UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

AVALONBAY COMMUNITIES, INC.

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

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

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

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 þ       No o

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

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

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

Yes o       No þ

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

74,430,871 shares of common stock, par value $0.01 per share, were outstanding as of July 31, 2006

 

 

AVALONBAY COMMUNITIES, INC.
FORM 10-Q
INDEX

PART I — FINANCIAL INFORMATION

				Page
Item 1.		Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of June 30, 2006 (unaudited) and
		December 31, 2005		1
		Condensed Consolidated Statements of Operations and Other Comprehensive Income
		(unaudited) for the three and six months ended June 30, 2006 and 2005		2
		Condensed Consolidated Statements of Cash Flows (unaudited) for the three and six
		months ended June 30, 2006 and 2005		3-4
		Notes to Condensed Consolidated Financial Statements (unaudited)		5-22
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of
		Operations		23-48
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		49
Item 4.		Controls and Procedures		49
PART II — OTHER INFORMATION
Item 1.		Legal Proceedings		49
Item 1a.		Risk Factors		50
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		51
Item 3.		Defaults Upon Senior Securities		51
Item 4.		Submission of Matters to a Vote of Security Holders		51
Item 5.		Other Information		52
Item 6.		Exhibits		53-54
SIGNATURES				55

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

		6-30-06				12-31-05
		(unaudited)
ASSETS
Real estate:
Land		$	895,105			$	882,874
Buildings and improvements			4,346,979				4,288,168
Furniture, fixtures and equipment			136,051				133,192
			5,378,135				5,304,234
Less accumulated depreciation			(1,018,627	)			(938,297	)
Net operating real estate			4,359,508				4,365,937
Construction in progress, including land			486,925				317,823
Land held for development			208,810				179,739
Operating real estate assets held for sale, net			—				82,289
Total real estate, net			5,055,243				4,945,788
Cash and cash equivalents			12,780				6,106
Cash in escrow			30,569				48,266
Resident security deposits			27,317				26,290
Investments in unconsolidated real estate entities			50,671				41,942
Deferred financing costs, net			16,465				17,976
Deferred development costs			30,625				31,467
Prepaid expenses and other assets			48,770				47,225
Total assets		$	5,272,440			$	5,165,060
LIABILITIES AND STOCKHOLDERS’ EQUITY
Unsecured notes		$	1,805,214			$	1,809,182
Variable rate unsecured credit facility			6,000				66,800
Mortgage notes payable			528,837				490,582
Dividends payable			60,220				54,476
Payables for construction			44,474				28,203
Accrued expenses and other liabilities			108,720				82,564
Accrued interest payable			34,482				34,649
Resident security deposits			37,962				35,640
Liabilities related to real estate assets held for sale			—				1,837
Total liabilities			2,625,909				2,603,933
Minority interest of unitholders in consolidated partnerships			5,483				19,464
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both June 30, 2006 and December 31, 2005; 4,000,000 shares issued and outstanding at both June 30, 2006 and December 31, 2005			40				40
Common stock, $0.01 par value; 140,000,000 shares authorized at both June 30, 2006 and December 31, 2005; 74,415,977 and 73,663,048 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively			744				737
Additional paid-in capital			2,465,362				2,429,568
Accumulated earnings less dividends			178,187				115,788
Accumulated other comprehensive loss			(3,285	)			(4,470	)
Total stockholders’ equity			2,641,048				2,541,663
Total liabilities and stockholders’ equity		$	5,272,440			$	5,165,060

See accompanying notes to Condensed Consolidated Financial Statements.

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

		For the three months ended								For the six months ended
		6-30-06				6-30-05				6-30-06				6-30-05
Revenue:
Rental and other income		$	179,280			$	164,289			$	353,232			$	325,165
Management, development and other fees			1,395				1,363				2,601				1,796
Total revenue			180,675				165,652				355,833				326,961
Expenses:
Operating expenses, excluding property taxes			51,665				46,146				100,736				90,951
Property taxes			16,871				16,171				33,775				32,222
Interest expense, net			26,595				32,112				55,259				64,232
Depreciation expense			41,238				39,377				81,153				78,693
General and administrative expense			6,479				6,262				12,762				13,421
Total expenses			142,848				140,068				283,685				279,519
Equity in income of unconsolidated entities			207				178				434				6,761
Minority interest in consolidated partnerships			(128	)			(337	)			(260	)			(851	)
Gain on sale of land			—				4,617				13,166				4,617
Income from continuing operations			37,906				30,042				85,488				57,969
Discontinued operations:
Income from discontinued operations			71				4,222				1,147				8,291
Gain on sale of communities			31,992				22,647				97,411				60,261
Total discontinued operations			32,063				26,869				98,558				68,552
Net income			69,969				56,911				184,046				126,521
Dividends attributable to preferred stock			(2,175	)			(2,175	)			(4,350	)			(4,350	)
Net income available to common stockholders		$	67,794			$	54,736			$	179,696			$	122,171
Other comprehensive income:
Unrealized gain (loss) on cash flow hedges			644				(354	)			1,185				946
Comprehensive income		$	68,438			$	54,382			$	180,881			$	123,117
Dividends declared per common share		$	0.78			$	0.71			$	1.56			$	1.42
Earnings per common share — basic:
Income from continuing operations (net of dividends attributable to preferred stock)		$	0.48			$	0.38			$	1.10			$	0.74
Discontinued operations			0.43				0.37				1.33				0.94
Net income available to common stockholders		$	0.91			$	0.75			$	2.43			$	1.68
Earnings per common share — diluted:
Income from continuing operations
(net of dividends attributable to preferred stock)		$	0.47			$	0.38			$	1.08			$	0.73
Discontinued operations			0.43				0.36				1.31				0.92
Net income available to common stockholders		$	0.90			$	0.74			$	2.39			$	1.65

See accompanying notes to Condensed Consolidated Financial Statements.

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

		For the six months ended
		6-30-06				6-30-05
Cash flows from operating activities:
Net income		$	184,046			$	126,521
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense, including discontinued operations			81,153				81,308
Amortization of deferred financing costs and debt premium/discount			2,076				1,944
Amortization of deferred compensation			8,201				4,503
Income allocated to minority interest in consolidated partnerships including discontinued operations			260				851
Gain on sale of real estate assets			(110,577	)			(64,878	)
Gain on sale of technology investment			—				(6,252	)
Increase in cash in operating escrows			(1,875	)			(2,033	)
Increase in resident security deposits, prepaid expenses and other assets			(250	)			(1,845	)
Increase in accrued expenses, other liabilities and accrued interest payable			21,972				4,650
Net cash provided by operating activities			185,006				144,769
Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs			(308,325	)			(187,465	)
Acquisition of real estate assets, including partner equity interest			—				(57,415	)
Capital expenditures — existing real estate assets			(7,701	)			(7,960	)
Capital expenditures — non-real estate assets			(225	)			(946	)
Proceeds from sale of communities and technology investment, including reimbursement for Fund and joint venture communities, net of selling costs			237,270				232,291
Increase (decrease) in payables for construction			16,271				(2,694	)
Decrease in cash in construction escrows			19,572				563
Increase in investments in unconsolidated real estate entities			(8,885	)			(13,074	)
Net cash used in investing activities			(52,023	)			(36,700	)
Cash flows from financing activities:
Issuance of common stock			15,651				21,251
Dividends paid			(114,542	)			(106,854	)
Net borrowings (repayments) under unsecured credit facility			(60,800	)			54,000
Issuance of mortgage notes payable and draws on construction loans			41,405				16,596
Repayments of mortgage notes payable			(3,150	)			(39,679	)
Repayment of unsecured notes			(4,000	)			(50,000	)
Payment of deferred financing costs			(533	)			(1,304	)
Redemption of units for cash by minority partners			(80	)			(50	)
Distributions to DownREIT partnership unitholders			(198	)			(611	)
Distributions to joint venture and profit-sharing partners			(62	)			(67	)
Net cash used in financing activities			(126,309	)			(106,718	)
Net increase in cash and cash equivalents			6,674				1,351
Cash and cash equivalents, beginning of period			6,106				1,526
Cash and cash equivalents, end of period		$	12,780			$	2,877
Cash paid during period for interest, net of amount capitalized		$	52,671			$	63,317

See accompanying notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

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

During the six months ended June 30, 2006:

	•		As described in Note 4, “Stockholders’ Equity,” 122,172 shares of common stock valued at $12,368 were issued in connection with stock grants, 943 shares valued at $94 were issued through the Company’s dividend reinvestment plan and 45,267 shares valued at $3,365 were withheld to satisfy employees’ tax withholding and other liabilities, for a net value of $9,097. In addition, the Company granted 862,613 options for common stock, net of forfeitures, at a value of $9,863.
	•		301,298 units of limited partnership, valued at $13,953, were presented for redemption to the DownREIT partnerships that issued such units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.
	•		The Company recorded a decrease to other liabilities and a corresponding gain to other comprehensive income of $1,185 to adjust the Company’s Hedged Derivatives (as defined in Note 5, “Derivative Instruments and Hedging Activities”) to their fair value.
	•		Common and preferred dividends declared but not paid totaled $60,220.

During the six months ended June 30, 2005:

	•		163,792 shares of common stock were issued in connection with stock grants, 738 shares were issued through the Company’s dividend reinvestment plan, 45,243 shares were withheld to satisfy employees’ tax withholding and other liabilities and 3,925 shares were forfeited, for a net value of $9,076. In addition, the Company granted 720,059 options for common stock at a value of $4,600.
	•		33,102 units of limited partnership, valued at $1,445, were presented for redemption to the DownREIT partnerships that issued such units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.
	•		The Company deconsolidated mortgage notes payable in the aggregate amount of $24,869 upon admittance of outside investors into a previously consolidated discretionary investment fund. See Note 6, “Investments in Unconsolidated Entities.”
	•		The Company assumed fixed rate debt of $4,566 in connection with the acquisition of an improved land parcel.
	•		The Company recorded a decrease to other liabilities and a corresponding gain to other comprehensive income of $946 to adjust the Company’s Hedged Derivatives to their fair value.
	•		Common and preferred dividends declared but not paid totaled $54,204.

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

1. Organization and Significant Accounting Policies

Organization

AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its subsidiaries) is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended. The Company focuses on the ownership and operation of apartment communities in high barrier-to-entry markets of the United States. These markets are located in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the country.

At June 30, 2006, the Company owned or held a direct or indirect ownership or economic interest in 143 operating apartment communities containing 41,485 apartment homes in ten states and the District of Columbia, of which three communities containing 1,573 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 17 communities under construction that are expected to contain an aggregate of 5,419 apartment homes when completed. The Company also owned or held a direct or indirect ownership interest in rights to develop an additional 49 communities that, if developed in the manner expected, will contain an estimated 11,996 apartment homes.

During the three months ended June 30, 2006:

	•		The Company sold one community, Avalon Corners, located in Stamford, Connecticut. Avalon Corners contained 195 apartment homes and was sold for a sales price of $60,200. The sale of this community resulted in a gain as reported in accordance with generally accepted accounting principles (“GAAP”) of $31,992.
	•		The Company completed the development of one community, Avalon Pines II, located in Coram, New York. Avalon Pines II is a garden-style community containing 152 apartment homes and was completed for a total capitalized cost of $25,100. Avalon Pines II is the second phase of a multi-phase apartment community containing an aggregate of 450 apartment homes that were completed for a total capitalized cost of $73,200.
	•		The Company commenced construction of two communities, Avalon at Dublin Station I, a mid-rise community located at the BART station in Dublin, California and Avalon at Lexington Hills, a garden-style community located in Lexington, Massachusetts. These two communities are expected to contain an aggregate of 692 apartment homes when completed for a total projected capitalized cost of $172,000.
	•		The Company completed the redevelopment of Avalon at Fairway Hills III, located in Columbia, Maryland. The redevelopment of Avalon at Fairway Hills III, a garden-style community containing 336 apartment homes, was completed for a total capitalized cost of $6,000, excluding costs incurred prior to the start of redevelopment.
	•		The Company purchased four parcels of land for a total purchase price of $39,665. These land parcels are located in Irvine, California, Lexington, Massachusetts, Coram, New York and Hingham, Massachusetts.
	•		AvalonBay Value Added Fund, L.P. (the “Fund”), the private, discretionary investment vehicle in which the Company holds an equity interest of approximately 15%, acquired one community, completed redevelopment of one community and commenced redevelopment of one community. See Note 6, “Investments in Unconsolidated Entities.”

The interim unaudited financial statements have been prepared in accordance with GAAP for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and the Company’s quarterly reports on Form 10-Q for subsequent quarters. The results of operations for the six months ended June 30, 2006 are not necessarily indicative of the operating results for the full year. Management believes the disclosures are adequate to ensure the information presented is not misleading. In the opinion of management, all adjustments and eliminations, consisting only of normal, recurring adjustments necessary for a fair presentation of the financial statements for the interim periods, have been included.

Principles of Consolidation

The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned partnerships, certain joint venture partnerships, subsidiary partnerships structured as DownREITs and any variable interest entities consolidated under FIN 46, as discussed below. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company assesses consolidation of variable interest entities under the guidance of FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” as revised in December 2003. The Company accounts for joint venture entities and subsidiary partnerships, including those structured as DownREITs, that are not variable interest entities, in accordance with EITF Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” Under EITF Issue No. 04-5, the general partner in a limited partnership is presumed to control that limited partnership, unless that presumption is overcome by the limited partners having either: (i) the substantive ability, either by a single limited partner or through a simple majority vote, to dissolve the limited partnership or otherwise remove the general partner without cause; or (ii) substantive participating rights.

In each of the partnerships structured as DownREITs, either the Company or one of the Company’s wholly-owned subsidiaries is the general partner, and there are one or more limited partners whose interest in the partnership is represented by units of limited partnership interest. For each DownREIT partnership, limited partners are entitled to receive an initial distribution before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions per unit paid to the holders of units of limited partnership interests have approximated the Company’s current common stock dividend per share. Each DownREIT partnership has been structured so that it is unlikely the limited partners will be entitled to a distribution greater than the initial distribution provided for in the partnership agreement. The holders of units of limited partnership interest have the right to present all or some of their units for redemption for a cash amount as determined by the applicable partnership agreement and based on the fair value of the Company’s common stock. In lieu of a cash redemption, the Company may elect to acquire such units for an equal number of shares of the Company’s common stock.

Revenue and Gain Recognition

Rental income related to leases is recognized on an accrual basis when due from residents in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition” and Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases.” In accordance with the Company’s standard lease terms, rental payments are generally due on a monthly basis. Any cash concessions given at the inception of the lease are amortized over the approximate life of the lease, which is generally one year. The Company accounts for sales of real estate assets and the related gain recognition in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.”

Real Estate

Significant expenditures which improve or extend the life of an asset are capitalized. The operating real estate assets are stated at cost and consist of land, buildings and improvements, furniture, fixtures and equipment, and other costs incurred during their development, redevelopment and acquisition. Expenditures for maintenance and repairs are charged to operations as incurred.

The Company’s policy with respect to capital expenditures is generally to capitalize only non-recurring expenditures. Improvements and upgrades are capitalized only if the item exceeds $15, extends the useful life of the asset and is not related to making an apartment home ready for the next resident. Purchases of personal property, such as computers and furniture, are capitalized only if the item is a new addition and exceeds $2.5. The Company generally expenses purchases of personal property made for replacement purposes.

The capitalization of costs during the development of assets (including interest and related loan fees, property taxes and other direct and indirect costs) begins when development efforts commence and ends when the asset, or a portion of an asset, is delivered and is ready for its intended use, which is generally indicated by the issuance of a certificate of occupancy. Cost capitalization during redevelopment of apartment homes (including interest and related loan fees, property taxes and other direct and indirect costs) begins when an apartment home is taken out-of-service for redevelopment and ends when the apartment home redevelopment is completed and the apartment home is available for a new resident. Rental income and operating costs incurred during the initial lease-up or post-redevelopment lease-up period are fully recognized as they accrue.

In accordance with SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” the Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable (“Development Rights”). Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and availability of capital. Pre-development costs incurred in the pursuit of Development Rights for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, deeming future development no longer probable, any capitalized pre-development costs are written-off with a charge to expense. The Company expensed costs related to abandoned pursuits, which include costs incurred on Development Rights not yet considered probable, as well as the abandonment or impairment of Development Rights, acquisition pursuits and disposition pursuits, in the amounts of $1,043 and $146 for the three months ended June 30, 2006 and 2005, respectively, and $1,365 and $366 for the six months ended June 30, 2006 and 2005, respectively. These costs are included in operating expenses, excluding property taxes on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income. Abandoned pursuit costs can be volatile, and the costs incurred in any given period may be widely different in future years.

The Company owns land improved with office buildings and industrial space occupied by unrelated third-parties in connection with five Development Rights. The Company intends to manage the current improvements until such time as all tenant obligations have been satisfied or eliminated through negotiation, and construction of new apartment communities is ready to begin. As provided under the guidance of SFAS No. 67, the revenue from incidental operations received from the current improvements in excess of any incremental costs are being recorded as a reduction of total capitalized costs of the Development Right and not as part of net income.

In connection with the acquisition of an operating community, the Company performs a valuation and allocation to each asset and liability acquired in such transaction, based on their estimated fair values at the date of acquisition in accordance with SFAS No. 141, “Business Combinations.” The purchase price allocations to tangible assets, such as land, buildings and improvements, and furniture, fixtures and equipment, are reflected in real estate assets and depreciated over their estimated useful lives. Any purchase price allocation to intangible assets, such as in-place leases, is included in prepaid expenses and

other assets on the accompanying Condensed Consolidated Balance Sheets and is amortized over the average remaining lease term of the acquired leases. The fair value of acquired in-place leases is determined based on the estimated cost to replace such leases, including foregone rents during an assumed re-lease period, as well as the impact on projected cash flow of acquired leases with leased rents above or below current market rents.

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

If there is an event or change in circumstance that indicates an impairment in the value of an operating community, the Company’s policy is to assess any impairment in value by making a comparison of the current and projected operating cash flow of the community over its remaining useful life, on an undiscounted basis, to the carrying amount of the community. If the carrying amount is in excess of the estimated projected operating cash flow of the community, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value. The Company did not recognize an impairment loss on any of its operating communities during the three and six months ended June 30, 2006 or 2005.

Deferred Financing Costs

Deferred financing costs include fees and costs incurred to obtain debt financing and are amortized on a straight-line basis, which approximates the effective interest method, over the shorter of the term of the loan or the related credit enhancement facility, if applicable. Unamortized financing costs are written-off when debt is retired before the maturity date. Accumulated amortization of deferred financing costs was $18,118 at June 30, 2006 and $16,074 at December 31, 2005.

Cash, Cash Equivalents and Cash in Escrow

Cash and cash equivalents include all cash and liquid investments with an original maturity of three months or less from the date acquired. The majority of the Company’s cash, cash equivalents and cash in escrows is held at major commercial banks.

Interest Rate Contracts

The Company utilizes derivative financial instruments to manage interest rate risk and has designated these financial instruments as hedges under the guidance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 138, “Accounting for Certain Instruments and Certain Hedging Activities, an Amendment of Statement No. 133.” For fair value hedge transactions, changes in the fair value of the derivative instrument and changes in the fair value of the hedged item due to the risk being hedged are recognized in current period earnings. For cash flow hedge transactions, changes in the fair value of the derivative instrument are reported in other comprehensive income. For cash flow hedges where the changes in the fair value of the derivative exceed the change in fair value of the hedged item, the ineffective portion is recognized in current period earnings. Derivatives which are not part of a hedge relationship are recorded at fair value through earnings. As of June 30, 2006 and December 31, 2005, the Company had approximately $265,000 and $233,000, respectively, in variable rate debt subject to cash flow hedges. See Note 5, “Derivative Instruments and Hedging Activities.”

Comprehensive Income

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

Earnings per Common Share

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

		For the three months ended								For the six months ended
		6-30-06				6-30-05				6-30-06				6-30-05
Basic and diluted shares outstanding
Weighted average common shares — basic			74,100,800				72,786,719				73,950,147				72,640,134
Weighted average DownREIT units outstanding			152,221				477,970				194,662				487,913
Effect of dilutive securities			1,108,890				1,324,547				1,141,137				1,289,458
Weighted average common shares — diluted			75,361,911				74,589,236				75,285,946				74,417,505
Calculation of Earnings per Share — basic
Net income available to common stockholders		$	67,794			$	54,736			$	179,696			$	122,171
Weighted average common shares — basic			74,100,800				72,786,719				73,950,147				72,640,134
Earnings per common share — basic		$	0.91			$	0.75			$	2.43			$	1.68
Calculation of Earnings per Share — diluted
Net income available to common stockholders		$	67,794			$	54,736			$	179,696			$	122,171
Add: Minority interest of DownREIT unitholders in consolidated partnerships, including discontinued operations			99				303				198				780
Adjusted net income available to common stockholders		$	67,893			$	55,039			$	179,894			$	122,951
Weighted average common shares — diluted			75,361,911				74,589,236				75,285,946				74,417,505
Earnings per common share — diluted		$	0.90			$	0.74			$	2.39			$	1.65

Employee options to purchase shares of common stock in the amount of 862,613 were outstanding during the three and six months ended June 30, 2006, but were not included in the computation of diluted earnings per share because in applying the treasury stock method under the provisions of SFAS 123(R), as discussed below, such options are anti-dilutive. Employee options to purchase shares of common stock of 0 and 16,267 were outstanding during the three and six months ended June 30, 2005, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares for the period and therefore, are anti-dilutive.

Stock-Based Compensation

Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123,” prospectively to all employee awards granted, modified, or settled on or after January 1, 2003. Awards under the Company’s stock option plans vest over a three-year period. Therefore, the cost related to stock-based employee compensation for employee stock options included in the determination of net income for the three and six months ended June 30, 2006 is the same as the cost that would have been recognized if the fair value based

method had been applied to all awards since the original effective date of SFAS No. 123. However, the cost related to stock-based employee compensation for stock options for the three and six months ended June 30, 2005 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. If the fair value based method had been applied to all outstanding and unvested awards in the three and six months ended June 30, 2005, net income would have been $4 and $104 lower in the three and six months ended June 30, 2005, respectively. There would not have been any impact on earnings per common share — diluted during either the three or six months ended June 30, 2005.

The Company adopted the provisions of SFAS No. 123(R), “Share Based Payment,” using the modified prospective transition method on January 1, 2006. The adoption of SFAS No. 123(R) did not have a material impact on the Company’s financial position or results of operations. However, the adoption of SFAS No. 123(R) changed the service period for, and timing of, the recognition of compensation cost related to retirement eligibility, which will generally result in accelerated expense recognition by the Company for its stock-based compensation programs. The Company previously recorded compensation cost over the vesting period, regardless of eligibility for retirement. If the Company had recorded compensation cost based on retirement eligibility, the increase to compensation cost during the three and six months ended June 30, 2006 and 2005 would not have been material.

Legal and Other Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are frequently covered by insurance. If it has been determined that a loss is probable to occur, the estimated amount of the loss is recorded in the financial statements. While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on the financial position or results of operations of the Company.

The Company is currently involved in construction litigation with a general contractor and a surety bond provider related to a community that has since completed development. A non-jury trial ended in April 2004, and in May 2004, the court issued a ruling, finding that these parties were liable to the Company for consequential damages due to breach of contract and other failures to perform. The court issued a ruling in October 2004, awarding the Company approximately $1,250 plus interest. In September 2005, the Company filed an appeal to seek an increase in the damage award and the general contractor and surety has filed an appeal seeking a reduction. There is no guarantee that a higher, or any, damage award, will be received by the Company after all appeals are filed and a final ruling is provided.

The Company is currently involved in a lawsuit regarding the handling of security deposits in California. The lawsuit alleges that the amounts withheld by the Company from security deposits at the end of tenancies exceeded the Company’s actual damages. The Company has agreed with the plaintiff on the terms of a settlement with the purported class. The settlement terms have been approved by the court, the settlement has been substantially implemented and the Company expects that the court will dismiss the case in the near future. The Company has paid or accrued for all costs it expects to incur in connection with this settlement.

In September 2005, the Equal Rights Center, an advocacy group for the disabled, filed a lawsuit against the Company alleging that communities constructed by the Company violate the accessibility requirements of the Fair Housing Act and the Americans with Disabilities Act. The lawsuit seeks monetary damages as well as injunctive relief, such as modifications to existing assets. Due to the preliminary nature of the litigation, the Company cannot predict or determine the outcome of this lawsuit, nor is it reasonably possible to estimate the amount of loss, if any, that would be associated with an adverse decision.

The Company recently determined that contaminated soil from imported fill was delivered to the Avalon Lyndhurst development site, located in Lyndhurst, New Jersey, by third parties. The contaminants exceeded allowable levels for residential use under New Jersey state and local regulations, and the Company is in the process of removing the previously imported fill soil. As a result, the Company estimates that the cost to complete construction of this community, including indirect costs associated with construction delays, may increase by approximately $10,000 as compared to the original construction budget. The Company is pursuing the recovery of these additional costs through its insurance as well as the third parties involved, but no assurance can be given as to the amount or timing of reimbursements to the Company. The Company will record these incremental costs as they are incurred, and potential recoveries as they become certain or are received. Although the estimated costs to complete construction of this community exceed the original construction budget, the Company does not expect that, upon completion, there will be an impairment in value of this asset which would require a write down in the carrying value. The Company will update this assessment based on changes in circumstances or market conditions.

Discontinued Operations

The Company follows SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which requires that the assets and liabilities and the results of operations of any communities which have been sold, or otherwise qualify as held for sale, be presented as discontinued operations in the Company’s Condensed Consolidated Financial Statements in both current and prior years presented. The community specific components of net income that are presented as discontinued operations include net operating income, depreciation expense, minority interest expense and interest expense, net. In addition, the net gain or loss (including any impairment loss) on the eventual disposal of communities held for sale will be presented as discontinued operations when recognized. A change in presentation for discontinued operations will not have any impact on the Company’s financial condition or results of operations. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value less the cost to sell, and are presented separately in the accompanying Condensed Consolidated Balance Sheets. Subsequent to classification of a community as held for sale, no further depreciation is recorded. The Company combines the operating, investing and financing portions of cash flows attributable to discontinued operations with the respective cash flows from continuing operations on the accompanying Condensed Consolidated Statements of Cash Flows.

Recently Issued Accounting Standards

In June 2006, the Financial Accounting Standards Board (“FASB”) ratified the consensus in EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43,” which addresses the accounting for compensated absences known as a sabbatical leave. EITF Issue No. 06-2 is effective for all fiscal years beginning after December 15, 2006. The adoption of EITF Issue No. 06-2 will not have a material effect on the Company’s financial position or results of operations.

Use of Estimates

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

Reclassifications

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

2. Interest Capitalized

Capitalized interest associated with communities under development or redevelopment totaled $11,205 and $6,036 for the three months ended June 30, 2006 and 2005, respectively, and $19,569 and $11,698 for the six months ended June 30, 2006 and 2005, respectively.

3. Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes and variable rate unsecured credit facility as of June 30, 2006 and December 31, 2005 are summarized as follows:

		6-30-06				12-31-05
Fixed rate unsecured notes (1)		$	1,805,214			$	1,809,182
Fixed rate mortgage notes payable — conventional and tax-exempt			236,693				239,025
Variable rate mortgage notes payable — conventional and tax-exempt			252,192				219,010
Total notes payable and unsecured notes			2,294,099				2,267,217
Variable rate secured short-term debt			39,952				32,547
Variable rate unsecured credit facility			6,000				66,800
Total mortgage notes payable, unsecured notes and unsecured credit facility		$	2,340,051			$	2,366,564

(1)		Balances at June 30, 2006 and December 31, 2005 are net of $786 and $818 of debt discount, respectively, related to the issuance of unsecured notes.

During the six months ended June 30, 2006, the Company issued $34,000 in variable rate mortgage debt maturing in April 2011. In the aggregate, secured notes payable mature at various dates from September 2007 through April 2043 and are secured by certain apartment communities (with a net carrying value of $740,211 as of June 30, 2006). As of June 30, 2006, the Company has guaranteed approximately $108,000 of mortgage notes payable held by wholly-owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Company’s fixed rate mortgage notes payable (conventional and tax-exempt) was 6.8% at June 30, 2006 and at December 31, 2005. The weighted average interest rate of the Company’s variable rate mortgage notes payable and its unsecured credit facility (as discussed on the following page), including the effect of certain financing related fees, was 6.3% at June 30, 2006 and 5.5% at December 31, 2005.

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at June 30, 2006 are as follows:

														Stated
		Secured notes				Secured notes				Unsecured notes				interest rate of
Year		payments				maturities				maturities				unsecured notes
2006		$	4,516			$	—			$	150,000				6.800	%
2007			7,738				39,952				110,000				6.875	%
											150,000				5.000	%
2008			8,197				4,368				50,000				6.625	%
											146,000				8.250	%
2009			7,255				73,793				150,000				7.500	%
2010			5,448				28,989				200,000				7.500	%
2011			4,302				35,910				300,000				6.625	%
											50,000				6.625	%
2012			3,495				12,166				250,000				6.125	%
2013			3,507				—				100,000				4.950	%
2014			3,748				33,100				150,000				5.375	%
2015			4,008				—				—				—
Thereafter			103,587				144,758				—				—
		$	155,801			$	373,036			$	1,806,000

The Company’s unsecured notes contain a number of financial and other covenants with which the Company must comply, including, but not limited to, limits on the aggregate amount of total and secured indebtedness the Company may have on a consolidated basis and limits on the Company’s required debt service payments.

The Company has a $500,000 revolving variable rate unsecured credit facility with JPMorgan Chase Bank and Wachovia Bank, N.A. serving as banks and syndication agents for a syndicate of commercial banks and Bank of America, serving as bank and administrative agent. The Company had $6,000 outstanding under the facility and $39,195 in letters of credit on June 30, 2006 and $66,800 outstanding under the facility and $40,154 in letters of credit on December 31, 2005. Under the terms of the credit facility, the Company may elect to increase the facility by up to an additional $150,000, provided that one or more banks (from the syndicate or otherwise) voluntarily agree to provide the additional commitment. No member of the syndicate of banks can prohibit such increase; such an increase in the facility will only be effective to the extent banks (from the syndicate or otherwise) choose to commit to lend additional funds. The Company pays participating banks, in the aggregate, an annual facility fee of approximately $750. The unsecured credit facility bears interest at varying levels based on the London Interbank Offered Rate (“LIBOR”), rating levels achieved on the Company’s unsecured notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 0.55% per annum. The stated spread over LIBOR can vary from LIBOR plus 0.50% to LIBOR plus 1.15% based upon the rating of the Company’s long-term unsecured debt. In addition, the unsecured credit facility includes a competitive bid option, which allows banks that are part of the lender consortium to bid to make loans to the Company at a rate that is lower than the stated rate provided by the unsecured credit facility for up to $250,000. The competitive bid option may result in lower pricing than the stated rate if market conditions allow. The Company does not have any amounts outstanding under this competitive bid option as of June 30, 2006. The Company is subject to (i) certain customary covenants under the unsecured credit facility, including, but not limited to, maintaining

certain maximum leverage ratios, a minimum fixed charges coverage ratio and minimum unencumbered assets and equity levels and (ii) prohibitions on paying dividends in amounts that exceed 95% of the Company’s Funds from Operations, as defined therein, except as may be required to maintain the Company’s REIT status. The credit facility matures in May 2008, assuming exercise of a one-year renewal option by the Company. The Company is currently evaluating the possibility of entering into a new expanded credit facility with lower pricing and additional capacity. However, there is no guarantee that such a credit facility will be obtained.

4. Stockholders’ Equity

The following summarizes the changes in stockholders’ equity for the six months ended June 30, 2006:

														Accumulated				Accumulated
										Additional				earnings				other
		Preferred				Common				paid-in				less				comprehensive				Stockholders’
		stock				stock				capital				dividends				loss				equity
Balance at December 31, 2005		$	40			$	737			$	2,429,568			$	115,788			$	(4,470	)		$	2,541,663
Net income			—				—				—				184,046				—				184,046
Unrealized gain on cash flow hedges			—				—				—				—				1,185				1,185
Dividends declared to common and preferred stockholders			—				—				—				(120,380	)			—				(120,380	)
Issuance of common stock, net of withholdings			—				7				27,593				(1,267	)			—				26,333
Vesting of restricted stock grants and options			—				—				8,201				—				—				8,201
Balance at June 30, 2006		$	40			$	744			$	2,465,362			$	178,187			$	(3,285	)		$	2,641,048

During the six months ended June 30, 2006, the Company (i) issued 373,783 shares of common stock in connection with stock options exercised, (ii) issued 301,298 shares of common stock to acquire an equal number of DownREIT limited partnership units, (iii) issued 943 shares through the Company’s dividend reinvestment plan, (iv) issued 122,172 common shares in connection with stock grants to employees of which 80% are restricted and (v) withheld 45,267 shares to satisfy employees’ tax withholding and other liabilities. In addition, the Company granted 862,613 options for common stock to employees. As required under SFAS No. 123(R), any deferred compensation related to the Company’s stock option and restricted stock grants during the six months ended June 30, 2006 are not reflected on the Company’s Condensed Consolidated Balance Sheet as of June 30, 2006 or on the summary of changes in stockholders’ equity above, and will not be reflected until earned as compensation cost.

Dividends per common share for the six months ended June 30, 2006 and 2005 were $1.56 and $1.42 per share, respectively. In both the six months ended June 30, 2006 and 2005, average dividends for preferred shares were $1.09 per share.

5. Derivative Instruments and Hedging Activities

The Company has historically used interest rate swap and cap agreements (collectively, the “Hedged Derivatives”) to reduce the impact of interest rate fluctuations on its variable rate, tax-exempt bonds and its variable rate conventional secured debt. The Company has not entered into any interest rate hedge agreements or treasury locks for its conventional unsecured debt and does not hold interest rate hedge agreements for trading or other speculative purposes. As of June 30, 2006, the Hedged Derivatives fix approximately $67,000 of the Company’s tax-exempt debt at a weighted average interest rate of 6.3% through interest rate swaps. In addition, as of June 30, 2006, the Company has Hedged Derivatives on approximately $198,000 of its existing variable rate debt, which floats at a weighted average coupon interest rate of 5.1% and has been capped at a weighted average interest rate of 7.7% through interest rate caps. These Hedged Derivatives have maturity dates ranging from 2007 to 2011. All of the Company’s Hedged Derivatives are accounted for in accordance with SFAS No. 133. SFAS No. 133 requires that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its

fair value, with changes in fair value recognized currently in earnings unless specific hedge accounting criteria are met.

The Company has determined that its Hedged Derivatives qualify as effective cash-flow hedges under SFAS No. 133, resulting in the Company recording the effective portion of changes in the fair value of the Hedged Derivatives in other comprehensive income. Amounts recorded in other comprehensive income will be reclassified into earnings in the period in which earnings are affected by the hedged cash flow. To adjust the Hedged Derivatives to their fair value, the Company recorded unrealized gains to other comprehensive income of $1,185 and $946 during the six months ended June 30, 2006 and 2005, respectively. The estimated amount, included in accumulated other comprehensive income as of June 30, 2006, expected to be reclassified into earnings within the next twelve months to offset the variability of cash flow during this period is not material.

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

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

6. Investments in Unconsolidated Entities

The Company accounts for its investments in unconsolidated real estate entities that are not considered variable interest entities under FIN 46 in accordance with EITF Issue No. 04-5. As of June 30, 2006, the Company’s investments in unconsolidated real estate entities accounted for under the equity method of accounting consisted of:

	•		a general partnership interest in a partnership that owns the Avalon Run community, in which after the partnership makes certain distributions to the third-party partner, the Company will generally be entitled to receive 40% of all operating cash flow distributions and 49% of all residual cash flow following a sale;
	•		a limited liability company membership interest in a limited liability company that owns the Avalon Grove community, in which after the limited liability company makes certain distributions to the third-party partner, the Company will generally be entitled to receive 50% of all distributions;
	•		a 25% limited liability company membership interest (with a right to 50% of distributions after achievement of a threshold return) in a limited liability company that owns the Avalon Bedford community;
	•		a 20% limited liability company membership interest (with a right to 50% of distributions after achievement of a threshold return) in the limited liability company that owns the Avalon Chrystie Place I community;
	•		a 25% limited liability company membership interest (with a right to 45% of distributions after achievement of a threshold return) in the limited liability company that is developing and will own the Avalon at Mission Bay North II community; and
	•		a 15.2% combined general partner and indirect limited partner equity interest in the Fund, which owns the following communities: Avalon at Redondo Beach, Avalon Lakeside, Avalon Columbia, Ravenswood at the Park, Avalon at Poplar Creek, Fuller Martel, Civic Center Place, Paseo Park, Aurora at Yerba Buena and Avalon at Aberdeen Station. During the three months ended June 30, 2006, the Fund:

	(i)		acquired Avalon at Aberdeen Station, located in Aberdeen, New Jersey for $57,600. Avalon at Aberdeen Station is a garden-style community containing 290 apartment homes;
	(ii)		completed redevelopment of Avalon Columbia for a total capitalized cost of $4,100, excluding costs incurred prior to redevelopment. Avalon Columbia is a garden-style community containing 170 apartment homes located in Columbia, Maryland; and
	(iii)		commenced redevelopment of Ravenswood at the Park for an expected total capitalized cost of $7,500, excluding costs incurred prior to redevelopment. Ravenswood at the Park is a garden-style community containing 400 apartment homes located in Redmond, Washington.

In addition, as part of the formation of the Fund, the Company has provided to one of the limited partners a guarantee. The guarantee provides that, if, upon final liquidation of the Fund, the total amount of all distributions to that partner during the life of the Fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $3,400 as of June 30, 2006). As of June 30, 2006, the fair value of the real estate assets owned by the Fund is considered adequate to cover such potential payment under a liquidation scenario. In addition, the estimated fair value of this guarantee is not significant, and the Company has therefore not recorded the fair value of this guarantee as of June 30, 2006.

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

		6-30-06				12-31-05
		(unaudited)
Assets:
Real estate, net		$	572,058			$	449,418
Other assets			139,257				111,623
Total assets		$	711,315			$	561,041
Liabilities and partners’ equity:
Mortgage notes payable and credit facility		$	417,541			$	332,760
Other liabilities			30,514				26,745
Partners’ equity			263,260				201,536
Total liabilities and partners’ equity		$	711,315			$	561,041

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

		For the three months ended								For the six months ended
		(unaudited)								(unaudited)
		6-30-06				6-30-05				6-30-06				6-30-05
Rental income		$	15,463			$	8,061			$	29,968			$	13,815
Operating and other expenses			(6,984	)			(4,825	)			(13,732	)			(8,194	)
Interest expense, net			(4,322	)			(1,387	)			(8,615	)			(1,942	)
Depreciation expense			(3,999	)			(1,804	)			(7,757	)			(2,917	)
Net income		$	158			$	45			$	(136	)		$	762

In addition, the Company is subject to the following arrangements related to entities that are not accounted for under the equity method of accounting:

	•		The Company is party to an agreement whereby upon completion, a community currently under construction will be owned through a joint venture arrangement, with the Company retaining a 30% equity interest in the joint venture. This entity is currently consolidated for financial reporting purposes;
	•		The Company retained a promoted residual interest in the profits of an entity that acquired the Avalon at Juanita Village community after construction of the community by the Company. Although the Company has the right to receive payments upon disposition of the community after achievement of a threshold return, the Company does not hold any equity interest in the joint venture; and
	•		The Company holds an option to make a capital contribution to an entity in connection with the pursuit of a Development Right in Pleasant Hill, California. The Company currently does not have any equity or economic interest in this entity. However, due to the nature of the Company’s option to make a capital contribution, this entity is considered a variable interest entity under FIN 46(R), where the Company is the primary beneficiary. This entity does not have any operations and has minimal assets and equity, and is therefore not considered a significant variable interest entity.

In connection with the general contractor services that the Company provides or has provided to three unconsolidated real estate entities, the Company has provided construction completion guarantees to the related lenders in order to fulfill their standard financing requirements related to the construction financing. Our obligations under these guarantees will terminate following construction completion once all of the lender’s standard completion requirements have been satisfied, which is expected to occur at dates between 2006 and 2007. Construction for each of these three unconsolidated real estate entities is either complete or proceeding on schedule and on budget, and therefore there are no payments that the Company would be required to make under these construction completion guarantees as of June 30, 2006. No liability has been recorded related to these construction completion guarantees as of June 30, 2006. In addition, the estimated fair value of each

of these guarantees is not significant, and therefore the Company has not recorded the fair value of these guarantees as of June 30, 2006.

7. Discontinued Operations — Real Estate Assets Sold or Held for Sale

During the six months ended June 30, 2006, the Company sold three communities: Avalon Estates, located in the Boston, Massachusetts area, Avalon Cupertino, located in San Jose, California and Avalon Corners, located in Stamford, Connecticut. These three communities, which contained a total of 668 apartment homes, were sold for an aggregate sales price of $182,750. The sale of these three communities resulted in a gain as reported in accordance with GAAP of $97,411. The buyers of these assets intend to continue to operate these communities as rental apartments.

As of June 30, 2006, the Company did not have any communities that qualified as held for sale under the provisions of SFAS No. 144. As required under SFAS No. 144, the operations for any communities sold from January 1, 2005 through June 30, 2006 have been presented as discontinued operations in the accompanying Condensed Consolidated Financial Statements. Accordingly, certain reclassifications have been made in prior periods to reflect discontinued operations consistent with current period presentation.

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

		For the three months ended								For the six months ended
		6-30-06				6-30-05				6-30-06				6-30-05
Rental income		$	157			$	7,277			$	1,787			$	15,970
Operating and other expenses			(86	)			(2,230	)			(640	)			(5,064	)
Interest expense, net			—				—				—				—
Depreciation expense			—				(825	)			—				(2,615	)
Income from discontinued operations		$	71			$	4,222			$	1,147			$	8,291

The Company’s Condensed Consolidated Balance Sheets include other assets (excluding net real estate) of $0 and $485, and other liabilities of $0 and $1,837 as of June 30, 2006 and December 31, 2005, respectively, relating to real estate assets sold or held for sale.

During the six months ended June 30, 2006, the Company also sold one parcel of land, located in the Northern New Jersey area, for a sales price of $15,000 resulting in a GAAP gain of $13,166. This land parcel was purchased in 1997 in connection with the development of The Tower at Avalon Cove, which was sold in December 2005.

8. Segment Reporting

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

•

Established Communities (also known as Same Store Communities) are communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the year 2006, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2005, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.

	•		Other Stabilized Communities includes all other completed communities that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year.
	•		Development/Redevelopment Communities consists of communities that are under construction and have not received a final certificate of occupancy, communities where substantial redevelopment is in progress or is planned to begin during the current year and communities under lease-up, that had not reached stabilized occupancy, as defined above, as of January 1, 2006.

In addition, the Company owns land held for future development and has other corporate assets that are not allocated to an operating segment.

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires that segment disclosures present the
measure(s) used by the chief operating decision maker for purposes of assessing such segments’ performance. The Company’s chief operating decision maker is comprised of several members of its executive management team who use Net Operating Income (“NOI”) as the primary financial measure for Established and Other Stabilized Communities. NOI is defined by the Company as total revenue less direct property operating expenses. Although the Company considers NOI a useful measure of a community’s or communities’ operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP. NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.

A reconciliation of NOI to net income for the three and six months ended June 30, 2006 and 2005 is as follows:

		For the three months ended								For the six months ended
		6-30-06				6-30-05				6-30-06				6-30-05
Net income		$	69,969			$	56,911			$	184,046			$	126,521
Corporate-level property management and other indirect operating expenses			8,307				7,594				16,938				14,722
Corporate-level other income			(1,394	)			(1,441	)			(2,600	)			(2,054	)
Investments and investment management			2,398				1,171				3,869				2,164
Interest expense, net			26,595				32,112				55,259				64,232
General and administrative expense			6,479				6,262				12,762				13,421
Equity in income of unconsolidated entities			(207	)			(178	)			(434	)			(6,761	)
Minority interest in consolidated partnerships			128				337				260				851
Depreciation expense			41,238				39,377				81,153				78,693
Gain on sale of land			—				(4,617	)			(13,166	)			(4,617	)
Gain on sale of communities			(31,992	)			(22,647	)			(97,411	)			(60,261	)
Income from discontinued operations			(71	)			(4,222	)			(1,147	)			(8,291	)
Net operating income		$	121,450			$	110,659			$	239,529			$	218,620

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

The table on the following page provides details of the Company’s segment information as of the dates specified. The segments are classified based on the individual community’s status as of the beginning of the given calendar year. Therefore, each year the composition of communities within each business segment is adjusted. Accordingly, the amounts between years are not directly comparable. The accounting policies applicable to

the operating segments described above are the same as those described in Note 1, “Organization and Significant Accounting Policies.” Segment information for the three and six months ended June 30, 2006 and 2005 has been adjusted for the communities that were sold from January 1, 2005 through June 30, 2006 as described in Note 7, “Discontinued Operations – Real Estate Assets Sold or Held for Sale.”

		For the three months ended																For the six months ended
		Total								% NOI change				Gross				Total								% NOI change				Gross
		revenue				NOI				from prior year				real estate (1)				revenue				NOI				from prior year				real estate (1)
For the period ended June 30, 2006
Established
Northeast		$	50,896			$	34,280				5.7	%		$	1,261,091			$	100,592			$	67,353				4.8	%		$	1,261,091
Mid-Atlantic			26,201				18,531				10.3	%			621,538				51,799				37,021				11.3	%			621,538
Midwest			2,832				1,778				(1.1	%)			92,069				5,567				3,444				(0.9	%)			92,069
Pacific Northwest			8,125				5,338				10.9	%			315,534				16,000				10,506				9.3	%			315,534
Northern California			36,161				25,167				8.8	%			1,374,113				71,720				50,161				9.1	%			1,374,113
Southern California			14,233				10,339				10.5	%			372,197				28,258				20,538				10.1	%			372,197
Total Established			138,448				95,433				8.1	%			4,036,542				273,936				189,023				7.8	%			4,036,542
Other Stabilized			24,419				15,486				n/a				827,326				48,055				30,764				n/a				827,326
Development / Redevelopment			16,414				10,531				n/a				969,332				31,242				19,742				n/a				969,332
Land Held for Future Development			n/a				n/a				n/a				208,810				n/a				n/a				n/a				208,810
Non-allocated (2)			1,394				n/a				n/a				31,860				2,600				n/a				n/a				31,860
Total		$	180,675			$	121,450				9.7	%		$	6,073,870			$	355,833			$	239,529				9.6	%		$	6,073,870
For the period ended June 30, 2005
Established
Northeast		$	41,597			$	27,742				(0.6	%)		$	1,056,726			$	82,574			$	55,110				2.5	%		$	1,056,726
Mid-Atlantic			16,985				11,974				3.1	%			386,622				33,483				23,702				1.6	%			386,622
Midwest			2,798				1,798				16.2	%			91,180				5,515				3,475				11.4	%			91,180
Pacific Northwest			7,393				4,812				8.6	%			1,410,143				14,700				9,608				7.4	%			1,410,143
Northern California			36,210				24,065				2.9	%			330,297				72,040				47,827				2.4	%			330,297
Southern California			12,037				8,673				5.7	%			314,873				23,922				17,318				5.5	%			314,873
Total Established			117,020				79,064				2.6	%			3,589,841				232,234				157,040				3.1	%			3,589,841
Other Stabilized			19,368				13,690				n/a				714,351				37,774				26,311				n/a				714,351
Development / Redevelopment			27,823				17,905				n/a				1,048,027				54,899				35,269				n/a				1,048,027
Land Held for Future Development			n/a				n/a				n/a				202,444				n/a				n/a				n/a				202,444
Non-allocated (2)			1,441				n/a				n/a				30,693				2,054				n/a				n/a				30,693
Total		$	165,652			$	110,659				9.7	%		$	5,585,356			$	326,961			$	218,620				11.3	%		$	5,585,356

9. Stock-Based Compensation Plans

The Company has a stock incentive plan (the “1994 Plan”), which was amended and restated on December 8, 2004. Individuals who are eligible to participate in the 1994 Plan include officers, other associates, outside directors and other key persons of the Company and its subsidiaries who are responsible for or contribute to the management, growth or profitability of the Company and its subsidiaries. The 1994 Plan authorizes (i) the grant of stock options that qualify as incentive stock options (“ISOs”) under Section 422 of the Internal Revenue Code, (ii) the grant of stock options that do not so qualify, (iii) grants of shares of restricted and unrestricted common stock, (iv) grants of deferred stock awards, (v) performance share awards entitling the recipient to acquire shares of common stock and (vi) dividend equivalent rights.

Shares of common stock of 1,792,604 and 2,066,308 were available for future option or restricted stock grant awards under the 1994 Plan as of June 30, 2006 and December 31, 2005, respectively. Annually on January 1^st, the maximum number available for issuance under the 1994 Plan is increased by between 0.48% and 1.00% of the total number of shares of common stock and DownREIT units actually outstanding on such date. Notwithstanding the foregoing, the maximum number of shares of stock for which ISOs may be issued under the 1994 Plan shall not exceed 2,500,000 and no awards shall be granted under the 1994 Plan after May 11, 2011. Options and restricted stock granted under the 1994 Plan vest and expire over varying periods, as determined by the Compensation Committee of the Board of Directors.

The Company is the surviving corporation from the merger (the “Merger”) of Bay Apartment Communities, Inc. (“Bay”) and Avalon Properties, Inc. (“Avalon”) on June 4, 1998. Before the Merger, Avalon had adopted its 1995 Equity Incentive Plan (the “Avalon 1995 Incentive Plan”). Under the Avalon 1995 Incentive Plan, a maximum number of 3,315,054 shares (or 2,546,956 shares as adjusted for the Merger) of common stock were issuable, plus any shares of common stock represented by awards under Avalon’s 1993 Stock Option and Incentive Plan (the “Avalon 1993 Plan”) that were forfeited, canceled, reacquired by Avalon, satisfied without the issuance of common stock or otherwise terminated (other than by exercise). Options granted to officers, non-employee directors and associates under the Avalon 1995 Incentive Plan generally vested over a three-year term, expire ten years from the date of grant and are exercisable at the market price on the date of grant.

In connection with the Merger, the exercise prices and the number of options under the Avalon 1995 Incentive Plan and the Avalon 1993 Plan were adjusted to reflect the equivalent Bay shares and exercise prices based on the 0.7683 share conversion ratio used in the Merger. Officers, non-employee directors and associates with Avalon 1995 Incentive Plan or Avalon 1993 Plan options may exercise their adjusted number of options for the Company’s common stock at the adjusted exercise price. As of June 4, 1998, the date of the Merger, options and other awards ceased to be granted under the Avalon 1993 Plan or the Avalon 1995 Incentive Plan. Accordingly, there were no options to purchase shares of common stock available for grant under the Avalon 1995 Incentive Plan or the Avalon 1993 Plan at June 30, 2006 or December 31, 2005.

						Weighted				Avalon 1995				Weighted
						average				and Avalon				average
		1994 Plan				exercise price				1993 Plan				exercise price
		shares				per share				shares				per share
Options Outstanding, December 31, 2005			2,229,778			$	51.40				26,624			$	37.09
Exercised			(353,399	)			45.11				(20,384	)			37.33
Granted			862,613				99.17				—				—
Forfeited			(618	)			49.01				—				—
Options Outstanding, June 30, 2006			2,738,374			$	67.30				6,240			$	36.33
Options Exercisable:
June 30, 2006			1,274,636			$	46.99				6,240			$	36.33

For options outstanding at June 30, 2006 under the 1994 Plan, 480,578 options had exercise prices ranging between $31.50 and $39.99 and a weighted average remaining contractual life of 3.5 years, 348,300 options had exercise prices ranging between $40.00 and $49.99 and a weighted average remaining contractual life of 5.2 years, 389,204 options had exercise prices between $50.00 and $59.99 and a weighted average remaining contractual life of 7.6 years, 653,179 options had exercise prices ranging between $60.00 and $79.99 and a weighted average remaining contractual life of 8.6 years, 4,500 options had exercise prices between $80.00 and $89.99 and a weighted average remaining contractual life of 9.2 years, and 862,613 options had exercise prices between $90.00 and $109.99 and a weighted average remaining contractual life of 9.6 years. Options outstanding at June 30, 2006 for the Avalon 1993 and Avalon 1995 Plans had exercise prices ranging from $35.31 to $37.66 and a weighted average contractual life of 1.2 years.

The weighted average fair value of the options granted during the six months ended June 30, 2006 is estimated at $11.44 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 5.0% over the expected life of the option, volatility of 17.64%, risk-free interest rates of 4.57%, estimated forfeitures of 1.6% and an expected life of approximately seven years.

Total compensation cost recognized related to stock-based compensation plans was $3,045 and $8,201 for the three and six months ended June 30, 2006, respectively. Of these amounts, $940 and $1,933 were capitalized in the three and six months ended June 30, 2006, respectively. As of June 30, 2006, total

unvested compensation cost not yet recognized was $26,910, which is expected to be recognized over a weighted average period of 2.7 years.

10. Related Party Arrangements

Unconsolidated Entities

The Company manages several unconsolidated real estate entities for which it receives property management, asset management, development and redevelopment fee revenue. From these entities the Company received fees of $1,395 and $2,601 in the three and six months ended June 30, 2006, respectively, and $1,363 and $1,796 in the three and six months ended June 30, 2005, respectively. These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income.

In addition, in connection with the general contractor services that the Company provides to MVP I, LLC, the entity that owns and is developing Avalon at Mission Bay North II, and CVP I, LLC, the entity that owns and developed Avalon Chrystie Place I, the Company funds certain construction costs that are expected to be reimbursed through construction financing within 30 to 60 days. Depending on the timing of such funding, the accompanying Condensed Consolidated Balance Sheets may reflect a corresponding receivable in prepaid expenses and other assets. As of June 30, 2006 and December 31, 2005, the Company has recorded receivables in the amounts of $8,935 and $6,653, respectively, from MVP I, LLC. As of June 30, 2006 and December 31, 2005, the Company has recorded receivables in the amount of $942 and $2,365, respectively, from CVP I, LLC.

Director Compensation

The Company’s stock incentive plan (the “1994 Plan”) provides that directors of the Company who are also employees receive no additional compensation for their services as a director. On May 14, 2003, the Company’s Board of Directors approved an amendment to the 1994 Plan pursuant to which each non-employee director would receive, following the 2004 Annual Meeting of Stockholders and each annual meeting thereafter, (i) a number of shares of restricted stock (or deferred stock awards) having a value of $100 based on the last reported sale price of the common stock on the New York Stock Exchange (“NYSE”) on the fifth business day following the prior year’s annual meeting and (ii) $30 cash, payable in quarterly installments of $7.5. A non-employee director may elect to receive all or a portion of such cash payment in the form of a deferred stock award. In addition, the Lead Independent Director receives an annual fee of $30 payable in equal monthly installments of $2.5. In February 2006, the Company’s Board of Directors approved another amendment to the 1994 Plan under which (i) following the 2006 Annual Meeting of Stockholders the cash payment will be adjusted to $40, payable in quarterly installments of $10 and (ii) following the 2007 Annual Meeting of Stockholders, the number of shares of restricted stock (or deferred stock awards) will be calculated based on the closing price on the day of the award (rather than the closing price on the award date of the prior year). The Company recorded non-employee director compensation expense relating to the restricted stock grants, deferred stock awards and stock options in the amount of $237 and $477 in the three and six months ended June 30, 2006, respectively, and $234 and $452 in the three and six months ended June 30, 2005, respectively. Deferred compensation relating to these restricted stock grants, deferred stock awards and stock options was $958 and $579 on June 30, 2006 and December 31, 2005, respectively.

11. Subsequent Events

In July 2006, the Company repaid $150,000 of unsecured notes with an annual interest rate of 6.8%, along with any unpaid interest, pursuant to their scheduled maturity.

In July 2006, the Fund acquired The Springs, located in Corona, California, part of the Inland Empire, for a purchase price of $47,120. The Springs is a garden-style community containing 320 apartment homes.

In August 2006, Moody’s Investor Service upgraded its rating on the Company’s unsecured notes from “stable” to “positive.”

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

We are primarily engaged in developing, acquiring, owning and operating apartment communities in high barrier-to-entry markets of the United States. We seek to create long-term shareholder value by accessing capital on cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in high barrier-to-entry markets; operating apartment communities; and selling communities when they no longer meet our long-term investment strategy and when pricing is attractive.

The net operating income of our current operating communities, as defined later in this report, is one of the financial measures that we use to evaluate community performance. Net operating income is affected by the demand and supply dynamics within our markets, our rental rates and occupancy levels, and our ability to control operating costs. Our overall financial performance is also impacted by the general availability and cost of capital and the performance of our newly developed and acquired apartment communities.

This Form 10-Q, including the following discussion and analysis of our financial condition and results of operations, contains forward-looking statements that predict or indicate future events or trends and that do not report historical matters. Actual results or developments could differ materially from those projected in such statements as discussed on page 47 of this report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and notes included elsewhere in this report, as well as our Annual Report filed on Form 10-K for the year ended December 31, 2005 and our quarterly reports on Form 10-Q for subsequent quarters.

Business Description

We believe that apartment communities present an attractive long-term investment opportunity compared to other real estate investments because a broad potential resident base should help reduce demand volatility over a real estate cycle. We intend to continue to pursue real estate investments in markets where constraints to new supply exist, and where new rental household formations are expected to out-pace multifamily permit activity over the course of the real estate cycle. Barriers-to-entry in our markets generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land is in limited supply.

We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets, which are located in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the United States. Our strategy is to more deeply penetrate these markets with a broad range of products and services and an intense focus on our customer. A substantial majority of our communities are upscale, which generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services.

We believe that, over an entire real estate cycle, lower housing affordability and the limited new supply of apartment homes in our markets will result in a higher propensity to rent and larger increases in cash flow relative to other markets. However, throughout the real estate cycle, apartment market fundamentals, and therefore operating cash flows, are affected by overall economic conditions. Improvement in the economic environment in 2005 and 2006, as evidenced by job growth and declining unemployment claims, and modest increases in net supply, has resulted in strengthening apartment market fundamentals. This is supported by the year-over-year rental revenue growth of 6.6% achieved within our Established Community portfolio (as defined later in this report) during the three months ended June 30, 2006, comprised of an increase in rental rates of 5.8% and an increase in occupancy of 0.8%. This revenue growth contributed to our Established Community portfolio achieving year-over-year growth in net operating income of 8.1%, our strongest operating performance in five years.

We expect continued job growth and household formation in our markets, the principal drivers of housing demand. Recent condominium activity has reduced the rental apartment supply, while the current disparity between for-sale housing prices and rental rates makes rental apartments an economically attractive housing alternative. In addition, the single-family home market has reached a transition point, where home prices have stopped accelerating and homes are not being sold as quickly, resulting in potential home buyers continuing to rent during this transition period. Accordingly, we expect apartment market fundamentals to remain strong in our markets such that apartment rental demand will outpace new supply. Based on our results for the six months ended June 30, 2006 and our expectations for demand/supply fundamentals, we expect continued growth in the revenue and net operating income generated by our operating communities for the remainder of 2006.

In positioning for future growth, we have increased our current development activity underway and our future Development Rights, as discussed below. We currently have in excess of $1,400,000,000 under construction (measured by total projected capitalized cost of the communities at completion, including the portions in which joint venture partners hold an equity or economic interest) and anticipate reaching a level of $1,500,000,000 under construction during 2006. In addition, we continue to secure new Development Rights, including the acquisition of land for future development. We currently have Development Rights for construction of new apartment communities that, based on total projected capitalized cost if developed as expected, total approximately $2,900,000,000.

We continue to look for opportunities to acquire existing communities through our investment in and management of a discretionary investment fund (the “Fund”). The Fund has acquired three communities since January 1, 2006. We expect the Fund to continue to focus on acquisition opportunities where value can be added, generally through redevelopment or repositioning opportunities.

Strong capital flows to the industry and the strength of the condominium market have resulted in an attractive selling environment. During the first six months of 2006, we continued to be an opportunistic seller, disposing of three apartment communities since January 1, 2006. While the capital flows to the multifamily industry and the active condominium market created demand for multifamily apartment communities, it has also created a challenging environment for us in other ways such as:

	•		increased competition for land, resulting in, at times, the acquisition of land zoned for uses other than residential with the potential for rezoning;
	•		increased competition for subcontractors; and
	•		increased competition for experienced multifamily development and construction professionals, particularly in our markets.

There are signs that condominium conversion is slowing, primarily indicated by the pace of new condominium conversions and external data regarding unsold condominium inventory. Each of the three communities that we sold since January 1, 2006 was acquired by buyers intending to continue to operate the assets as rental apartments. A shift in condominium activity could impact the volume and pricing of assets we offer for sale going forward, but may alleviate some of the pressure on construction costs and availability of subcontractors previously experienced.

Community Information Overview

Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development (“Development Communities”) and Development Rights as defined below. Our current operating communities and our Development Communities include communities in which we hold a direct and indirect ownership interest. Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities. The following is a description of each category:

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

	•		Established Communities (also known as Same Store Communities) are consolidated communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the year 2006, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2005, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
	•		Other Stabilized Communities includes all other completed communities that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year.
	•		Lease-Up Communities are communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.
	•		Redevelopment Communities are communities where substantial redevelopment is in progress or is planned to begin during the current year. For communities that we wholly-own, redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed the lesser of $5,000,000 or 10% of the community’s acquisition cost. The definition of substantial redevelopment may differ for communities that are not wholly-owned.

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

Development Rights are development opportunities in the early phase of the development process for which we have an option to either acquire land or enter into a leasehold interest, for which we are the buyer under a long-term conditional contract to purchase land or where we own land to develop a new community. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.

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

As of June 30, 2006, our communities, including communities that we manage or do not wholly-own, were classified as follows:

		Number of				Number of
		communities				apartment homes
Current Communities
Established Communities:
Northeast			35				8,674
Mid-Atlantic			18				5,833
Midwest			3				887
Pacific Northwest			10				2,500
Northern California			28				8,126
Southern California			11				3,430
Total Established			105				29,450
Other Stabilized Communities:
Northeast			16				5,571
Mid-Atlantic			3				1,026
Midwest			2				400
Pacific Northwest			1				211
Northern California			4				926
Southern California			5				1,442
Total Other Stabilized			31				9,576
Lease-Up Communities			4				886
Redevelopment Communities			3				1,573
Total Current Communities			143				41,485
Development Communities			17				5,419
Development Rights			49				11,996

During July 2006, the Fund acquired one community containing 320 apartment homes. As of July 31, 2006, our 144 current communities consisted of 41,805 apartment homes. Of those communities, we owned, directly or through wholly-owned subsidiaries:

	•		the full fee simple, or absolute, ownership interest in 108 operating communities, four of which are on land subject to land leases expiring in July 2029, January 2062, April 2095 and March 2142;
	•		a general partnership interest in three partnerships that each own a fee simple interest in an operating community;
	•		a general partnership interest and an indirect limited partnership interest in the Fund, which owns a fee simple interest in 12 operating communities;
	•		a general partnership interest in five partnerships structured as “DownREITs,” as described more fully below, that own an aggregate of 16 communities;
	•		a membership interest in four limited liability companies that each hold a fee simple interest in an operating community, two of which are on land subject to land leases expiring in December 2026 and November 2089; and
	•		a residual profits interest (with no ownership interest) in a limited liability company to which an operating community that recently completed construction was transferred.

We also hold, directly or through wholly-owned subsidiaries, the full fee simple ownership interest in 16 of the Development Communities, one of which will be subject to a joint venture ownership structure upon construction completion, in addition to a membership interest in one limited liability company that owns a Development Community, which is subject to a land lease expiring in December 2103.

In each of our five partnerships structured as DownREITs, either AvalonBay or one of our wholly-owned subsidiaries is the general partner, and there are one or more limited partners whose interest in the partnership is represented by units of limited partnership interest. For each DownREIT partnership, limited partners are entitled to receive an initial distribution before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions per unit paid to the holders of units of limited partnership interests have approximated our current common stock dividend amount. Each DownREIT partnership has been structured so that it is unlikely the limited partners will be entitled to a distribution greater than the initial distribution provided for in the applicable partnership agreement. The holders of units of limited partnership interest have the right to present all or some of their units for redemption for a cash amount as determined by the applicable partnership agreement and based on the fair value of our common stock. In lieu of a cash redemption by the partnership, we may elect to acquire any unit presented for redemption for one share of our common stock or for such cash amount. As of July 31, 2006, there were 152,002 DownREIT partnership units outstanding. The DownREIT partnerships are consolidated for financial reporting purposes.

We elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes for the year ended December 31, 1994 and we have not revoked that election. We were incorporated under the laws of the State of California in 1978, and we were reincorporated in the State of Maryland in July 1995. Our principal executive offices are located at 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia, 22314, and our telephone number at that location is (703) 329-6300. We also maintain regional offices and administrative or specialty offices in or near the following cities:

	•		Boston, Massachusetts;
	•		Chicago, Illinois;
	•		Encino, California;
	•		Long Island, New York;
	•		Los Angeles, California;
	•		New York, New York;
	•		Newport Beach, California;
	•		San Jose, California;
	•		Seattle, Washington;
	•		Shelton, Connecticut; and
	•		Woodbridge, New Jersey.