity was F-10 75 used to provide letters of credit and $50,000 was borrowed under the facility. Accordingly, the balance that remained available at December 31, 1997 to be drawn under the Unsecured Facility is $108,833. The Unsecured Facility bears interest based upon a LIBOR, Prime or CD rate election at the Company's option. Current pricing level is LIBOR plus .80%, provided, however, that up to $75,000 can be competitively bid at lower pricing if market conditions allow. Pricing may be adjusted higher or lower depending on the Company's senior unsecured debt ratings. The Company's supplemental unsecured credit facility (the "Supplemental Unsecured Facility" and together with the Unsecured Facility, the "Unsecured Facilities") is provided by First Union National Bank in the amount of $50,000 and is subject to an annual facility fee of $75. The Supplemental Unsecured Facility expires in March 2000 and bears a current interest rate of LIBOR plus .80%. At December 31, 1997, $3,214 of available capacity was used to provide letters of credit and $21,500 was borrowed under the Supplemental Unsecured Facility. Accordingly, the balance that remains available at December 31, 1997 to be drawn under the Supplemental Unsecured Facility is $25,286. The weighted average effective interest rates (excluding the cost of facility fees and unused line of credit fees) on borrowings under the Unsecured Facilities for the years ended December 31, 1997, 1996 and 1995 were 6.3%, 7.3% and 7.8%, respectively. Including the cost of facility fees and unused fees, the weighted average effective interest rates on borrowings under the Unsecured Facilities for the years ended December 31, 1997, 1996 and 1995 were 6.8%, 7.4% and 8.1%, respectively. The Company, among other things, is subject to certain customary covenants under the credit agreements for the Unsecured Facilities including maintaining certain maximum leverage ratios, minimum fixed charge coverage ratio, minimum unencumbered asset and equity levels and is restricted from paying dividends in amounts that exceed 95% of the Company's Funds from Operation, as defined. F-11 76 7. Notes Payable The following notes payable were outstanding at December 31, 1997 and 1996:
1997 1996 ---------------- ----------------- Tax-exempt bonds: Notes with fixed interest at: 7.04%, maturing July 2024 (c) $ 11,550 $ 11,550 7.06%, maturing July 2024 (c) 9,780 9,780 7.04%, maturing July 2024 (c) 12,360 12,360 7.55%, maturing August 2024 (a) (c) 19,315 19,487 6.56%, maturing February 2025 (a) (c) 15,071 15,284 6.95%, maturing June 2026 (a) (c) 13,917 14,070 8.02%, maturing June 2026 (a) (c) 16,835 16,782 8.00%, maturing June 2026 (a) (c) 26,815 26,724 6.85%, maturing June 2026 (a) (c) 6,892 6,969 7.57%, maturing May 2027 (a) (c) 12,019 -- 7.73%, maturing December 2036 (a) (c) 8,731 8,771 --------- --------- Total fixed rate notes 153,285 141,777 --------- --------- Tax-exempt variable rate notes maturing (a) (b) (c) December 2025 27,305 -- June 2026 8,060 8,060 June 2026 11,500 11,500 June 2026 6,387 6,387 --------- --------- Total variable rate notes 53,252 25,947 --------- --------- Conventional notes with fixed interest at: 9.25%, repaid August 1997 -- 24,335 7.375%, maturing September 2002 99,892 99,869 8.00%, maturing December 2003 (c) 5,433 5,529 8.93%, maturing November 2004 (c) 12,964 13,149 7.035%, maturing December 2007 109,803 -- --------- --------- Total fixed rate notes 228,092 142,882 --------- --------- Total notes payable $ 434,629 $ 310,606 ========= =========
(a) Various lenders require cash to be held in escrow for interest, property taxes, principal repayments and bond remarketing costs. (b) Average interest rates on these notes ranged from 4.09% to 5.76% during the year ended December 31, 1997 and 2.37% to 4.93% during the year ended December 31, 1996. (c) Notes are collateralized by a community. F-12 77 Scheduled maturities of notes payable are as follows for the years ending December 31: 1998 $ 1,180 1999 1,314 2000 1,429 2001 1,531 2002 101,535 Thereafter 327,640 -------- Total notes payable $434,629 ========
Capitalized interest was $9,024, $12,210, and $6,027 for the years ended December 31, 1997, 1996 and 1995, respectively. The weighted average interest rates on all borrowings outstanding (including the Unsecured Facilities and related cost of the facility fees) during the years ended December 31, 1997, 1996 and 1995 was 6.90%, 7.26%, and 7.04%, respectively. On April 28, 1997, the Company completed the loan closing related to the tax-exempt financing for the Avalon Fields apartment community. The Community Development Administration of Maryland issued $12,088 of thirty-year fixed-rate bonds at an all-in rate of 7.57%. The net cash proceeds from the loan closing of approximately $11,565 were used to retire indebtedness under the Company's Unsecured Facilities. On October 8, 1997, the Company obtained an interest rate protection agreement for a notional amount of $75,000, which terminated on December 11, 1997. The Company realized a loss of $1,764 related to this interest rate protection that will be amortized as additional interest expense over the term of the $110,000 unsecured senior notes offering completed on December 16, 1997. On October 30, 1997, the Company completed a refinancing of approximately $44,000 of tax-exempt bonds related to the Avalon Ridge and Avalon Lea communities. These bonds bear a variable interest rate, will mature on June 15, 2026 and are credit enhanced by the Company's credit enhancement facility with the Federal National Mortgage Association. In connection with this refinancing, the Company purchased an interest rate ceiling agreement for $101 from Morgan Guaranty Trust Company of New York. This agreement terminates on October 31, 2002 and serves to limit the interest rate to no higher than 6.9% per annum. This agreement had an estimated unrealized loss of $62 based on prevailing interest rates at December 31, 1997. On December 16, 1997, the Company completed a $110,000 offering of unsecured senior notes. The notes bear an interest rate at 6.875% payable semi-annually on June 15 and December 15 and will mature on December 15, 2007. The notes were sold at a price of 99.821% of par value to yield 6.9% to maturity or a 110 basis point spread over the 10-year U.S. Treasury Note rate. The net proceeds were used to repay amounts outstanding under the Company's Unsecured Facilities. 8. Investments in Unconsolidated Joint Ventures At December 31, 1997, investments in joint ventures consisted of a 50% general partnership interest in Falkland Partners, a 49% equity interest in Avalon Run, an 86.5% effective equity interest in Town Close Associates (the New Canaan development right) and 50% general partnership interest in Avalon Grove. At December 31, 1996, investments in joint ventures included a 50% general partnership interest in Falkland Partners, a 49% equity interest in Avalon Run, an 86.5% effective equity interest in Town Close Associates and 100% of the operating income from the Avalon Grove joint venture. The following is a combined summary of the financial position of these joint ventures for the years presented: F-13 78
Unaudited ------------------------------------- 12-31-97 12-31-96 ---------------- --------------- Assets: Real estate, net $ 97,964 $ 92,835 Other assets 10,790 5,029 --------- -------- Total assets $ 108,754 $ 97,864 ========= ======== Liabilities and partners' equity: Mortgage notes payable $ 26,000 $ 26,000 Other liabilities 4,164 3,786 Partners' equity 78,590 68,078 --------- -------- Total liabilities and partners' equity $ 108,754 $ 97,864 ========= ========
The following is a combined summary of the results of operations of these joint ventures for the periods presented:
Year ended --------------------------------------------------- 12-31-97 12-31-96 12-31-95 ---------------- --------------- -------------- Summary of operations: Rental income $16,497 $10,238 $ 9,004 Other income 44 58 67 Operating expenses (5,020) (4,238) (3,610) Mortgage interest expense (893) (849) (1,027) Depreciation and amortization (1,869) (1,779) (1,706) ------- ------- ------- Net income $ 8,759 $ 3,430 $ 2,728 ======== ======== =======
In 1997, the Company completed the construction of Avalon Grove, a community which was subject to an agreement to form a joint venture with The Prudential Insurance Company of America ("Prudential"). The agreement provided for the admission of Prudential to the Company's single purpose entity owning a fee simple interest in the community. On December 8, 1997, Prudential exercised its right to acquire a 50% equity interest and 50% cash flow interest in this community and made an equity contribution of $37,800. The proceeds of the equity contribution were used primarily to repay amounts outstanding under the Company's Unsecured Facilities. Operating cash flow from this community, after the Company receives a management fee and after Prudential receives a preferred return on two thirds of its equity contribution, will be allocated pursuant to the cash flow interests of the Company and Prudential. 9. Commitments and Contingencies 401(k) Savings Plan Eligible employees of the Company participate in a contributory employee savings plan. Under the plan, the Company may match a percentage of contributions made by eligible employees, such percentage to apply to a maximum of 4% of their annual salary. The Company's contribution under this plan for 1997, 1996 and 1995 were $381, $322 and $223, respectively. Employment Agreements The Company entered into employment agreements with five executives that will expire on December 31, 1999 and will automatically be renewed for successive one-year terms, unless otherwise terminated. Each employment agreement provides for annual minimum base salary increases based on increases in the F-14 79 Consumer Price Index, plus additional compensation as a discretionary bonus as determined by the Compensation Committee of the Board of Directors. Contingencies The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, Management believes that the final outcome of such matters will not have a material adverse effect on the financial position or results of operations of the Company. 10. Value of Financial Instruments Cash Equivalents and Cash in Escrow The Company estimates that the fair value approximates carrying value due to the relatively short maturity of these instruments. Notes Payable, Loans Payable, Tax-Exempt Bonds and Unsecured Credit Facilities The Company determines the fair value based on an analysis of discounted future cash flows at a discount rate that approximates the Company's effective current borrowing rate for instruments of comparable maturities. Based on this analysis, the Company has determined that the fair value of these instruments approximates carrying value. 11. Stock-Based Compensation Plans The Company has adopted the 1995 Equity Incentive Plan (the "Plan"), as amended and restated. Plan participants include officers of the Company, key employees, non-employee directors, as well as other non-executive personnel of the Company. The Plan authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Code, (ii) the grant of stock options that do not so qualify, (iii) grants of shares of restricted and unrestricted Common Stock contingent upon the attainment of performance goals or subject to other restrictions, (iv) grants of shares of unrestricted Common Stock in lieu of cash compensation and (v) dividend equivalent rights. Under the Plan, a maximum of 3,315,054 shares of Common Stock may be issued, plus any shares of Common Stock represented by awards under the Company's 1993 Stock Option and Incentive Plan (the"1993 Plan") that are forfeited, canceled, reacquired by the Company, satisfied without the issuance of Common Stock or otherwise terminated (other than by exercise). Options granted to officers, non-employee directors and employees under the Plan generally vest ratably over a three-year term, expire ten years from the date of grant and may be exercised at the market price on the date of grant. Information with respect to stock options granted under the Plan and the 1993 Plan is as follows: F-15 80
Weighted Average Exercise Price Shares Per Share --------------------- ------------------------ Options outstanding, December 31, 1994 1,069,750 $ 20.522 Exercised (15,000) 20.500 Granted 137,150 20.726 Forfeited (163,750) 20.511 --------- -------- Options outstanding, December 31, 1995 1,028,150 $ 20.551 Exercised (36,413) 20.630 Granted 106,800 22.409 Forfeited (43,536) 20.636 --------- -------- Options outstanding, December 31, 1996 1,055,001 $ 20.733 Exercised (45,313) 20.612 Granted 1,211,000 29.213 Forfeited (3,653) 22.197 --------- -------- Options outstanding, December 31, 1997 2,217,035 $ 25.365 ========= ======== Options exercisable: December 31, 1995 604,667 $ 20.031 ========= ======== December 31, 1996 908,345 $ 20.525 ========= ======== December 31, 1997 939,767 $ 20.619 ========= ========
Options to purchase 730,486, 711,223 and 924,350 shares of common stock were available for grant under the Plan at December 31, 1997, 1996 and 1995, respectively. The Company has adopted the disclosure-only provision of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation expense has been recognized for the options described above. Had compensation expense for these options been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been reduced to the following pro forma amounts:
Pro Forma ---------------------------------------- Year ended Year ended 12-31-97 12-31-96 ------------------ ------------------- Income before extraordinary items $ 65,505 $ 53,861 ======== ======== Net income $ 64,322 $ 51,505 ======== ======== Income before extraordinary items per common share - basic $ 1.25 $ 1.41 ======== ======== Income before extraordinary items per common share - diluted $ 1.24 $ 1.41 ======== ======== Net income per share - basic $ 1.21 $ 1.34 ======== ======== Net income per share - diluted $ 1.20 $ 1.33 ======== ========
F-16 81 The fair value for the Company's stock options granted subsequent to December 31, 1995 was estimated at the time the options were granted using the Binomial option pricing model with the following assumptions for 1997 and 1996, respectively: risk-free interest rates ranging from 5.8% to 6.7% and 5.7% to 6.9%, dividend yields ranging from 5.0% to 5.5% and 5.7% to 7.0%, volatility factors of the expected market price of the Company's Common Stock of .142 and .176; and a weighted-average expected life of the options of 8 years. As of December 31, 1997, the weighted average remaining contractual life of all options outstanding was 8.2 years. 12. Extraordinary Items In March 1997, the unamortized deferred financing costs associated with the early retirement of the Company's previous $165,000 unsecured credit facility totaling approximately $1,183 were written off. In August 1996, the Company recorded a non-recurring charge of $2,356 to earnings for the recorded value of the unamortized deferred financing costs associated with the refinancing of tax-exempt bonds in conjunction with the completion of the new credit enhancement facility with the Federal National Mortgage Association. In 1995, the unamortized deferred financing costs associated with the retirement of the secured revolving credit facility totaling $1,158 were written off. 13. Quarterly Financial Information (Unaudited) The following summary represents the quarterly results of operations for the years ended December 31, 1997 and 1996:
Three months ended ----------------------------------------------------------- 1997 March 31 June 30 September 30 December 31 - ---- ------------- ----------- --------------- -------------- Total revenue $37,527 $40,772 $ 44,583 $ 48,222 Income before extraordinary items $14,296 $15,859 $ 17,823 $ 18,121 Net income available to common stockholders $ 8,199 $10,945 $ 12,909 $ 13,207 Income before extraordinary items per common share - basic $ 0.280 $ 0.306 $ 0.336 $ 0.336 Income before extraordinary items per common share - diluted $ 0.278 $ 0.304 $ 0.334 $ 0.335 Net income per common share - basic $ 0.245 $ 0.306 $ 0.336 $ 0.336 Net income per common share - diluted $ 0.243 $ 0.304 $ 0.334 $ 0.335
Three months ended ----------------------------------------------------------- 1996 March 31 June 30 September 30 December 31 - ---- ------------- ----------- --------------- -------------- Total revenue $28,108 $29,831 $ 32,811 $ 34,463 Income before extraordinary items $ 9,542 $11,495 $ 11,622 $ 13,498 Net income available to common stockholders $ 8,456 $ 8,979 $ 6,798 $ 16,996 Income before extraordinary items per common share - basic $ 0.280 $ 0.292 $ 0.298 $ 0.554 Income before extraordinary items per common share - diluted $ 0.280 $ 0.292 $ 0.297 $ 0.538 Net income per common share - basic $ 0.280 $ 0.292 $ 0.221 $ 0.544 Net income per common share - diluted $ 0.280 $ 0.292 $ 0.221 $ 0.538
The sum of the quarterly net income per common share, basic and diluted, for 1997 and 1996 are not equal to the full year amounts primarily because the computations for each quarter and the full year are made independently. 14. Subsequent Events F-17 82 On January 7, 1998, the Company purchased two apartment communities located in the Minneapolis metropolitan area. Carriage Green, a 246 apartment home community located in Eagan, Minnesota, and Summer Place, a 160 apartment home community located in Plymouth, Minnesota, were acquired for $27,625. On January 9, 1998, the Company purchased a 5-story office building located in Alexandria, Virginia for approximately $6,600. The Company has relocated its Mid-Atlantic regional office to this location and it occupies half of the 60,000 net rentable square feet of this office building. The remaining 30,000 square feet is rented to unrelated third party tenants at market rents. On January 15, 1998, the Company announced that it entered into a letter of intent with Prudential to purchase the residential component of the Prudential Center in Boston Massachusetts. This property contains approximately 779 apartment homes and related underground parking. Negotiations are in a preliminary state, and there can be no assurance that these negotiations will be successful. On January 22, 1998, the Company completed a $100,000 offering of unsecured senior notes. The notes bear an interest rate at 6.625% payable semi-annually on January 15 and July 15 and will mature on January 15, 2005. The notes were sold at a price of 99.976% of par value to yield 6.629% to maturity or a 111 basis point spread over the 7-year U.S. Treasury Note rate. The net proceeds of approximately $99,400 were used to repay amounts outstanding under the Company's Unsecured Facilities. On January 27, 1998, the Company completed the sale of 923,856 shares of Common Stock to Prudential, under its existing shelf registration at a net purchase price of $29.09 per share. The net proceeds of approximately $26,872 were used to retire indebtedness under the Company's Unsecured Facilities. On February 26, 1998, the Company purchased a 7.4 acre tract of land in Danbury, Connecticut for $2,100. A new 268 apartment community, Avalon Valley, will commence construction in the second quarter of 1998. On February 27, 1998, the Company purchased a 32 acre tract of land in Danbury, Connecticut for $3,271. Construction of a new 135 apartment community, Avalon Lake, commenced in the first quarter of 1998. On March 9, 1998, the Company announced that it has entered into a definitive agreement to acquire selected assets on a presale basis from Trammell Crow Residential - Pacific Northwest (TCR-NW). The presale acquisitions are expected to be completed during the next 24 to 36 months. The acquisitions include seven communities in the Seattle, Washington market and one community in the Portland, Oregon market for a total investment by the Company of up to $279,000. Together, these eight communities contain 2,411 apartment homes. The Company will manage these communities after acquiring ownership. On March 9, 1998, the Company announced that it has entered into a definitive strategic merger agreement with Bay Apartment Communities, Inc. ("Bay"), pursuant to which the Company will be merged into Bay, the surviving entity (the "Merger"). Under the terms of the agreement, each outstanding common share of the Company will be exchanged for 0.7683 shares of common stock of Bay. The Merger will be structured as a purchase of the Company by Bay for accounting purposes. The Merger is expected to close in June 1998 and is subject to the approval of both companies' shareholders and other customary regulatory conditions and there can be no assurance that the Merger will be consummated, that the required conditions to closing will be met, or that the Merger will be terminated. The surviving company, to be named Avalon Bay Communities, Inc. (the "New Company"), will own 140 apartment communities containing 40,506 apartment homes in 29 markets in 15 states and the District of Columbia. On March 25, 1998, the Company purchased a 22.5 acre tract of land in Wilmington, Massachusetts for $1,500. Construction of a new 204 apartment community, Avalon Oaks, will commence in the second quarter of 1998. F-18 83 In connection with an agreement executed by the Company in March 1998 which provides for the buyout of certain partners in DownREIT V Limited Partnership, the Company granted such partners, or their respective affiliates, the option to purchase two communities owned by the Company and located in Michigan for an aggregate purchase price of approximately $43,900. The purchase option expired on July 20, 1998. F-19 84 SCHEDULE III AVALON PROPERTIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
INITIAL COST ------------------------- COSTS SUBSEQUENT BUILDING & TO ACQUISITION/ LAND IMPROVEMENTS CONSTRUCTION LAND ----------- ------------ --------------- -------- Current Communities 4100 Massachusetts Avenue $ 6,848 $ 27,609 $ 474 $ 6,848 AutumnWoods 6,096 24,379 156 6,096 Avalon Arbor 5,133 20,958 2,370 5,133 Avalon at Ballston 7,291 29,166 436 7,291 Avalon at Boulders 3,207 12,831 49 3,207 Avalon at Carter Lake 2,280 9,128 152 2,280 Avalon at Decoverly 6,157 24,791 203 6,157 Avalon at Dulles 2,302 9,207 197 2,302 Avalon at Fairway Hills I 1,847 7,386 221 1,847 Avalon at Fairway Hills II 6,765 27,046 113 6,765 Avalon at Gayton 2,907 6,626 412 2,907 Avalon at Hampton I 727 2,908 129 727 Avalon at Hampton II 1,601 6,461 167 1,601 Avalon at Lake Arbor 2,354 9,541 55 2,354 Avalon at Lexington 2,124 12,061 140 2,124 Avalon at Park Center 7,293 29,400 965 7,293 Avalon at Symphony Glen 1,594 6,377 195 1,594 Avalon Birches 2,678 10,735 48 2,678 Avalon Chase 4,718 18,897 46 4,718 Avalon Commons 4,658 17,603 9,471 4,658 Avalon Court 3,083 5,048 9,100 3,083 Avalon Cove 8,760 78,531 3,000 8,760 Avalon Crescent 13,851 34,753 8,021 13,851 Avalon Crossing 2,207 11,188 383 2,207 Avalon Fields 2,608 11,654 36 2,608 Avalon Gates 4,414 28,343 2,612 4,414 Avalon Glen 5,956 23,935 353 5,956 Avalon Green 1,820 10,156 463 1,820 Avalon Knoll 1,528 6,113 426 1,528 Avalon Landing 1,849 7,404 50 1,849 Avalon Lea 3,193 12,773 164 3,193 Avalon Park 3,903 15,611 434 3,903 Avalon Pavilions 11,256 45,023 414 11,256 Avalon Pines 1,714 6,864 81 1,714 Avalon Pointe 1,537 6,175 129 1,537 Avalon Ridge 4,939 19,755 575 4,939 Avalon Run East 1,579 14,423 231 1,579 Avalon Springs 2,116 12,042 1,617 2,116 Avalon Station 1,719 10,086 196 1,719 Avalon Summit 1,743 14,451 95 1,743 Avalon Towers 3,118 12,702 123 3,118 Avalon View 3,529 14,114 169 3,529 Avalon Walk I 6,877 27,502 208 6,877 Avalon Walk II 2,225 21,222 293 2,225 Avalon Watch 5,585 22,339 499 5,585 Avalon West 944 9,680 186 944 Avalon Woods 1,490 6,610 219 1,490 Longwood Towers 4,219 13,240 70 4,219 --------- ---------- -------- ---------- 186,342 814,847 46,146 186,342 --------- ---------- -------- ---------- TOTAL COST ---------------------------- BUILDING/ CONSTRUCTION TOTAL COST, NET YEAR OF IN PROGRESS & ACCUMULATED OF ACCUMULATED COMPLETION/ IMPROVEMENTS TOTAL DEPRECIATION DEPRECIATION ENCUMBRANCES ACQUISITION -------------- ---------- ------------ --------------- ------------- --------------- Current Communities 4100 Massachusetts Avenue $ 28,083 $ 34,931 $ 2,793 $ 32,138 $ -- 1994 AutumnWoods 24,535 30,631 725 29,906 -- 1996 Avalon Arbor 23,328 28,461 4,092 24,369 -- 1993 ** Avalon at Ballston 29,602 36,893 3,371 33,522 -- 1993 ** Avalon at Boulders 12,880 16,087 470 15,617 -- 1996 Avalon at Carter Lake 9,280 11,560 864 10,696 -- 1994 Avalon at Decoverly 24,994 31,151 1,678 29,473 -- 1995 Avalon at Dulles 9,404 11,706 1,152 10,554 12,360 1993 ** Avalon at Fairway Hills I 7,607 9,454 941 8,513 11,500 1993 ** Avalon at Fairway Hills II 27,159 33,924 1,111 32,813 -- 1996 Avalon at Gayton 7,038 9,945 1,034 8,911 -- 1993 ** Avalon at Hampton I 3,037 3,764 459 3,305 8,060 1993 ** Avalon at Hampton II 6,628 8,229 863 7,366 11,550 1993 ** Avalon at Lake Arbor 9,596 11,950 668 11,282 -- 1995 Avalon at Lexington 12,201 14,325 1,341 12,984 15,071 1994 Avalon at Park Center 30,365 37,658 3,245 34,413 -- 1994 Avalon at Symphony Glen 6,572 8,166 820 7,346 9,780 1993 ** Avalon Birches 10,783 13,461 857 12,604 -- 1995 Avalon Chase 18,943 23,661 1,035 22,626 -- 1996 Avalon Commons 27,074 31,732 342 31,390 -- 1997 Avalon Court 14,148 17,231 109 17,122 -- 1997 Avalon Cove 81,531 90,291 2,600 87,691 -- 1997 Avalon Crescent 42,774 56,625 810 55,815 -- 1997 Avalon Crossing 11,571 13,778 414 13,364 -- 1996 Avalon Fields 11,690 14,298 763 13,535 12,019 1996 Avalon Gates 30,955 35,369 671 34,698 -- 1997 Avalon Glen 24,288 30,244 2,613 27,631 -- 1993**/95 Avalon Green 10,619 12,439 818 11,621 -- 1995 Avalon Knoll 6,539 8,067 942 7,125 13,917 1993 ** Avalon Landing 7,454 9,303 613 8,690 6,892 1995 Avalon Lea 12,937 16,130 1,575 14,555 16,835 1993 ** Avalon Park 16,045 19,948 1,963 17,985 -- 1993 ** Avalon Pavilions 45,437 56,693 5,397 51,296 -- 1993 ** Avalon Pines 6,945 8,659 324 8,335 5,433 1996 Avalon Pointe 6,304 7,841 561 7,280 6,387 1994 Avalon Ridge 20,330 25,269 2,460 22,809 26,815 1993 ** Avalon Run East 14,654 16,233 575 15,658 -- 1996 Avalon Springs 13,659 15,775 408 15,367 -- 1997 Avalon Station 10,282 12,001 727 11,274 -- 1994 Avalon Summit 14,546 16,289 774 15,515 -- 1996 Avalon Towers 12,825 15,943 774 15,169 -- 1995 Avalon View 14,283 17,812 1,734 16,078 19,315 1993 ** Avalon Walk I 27,710 34,587 3,176 31,411 -- 1993 ** Avalon Walk II 21,515 23,740 1,909 21,831 12,964 1994 Avalon Watch 22,838 28,423 2,813 25,610 - 1993 ** Avalon West 9,866 10,810 473 10,337 8,731 1996 Avalon Woods 6,829 8,319 826 7,493 -- 1994 Longwood Towers 13,310 17,529 1,747 15,782 -- 1993 ---------- ---------- ------- ------------ ----------- 860,993 1,047,335 66,430 980,905 197,629 ---------- ---------- ------- ------------ -----------
F-20 85 AVALON PROPERTIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
INITIAL COST -------------------------- COSTS SUBSEQUENT BUILDING & TO ACQUISITION/ LAND IMPROVEMENTS CONSTRUCTION LAND ----------- ------------ --------------- -------- Acquisitions Aspen Meadows 2,487 9,948 -- 2,487 Avalon at Ballston - Vermont/Quincy 9,340 37,382 -- 9,340 Avalon at Center Place -- 26,424 -- -- Avalon at Danada Farms 7,514 30,057 -- 7,514 Avalon at Geist 2,416 9,664 -- 2,416 Avalon at Montgomery 3,031 12,122 -- 3,031 Avalon at Providence Park 2,152 8,914 -- 2,152 Avalon at Stratford Green 4,314 17,258 -- 4,314 Avalon at Willow Lake 2,989 11,955 -- 2,989 Avalon Devonshire 7,229 28,914 -- 7,229 Avalon Heights 3,062 12,246 -- 3,062 Village Park of Troy 6,258 25,032 -- 6,258 Village Park of Westmont 5,149 20,594 -- 5,149 --------- ----------- -------- --------- 55,941 250,510 -- 55,941 --------- ----------- -------- --------- Development Communities* Avalon at Cameron Court -- 25,108 -- -- Avalon at Fair Lakes 1,147 16,347 -- 1,147 Avalon at Faxon Park 179 10,601 -- 179 Avalon Bronxville -- 3,767 -- -- Avalon Cove South -- 5,685 -- -- Avalon Crest -- 14,678 -- -- Avalon Fields II -- 2,997 -- -- Avalon Gardens 4,004 41,976 -- 4,004 Avalon Willow -- 12,714 -- -- Issaquah *** -- 8,664 -- -- Kaiser *** -- 6,895 -- -- --------- ----------- -------- --------- 5,330 149,432 -- 5,330 --------- ----------- -------- --------- Major Renovations/Improvements Longwood Towers -- -- 19,848 -- Corporate -- 227 6,363 -- --------- ----------- -------- --------- $ 247,613 $ 1,215,016 $ 72,357 $ 247,613 ========= =========== ======== ========= TOTAL COST ---------------------------- BUILDING/ CONSTRUCTION TOTAL COST, NET YEAR OF IN PROGRESS & ACCUMULATED OF ACCUMULATED COMPLETION/ IMPROVEMENTS TOTAL DEPRECIATION DEPRECIATION ENCUMBRANCES ACQUISITION -------------- ---------- ------------ --------------- ------------- --------------- Acquisitions Aspen Meadows 9,948 12,435 16 12,419 -- 1997 Avalon at Ballston - Vermont/Quincy 37,382 46,722 995 45,727 -- 1997 Avalon at Center Place 26,424 26,424 438 25,986 -- 1997 Avalon at Danada Farms 30,057 37,571 22 37,549 -- 1997 Avalon at Geist 9,664 12,080 7 12,073 -- 1997 Avalon at Montgomery 12,122 15,153 10 15,143 -- 1997 Avalon at Providence Park 8,914 11,066 127 10,939 -- 1997 Avalon at Stratford Green 17,258 21,572 13 21,559 -- 1997 Avalon at Willow Lake 11,955 14,944 9 14,935 -- 1997 Avalon Devonshire 28,914 36,143 22 36,121 27,305 1997 Avalon Heights 12,246 15,308 46 15,262 -- 1997 Village Park of Troy 25,032 31,290 96 31,194 -- 1997 Village Park of Westmont 20,594 25,743 57 25,686 -- 1997 ----------- ----------- -------- ----------- --------- 250,510 306,451 1,858 304,593 27,305 ----------- ----------- -------- ----------- --------- Development Communities* Avalon at Cameron Court 25,108 25,108 -- 25,108 -- Avalon at Fair Lakes 16,347 17,494 11 17,483 -- Avalon at Faxon Park 10,601 10,780 -- 10,780 -- Avalon Bronxville 3,767 3,767 -- 3,767 -- Avalon Cove South 5,685 5,685 -- 5,685 -- Avalon Crest 14,678 14,678 -- 14,678 -- Avalon Fields II 2,997 2,997 -- 2,997 -- Avalon Gardens 41,976 45,980 135 45,845 -- Avalon Willow 12,714 12,714 -- 12,714 -- Issaquah *** 8,664 8,664 -- 8,664 -- Kaiser *** 6,895 6,895 -- 6,895 -- ----------- ----------- -------- ----------- --------- 149,432 154,762 146 154,616 -- ----------- ----------- -------- ----------- --------- Major Renovations/Improvements Longwood Towers 19,848 19,848 -- 19,848 -- 1993 Corporate 6,590 6,590 1,498 5,092 -- -- ----------- ----------- -------- ----------- --------- $ 1,287,373 $ 1,534,986 $ 69,932 $ 1,465,054 $ 224,934 =========== =========== ======== =========== =========
*Under construction at December 31, 1997. **Reflects acquisition of communities from the Predecessor of the Company on November 18, 1993. *** Presale Development Community. F-21 -----END PRIVACY-ENHANCED MESSAGE-----