AvalonBay Communities, Inc. Announces Third Quarter 2012 Operating Results

  AvalonBay Communities, Inc. Announces Third Quarter 2012 Operating Results

Business Wire

ARLINGTON, Va. -- October 24, 2012

AvalonBay Communities, Inc. (NYSE: AVB) (the “Company”) reported today that
Net Income Attributable to Common Stockholders (“Net Income”) for the quarter
ended September 30, 2012 was $86,844,000. This resulted in Earnings per Share
– diluted (“EPS”) of $0.89 for the quarter ended September 30, 2012, compared
to EPS of $0.49 for the comparable period of 2011, an increase of 81.6%. For
the nine months ended September 30, 2012, EPS was $3.13 compared to $1.33 for
the comparable period of 2011, an increase of 135.3%.

The increase in EPS for the quarter ended September 30, 2012 over the prior
year period is due primarily to an increase in Net Operating Income (“NOI”)
from existing and newly developed and acquired communities, a gain on the
acquisition of an unconsolidated entity, and a decline in net interest
expense. The increase in EPS for the nine months ended September 30, 2012 over
the prior year period is due primarily to an increase in real estate sales and
related gains in 2012, increased NOI from existing and newly developed and
acquired communities, and a decline in net interest expense.

Funds from Operations attributable to common stockholders - diluted (“FFO”)
per share for the quarter ended September 30, 2012 increased 23.1% to $1.44
from $1.17 for the comparable period of 2011. FFO per share for the nine
months ended September 30, 2012 increased 19.8% to $4.05 from $3.38 for the
comparable period of 2011. Adjusting for the non-routine items detailed in
Attachment 14, FFO per share would have increased by 20.5% for the three
months ended September 30, 2012 and 20.2% for the nine months ended September
30, 2012 over the prior year periods.

The Company’s FFO per share for the third quarter of 2012 exceeded the
midpoint of the range for its third quarter 2012 outlook provided in July
2012. The better than expected results were driven by the Company’s
recognition of its promoted interest in conjunction with the acquisition of
our partner’s 70% interest in Avalon Del Rey, discussed in this release.
Better than expected revenue from existing and newly developed communities
also contributed to the outperformance. These favorable variances were offset
in part by the timing of the Company’s capital markets activities, primarily
interest and associated costs from the timing of the Company’s third quarter
2012 unsecured notes offering, which the Company previously expected would
occur in the fourth quarter of 2012.

The following table provides a comparison of the Company’s actual results to
the outlook provided in its second quarter 2012 earnings release in July 2012:

                                                  
Third Quarter 2012 Results
Comparison to July 2012 Outlook
                                                    
                                                    Per Share
                                                    
FFO per share 3Q 2012 - July 2012 Outlook (1)       $ 1.40
                                                    
Favorable Community Revenue                           0.01
Timing of capital markets activity (2)                (0.01 )
Recognition of promoted interest in joint venture     0.04
                                                    
                                                    
FFO per share 3Q 2012 reported results              $ 1.44  

    
(1)   Represents the mid-point of the Company's July 2012 Outlook.
(2)   Composed primarily of costs from the Company's September 2012 $450
      million unsecured notes offering.
      

Commenting on the Company’s results, Tim Naughton, CEO and President, said,
“We had a strong third quarter as evidenced by 20% FFO per share growth.
Operating fundamentals remain favorable as same-store NOI growth topped 7% for
the sixth consecutive quarter and recently completed development communities
continued to exceed our expectations.”

Operating Results for the Quarter Ended September 30, 2012 Compared to the
Prior Year Period

For the Company, including discontinued operations, total revenue increased by
$18,716,000, or 7.4% to $271,904,000. For Established Communities, rental
revenue increased 5.6%, attributable to increases in average rental rates of
5.1% and Economic Occupancy of 0.5%. As a result, total revenue for
Established Communities increased $10,424,000 to $194,883,000. Operating
expenses for Established Communities increased $1,547,000, or 2.6%, to
$60,316,000. Accordingly, NOI for Established Communities increased by 7.1%,
or $8,876,000, to $134,567,000.

The following table reflects the percentage changes in rental revenue,
operating expenses and NOI for Established Communities for the third quarter
of 2012 compared to the third quarter of 2011:


Q3 2012 Compared to Q3 2011
                                           
                 Rental    Operating            % of
                 Revenue   Expenses    NOI      NOI ^(1)
                                                
New England      4.0   %   6.3   %     2.7  %   18.9   %
Metro NY/NJ      5.0   %   3.5   %     5.6  %   30.4   %
Mid-Atlantic     3.8   %   4.0   %     3.7  %   13.1   %
Pacific NW       10.0  %   (8.2  %)    19.6 %   3.7    %
No. California   10.5  %   (2.2  %)    15.9 %   19.7   %
So. California   4.7   %   1.7   %     6.2  %   14.2   %
Total            5.6   %   2.6   %     7.1  %   100.0  %

    
(1)   Total represents each region's % of total NOI from the Company,
      including discontinued operations.
      

Operating Results for the Nine Months Ended September 30, 2012 Compared to the
Prior Year Period

For the Company, including discontinued operations, total revenue increased by
$54,407,000, or 7.4% to $788,262,000. For Established Communities, rental
revenue increased 6.0%, attributable to increases in average rental rates of
5.8% and Economic Occupancy of 0.2%. Total revenue for Established Communities
increased $32,400,000 to $572,530,000. Operating expenses for Established
Communities increased $2,466,000, or 1.4%, to $175,050,000. Accordingly, NOI
for Established Communities increased by 8.1%, or $29,934,000, to
$397,480,000.

The following table reflects the percentage changes in rental revenue,
operating expenses and NOI for Established Communities for the nine months
ended September 30, 2012 as compared to the nine months ended September 30,
2011:

                                           
YTD 2012 Compared to YTD 2011
                                                
                 Rental    Operating            % of
                 Revenue   Expenses    NOI      NOI ^(1)
                                                
New England      4.6   %   2.7   %     5.6  %   19.0   %
Metro NY/NJ      5.6   %   2.1   %     7.2  %   29.9   %
Mid-Atlantic     4.2   %   4.4   %     4.2  %   13.7   %
Pacific NW       9.1   %   (0.3  %)    13.6 %   3.6    %
No. California   10.3  %   (0.1  %)    14.7 %   19.6   %
So. California   4.9   %   (2.8  %)    8.8  %   14.2   %
Total            6.0   %   1.4   %     8.1  %   100.0  %

    
(1)   Total represents each region's % of total NOI from the Company,
      including discontinued operations.
      

Development Activity

During the third quarter of 2012, the Company started the construction of four
communities: Avalon at Wesmont Station II, located in Wood-Ridge, NJ, Avalon
Bloomingdale, located in Bloomingdale, NJ, AVA 55 Ninth, located in San
Francisco, CA and Avalon Morrison Park, located in San Jose, CA. These four
communities will contain 837 apartment homes when completed, and will be
developed for an estimated Total Capital Cost of $258,900,000.

During the third quarter of 2012, the Company completed the development of two
communities: Avalon North Bergen, located in North Bergen, NJ and Avalon Ocean
Avenue, located in San Francisco, CA. These two communities contain 337
apartment homes and were constructed for an aggregate Total Capital Cost of
$101,100,000.

The Company also acquired four land parcels during the quarter ended September
30, 2012 for an aggregate purchase price of approximately $51,300,000. The
Company has started, or anticipates starting construction in 2012 and 2013 on
these four land parcels.

Redevelopment Activity

During the third quarter of 2012, the Company commenced the redevelopment of
The Avalon, located in Bronxville, NY. The Avalon contains 110 apartment homes
and will be redeveloped for an estimated Total Capital Cost of $8,300,000,
excluding costs incurred prior to redevelopment.

During the third quarter of 2012, the Company completed the redevelopment of
five communities: Eaves Foster City, located in Foster City, CA, Eaves Santa
Margarita, located in Rancho Santa Margarita, CA, AVA Newport, located in
Costa Mesa, CA, Avalon Wilton I, located in Wilton, CT and Avalon at
Lexington, located in Lexington, MA. These five communities contain 1,034
apartment homes and were redeveloped for an aggregate Total Capital Cost of
$32,100,000, excluding costs incurred prior to redevelopment.

Acquisition Activity

In July 2012, the Company acquired Avalon Del Rey, a 309 apartment home
community which was owned by a joint venture in which the Company held a 30%
ownership interest. As part of this transaction the venture repaid the
$43,606,000 variable rate note secured by the community. The Company paid
approximately $67,200,000 for its joint venture partner’s 70% interest as well
as contributing its proportionate share of the note repayment to the venture.

In conjunction with the acquisition, the Company recognized income from its
promoted interest of $4,055,000 included in joint venture income, and a gain
of $14,194,000, the amount that the fair value of the Company’s prior 30%
ownership interest exceeded its carrying value.

Financing, Liquidity and Balance Sheet Statistics

At September 30, 2012, the Company had no amounts outstanding under its
$750,000,000 unsecured credit facility.

At September 30, 2012, the Company had $713,984,000 in unrestricted cash and
cash in escrow.

Unencumbered NOI as a percentage of total NOI generated by real estate assets
for the nine months ended September 30, 2012 was 73%. Interest Coverage for
the third quarter of 2012 was 5.5 times.

New Financing Activity

In July 2012 the Company completed the authorized issuance of shares of common
stock under its second Continuous Equity Program (“CEP II”).

In August 2012, the Company commenced its third Continuous Equity Program
(“CEP III”), under which the Company is authorized to sell up to $750,000,000
in shares of its common stock from time to time during a 36-month period.

A summary of activity for 2012 for the two programs is provided in the
following table:


$500 million CEP II and $750 million CEP III
2012 Activity (1)
                                 
           Shares      Average       Net
           Issued      Price/Share   Proceeds
3Q 2012    1,045,314   $   141.87    $ 146,069,000
YTD 2012   2,165,206       140.98      300,658,000

    
(1)   Includes activity for CEP II through completion of the program in July
      2012.
      

During the three months ended September 30, 2012, the Company sold 729,991
shares at an average sales price of $142.09 per share, for net proceeds of
$102,168,000 under CEP III.

In September 2012, the Company issued $450,000,000 principal amount of
unsecured notes under its existing shelf registration statement. The unsecured
notes mature in September 2022 and were issued at a 2.95% coupon rate. The
notes have an effective interest rate of approximately 4.30%, including the
effect of an interest rate hedge and offering costs.

Fourth Quarter and Updated Full Year 2012 Outlook

For the fourth quarter of 2012, the Company expects EPS in the range of $1.34
to $1.39. The Company expects EPS for the full year 2012 to be in the range of
$4.47 to $4.52.

The Company expects Projected FFO per share in the range of $1.40 to $1.45 for
the fourth quarter of 2012 and Projected FFO per share for the full year 2012
to be in the range of $5.45 to $5.50.

Fourth Quarter 2012 Conference Schedule

The Company is scheduled to participate in REITWorld hosted by NAREIT in San
Diego, CA from November 13-15, 2012. During this conference, Management may
discuss the Company’s current operating environment; operating trends;
development, redevelopment, disposition and acquisition activity; portfolio
strategy and other business and financial matters affecting the Company.
Details on how to access related materials will be available beginning
November 9, 2012 on the Company’s website at http://www.avalonbay.com/events.

Other Matters

The Company will hold a conference call on October 25, 2012 at 1:00 PM ET to
review and answer questions about this release, its third quarter 2012
results, the Attachments (described below) and related matters. To participate
on the call, dial 1-855-367-4146 domestically and 1-763-416-6924
internationally, and use Conference ID: 34734741.

To hear a replay of the call, which will be available from October 25, 2012 at
5:00 PM ET to October 31, 2012 at 11:59 PM ET, dial 1-855-859-2056
domestically and 1-404-537-3406 internationally, and use Conference ID:
34734741. A webcast of the conference call will also be available at
http://www.avalonbay.com/earnings, and an on-line playback of the webcast will
be available for at least 30 days following the call.

The Company produces earnings release attachments (the "Attachments") that
provide detailed information regarding operating, development, redevelopment,
disposition and acquisition activity. These Attachments are considered a part
of this earnings release and are available in full with this earnings release
via the Company's website at http://www.avalonbay.com/earnings. To receive
future press releases via e-mail, please submit a request through
http://www.avalonbay.com/email.

About AvalonBay Communities, Inc.

As of September 30, 2012, the Company owned or held a direct or indirect
ownership interest in 205 apartment communities containing 60,101 apartment
homes in nine states and the District of Columbia, of which 22 communities
were under construction and seven communities were under reconstruction. The
Company is an equity REIT in the business of developing, redeveloping,
acquiring and managing apartment communities in high barrier-to-entry markets
of the United States. More information may be found on the Company’s website
at http://www.avalonbay.com. For additional information, please contact Jason
Reilley, Senior Manager of Investor Relations at 1-703-317-4681 or Thomas J.
Sargeant, Chief Financial Officer at 1-703-317-4635.

Forward-Looking Statements

This release, including its Attachments, contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. You can
identify these forward-looking statements by the Company’s use of words such
as “expects,” “plans,” “estimates,” “anticipates,” “projects,” “intends,”
“believes,” “outlook” and similar expressions that do not relate to historical
matters. Actual results may differ materially from those expressed or implied
by the forward-looking statements as a result of risks and uncertainties,
which include the following: we may abandon development or redevelopment
opportunities for which we have already incurred costs; adverse capital market
conditions may affect our access to various sources of capital and/or cost of
capital, which may affect our business activities, earnings and common stock
price, among other things; changes in local employment conditions, demand for
apartment homes, supply of competitive housing products, and other economic
conditions may result in lower than expected occupancy and/or rental rates and
adversely affect the profitability of our communities; delays in completing
development, redevelopment and/or lease-up may result in increased financing
and construction costs and may delay and/or reduce the profitability of a
community; debt and/or equity financing for development, redevelopment or
acquisitions of communities may not be available or may not be available on
favorable terms; we may be unable to obtain, or experience delays in
obtaining, necessary governmental permits and authorizations; and increases in
costs of materials, labor or other expenses may result in communities that we
develop or redevelop failing to achieve expected profitability. Additional
discussions of risks and uncertainties appear in the Company’s filings with
the Securities and Exchange Commission, including the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2011 under the heading
“Risk Factors” and under the heading “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Statements”
and in subsequent quarterly reports on Form 10-Q. The Company does not
undertake a duty to update forward-looking statements, including its expected
fourth quarter and full year 2012 operating results. The Company may, in its
discretion, provide information in future public announcements regarding its
outlook that may be of interest to the investment community. The format and
extent of future outlooks may be different from the format and extent of the
information contained in this release.

Definitions and Reconciliations

Non-GAAP financial measures and other capitalized terms, as used in this
earnings release, are defined and further explained on Attachment 14,
“Definitions and Reconciliations of Non-GAAP Financial Measures and Other
Terms.” Attachment 14 is included in the full earnings release available at
the Company’s website at http://www.avalonbay.com/earnings. This wire
distribution includes only definitions and reconciliations of the following
non-GAAP financial measures:

FFO is determined based on a definition adopted by the Board of Governors of
the National Association of Real Estate Investment Trusts (“NAREIT”). FFO is
calculated by the Company as Net income or loss attributable to common
stockholders computed in accordance with GAAP, adjusted for gains or losses on
sales of previously depreciated operating communities, extraordinary gains or
losses (as defined by GAAP), cumulative effect of a change in accounting
principle, impairment write-downs of depreciable real estate assets,
write-downs of investments in affiliates which are driven by a decrease in the
value of depreciable real estate assets held by the affiliate and depreciation
of real estate assets, including adjustments for unconsolidated partnerships
and joint ventures. Management generally considers FFO to be an appropriate
supplemental measure of operating performance because, by excluding gains or
losses related to dispositions of previously depreciated operating communities
and excluding real estate depreciation (which can vary among owners of
identical assets in similar condition based on historical cost accounting and
useful life estimates), FFO can help one compare the operating performance of
a company’s real estate between periods or as compared to different companies.
A reconciliation of FFO to Net income attributable to common stockholders is
as follows (dollars in thousands):


                Q3              Q3              YTD             YTD
                  2012           2011           2012           2011       
                                                                    
Net income
attributable     $ 86,844         $ 44,824         $ 301,512        $ 118,537
to common
stockholders
Depreciation -
real estate
assets,
including          67,590           64,499           199,593          191,933
discontinued
operations and
joint venture
adjustments
Distributions
to
noncontrolling
interests,         7                7                21               20
including
discontinued
operations
Gain on sale
of
unconsolidated
entities
holding            --               (1,743     )     (1,471     )     (1,743     )
previously
depreciated
real estate
assets
Gain on sale
of previously
depreciated        --               --               (95,049    )     (7,675     )
real estate
assets
Gain on
acquisition of
unconsolidated     (14,194    )     --               (14,194    )     --
real estate
entity
                                                                 
FFO
attributable     $ 140,247       $ 107,587       $ 390,412       $ 301,072    
to common
stockholders
                                                                    
Average shares
outstanding -      97,546,569       92,340,368       96,401,558       89,199,498
diluted
                                                                    
Earnings per
share -          $ 0.89          $ 0.49          $ 3.13          $ 1.33       
diluted
                                                                    
FFO per common
share -          $ 1.44          $ 1.17          $ 4.05          $ 3.38       
diluted
                                                                    

The Company’s results for the three and nine months ended September 30, 2012
and the comparable prior year periods include the non-routine items outlined
in the following table:

                                                             
Non-Routine Items
Decrease (Increase) in Net income and FFO
(dollars in thousands)
                                                                  
               Q3               YTD              Q3               YTD
                2012           2012           2011           2011       
                                                                  
Prepayment
penalties
and write
off of         $ -              $ 1,853          $ -              $ -
deferred
financing
costs
Acquisition
costs -
consolidated     88               392              139              1,414
and joint
venture (1)
Gain on land     -                (280       )     (13,716    )     (13,716    )
sales
Joint
venture          (4,055     )     (4,055     )     -                -
promoted
income (2)
Legal
settlements
and              895              1,362            -                (400       )
severance
related
costs
Interest
income on        -                -                -                (2,478     )
escrow
Land             -                -                14,052           14,052
impairments
                                                               
Total
non-routine    $ (3,072     )   $ (728       )   $ 475           $ (1,128     )
items
                                                                  
Weighted
average
dilutive         97,546,569       96,401,558       92,340,368       89,199,498
shares
outstanding

    
(1)   Includes the Company's proportionate share of acquisition costs for
      joint venture acquisitions.
(2)   Represents promoted income related to the acquisition of Avalon Del Rey.
      

Projected FFO, as provided within this release in the Company’s outlook, is
calculated on a basis consistent with historical FFO, and is therefore
considered to be an appropriate supplemental measure to projected Net Income
from projected operating performance. A reconciliation of the range provided
for Projected FFO per share (diluted) for the fourth quarter and full year
2012 to the range provided for projected EPS (diluted) is as follows:

                                                   
                                                     Low        High
                                                     Range       Range
                                                                 
Projected EPS (diluted) - Q4 2012                    $ 1.34      $ 1.39
Projected depreciation (real estate related)           0.67        0.72
Projected gain on sale of operating communities       (0.61 )    (0.66 )
                                                                 
Projected FFO per share (diluted) - Q4 2012          $ 1.40     $ 1.45  
                                                                 
                                                                 
Projected EPS (diluted) - Full Year 2012             $ 4.47      $ 4.52
Projected depreciation (real estate related)           2.74        2.79
Projected gain on sale of operating communities       (1.76 )    (1.81 )
                                                                 
Projected FFO per share (diluted) - Full Year 2012   $ 5.45     $ 5.50  
                                                                 

NOI is defined by the Company as total property revenue less direct property
operating expenses (including property taxes), and excludes corporate-level
income (including management, development and other fees), corporate-level
property management and other indirect operating expenses, investments and
investment management expenses, expensed development and other pursuit costs,
net interest expense, gain (loss) on extinguishment of debt, general and
administrative expense, joint venture income (loss), depreciation expense,
impairment loss on land holdings, gain on sale of real estate assets and
income from discontinued operations. The Company considers NOI to be an
appropriate supplemental measure to Net Income of operating performance of a
community or communities because it helps both investors and management to
understand the core operations of a community or communities prior to the
allocation of corporate-level property management overhead or general and
administrative costs. This is more reflective of the operating performance of
a community, and allows for an easier comparison of the operating performance
of single assets or groups of assets. In addition, because prospective buyers
of real estate have different overhead structures, with varying marginal
impact to overhead by acquiring real estate, NOI is considered by many in the
real estate industry to be a useful measure for determining the value of a
real estate asset or groups of assets.

A reconciliation of NOI (from continuing operations) to Net Income, as well as
a breakdown of NOI by operating segment, is as follows (dollars in thousands):

                                                                                                           
                            Q3            Q3           Q2            Q1            Q4            YTD           YTD
                             2012        2011        2012        2012        2011         2012        2011    
                                                                                                                 
Net income                  $ 86,747      $ 44,677      $ 156,821     $ 57,609      $ 322,965      $ 301,178     $ 118,405
Indirect operating
expenses, net of              7,396         7,743         8,617         8,036         8,096          24,049        22,490
corporate income
Investments and
investment management         1,582         1,328         1,499         1,446         1,266          4,526         3,860
expense
Expensed acquisition,
development and other         608           633           901           239           330            1,749         2,636
pursuit costs
Interest expense, net         33,985        42,659        33,193        33,626        37,640         100,804       130,174
Loss on extinguishment of     --            --            --            1,179         1,940          1,179         --
debt, net
General and                   8,372         6,087         8,316         9,710         7,847          26,398        21,524
administrative expense
Joint venture income          (5,553  )     (2,615  )     (2,073  )     (2,175  )     (1,607   )     (9,801  )     (3,513  )
Depreciation expense          65,998        60,893        64,875        62,561        61,991         193,434       180,953
Impairment loss               --            14,052        --            --            --             --            14,052
Gain on sale of real          --            (13,716 )     (95,329 )     --            (273,415 )     (95,329 )     (21,391 )
estate assets
(Income) loss from            --            (327    )     (1,152  )     (1,717  )     845            (2,870  )     (631    )
discontinued operations
Gain on acquisition of
unconsolidated real          (14,194 )    --          --          --          --           (14,194 )    --      
estate entity
                                                                                                                 
NOI from continuing         $ 184,941    $ 161,414    $ 175,668    $ 170,514    $ 167,898     $ 531,123    $ 468,559 
operations
                                                                                                                 
Established:
New England                 $ 27,374      $ 26,650      $ 27,263      $ 26,631      $ 27,299       $ 81,268      $ 76,930
Metro NY/NJ                   41,051        38,885        40,637        39,591        38,571         121,280       113,166
Mid-Atlantic                  18,618        17,954        18,722        18,816        19,063         56,156        53,912
Pacific NW                    5,984         5,003         5,651         5,572         5,229          17,207        15,145
No. California                24,316        20,979        23,235        22,793        21,917         70,344        61,317
So. California               17,224      16,220      17,023      16,979      17,326       51,225      47,076  
Total Established            134,567     125,691     132,531     130,382     129,405      397,480     367,546 
Other Stabilized              25,691        20,987        23,244        22,705        21,344         71,641        57,347
Development/Redevelopment    24,683      14,736      19,893      17,427      17,149       62,002      43,666  
NOI from continuing         $ 184,941    $ 161,414    $ 175,668    $ 170,514    $ 167,898     $ 531,123    $ 468,559 
operations
                                                                                                                           

NOI as reported by the Company does not include the operating results from
discontinued operations (i.e., assets sold during the period January 1, 2011
through September 30, 2012 or classified as held for sale at September 30,
2012). A reconciliation of NOI from communities sold or classified as
discontinued operations to Net Income for these communities is as follows
(dollars in thousands):

                                                            
                                      Q3     Q3        YTD       YTD
                                      2012   2011      2012      2011
                                                                 
                                                                 
Income from discontinued operations   $  -   $ 327     $ 2,870   $ 631
Interest expense, net                    -     1,311     133       3,922
Loss on extinguishment of debt           -     -         602       -
Depreciation expense                    -    1,843    895      6,002
                                                                 
NOI from discontinued operations      $  -   $ 3,481   $ 4,500   $ 10,555
                                                                 
NOI from assets sold                    -    3,481    4,500    10,555
                                                                 
NOI from discontinued operations      $  -   $ 3,481   $ 4,500   $ 10,555
                                                                   

Projected NOI, as used within this release for certain development communities
and in calculating the Initial Year Market Cap Rate for dispositions,
represents management’s estimate, as of the date of this release (or as of the
date of the buyer’s valuation in the case of dispositions), of projected
stabilized rental revenue minus projected stabilized operating expenses. For
development communities, Projected NOI is calculated based on the first twelve
months of stabilized operations following the completion of construction. In
calculating the Initial Year Market Cap Rate, Projected NOI for dispositions
is calculated for the first twelve months following the date of the buyer’s
valuation. Projected stabilized rental revenue represents management’s
estimate of projected gross potential minus projected stabilized economic
vacancy and adjusted for projected stabilized concessions plus projected
stabilized other rental revenue. Projected stabilized operating expenses do
not include interest, income taxes (if any), depreciation or amortization, or
any allocation of corporate-level property management overhead or general and
administrative costs. Projected gross potential for development communities
and dispositions is based on leased rents for occupied homes and management’s
best estimate of rental levels for homes which are currently unleased, as well
as those homes which will become available for lease during the twelve month
forward period used to develop Projected NOI. The weighted average Projected
NOI as a percentage of Total Capital Cost is weighted based on the Company’s
share of the Total Capital Cost of each community, based on its percentage
ownership.

Management believes that Projected NOI of the development communities, on an
aggregated weighted average basis, assists investors in understanding
management's estimate of the likely impact on operations of the development
communities when the assets are complete and achieve stabilized occupancy
(before allocation of any corporate-level property management overhead,
general and administrative costs or interest expense). However, in this
release the Company has not given a projection of NOI on a company-wide basis.
Given the different dates and fiscal years for which NOI is projected for
these communities, the projected allocation of corporate-level property
management overhead, general and administrative costs and interest expense to
communities under development is complex, impractical to develop, and may not
be meaningful. Projected NOI of these communities is not a projection of the
Company's overall financial performance or cash flow. There can be no
assurance that the communities under development or redevelopment will achieve
the Projected NOI as described in this release.

Rental Revenue with Concessions on a Cash Basis is considered by the Company
to be a supplemental measure to rental revenue in conformity with GAAP to help
investors evaluate the impact of both current and historical concessions
associated with the Company’s apartment homes, on GAAP-based rental revenue
and to more readily enable comparisons to revenue as reported by other
companies. In addition, rental revenue (with concessions on a cash basis)
allows an investor to understand the historical trend in cash concessions.

A reconciliation of rental revenue from Established Communities in conformity
with GAAP to rental revenue (with concessions on a cash basis) is as follows
(dollars in thousands):

                                                              
                         Q3            Q3            YTD           YTD
                          2012        2011        2012        2011    
                                                                   
Rental revenue (GAAP     $ 194,812     $ 184,394     $ 572,316     $ 539,885
basis)
Concessions amortized      59            794           354           3,577
Concessions granted       (53     )    (97     )    (139    )    (1,231  )
                                                                   
Rental revenue (with
concessions on a cash    $ 194,818    $ 185,091    $ 572,531    $ 542,231 
basis)
                                                                   
% change -- GAAP                         5.6     %                   6.0     %
revenue
                                                                   
% change -- cash                         5.3     %                   5.6     %
revenue
                                                                   

Economic Gain (Loss) is calculated by the Company as the gain (loss) on sale
in accordance with GAAP, less accumulated depreciation through the date of
sale and any other non-cash adjustments that may be required under GAAP
accounting. Management generally considers Economic Gain (Loss) to be an
appropriate supplemental measure to gain (loss) on sale in accordance with
GAAP because it helps investors to understand the relationship between the
cash proceeds from a sale and the cash invested in the sold community. The
Economic Gain (Loss) for each of the communities presented is estimated based
on their respective final settlement statements. A reconciliation of Economic
Gain (Loss) to gain on sale in accordance with GAAP for the quarter ended
September 30, 2012 as well as prior years’ activities is presented in the full
earnings release.

Interest Coverage is calculated by the Company as EBITDA from continuing
operations, excluding land gains and gain on the sale of investments in real
estate joint ventures, divided by the sum of interest expense, net, and
preferred dividends. Interest Coverage is presented by the Company because it
provides rating agencies and investors an additional means of comparing our
ability to service debt obligations to that of other companies. EBITDA is
defined by the Company as net income or loss attributable to the Company
before interest income and expense, income taxes, depreciation and
amortization.

A reconciliation of EBITDA and a calculation of Interest Coverage for the
third quarter of 2012 are as follows (dollars in thousands):

                                               
Net income attributable to common stockholders   $ 86,844
Interest expense, net                              33,985
Depreciation expense                              65,998
EBITDA                                           $ 186,827
                                                 
Interest expense, net                            $ 33,985
                                                 
Interest coverage                                 5.5
                                                 

Total Capital Cost includes all capitalized costs projected to be or actually
incurred to develop the respective Development or redevelopment community, or
development right, including land acquisition costs, construction costs, real
estate taxes, capitalized interest and loan fees, permits, professional fees,
allocated development overhead and other regulatory fees, all as determined in
accordance with GAAP. For redevelopment communities, Total Capital Cost
excludes costs incurred prior to the start of redevelopment when indicated.
With respect to communities where development or redevelopment was completed
in a prior or the current period, Total Capital Cost reflects the actual cost
incurred, plus any contingency estimate made by management. Total Capital Cost
for communities identified as having joint venture ownership, either during
construction or upon construction completion, represents the total projected
joint venture contribution amount. For joint ventures not in construction,
Total Capital Cost is equal to gross real estate cost.

Initial Year Market Cap Rate is defined by the Company as Projected NOI of a
single community for the first 12 months of operations (assuming no
repositioning), less estimates for non-routine allowance of approximately $200
- $300 per apartment home, divided by the gross sales price for the community.
Projected NOI, as referred to above, represents management’s estimate of
projected rental revenue minus projected operating expenses before interest,
income taxes (if any), depreciation, amortization and extraordinary items. For
this purpose, management’s projection of operating expenses for the community
includes a management fee of 3.0% -  3.5%. The Initial Year Market Cap Rate,
which may be determined in a different manner by others, is a measure
frequently used in the real estate industry when determining the appropriate
purchase price for a property or estimating the value for a property. Buyers
may assign different Initial Year Market Cap Rates to different communities
when determining the appropriate value because they (i) may project different
rates of change in operating expenses and capital expenditure estimates and
(ii) may project different rates of change in future rental revenue due to
different estimates for changes in rent and occupancy levels. The weighted
average Initial Year Market Cap Rate is weighted based on the gross sales
price of each community.

Unleveraged IRR on sold communities refers to the internal rate of return
calculated by the Company considering the timing and amounts of (i) total
revenue during the period owned by the Company and (ii) the gross sales price
net of selling costs, offset by (iii) the undepreciated capital cost of the
communities at the time of sale and (iv) total direct operating expenses
during the period owned by the Company. Each of the items (i), (ii), (iii) and
(iv) are calculated in accordance with GAAP.

The calculation of Unleveraged IRR does not include an adjustment for the
Company’s general and administrative expense, interest expense, or
corporate-level property management and other indirect operating expenses.
Therefore, Unleveraged IRR is not a substitute for Net Income as a measure of
our performance. Management believes that the Unleveraged IRR achieved during
the period a community is owned by the Company is useful because it is one
indication of the gross value created by the Company’s acquisition,
development or redevelopment, management and sale of a community, before the
impact of indirect expenses and Company overhead. The Unleveraged IRR achieved
on the communities as cited in this release should not be viewed as an
indication of the gross value created with respect to other communities owned
by the Company, and the Company does not represent that it will achieve
similar Unleveraged IRRs upon the disposition of other communities. The
weighted average Unleveraged IRR for sold communities is weighted based on all
cash flows over the holding period for each respective community, including
net sales proceeds.

Unencumbered NOI as calculated by the Company represents NOI generated by real
estate assets unencumbered by either outstanding secured debt or land leases
(excluding land leases with purchase options that were put in place for
governmental incentives or tax abatements) as a percentage of total NOI
generated by real estate assets. The Company believes that current and
prospective unsecured creditors of the Company view Unencumbered NOI as one
indication of the borrowing capacity of the Company. Therefore, when reviewed
together with the Company's Interest Coverage, EBITDA and cash flow from
operations, the Company believes that investors and creditors view
Unencumbered NOI as a useful supplemental measure for determining the
financial flexibility of an entity. A calculation of Unencumbered NOI for the
nine months ended September 30, 2012 is as follows (dollars in thousands):

                                              
NOI for Established Communities                 $ 397,480
NOI for Other Stabilized Communities              71,641
NOI for Development/Redevelopment Communities     62,002
NOI for discontinued operations                  4,500   
Total NOI generated by real estate assets         535,623
NOI on encumbered assets                         145,099 
NOI on unencumbered assets                       390,524 
                                                
Unencumbered NOI                                 73      %
                                                          

Established Communities are identified by the Company as communities where a
comparison of operating results from the prior year to the current year is
meaningful, as these communities were owned and had stabilized operations as
of the beginning of the prior year. Therefore, for 2012, Established
Communities are consolidated communities that have stabilized operations as of
January 1, 2011 and are not conducting or planning to conduct substantial
redevelopment activities within the current year. Established Communities do
not include communities that are currently held for sale or planned for
disposition during the current year. While the Company establishes the
classification of its communities on an annual basis, the Company may update
the classification of its communities during the calendar year to the extent
that its plans with regard to the disposition or redevelopment of a community
change during the year.

Economic Occupancy is defined as total possible revenue less vacancy loss as a
percentage of total possible revenue. Total possible revenue is determined by
valuing occupied units at contract rates and vacant units at market rents.
Vacancy loss is determined by valuing vacant units at current market rents. By
measuring vacant apartments at their market rents, Economic Occupancy takes
into account the fact that apartment homes of different sizes and locations
within a community have different economic impacts on a community’s gross
revenue.

Contact:

AvalonBay Communities, Inc.
Jason Reilley, 703-317-4681
or
Thomas J. Sargeant, 703-317-4635
 
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