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 twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.

Yes þ      No o

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

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

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

Yes o      No þ

APPLICABLE ONLY TO CORPORATE ISSUERS

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

76,975,524 shares of common stock, par value $0.01 per share, were outstanding as of April 30, 2008

 

 

AVALONBAY COMMUNITIES, INC.
FORM 10-Q
INDEX

				Page
PART I - FINANCIAL INFORMATION
Item 1.		Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007			1
		Condensed Consolidated Statements of Operations and Other Comprehensive Income (unaudited) for the three months ended March 31, 2008 and 2007			2
		Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2008 and 2007			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			50
Item 3.		Defaults Upon Senior Securities			51
Item 4.		Submission of Matters to a Vote of Security Holders			51
Item 5.		Other Information			51
Item 6.		Exhibits			51
SIGNATURES					54

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

		3-31-08				12-31-07
		(unaudited)
ASSETS
Real estate:
Land		$	1,014,121			$	1,002,944
Buildings and improvements			5,183,407				5,017,057
Furniture, fixtures and equipment			161,804				156,789
			6,359,332				6,176,790
Less accumulated depreciation			(1,267,010	)			(1,219,410	)
Net operating real estate			5,092,322				4,957,380
Construction in progress, including land			962,038				952,670
Land held for development			305,669				288,423
Operating real estate assets held for sale, net			97,642				98,709
Total real estate, net			6,457,671				6,297,182
Cash and cash equivalents			270,320				21,166
Cash in escrow			128,190				189,171
Resident security deposits			30,662				29,542
Investments in unconsolidated real estate entities			60,474				57,990
Deferred financing costs, net			28,209				27,682
Deferred development costs			62,529				60,996
Prepaid expenses and other assets			82,048				52,755
Total assets		$	7,120,103			$	6,736,484
LIABILITIES AND STOCKHOLDERS’ EQUITY
Unsecured notes, net		$	1,843,605			$	1,893,499
Variable rate unsecured credit facility			798,500				514,500
Mortgage notes payable			1,036,461				773,803
Dividends payable			70,891				67,909
Payables for construction			88,414				91,580
Accrued expenses and other liabilities			190,132				234,873
Accrued interest payable			27,217				38,536
Resident security deposits			43,037				41,638
Liabilities related to real estate assets held for sale			30,503				30,340
Total liabilities			4,128,760				3,686,678
Minority interest of unitholders in consolidated partnerships			19,652				23,152
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both March 31, 2008 and December 31, 2007; 4,000,000 shares issued and outstanding at both March 31, 2008 and December 31, 2007			40				40
Common stock, $0.01 par value; 140,000,000 shares authorized at both March 31, 2008 and December 31, 2007; 76,971,919 and 77,318,611 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively			770				773
Additional paid-in capital			3,015,160				3,026,708
Accumulated earnings less dividends			(40,677	)			2,499
Accumulated other comprehensive loss			(3,602	)			(3,366	)
Total stockholders’ equity			2,971,691				3,026,654
Total liabilities and stockholders’ equity		$	7,120,103			$	6,736,484

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
		3-31-08				3-31-07
Revenue:
Rental and other income		$	210,200			$	187,171
Management, development and other fees			1,638				1,444
Total revenue			211,838				188,615
Expenses:
Operating expenses, excluding property taxes			61,380				55,446
Property taxes			19,850				16,994
Interest expense, net			28,005				23,186
Depreciation expense			47,682				42,014
General and administrative expense			8,119				6,780
Total expenses			165,036				144,420
Equity in income (loss) of unconsolidated entities			34				(86	)
Minority interest in consolidated partnerships			(106	)			(449	)
Gain on sale of land			—				545
Income from continuing operations			46,730				44,205
Discontinued operations:
Income from discontinued operations			1,720				2,315
Total discontinued operations			1,720				2,315
Net income			48,450				46,520
Dividends attributable to preferred stock			(2,175	)			(2,175	)
Net income available to common stockholders		$	46,275			$	44,345
Other comprehensive income:
Unrealized gain (loss) on cash flow hedges			(236	)			172
Comprehensive income		$	46,039			$	44,517
Earnings per common share — basic:
Income from continuing operations (net of dividends attributable to preferred stock)		$	0.58			$	0.54
Discontinued operations			0.02				0.03
Net income available to common stockholders		$	0.60			$	0.57
Earnings per common share — diluted:
Income from continuing operations (net of dividends attributable to preferred stock)		$	0.58			$	0.53
Discontinued operations			0.02				0.03
Net income available to common stockholders		$	0.60			$	0.56

See accompanying notes to Condensed Consolidated Financial Statements.

AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

		For the three months ended
		3-31-08				3-31-07
Cash flows from operating activities:
Net income		$	48,450			$	46,520
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense			47,682				42,014
Depreciation expense from discontinued operations			1,110				2,080
Amortization of deferred financing costs and debt premium/discount			1,147				1,199
Amortization of stock-based compensation			4,617				5,539
Income allocated to minority interest in consolidated partnerships			106				449
Equity in income of unconsolidated entities, net of eliminations			257				326
Return on investment of unconsolidated entities			—				99
Gain on sale of real estate assets			—				(545	)
Decrease in cash in operating escrows			1,795				4,866
Decrease (increase) in resident security deposits, prepaid expenses and other assets			(28,711	)			6,603
Decrease in accrued expenses, other liabilities and accrued interest payable			(56,876	)			(9,962	)
Net cash provided by operating activities			19,577				99,188
Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs			(208,132	)			(291,082	)
Capital expenditures — existing real estate assets			(204	)			(355	)
Capital expenditures — non-real estate assets			(1,837	)			(568	)
Proceeds from sale of real estate, including reimbursement for Fund communities, net of selling costs			—				5,129
Decrease in payables for construction			(3,166	)			(388	)
Decrease in cash in construction escrows			59,186				—
Decrease (increase) in investments in unconsolidated real estate entities			(2,792	)			1,998
Net cash used in investing activities			(156,945	)			(285,266	)
Cash flows from financing activities:
Issuance of common stock			1,457				612,744
Repurchase of common stock			(42,159	)			—
Dividends paid			(67,760	)			(60,342	)
Net borrowings under unsecured credit facility			284,000				—
Issuance of mortgage notes payable and draws on construction loans			264,697				—
Repayments of mortgage notes payable			(2,039	)			(17,785	)
Repayment of unsecured notes			(50,000	)			—
Payment of deferred financing costs			(1,568	)			(406	)
Distributions to DownREIT partnership unitholders			(57	)			(88	)
Distributions to joint venture and profit-sharing partners			(49	)			(177	)
Net cash provided by financing activities			386,522				533,946
Net increase in cash and cash equivalents			249,154				347,868
Cash and cash equivalents, beginning of period			21,166				8,567
Cash and cash equivalents, end of period		$	270,320			$	356,435
Cash paid during the period for interest, net of amount capitalized		$	36,849			$	36,052

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 three months ended March 31, 2008:

	•		As described in Note 4, “Stockholders’ Equity,” 127,077 shares of common stock valued at $11,317 were issued in connection with stock grants, 1,562 shares valued at $131 were issued through the Company’s dividend reinvestment plan, 7,908 shares valued at $346 were issued to a member of the Board of Directors in fulfillment of a deferred stock award and 36,835 shares valued at $3,375 were withheld to satisfy employees’ tax withholding and other liabilities, for a net value of $8,419. In addition, the Company granted 401,212 options for common stock, net of forfeitures, at a value of $3,976.
	•		The Company recorded a decrease to other comprehensive income of $236 to record the impact of the Company’s hedge accounting activity.
	•		Common and preferred dividends declared but not paid totaled $70,891.
	•		The Company recorded a decrease of $3,500 to minority interest with a corresponding increase to accumulated earnings less dividends to adjust the redemption value associated with the put option held by a joint venture partner. This put option allows our partner to require the Company to purchase their interest in the investment at the future fair market value, payable in cash or, at the Company’s option, shares of the Company’s common stock. For further discussion of the nature and valuation of the put option, see Note 11, “Fair Value Measurements.”

During the three months ended March 31, 2007:

	•		As described in Note 4, “Stockholders’ Equity,” 69,576 shares of common stock valued at $10,279 were issued in connection with stock grants, 534 shares valued at $73 were issued through the Company’s dividend reinvestment plan, 38,692 shares valued at $4,329 were withheld to satisfy employees’ tax withholding and other liabilities and 1,904 shares valued at $70 were forfeited, for a net value of $5,953. In addition, the Company granted 335,856 options for common stock, net of forfeitures, at a value of $7,417.
	•		15,173 units of limited partnership, valued at $737, 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 of $194 and a gain to other comprehensive income of $172 to adjust the Company’s Hedging Derivatives (as defined in Note 5, “Derivative Instruments and Hedging Activities”) to their fair value.
	•		Common and preferred dividends declared but not paid totaled $69,871.
	•		The Company recorded an increase of $4,376 to minority interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put option held by a joint venture partner. This put option allows our partner to require the Company to purchase their interest in the investment at the future fair market value, payable in cash or, at the Company’s option, shares of the Company’s common stock.

AVALONBAY COMMUNITIES, INC.

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 (“the Code”), 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 New England, Metro New York/New Jersey, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the country.

At March 31, 2008, the Company owned or held a direct or indirect ownership interest in 161 operating apartment communities containing 45,151 apartment homes in ten states and the District of Columbia, of which eight communities containing 2,120 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 22 communities under construction that are expected to contain an aggregate of 7,016 apartment homes when completed. The Company also owned or held a direct or indirect ownership interest in rights to develop an additional 46 communities that, if developed as expected, will contain an estimated 13,266 apartment homes.

During the three months ended March 31, 2008:

	•		The Company commenced construction of one community, Avalon Charles Pond, located in Coram, New York. Avalon Charles Pond will contain 200 apartment homes and, if completed as planned, will be completed for a projected total capitalized cost of approximately $46,500.
	•		The Company purchased two land parcels for an aggregate purchase price of $26,925. These land parcels are located in Seattle, Washington and Los Angeles, California.
	•		The Board of Directors of the Company authorized an increase of $200,000 in the Company’s stock repurchase program, expanding the amount that the Company can acquire in open market or negotiated transactions to $500,000. During the first quarter of 2008, the Company purchased 482,100 shares of common stock in open market transactions under its program at an average price of $87.42 per share, bringing total purchases under the program to approximately $300,000.
	•		The Company executed two separate five-year, interest only mortgage loans for an aggregate borrowing of approximately $264,697 at a weighted average effective interest rate of approximately 4.78%. One mortgage loan for approximately $170,125 is secured by Avalon at Arlington Square, located in Arlington, Virginia. The second mortgage loan, for approximately $94,572 is secured by Avalon at Cameron Court, located in Alexandria, Virginia.
	•		AvalonBay Value Added Fund, L.P. (the “Fund”) is the private, discretionary investment vehicle in which the Company holds an equity interest of approximately 15%. The Company completed the redevelopment of Avalon at Poplar Creek, located in Schumburg, Illinois, on behalf of the Fund. Avalon at Poplar Creek is a garden-style community and was completed for a total capitalized cost of $3,100 excluding costs incurred prior to the start of redevelopment. During the first quarter of 2008, the Company also commenced the redevelopment of one community, South Hills Apartments, on behalf of the Fund. South Hills Apartments is a garden-style community located in West Covina, California that contains 85 apartment homes. The projected total capitalized cost for the redevelopment is $4,400, excluding costs incurred prior to redevelopment.

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 2007 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2008 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 FASB Interpretation No. 46 (“FIN 46(R)”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” as revised in December 2003. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company assesses consolidation of variable interest entities under the guidance of FIN 46(R). The Company accounts for joint venture entities and subsidiary partnerships, including those structured as DownREITs, that are not variable interest entities, in accordance with EITF Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” Statement of Position (“SOP”) 78-9, “Accounting for Investments in Real Estate Ventures,” Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” and EITF Topic D-46, “Accounting for Limited Partnership Investments.” The Company uses EITF Issue No. 04-5 to evaluate the partnership of each joint venture entity and determine whether control over the partnership, as defined by the EITF, lies with the general partner, or the limited partners, when the limited partners have certain rights. If the Company is the general partner and has control over the partnership, or if the Company’s limited partnership ownership includes the ability to dissolve the partnership, or has substantive participating rights, the Company consolidates the investments. If the Company is not the general partner, or the Company’s partnership interest does not overcome the presumption of control in a limited partnership residing with the general partner as discussed in the EITF, the Company then looks to the guidance in SOP 78-9, APB No. 18 and EITF Topic D-46 to determine the accounting framework to apply. The Company generally uses the equity method to account for these investments unless its ownership interest is so minor that it has virtually no influence over the partnership’s operating and financial policies. Investments in which the Company has little or no influence are accounted for using the cost method.

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

In conjunction with the acquisition and development of investments in unconsolidated entities, the Company may incur costs in excess of its equity in the underlying assets. These costs are capitalized and depreciated over the life of the underlying assets to the extent that the Company expects to recover the costs.

If there is an event or change in circumstance that indicates a loss in the value of an investment, the Company’s policy is to record the loss and reduce the value of the investment to its fair value. A loss in value would be indicated if the Company could not recover the carrying value of the investment or if the investee could not sustain an earnings capacity that would justify the carrying amount of the investment. The Company did not recognize an impairment loss on any of its investments in unconsolidated entities during the three months ended March 31, 2008 or 2007.

Revenue and Gain Recognition

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

The Company accounts for sales of real estate assets and the related gain recognition in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.”

Real Estate

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

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

Project costs related to the acquisition, development, construction and redevelopment of real estate projects (including interest and related loan fees, property taxes and other direct costs) are capitalized as a cost of the project. Indirect project costs that relate to several projects are capitalized and allocated to the projects to which they relate. Indirect costs not clearly related to development, construction and redevelopment activity are expensed as incurred. For development, capitalization begins when the Company has determined that development of the future asset is probable and ends when the asset, or a portion of an asset, is delivered and is ready for its intended use. For redevelopment efforts, we capitalize costs either (i) in advance of taking homes out of service when significant renovation of the common area has begun until the redevelopment is completed, or (ii) when an apartment home is taken out-of-service for redevelopment until the redevelopment is completed and the apartment home is available for a new resident. Rental income and operating costs incurred during the initial lease-up or post-redevelopment lease-up period are recognized as they accrue.

In accordance with SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” the Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable (“Development Rights”). Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital. Pre-development costs incurred in the pursuit of Development Rights for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development by the Company no longer probable, any capitalized pre-development costs are written-off with a charge to expense. The Company expensed costs related to abandoned pursuits, which includes the abandonment or impairment of Development Rights, acquisition pursuits and disposition pursuits, in the amounts of $500 and $787 for the three months ended March 31, 2008 and 2007, respectively. These costs are included in operating expenses, excluding property taxes on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future years.

The Company owns land improved with office buildings, industrial space and other commercial ventures occupied by unrelated third parties in connection with 13 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, allocating to each asset and liability acquired in such transaction, 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 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.

It is the Company’s policy to perform a quarterly qualitative analysis to determine if there are changes in circumstances that suggest the carrying value of a long-lived asset may not be recoverable. If there is an event or change in circumstance that indicates an impairment in the value of an operating community, the Company compares 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 months ended March 31, 2008 or 2007.

Deferred Financing Costs

Deferred financing costs include fees and other expenditures necessary to obtain debt financing and are amortized on a straight-line basis, which approximates the effective interest method, over the shorter of the term of the loan or the related credit enhancement facility, if applicable. Unamortized financing costs are written-off when debt is retired before the maturity date. Accumulated amortization of deferred financing costs was $20,017 at March 31, 2008 and was $19,368 at December 31, 2007.

Cash, Cash Equivalents and Cash in Escrow

Cash and cash equivalents include all cash and liquid investments with an original maturity of three months or less from the date acquired. Cash in escrow consists primarily of construction financing proceeds that are restricted for use in the construction of a specific community. The majority of the Company’s cash, cash equivalents and cash in escrows are held at major commercial banks.

Interest Rate Contracts

The Company utilizes derivative financial instruments to manage interest rate risk and generally designates these financial instruments as cash flow hedges under the guidance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. As of March 31, 2008 and December 31, 2007, the Company had approximately $153,962 and $213,108, respectively, in variable rate debt subject to cash flow hedges. Excluding debt on communities classified as held for sale, the Company did not apply hedge accounting for an additional $94,820 in variable rate debt which is subject to interest rate caps as of March 31, 2008. See Note 5, “Derivative Instruments and Hedging Activities,” for further discussion of derivative financial instruments.

Comprehensive Income

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

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
		3-31-08				3-31-07
Basic and diluted shares outstanding
Weighted average common shares — basic			76,600,201				78,431,936
Weighted average DownREIT units outstanding			64,019				144,586
Effect of dilutive securities			776,672				1,354,226
Weighted average common shares — diluted			77,440,892				79,930,748
Calculation of Earnings per Share — basic
Net income available to common stockholders		$	46,275			$	44,345
Weighted average common shares — basic			76,600,201				78,431,936
Earnings per common share — basic		$	0.60			$	0.57
Calculation of Earnings per Share — diluted
Net income available to common stockholders		$	46,275			$	44,345
Add: Minority interest of DownREIT unitholders in consolidated partnerships, including discontinued operations			57				88
Adjusted net income available to common stockholders		$	46,332			$	44,433
Weighted average common shares — diluted			77,440,892				79,930,748
Earnings per common share — diluted		$	0.60			$	0.56

Certain options to purchase shares of common stock in the amounts of 1,508,451 and 335,856 were outstanding during the three months ended March 31, 2008 and 2007, respectively, but were not included in the computation of diluted earnings per share because in applying the treasury stock method under the provisions of SFAS No. 123(R), “Share Based Payments” as discussed below, such options are anti-dilutive.

Legal and Other Contingencies

The Company is currently involved in litigation alleging that 100 communities currently or formerly owned by the Company violated the accessibility requirements of the Fair Housing Act and the Americans with Disabilities Act. The lawsuit, Equal Rights Center v. AvalonBay Communities, Inc., was filed on September 23, 2005 in the federal district court in Maryland. The plaintiff seeks compensatory and punitive damages in unspecified amounts as well as injunctive relief (such as modification of existing communities), an award of attorneys’ fees, expenses and costs of suit. The Company has filed a motion to dismiss all or parts of the suit, which has not been ruled on yet by the court. 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.

In addition, 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 expensed in the financial statements. While the resolution of these matters cannot be predicted with certainty, management currently believes the final outcome of such matters will not have a material adverse effect on the financial position or results of operations of the Company.

Assets Held for Sale & Discontinued Operations

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

Income Taxes

As of March 31, 2008, the Company did not have any unrecognized tax benefits as defined in FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” (“FIN 48”). We do not believe that there will be any material changes in our unrecognized tax positions over the next 12 months. The Company is subject to examination by the respective taxing authorities for the tax years 2004 through 2006.

Use of Estimates

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

Reclassifications

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

Recently Issued Accounting Standards

On January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value Measurements (“SFAS No. 157”). This standard defines fair value, establishes a methodology for measuring fair value and expands the required disclosure for fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based, not an entity-specific, measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. This statement applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The standard applies prospectively to new fair value measurements performed after the required effective dates, which are as follows: (i) on January 1, 2008, the standard applied to the measurements of fair values for financial instruments and recurring fair value measurements of non-financial assets and liabilities; and (ii) on January 1, 2009, the standard will apply to all remaining fair value measurements, including non-recurring measurements of non-financial assets and liabilities such as the Company’s long-lived assets. It also will apply to fair value measurements of non-financial assets acquired and liabilities assumed in business combinations. On January 18, 2008, the FASB issued proposed FASB Staff Position (FSP) FAS 157-c, Measuring Liabilities under Statement 157, which will modify the definition of fair value by requiring estimation of the proceeds that would be received if the entity were to issue the liability at the measurement date. The adoption of the provisions in SFAS No. 157 did not have a material impact on our consolidated financial statements.

The provisions in the consensus of Emerging Issues Task Force on Issue 07-6 “Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66 (“SFAS No. 66”) When the Agreement Includes a Buy-Sell Clause” (“EITF 07-6”) became effective for the Company for any new arrangements entered into beginning January 1, 2008. EITF 07-6 addresses the impact of a buy-sell clause contained within a joint venture agreement on a seller’s continuing involvement in the entity and corresponding ability to recognize profit on a sale of real estate to the joint venture, in which they retain a partial ownership interest. In EITF 07-6, the Task Force reached a consensus that a buy-sell clause, in and of itself, does not constitute a prohibited form of continuing involvement that would preclude partial sales treatment under SFAS No. 66. However, a buy-sell clause may constitute a prohibited form of continuing involvement that precludes partial sales treatment if the buyer cannot act independently from the seller or if the seller is economically compelled to reacquire the other partner’s interest in the jointly owned entity. The Company does not believe the provisions of EITF 07-6 will have a material impact on its financial position or results of operations.

2. Interest Capitalized

The Company capitalizes interest during the development and redevelopment of real estate assets in accordance with SFAS No. 34, “Capitalization of Interest Cost.” Capitalized interest associated with communities under development or redevelopment totaled $19,663 for the three months ended March 31, 2008 and $15,433 for the three months ended March 31, 2007.

3. Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes and variable rate unsecured credit facility as of March 31, 2008 and December 31, 2007 are summarized below. The following amounts and discussion do not include the mortgage notes related to two of the communities classified as held for sale as of March 31, 2008 as shown in the Condensed Consolidated Balance Sheets (see Note 7, “Real Estate Disposition Activities”).

		3-31-08				12-31-07
Fixed rate unsecured notes (1)		$	1,843,605			$	1,893,499
Fixed rate mortgage notes payable — conventional and tax-exempt			493,627				230,050
Variable rate mortgage notes payable — conventional and tax-exempt			542,834				543,753
Total notes payable and unsecured notes			2,880,066				2,667,302
Variable rate unsecured credit facility			798,500				514,500
Total mortgage notes payable, unsecured notes and unsecured credit facility		$	3,678,566			$	3,181,802

The following debt activity occurred during the three months ended March 31, 2008:

	•		the Company repaid $50,000 in previously issued unsecured notes in January 2008, along with any unpaid interest, pursuant to their scheduled maturity;
	•		the Company borrowed $284,000 under its unsecured credit facility; and
	•		the Company executed two separate five-year, interest only mortgage loans for aggregate borrowings of approximately $264,697 at a weighted average effective interest rate of approximately 4.78%. One mortgage loan for approximately $170,125 is secured by Avalon at Arlington Square, located in Arlington, Virginia. The second mortgage loan, for approximately $94,572 is secured by Avalon at Cameron Court, located in Alexandria, Virginia. As discussed in Note 12, “Subsequent Events,” the Company used the net proceeds from these financings to reduce the outstanding amount on the Company’s unsecured credit facility.

In the aggregate, secured notes payable mature at various dates from October 2008 through October 2047 and are secured by certain apartment communities and improved land parcels (with a net carrying value of $1,233,318 as of March 31, 2008). As of March 31, 2008, the Company has guaranteed approximately $108,414 of mortgage notes payable held by wholly owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Company’s fixed rate mortgage notes payable (conventional and tax-exempt) was 5.6% and 6.5% at March 31, 2008 and December 31, 2007, respectively. The weighted average interest rate of the Company’s variable rate mortgage notes payable and its unsecured credit facility, including the effect of certain financing related fees, was 4.0% at March 31, 2008 and 5.4% at December 31, 2007.

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at March 31, 2008 are as follows:

														Stated
										Unsecured				interest rate
		Secured notes				Secured notes				notes				of unsecured
Year		payments				maturities				maturities				notes
2008			6,813				4,410				146,000				8.250	%
2009 (1)			6,128				76,030				150,000				7.500	%
2010			6,226				29,388				200,000				7.500	%
2011			5,324				36,579				300,000				6.625	%
											50,000				6.625	%
2012			4,265				27,143				250,000				6.125	%
											250,000				5.500	%
2013			4,610				264,697				100,000				4.950	%
2014			4,988				33,100				150,000				5.375	%
2015			5,396				—				—				—
2016			5,838				—				250,000				5.750	%
2017			6,328				18,300				—				—
Thereafter			253,727				237,171				—				—
		$	309,643			$	726,818			$	1,846,000

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 variable rate unsecured credit facility in the amount of $1,000,000 with a syndicate of commercial banks, to whom the Company pays, in the aggregate, an annual facility fee of approximately $1,250. The Company had $798,500 outstanding under the current credit facility and $58,512 outstanding in letters of credit on March 31, 2008. At December 31, 2007, there was $514,500 outstanding under the current credit facility and $61,689 outstanding in letters of credit. 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 0.40% per annum (3.10% at March 31, 2008). The stated spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00% based on the Company’s credit rating. 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 $422,500. The competitive bid option may result in lower pricing than the stated rate if market conditions allow. The Company did not have any amounts outstanding under this competitive bid option as of March 31, 2008. The Company is in compliance with 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. The credit facility matures in November 2011, assuming exercise of a one-year renewal option by the Company.

4. Stockholders’ Equity

The following summarizes the changes in stockholders’ equity for the three months ended March 31, 2008:

														Accumulated				Accumulated
										Additional				earnings				other				Total
		Preferred				Common				paid-in				less				comprehensive				stockholders’
		stock				stock				capital				dividends				loss				equity
Balance at December 31, 2007		$	40			$	773			$	3,026,708			$	2,499			$	(3,366	)		$	3,026,654
Net income			—				—				—				48,450				—				48,450
Unrealized loss on cash flow hedges			—				—				—				—				(236	)			(236	)
Change in redemption value of minority interest			—				—				—				3,500				—				3,500
Dividends declared to common and preferred stockholders			—				—				—				(70,873	)			—				(70,873	)
Issuance of common stock, net of withholdings			—				2				(1,477	)			(185	)			—				(1,660	)
Purchase of common stock			—				(5	)			(18,086	)			(24,068	)			—				(42,159	)
Amortization of deferred compensation			—				—				8,015				—				—				8,015
Balance at March 31, 2008		$	40			$	770			$	3,015,160			$	(40,677	)		$	(3,602	)		$	2,971,691

During the three months ended March 31, 2008, the Company:

	(i)		issued 35,696 shares of common stock in connection with stock options exercised;
	(ii)		issued 7,908 shares to a member of the Board of Directors in fulfillment of a deferred stock award;
	(iii)		issued 1,562 shares through the Company’s dividend reinvestment plan;
	(iv)		issued 127,077 common shares in connection with stock grants;
	(v)		withheld 36,835 shares to satisfy employees’ tax withholding and other liabilities; and
	(vi)		purchased 482,100 shares through the Company’s stock repurchase program.

In addition, the Company granted 401,212 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 three months ended March 31, 2008 is not reflected on the Company’s Condensed Consolidated Balance Sheet as of March 31, 2008 or above, and will not be reflected until earned as compensation cost.

Dividends per common share were $0.8925 for the three months ended March 31, 2008 and $0.85 for the three months ended March 31, 2007. The average dividend for all non-redeemed preferred shares during the three months ended March 31, 2008 and 2007 was $0.54 per share.

The Company offers a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”), which allows for holders of the Company’s common stock or preferred stock to purchase shares of common stock through either reinvested dividends or optional cash payments. The purchase price per share for newly issued shares of common stock under the DRIP will be equal to the last reported sale price for a share of the Company’s common stock as reported by the New York Stock Exchange (“NYSE”) on the applicable investment date.

In February 2008, the Company announced that its Board of Directors increased the Company’s common stock repurchase program for purchases of shares of its common stock in open market or negotiated transactions to $500,000. During the three months ended March 31, 2008, the Company repurchased 482,100 shares at an average price of $87.42 per share through this program, bringing the total amount of common stock purchased under the program to approximately $300,000.

5. Derivative Instruments and Hedging Activities

The Company enters into interest rate swap and interest rate cap agreements (collectively, the “Hedging Derivatives”) to reduce the impact of interest rate fluctuations on its variable rate, tax-exempt bonds and its variable rate conventional secured debt (collectively, the “Hedged Debt”). The Company has not entered into any interest rate hedge agreements for its conventional unsecured debt and does not enter into derivative transactions for trading or other speculative purposes. The following table summarizes the consolidated Hedging Derivatives at March 31, 2008 (dollars in thousands):

		Interest				Interest
		Rate Caps				Rate Swaps
Notional balance		$	235,637			$	45,996
Weighted average interest rate (1)			4.2	%			6.5	%
Weighted average capped interest rate			7.5	%			n/a
Earliest maturity date		May-09				Jun-10
Latest maturity date		Mar-14				Jun-10
Estimated fair value, asset/(liability)		$	133			$	(2,945	)

Excluding derivatives executed to hedge debt on communities classified as held for sale, the Company had six derivatives designated as cash flow hedges and five derivatives not designated as hedges at March 31, 2008. For the derivative positions that the Company has determined qualify as effective cash flow hedges under SFAS No. 133, the Company has recorded the effective portion of cumulative changes in the fair value of the Hedging Derivatives in other comprehensive income. Amounts recorded in other comprehensive income will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. To adjust the Hedging Derivatives to their fair value and recognize the impact of hedge accounting, the Company recorded a reduction in other comprehensive income of $236 during the three months ended March 31, 2008 and an increase of $172 during the three months ended March 31, 2007. Amounts in other comprehensive income will be reclassified into earnings in conjunction with the periodic adjustment of the floating rates on the Hedged Debt, in interest expense, net. The amount reclassified into earnings for the three months ended March 31, 2008, as well as the estimated amount included in accumulated other comprehensive income as of March 31, 2008, expected to be reclassified into earnings within the next twelve months to offset the variability of cash flows of the hedged items during this period are not material.

The Company assesses both at inception and on an on-going basis, the effectiveness of qualifying cash flow hedges. Hedge ineffectiveness, reported as a component of general and administrative expenses, did not have a material impact on earnings of the Company for any prior period, and the Company does not anticipate that it will have a material effect in the future. The fair values of the Hedging Derivatives are included in accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets.

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

6. Investments in Real Estate Entities

Investments in Unconsolidated Real Estate Entities

The Company accounts for its investments in unconsolidated real estate entities that are not considered variable interest entities under FIN 46(R) in accordance with EITF Issue No. 04-5, SOP 78-9, APB No. 18, and EITF Topic D-46 as applicable. As of March 31, 2008, the Company’s investments in unconsolidated real estate entities accounted for under the equity method of accounting consisted of:

	•		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 developed and owns the Avalon at Mission Bay North II community;
	•		a 30% limited liability company membership interest (with a right to 45% or the residual distribution after the joint venture partners receive both a return of their initial investment and an achievement of a threshold return on that investment) in the limited liability company that developed and owns the Avalon Del Rey community;
	•		a 50% limited liability company membership interest (with a right to 95% of distributions until the Company receives a return of our investment capital and a threshold return thereon) in the limited liability company that will develop 64 for-sale town homes adjacent to the Company’s Avalon Danvers community; and
	•		a 15.2% combined general partner and indirect limited partner equity interest in the Fund (with the opportunity to receive as much as 20% of the Fund’s distributions in excess of return of capital, as an additional promoted distribution, based on the achievement of certain threshold returns), which owns the following 20 communities: Avalon at Redondo Beach, Avalon Lakeside, Avalon Columbia, Avalon Redmond, Avalon Sunset, Avalon at Poplar Creek, Avalon at Civic Center, Avalon Paseo Place, Avalon Yerba Buena, Avalon at Aberdeen Station, The Springs, The Covington, Avalon Cedar Place, Avalon Crystal Hill, Middlesex Crossing, Avalon Centerpoint, Skyway Terrace, Avalon Rutherford Station, South Hills Apartments and Colonial Towers/South Shore Manor.

In addition, as part of the formation of the Fund, the Company provided a guarantee to one of the limited partners. 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 $7,192 as of March 31, 2008). As of March 31, 2008, the fair value of the real estate assets owned by the Fund is considered adequate to cover such potential payment under a liquidation scenario. The estimated fair value of and the Company’s obligation under this guarantee, both at inception and as of March 31, 2008 was not significant and therefore the Company has not recorded any obligation for this guarantee as of March 31, 2008.

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

		3-31-08				12-31-07
		(unaudited)				(unaudited)
Assets:
Real estate, net		$	1,060,851			$	997,319
Other assets			39,135				31,774
Total assets		$	1,099,986			$	1,029,093
Liabilities and partners’ capital:
Mortgage notes payable and credit facility		$	735,883			$	719,310
Other liabilities			22,428				20,496
Partners’ capital			341,675				289,287
Total liabilities and partners’ capital		$	1,099,986			$	1,029,093

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

		For the three months ended
		3-31-08				3-31-07
		(unaudited)				(unaudited)
Rental and other income		$	26,867			$	19,214
Operating and other expenses			(11,354	)			(8,775	)
Interest expense, net			(10,117	)			(8,526	)
Depreciation expense			(8,031	)			(5,877	)
Net loss		$	(2,635	)		$	(3,964	)

In conjunction with the acquisition and development of the investments in unconsolidated entities, the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $5,326 at March 31, 2008 and $5,375 at December 31, 2007 of the respective investment balances.

Investments in Consolidated Real Estate Entities

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 has no operations and has minimal assets and equity, and is therefore not considered a significant variable interest entity.

7. Real Estate Disposition Activities

During the three months ended March 31, 2008, the Company did not sell any communities. As of March 31, 2008, the Company had five communities that qualified as discontinued operations and held for sale under the provisions of SFAS No. 144.

In accordance with the requirements of SFAS No. 144, the operations for any communities sold from January 1, 2007 through March 31, 2008 and the communities that qualified as discontinued operations and held for sale as of March 31, 2008 have been presented as such in the accompanying Condensed Consolidated Financial Statements. Accordingly, certain reclassifications have been made in prior periods to reflect discontinued operations consistent with current period presentation.

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

		For the three months ended
		3-31-08				3-31-07
Rental income		$	4,350			$	8,091
Operating and other expenses			(1,334	)			(3,004	)
Interest expense, net			(186	)			(692	)
Depreciation expense			(1,110	)			(2,080	)
Income from discontinued operations		$	1,720			$	2,315

The Company’s Condensed Consolidated Balance Sheets include other assets (excluding net real estate) of $1,074 and $891 as of March 31, 2008 and December 31, 2007, respectively, $26,400 of mortgage notes as of March 31, 2008 and December 31, 2007, and other liabilities of $4,103 as of March 31, 2008 and $3,940 as of December 31, 2007, relating to real estate assets sold or classified as held for sale.

During the three months ended March 31, 2008, the Company did not sell any parcels of land. The Company had gains on the sales of land parcels of $545 in the three months ended March 31, 2007.

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 three months ended March 31, 2008, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2007, 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, 2007.

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

A reconciliation of NOI to net income for the three months ended March 31, 2008 and 2007 is as follows:

		For the three months ended
		3-31-08				3-31-07
Net income		$	48,450			$	46,520
Indirect operating expenses, net of corporate income			8,458				6,996
Investments and investment management			1,719				2,024
Interest expense, net			28,005				23,186
General and administrative expense			8,119				6,780
Equity in income of unconsolidated entities			(34	)			86
Minority interest in consolidated partnerships			106				449
Depreciation expense			47,682				42,014
Gain on sale of real estate assets			—				(545	)
Income from discontinued operations			(1,720	)			(2,315	)
Net operating income		$	140,785			$	125,195

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 below 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 months ended March 31, 2008 and 2007 has been adjusted for the communities that were sold from January 1, 2007 through March 31, 2008, or otherwise qualify as discontinued operations as of March 31, 2008, as described in Note 7, “Real Estate Disposition Activities.”

		Total								% NOI change				Gross
		revenue				NOI				from prior year				real estate (1)
For the three months ended March 31, 2008
Established
New England		$	31,435			$	19,897				1.3	%		$	821,456
Metro NY/NJ			37,628				25,568				1.7	%			963,395
Mid-Atlantic/Midwest			31,676				20,277				3.6	%			771,024
Pacific Northwest			5,324				3,824				11.2	%			174,490
Northern California			34,156				25,626				10.7	%			1,144,113
Southern California			15,390				11,106				1.9	%			375,446
Total Established			155,609				106,298				4.4	%			4,249,924
Other Stabilized			29,153				18,889				n/a				1,089,627
Development / Redevelopment			25,438				15,598				n/a				1,934,647
Land Held for Future Development			n/a				n/a				n/a				305,669
Non-allocated (2)			1,638				n/a				n/a				47,172
Total		$	211,838			$	140,785				12.5	%		$	7,627,039
For the three months ended March 31, 2007
Established
New England		$	31,151			$	20,937				4.0	%		$	847,764
Metro NY/NJ			34,722				24,119				8.5	%			901,544
Mid-Atlantic/Midwest			29,905				18,910				7.6	%			749,541
Pacific Northwest			8,094				5,480				17.1	%			289,682
Northern California			36,390				26,498				12.5	%			1,293,487
Southern California			13,824				10,068				8.1	%			349,115
Total Established			154,086				106,012				8.7	%			4,431,133
Other Stabilized			12,616				7,259				n/a				360,763
Development / Redevelopment			20,469				11,924				n/a				1,430,977
Land Held for Future Development			n/a				n/a				n/a				315,241
Non-allocated (2)			1,444				n/a				n/a				42,844
Total		$	188,615			$	125,195				13.2	%		$	6,580,958

9. Stock-Based Compensation Plans

The Company has a stock incentive plan (the “1994 Plan”), which was amended and restated on December 8, 2004, and amended on February 9, 2006, December 6, 2006 and September 19, 2007. 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 2,365,816 and 2,160,738 were available for future option or restricted stock grant awards under the 1994 Plan as of March 31, 2008 and December 31, 2007, respectively. Annually on January 1^st, the maximum number available for issuance under the 1994 Plan is increased by up to 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.

Information with respect to stock options granted under the 1994 Plan, the Avalon 1995 Incentive Plan and the Avalon 1993 Plan is as follows:

										Avalon 1995
						Weighted				Incentive Plan				Weighted
						average				and Avalon				average
		1994 Plan				exercise price				1993 Plan				exercise price
		shares				per share				shares				per share
Options Outstanding, December 31, 2007			2,321,715			$	83.15				768			$	36.61
Exercised			(35,696	)			41.52				—				—
Granted			401,212				89.06				—				—
Forfeited			(7,490	)			117.04				—				—
Options Outstanding, March 31, 2008			2,679,741			$	84.50				768			$	36.61
Options Exercisable:
March 31, 2008			1,783,596			$	73.46				768			$	36.61

The weighted average fair value of the options granted during the three months ended March 31, 2008 is estimated at $9.91 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 5.5% over the expected life of the option, volatility of 22.17%, risk-free interest rate of 3.09% and an expected life of approximately seven years.

The Company issued 127,077 shares of restricted stock valued at $11,317, as part of its stock-based compensation plan during the three months ended March 31, 2008. Compensation cost is recognized over the requisite service period, which varies, but does not exceed five years. The fair value of restricted stock is the closing stock price on the date of the grant. Provisions of SFAS No. 123(R) require the Company to recognize compensation cost taking into consideration retirement eligibility. The cost related to stock-based compensation for restricted stock included in the determination of net income is based on actual forfeitures for the given year. Restricted stock awards typically vest over a five-year period with the exception of accelerated vesting provisions. Restricted stock vesting during the three months ended March 31, 2008 had fair values ranging from $51.20 to $147.75 per share. The total fair value of shares vested was $9,614 for the three months ended March 31, 2008.

Total stock-based compensation cost recognized in income was $4,617 and $5,539 for the three months ended March 31, 2008 and 2007, respectively, and total capitalized stock-based compensation cost was $1,377 and $912 for the three months ended March 31, 2008 and 2007, respectively. At March 31, 2008, there was a total of $10,146 and $16,234 in unrecognized compensation cost for unvested stock options and unvested restricted stock, respectively. The unrecognized compensation cost for stock options does not take into account estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock is expected to be recognized over a weighted average period of 1.93 years and 2.83 years, respectively.

10. Related Party Arrangements

Unconsolidated Entities

The Company manages unconsolidated real estate entities for which it receives asset management, property management, development and redevelopment fee revenue. From these entities, the Company received fees of $1,638 and $1,444 in the three months ended March 31, 2008 and 2007, respectively. These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Operations and Other Comprehensive Income.

Director Compensation

Directors of the Company who are also employees receive no additional compensation for their services as a director. Following each annual meeting of stockholders starting with the 2006 annual meeting, non-employee directors receive (i) a number of shares of restricted stock (or deferred stock awards) having a value of $100 and (ii) a cash payment of $40, payable in quarterly installments of $10. After September 20, 2007, the cash payment increased to $50, payable in quarterly installments of $12.5. The value of the restricted stock or deferred stock award will increase to $125 following the 2008 annual meeting. Until the 2007 annual meeting, the number of shares of restricted stock (or deferred stock awards) was calculated based on the last reported sale price of the common stock on the NYSE on the fifth business day following the prior year’s annual meeting. Following the 2007 annual meeting, the number of shares of restricted stock (or deferred stock awards) is calculated based on the closing price on the day of the award. Non-employee directors may elect to receive all or a portion of cash payments in the form of a deferred stock award. In addition, the Lead Independent Director receives an annual fee of $30 payable in equal monthly installments of $2.5.

The Company recorded non-employee director compensation expense relating to the restricted stock grants and deferred stock awards in the amount of $218 for the three months ended March 31, 2008 as a component of general and administrative expense. Deferred compensation relating to these restricted stock grants and deferred stock awards was $667 and $766 on March 31, 2008 and December 31, 2007, respectively.

11. Fair Value Measurements

As a basis for applying a market-based approach in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than Level 1 prices. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs other than quoted prices that are observable, such as interest rates and yield curves at commonly quoted intervals. Level 3 inputs are unobservable inputs which are typically based on the Company’s assumptions, as there is little, if any, related market activity. If inputs to the fair value measurement come from different levels of the fair value hierarchy, the entire fair value measurement is classified according to the lowest level input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Derivative Financial Instruments

Currently, the Company uses interest rate swap and interest rate cap agreements to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2008, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy. See Note 5, “Derivative Instruments and Hedging Activities,” for derivative values at March 31, 2008.

Other Financial Instruments

In conjunction with a joint venture agreement, the Company provided our joint venture partner with a redemption option (the “Put”). This Put allows our partner to require the Company to purchase their interest in the investment at the future fair market value, payable in cash or, at the Company’s option, common equity shares of the Company. Consistent with the guidance in EITF Topic D-98, “Classification and Measurement of Redeemable Securities,” we classify our obligation under this Put as a component of minority interest at fair value, with a corresponding offset of changes in the fair value of the Put recorded in accumulated earnings less dividends. The fair value of the Put is based on the fair market value of the net assets of the joint venture. The Company calculates the fair value of the Put based on unobservable inputs considering the assumptions that market participants would make in pricing this obligation. Accordingly, the valuation of the Put is classified in Level 3 of the fair value hierarchy. At March 31, 2008, the fair value of the Put was $15,666, which represents an unrealized decrease in the fair value of this obligation of $3,500 for the three month period ended March 31, 2008.

12. Subsequent Events

In April 2008, the Company redeemed $10,000 aggregate principal amount of its $150,000, 7.5% medium-term notes due August 2009. The Company recognized a 2.875% premium upon redemption, purchasing the medium-term notes for approximately $10,288. The Company will record this premium as a charge to earnings in the second quarter of 2008.

In April 2008, the Company obtained a seven year, interest only mortgage loan at an effective interest rate of 5.48% for $110,600 secured by Avalon Crescent, located in McLean, Virginia. The net carrying value of Avalon Crescent was $41,225 as of March 31, 2008. The Company used the net proceeds from this financing as well as the two secured financings discussed in Note 3, “Notes Payable, Unsecured Notes and Credit Facility,” to reduce the outstanding amount on the Company’s unsecured credit facility.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends as described more fully under “Forward-Looking Statements” included in this report. Actual results or developments could differ materially from those projected in such statements as a result of the risk factors described in Item 1a, “Risk Factors,” of our Form 10-K for the year ended December 31, 2007.

Executive Overview

Business Description

We are primarily engaged in developing, acquiring, owning and operating apartment communities in high barrier-to-entry markets of the United States. We believe that apartment communities are an attractive long-term investment opportunity compared to other real estate investments because a broad potential resident base should help reduce demand volatility over a real estate cycle. However, throughout the real estate cycle, apartment market fundamentals, and therefore operating cash flows, are affected by overall economic conditions. We seek to create long-term shareholder value by accessing capital on cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in high barrier-to-entry markets; operating apartment communities; and selling communities when they no longer meet our long-term investment strategy or when pricing is attractive. 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 New England, New York/New Jersey metro, 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. Our communities are predominately upscale, which generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services.

First Quarter 2008 Highlights

	•		We continued to experience earnings growth in the first quarter of 2008 despite slowing economic conditions.
	•		Net income available to common stockholders for the quarter ended March 31, 2008 was $46,275,000, as compared to $44,345,000 for the quarter ended March 31, 2007, an increase of 4.4%. This increase is primarily attributable to growth in income from newly developed and existing communities in the first quarter of 2008.
	•		Our Established Community portfolio (as defined later in this report) experienced a 4.4% increase in net operating income (“NOI”) over the comparable period of 2007, driven by a 4.4% increase in rental revenue partially offset by growth in operating expenses of 4.2%. The rental revenue growth over the comparable period in 2007 is comprised of an increase in rental rates of 4.1% and an increase in occupancy of 0.3%.
	•		In addition to our Established Community year-over-year growth in NOI, our operating results were supported by the growing contribution from communities that are both currently under development as well as those that have recently completed development. We continue to focus on creating value through our development activities and pipeline. We began the construction of one wholly-owned apartment community that, upon completion, is expected to contain 200 apartment homes for a total capitalized cost of $46,500,000 and have 22 communities under construction with a projected total capital cost upon completion of approximately $2,209,700,000 at March 31, 2008.
	•		We executed two separate five-year, interest only secured financings for borrowings of approximately $265,000,000, at a weighted average effective interest rate of 4.78%.
	•		We repurchased 482,100 shares of our common stock through open market transactions under our common stock repurchase program. The shares were repurchased at an average price of $87.42.

Financial Outlook

We expect revenue and NOI growth at our Established Communities to remain positive but to continue to moderate for the remainder of 2008 from the levels achieved over the last few quarters for the remainder of 2008. Our expectation of continued growth in 2008 of NOI for our Established Communities is supported by the apartment demand-supply fundamentals, but tempered by job losses. New demand for rental apartments is supported by an increasing propensity to rent, as reflected in the declining home ownership rate, as well as an increase in the demographic segments of our population with traditionally higher propensities to rent. New rental supply remains modest and the potential amount of new supply from unsold condominiums is less in our markets than in other regions of the country. Our focus on high-barrier to entry markets with constrained supply and favorable demographics has mitigated the impact of the current volatility in the credit and housing markets. These supply constraints limit construction and lessen the impact of an economic slowdown in our markets relative to other areas of the country. The strength of the markets in which we operate has yielded above average employment growth during the first quarter for all but two of our regions, and we expect will allow our markets to continue to achieve greater separation in market performance for the balance of 2008.

We expect our development activity will continue to create long-term value. We currently have approximately $2,210,000,000 under construction (measured by total projected capitalized cost of the communities at completion). As of March 31, 2008, approximately $1,411,041,000 of this development had been funded, with $798,659,000 remaining to be disbursed. For the remainder of 2008, we anticipate our construction activity will remain at or slightly below this level. Given current economic and capital market conditions, we continue to selectively secure new Development Rights, including the acquisition of land for future development. We currently have Development Rights for construction of new apartment communities that would, if developed as expected, total approximately $3,914,000,000 based on total projected capitalized costs at March 31, 2008. During the first quarter of 2008 we commenced the redevelopment of one community on behalf of the Fund (as defined below). We expect to continue to increase our redevelopment activities in 2008, for both wholly owned and Fund-owned assets. While current market conditions with respect to liquidity may impact the types of funding sources used, we believe that our current level of indebtedness, our current ability to service interest and other fixed charges and our large base of unencumbered assets will provide us with the financial flexibility to access the capital necessary to fund our development and redevelopment activities currently underway. We expect to meet these needs from both secured and unsecured debt, as well as asset sales and retained cash.

AvalonBay Value Added Fund, L.P. (the “Fund”) is a discretionary investment fund in which we hold a 15% interest. The Fund has been our principal vehicle for acquiring apartment communities, subject to certain exceptions, since its formation in March 2005. As of April 30, 2008, the total amount invested by the Fund is $784,369,000. Management of the Fund expects to invest approximately $34,000,000 of additional funds to redevelop the assets acquired. The investment period for the Fund concluded in March 2008. Accordingly, no new acquisitions for the Fund will be considered. We are exploring various potential sources and vehicles for funding future acquisitions.

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 are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities. The following is a description of each category:

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

	•		Established Communities (also known as Same Store Communities) are consolidated communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the period ended March 31, 2008, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2007, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
	•		Other Stabilized Communities are all other completed communities that we own or have a direct or indirect ownership interest in, and that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year.
	•		Lease-Up Communities are communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.
	•		Redevelopment Communities are communities where 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 owned through a joint venture arrangement.

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

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

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

As of March 31, 2008, communities that we owned or held a direct or indirect interest in were classified as follows:

		Number of				Number of
		communities				apartment homes
Current Communities
Established Communities:
New England			23				5,351
Metro NY/NJ			18				5,621
Mid-Atlantic/Midwest			19				6,422
Pacific Northwest			6				1,320
Northern California			22				6,207
Southern California			11				3,430
Total Established			99				28,351
Other Stabilized Communities:
New England			10				3,181
Metro NY/NJ			10				2,326
Mid-Atlantic/Midwest			11				2,773
Pacific Northwest			5				1,569
Northern California			10				3,051
Southern California			8				1,780
Total Other Stabilized			54				14,680
Redevelopment Communities			8				2,120
Total Current Communities			161				45,151
Development Communities			22				7,016
Development Rights			46				13,266

Results of Operations

Our year-over-year operating performance is primarily affected by individual geographic market conditions and apartment fundamentals as measured by changes in net operating income of our Established Communities; NOI derived from acquisitions and development completions; the loss of NOI related to disposed communities; and capital market and financing activity. A comparison of our operating results for the three months ended March 31, 2008 and 2007 follows (dollars in thousands):

		For the three months ended
		3-31-08				3-31-07				$ Change				% Change
Revenue:
Rental and other income		$	210,200			$	187,171			$	23,029				12.3	%
Management, development and other fees			1,638				1,444				194				13.4	%
Total revenue			211,838				188,615				23,223				12.3	%
Expenses:
Direct property operating expenses, excluding property taxes			49,564				44,983				4,581				10.2	%
Property taxes			19,850				16,994				2,856				16.8	%
Total community operating expenses			69,414				61,977				7,437				12.0	%
Corporate-level property management and other indirect operating expenses			10,097				8,439				1,658				19.6	%
Investments and investment management			1,719				2,024				(305	)			(15.1	%)
Interest expense, net			28,005				23,186				4,819				20.8	%
Depreciation expense			47,682				42,014				5,668				13.5	%
General and administrative expense			8,119				6,780				1,339				19.7	%
Total other expenses			95,622				82,443				13,179				16.0	%
Equity in income of unconsolidated entities			34				(86	)			120				139.5	%
Minority interest in consolidated partnerships			(106	)			(449	)			343				(76.4	%)
Gain on sale of land			—				545				(545	)			(100.0	%)
Income from continuing operations			46,730				44,205				2,525				5.7	%
Discontinued operations:
Income from discontinued operations			1,720				2,315				(595	)			(25.7	%)
Gain on sale of communities			—				—				—				N/A
Total discontinued operations			1,720				2,315				(595	)			(25.7	%)
Net income			48,450				46,520				1,930				4.1	%
Dividends attributable to preferred stock			(2,175	)			(2,175	)			—				—
Net income available to common stockholders		$	46,275			$	44,345			$	1,930				4.4	%

Net income available to common stockholders increased $1,930,000 or 4.4%, to $46,275,000 for the three months ended March 31, 2008 due primarily to contributions to NOI from newly developed communities and growth in net operating income from Established Communities.

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

NOI does not represent cash generated from operating activities in accordance with U.S. generally accepted accounting principles (“GAAP”). Therefore, NOI should not be considered an alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI necessarily indicative of cash available to fund cash needs. Reconciliations of NOI for the three months ended March 31, 2008 and 2007 to net income for each year, are as follows (dollars in thousands):

		For the three months ended
		3-31-08				3-31-07
Net income		$	48,450			$	46,520
Indirect operating expenses, net of corporate income			8,458				6,996
Investments and investment management			1,719				2,024
Interest expense, net			28,005				23,186
General and administrative expense			8,119				6,780
Equity in income of unconsolidated entities			(34	)			86
Minority interest in consolidated partnerships			106				449
Depreciation expense			47,682				42,014
Gain on sale of real estate assets			—				(545	)
Income from discontinued operations			(1,720	)			(2,315	)
Net operating income		$	140,785			$	125,195

The NOI increases for the three months ended March 31, 2008, as compared to the prior year period, consist of changes in the following categories (dollars in thousands):

		For the three months ended
		3-31-08
Established Communities		$	4,474
Other Stabilized Communities			6,452
Development and Redevelopment Communities			4,664
Total		$	15,590

The NOI increases in Established Communities in 2008 were largely due to continued favorable but moderating apartment market fundamentals. During the three months ended March 31, 2008, we continued to focus on rental rate growth, while maintaining occupancy of at least 95% in all regions. We anticipate that year over year increases in rental rates and overall rental revenue growth will moderate during the remainder of 2008 as compared to the 4.4% growth achieved in the first quarter of 2008, as we expect reduced job growth (demand) as well as a decline in new rental completions in our markets (supply). Expense growth also impacts growth in NOI and we will continue to monitor and manage operating expenses to constrain expense growth.

Rental and other income increased in the three months ended March 31, 2008 as compared to the prior year due to increased rental rates for our Established Communities, coupled with additional rental income generated from newly developed communities.

Overall Portfolio – The weighted average number of occupied apartment homes increased to 38,350 apartment homes for the three months ended March 31, 2008 as compared to 38,047 homes for the prior year period. This change is primarily the result of increased homes available from newly developed and acquired communities, partially offset by communities sold in 2007. The weighted average monthly revenue per occupied apartment home increased to $1,826 for the three months ended March 31, 2008 as compared to $1,709 in the prior year period.

Established Communities – Rental revenue increased $6,551,000, or 4.4%, for the three months ended March 31, 2008 over the prior year period. These increases are due to increased average rental rates and increased economic occupancy. For the three months ended March 31, 2008, the weighted average monthly revenue per occupied apartment home increased 4.1% to $1,897 compared to $1,822 in the prior year period, primarily due to increased market rents. The average economic occupancy increased 0.3% to 96.4% for the three months ended March 31, 2008. Economic occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a community’s gross revenue. Economic occupancy is defined as gross potential revenue less vacancy loss, as a percentage of gross potential revenue. Gross potential revenue is determined by valuing occupied homes at leased rates and vacant homes at market rents.

We experienced increases in Established Communities’ rental revenue in all six of our regions for the three months ended March 31, 2008 as compared to the prior year period. The largest increases in rental revenue were in the Pacific Northwest, Northern California and New England, with increases of 7.9%, 7.7% and 3.5%, respectively, between years. The Metro New York/New Jersey and Northern California regions are the two largest regions and comprise almost half of our Established Community revenue, and therefore are discussed in more detail below.

Northern California, which represented approximately 21.9% of Established Community rental revenue during the three months ended March 31, 2008, experienced an increase in rental revenue of 7.7% as compared to the prior year period. Average rental rates increased by 7.6% to $1,888, and economic occupancy increased 0.1% to 97.1% for the three months ended March 31, 2008. Apartment fundamentals remain strong in Northern California. We expect Northern California to see continued but moderating revenue growth during the remainder of 2008, with growth levels in excess of those expected in other markets in the United States.

The Metro New York/New Jersey region, which accounted for approximately 24.2% of Established Community rental revenue for the three months ended March 31, 2008, experienced an increase in rental revenue of 3.3% for the three months ended March 31, 2008 as compared to the prior year period. Average rental rates increased 3.6% to $2,321, and economic occupancy decreased 0.3% to 96.1% for the three months ended March 31, 2008. Through the first quarter of 2008, job growth remained positive in New York and rental market conditions remained healthy in both New York City and surrounding suburban markets. Despite layoff announcements by major banks and other financial institutions, reported securities industry job losses have been nominal. However, we are watchful for changing in market conditions and the potential that actual job losses may accelerate during the second half of 2008. We will monitor these and other variables that may impact rental revenue during the second half of 2008 and first half of 2009, and will respond with pricing adjustments to optimize revenues.

In accordance with GAAP, cash concessions are amortized as an offset to rental revenue over the approximate lease term, which is generally one year. As a supplemental measure, we also present rental revenue with concessions stated on a cash basis to help investors evaluate the impact of both current and historical concessions on GAAP based rental revenue and to more readily enable comparisons to revenue as reported by other companies. Rental revenue with concessions stated on a cash basis also allows investors to understand historical trends in cash concessions, as well as current rental market conditions.

The following table reconciles total rental revenue in conformity with GAAP to total rental revenue adjusted to state concessions on a cash basis for our Established Communities for the three months ended March 31, 2008 and 2007 (dollars in thousands).

		For the three months ended
		3-31-08				3-31-07
Rental revenue (GAAP basis)		$	155,561			$	149,010
Concessions amortized			1,357				1,328
Concessions granted			(1,144	)			(1,313	)
Rental revenue adjusted to state concessions on a cash basis		$	155,774			$	149,025
Year-over-year % change — GAAP revenue			4.4	%			n/a
Year-over-year % change — cash concession based revenue			4.5	%			n/a

Management, development and other fees increased $194,000, or 13.4% for the three months ended March 31, 2008. The increase was due primarily to increased property management fees from the Fund, as additional communities were acquired.

Direct property operating expenses, excluding property taxes increased $4,581,000 or 10.2% for the three months ended March 31, 2008 as compared to the prior year period, primarily due to the addition of recently developed and acquired apartment homes coupled with expense growth in our Established Communities.

For Established Communities, direct property operating expenses, excluding property taxes, increased $156,000, or 0.5% to $33,991,000 for the three months ended March 31, 2008, due primarily to higher maintenance, office and administrative and redecorating costs offset by decreases in insurance and utility expenses.

Property taxes increased $2,856,000 or 16.8% for the three months ended March 31, 2008, due to overall higher assessments and the addition of newly developed and redeveloped apartment homes. Property taxes are impacted by the size and timing of successful tax appeals in both years.

For Established Communities, property taxes increased by $1,810,000, or 13.4% for the three months ended March 31, 2008 due to both higher assessments throughout all regions and reductions in property taxes realized in 2007 that have not occurred in 2008. Year over year changes are impacted by the size and timing of successful tax appeals. Overall, we expect property taxes in 2008 to continue to increase from 2007 levels due to increased valuations but at a more moderate rate of growth than that experienced in the first quarter of 2008. However, property tax increases are limited by law (Proposition 13) for communities in California. We evaluate property tax increases internally, as well as engage third-party consultants, and appeal increases when appropriate.

Corporate-level property management and other indirect operating expenses increased by $1,658,000, or 19.6% for the three months ended March 31, 2008 over the prior year period due primarily to increased costs relating to corporate initiatives focused on increasing efficiency and enhancing controls at our operating communities, coupled with increased compensation and relocation costs. The 2008 expense includes the set up and ongoing costs related to our Customer Care Center in Virginia Beach, Virginia that we opened in the third quarter of 2007. This office is being used to centralize certain community-related accounting, administrative and customer service functions. The transition is expected to continue through the end of 2008.

Investments and investment management reflects the costs incurred for investment acquisitions, investment management and abandoned pursuit costs, which include costs incurred for development pursuits not yet considered probable for development, as well as the abandonment or impairment of development pursuits, acquisition pursuits and disposition pursuits. Investments and investment management costs decreased during the three months ended March 31, 2008 compared to the prior year period due primarily to decreased abandoned pursuit costs. Abandoned pursuit costs can be volatile, and the costs incurred in any given period may vary significantly in future periods.

Interest expense, net increased $4,819,000 or 20.8% for the three months ended March 31, 2008 due primarily to a decrease in interest income in the three months ended March 31, 2008 as compared to the prior year period. The higher level of interest income in the three months ended March 31, 2007 is due to higher invested cash balances from our January 2007 equity offering during that period as well as higher yields on invested cash during the first quarter of 2007.

Depreciation expense increased $5,668,000 or 13.5% for the three months ended March 31, 2008 primarily due to the completion of development and redevelopment activities.

General and administrative expense (“G&A”) increased $1,339,000 or 19.7% for the three months ended March 31, 2008 primarily due to increased compensation and office and administrative costs.

Gain on sale of land for the three months ended March 31, 2008 decreased from the prior year period due to the absence of land sales in the first quarter of 2008.

Equity in income of unconsolidated entities for the three months ended March 31, 2008 increased from the prior year period due primarily to income from joint ventures where the underlying communities have achieved stabilized operations, gains from our investment in a joint venture formed to develop for sale homes, offset by the sale of a partnership interest in a joint venture in the fourth quarter of 2007.

Minority interest in consolidated partnerships decreased for the three months ended March 31, 2008 as compared to the prior year period due to the conversion and redemption of limited partnership units in 2007, thereby reducing outside ownership interests and the allocation of net income to outside ownership interests.

Income from discontinued operations represents the net income generated by communities sold or qualifying as discontinued operations during the period from January 1, 2007 through March 31, 2008. This income decreased for the three months ended March 31, 2008 due to fewer communities sold or classified as discontinued operations. See Note 7, “Real Estate Disposition Activities,” of our Condensed Consolidated Financial Statements.

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

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

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

	•		gains or losses on sales of previously depreciated operating communities;
	•		extraordinary gains or losses (as defined by GAAP);
	•		depreciation of real estate assets; and
	•		adjustments for unconsolidated partnerships and joint ventures.

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

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

		For the three months ended
		3-31-08				3-31-07
Net income		$	48,450			$	46,520
Dividends attributable to preferred stock			(2,175	)			(2,175	)
Depreciation — real estate assets, including discontinued operations and joint venture adjustments			49,785				44,685
Minority interest expense, including discontinued operations			57				88
Gain on sale of operating communities			—				—
Funds from operations attributable to common stockholders		$	96,117			$	89,118
Weighted average common shares outstanding — diluted			77,440,892				79,930,748
EPS per common share — diluted		$	0.60			$	0.56
FFO per common share — diluted		$	1.24			$	1.11

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

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

		For the three months ended
		3-31-08				3-31-07
Net cash provided by operating activities		$	19,577			$	99,188
Net cash used in investing activities		$	(156,945	)		$	(285,266	)
Net cash provided by financing activities		$	386,522			$	533,946

Liquidity and Capital Resources

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

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

	•		normal recurring operating expenses;
	•		debt service and maturity payments;
	•		preferred stock dividends and DownREIT partnership unit distributions;
	•		the minimum dividend payments on our common stock required to maintain our REIT qualification under the Internal Revenue Code of 1986;
	•		development and redevelopment activity in which we are currently engaged; and
	•		capital calls for the Fund, as required.