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 factors described under "Forward-Looking Statements" below and the risk factors described in Item 1a, "Risk Factors," of our Form 10-K for the year ended December 31, 2011 (our "Form 10-K").

All capitalized terms have the meaning as provided elsewhere in this Form 10-Q.

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. We seek to create long-term shareholder value by accessing capital at 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.

Our strategy is to be leaders in market research and capital allocation, delivering a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best-performing submarkets of the United States. 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. We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets, which are located in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and the Northern and Southern California regions of the United States.

Third Quarter 2012 Highlights

Solid apartment fundamentals continued to support earnings growth in the third quarter of 2012.

† Net income attributable to common stockholders for the quarter ended September 30, 2012 was $86,844,000, an increase of $42,020,000 or 93.7% over the prior year period. The increase is attributable primarily to an increase in NOI from our communities and a gain on the acquisition of an unconsolidated entity in 2012, as well as a decrease in net interest expense.

† For the quarter ended September 30, 2012, Established Communities NOI increased by $8,876,000 or 7.1% over the prior year period. This year-over-year increase was driven by an increase in rental revenue of 5.6% offset by an increase in operating expenses of 2.6% as compared to the prior year period.

We also had liquidity at September 30, 2012, with $664,133,000 in unrestricted cash.

Financial Outlook

Our portfolio results for the quarter ended September 30, 2012 reflect both year-over-year revenue growth, as well as strengthening sequential rental revenue growth. The increase in revenues was driven by an increase in both rental rates and occupancy for our Established Communities as well as portfolio growth and leasing activity from new development. We expect year-over-year revenue growth to continue for the balance of 2012, although at a slower

rate of growth in certain markets. Our expectation of revenue growth for the balance of 2012 is based on continued strong fundamentals in the multifamily sector, supported by a combination of a decline in the homeownership rate, continued growth in the population segments with the highest propensity to rent, and limited supply of new multifamily rental product. However, increases in development activity by others and related supply may moderate future revenue growth in certain markets as further discussed in this Form 10-Q. We believe the current continued favorable apartment fundamentals, combined with a capital markets environment that provides for cost effective access to capital, supports our expanded investment activity as further discussed below.

During the quarter ended September 30, 2012, we completed the construction of two communities with an aggregate of 337 apartment homes for a total capitalized cost of $101,100,000. Also, we started construction of four communities containing 837 apartment homes with an expected aggregate total capitalized cost of $258,900,000. At September 30, 2012, 22 communities were under construction with a total projected capitalized cost of approximately $1,802,100,000. As of September 30, 2012, approximately $840,866,000 of the capital for this development was invested, with $961,234,000 remaining to invest.

During the three months ended September 30, 2012, we started the redevelopment of The Avalon located in Bronxville, NY. The Avalon contains 110 apartment homes and is expected to be redeveloped for a total capitalized cost of $8,300,000, excluding costs incurred prior to redevelopment. At September 30, 2012, there were seven communities under redevelopment, with an expected investment of approximately $72,300,000, excluding costs incurred prior to the start of redevelopment, with $26,878,000 remaining to be invested.

Cash on hand and available capital from our Credit Facility are sufficient to provide the capital necessary to fund our committed development and redevelopment activities as of September 30, 2012. We believe that our balance sheet, as measured by our current level of indebtedness, our current ability to service interest and other fixed charges and our current limited use of financial encumbrances (such as secured financing), provides adequate access to liquidity from the capital markets through the issuance of corporate securities (which could include unsecured debt and/or common and preferred equity) and secured debt, as well as other sources of liquidity such as from joint ventures or from our retained cash, to meet any reasonably foreseeable liquidity needs as they arise. See the discussion under Liquidity and Capital Resources.

While we continue to grow principally through our demonstrated core competency of developing wholly owned assets, we also acquire operating assets. During the three months ended September 30, 2012, we purchased our joint venture partner's 70% interest in Avalon Del Rey, a 309 apartment home community, for $67,200,000. See further discussion under Unconsolidated Real Estate Investments and Off-balance Sheet Arrangements below.

Communities 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. While we establish the classification of communities on an annual basis, we may update the classification of communities during the calendar year to the extent that our plans with regard to the disposition or redevelopment of a community change during the year. 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 September 30, 2012, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2011, 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. Redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed either $5,000,000 or 10% of the community's pre-redevelopment basis and is expected to have a material impact on the operations of the community, including occupancy levels and future rental rates.

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 control the land through a ground lease or 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.

We currently lease our corporate headquarters located in Arlington, Virginia under an operating lease. The lease term ends in 2020, subject to two five year renewal options. All other regional and administrative offices are leased under operating leases.

As of September 30, 2012, 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                              28             7,066
Metro NY/NJ                              23             7,893
Mid-Atlantic                             11             4,748
Pacific Northwest                         8             1,908
Northern California                      18             5,220
Southern California                      16             4,899
Total Established                       104            31,734

Other Stabilized Communities:
New England                              10             1,823
Metro NY/NJ                              11             3,762
Mid-Atlantic                              9             3,465
Pacific Northwest                         6             1,535
Northern California                      10             2,904
Southern California                      20             5,238
Total Other Stabilized                   66            18,727

Lease-Up Communities                      6             1,224

Redevelopment Communities                 7             1,802

Total Current Communities               183            53,487

Development Communities                  22             6,614

Development Rights                       31             8,837

Results of Operations

Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and apartment fundamentals and is reflected in changes in NOI of our Established Communities; NOI derived from acquisitions and development completions; the loss of NOI related to disposed communities; and capital market and financing activity. A comparison of our operating results for the three and nine months ended September 30, 2012 and 2011 follows (unaudited, dollars in thousands):

                               For the three months ended                      For the nine months ended
                       9-30-12     9-30-11    $ Change    % Change     9-30-12     9-30-11    $ Change    % Change

Revenue:
Rental and other
income                $ 269,371   $ 241,286   $  28,085       11.6 %  $ 773,424   $ 698,938   $  74,486       10.7 %
Management,
development and
other fees                2,533       2,433         100        4.1 %      7,852       7,085         767       10.8 %
Total revenue           271,904     243,719      28,185       11.6 %    781,276     706,023      75,253       10.7 %

Expenses:
Direct property
operating expenses,
excluding property
taxes                    58,240      56,145       2,095        3.7 %    166,644     159,493       7,151        4.5 %
Property taxes           26,184      23,741       2,443       10.3 %     75,641      70,908       4,733        6.7 %
Total community
operating expenses       84,424      79,886       4,538        5.7 %    242,285     230,401      11,884        5.2 %

Corporate-level
property management
and other indirect
operating expenses        9,935      10,162        (227 )     (2.2 )%    31,917      29,553       2,364        8.0 %
Investments and
investment
management expense        1,582       1,328         254       19.1 %      4,526       3,860         666       17.3 %
Expensed
acquisition,
development and
other pursuit costs         608         633         (25 )     (3.9 )%     1,749       2,636        (887 )    (33.6 )%
Interest expense,
net                      33,985      42,659      (8,674 )    (20.3 )%   100,804     130,174     (29,370 )    (22.6 )%
Loss on
extinguishment of
debt, net                     -           -           -          -        1,179           -       1,179      100.0 %
Depreciation
expense                  65,998      60,893       5,105        8.4 %    193,434     180,953      12,481        6.9 %
General and
administrative
expense                   8,372       6,087       2,285       37.5 %     26,398      21,524       4,874       22.6 %
Impairment loss               -      14,052     (14,052 )   (100.0 )%         -      14,052     (14,052 )   (100.0 )%
Gain on sale of
land                          -     (13,716 )    13,716     (100.0 )%      (280 )   (13,716 )    13,436      (98.0 )%
Gain on acquisition
of unconsolidated
entity                  (14,194 )         -     (14,194 )    100.0 %    (14,194 )         -     (14,194 )   (100.0 )%
Total other
expenses                106,286     122,098     (15,812 )    (13.0 )%   345,533     369,036     (23,503 )     (6.4 )%

Equity in income of
unconsolidated
entities                  5,553       2,615       2,938      112.4 %      9,801       3,513       6,288      179.0 %

Income from
continuing
operations               86,747      44,350      42,397       95.6 %    203,259     110,099      93,160       84.6 %

Discontinued
operations:
Income from
discontinued
operations                    -         327        (327 )   (100.0 )%     2,870         631       2,239      354.8 %
Gain on sale of
communities                   -           -           -          -       95,049       7,675      87,374    1,138.4 %
Total discontinued
operations                    -         327        (327 )   (100.0 )%    97,919       8,306      89,613    1,078.9 %

Net income               86,747      44,677      42,070       94.2 %    301,178     118,405     182,773      154.4 %

Net loss
attributable to
noncontrolling
interests                    97         147         (50 )    (34.0 )%       334         132         202      153.0 %

Net income
attributable to
common stockholders   $  86,844   $  44,824   $  42,020       93.7 %  $ 301,512   $ 118,537   $ 182,975      154.4 %

Net income attributable to common stockholders increased $42,020,000 or 93.7%, to $86,844,000 for the three months ended September 30, 2012 and increased $182,975,000 or 154.4% to $301,512,000 for the nine months ended September 30, 2012. The increase for the three months ended September 30, 2012 over the prior year period is due primarily to an increase in Net Operating Income ("NOI") from existing and newly developed and acquired communities, a gain on the acquisition of an unconsolidated entity, and a decline in net interest expense. The increase for the nine months ended September 30, 2012 is due primarily to an increase in asset sales and associated gains in 2012 as compared to the prior year period, as well as an increase in NOI and decrease in net interest expense.

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, and excluding corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, investments and investment management expenses, expensed

development and other pursuit costs, net interest expense, gain (loss) on extinguishment of debt, general and administrative expense, joint venture income
(loss), depreciation expense, impairment loss on land holdings, gain on sale of real estate assets and income from discontinued operations.

NOI does not represent cash generated from operating activities in accordance with 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 indicative of cash available to fund cash needs. Reconciliations of NOI for the three and nine months ended September 30, 2012 and 2011 to net income for each period are as follows (unaudited, dollars in thousands):

                                              For the three months ended          For the nine months ended
                                              09-30-12          09-30-11          09-30-12          09-30-11

Net income                                 $       86,747    $       44,677    $      301,178    $      118,405
Indirect operating expenses, net of
corporate income                                    7,396             7,743            24,049            22,490
Investments and investment management
expense                                             1,582             1,328             4,526             3,860
Expensed acquisition, development and
other pursuit costs                                   608               633             1,749             2,636
Interest expense, net                              33,985            42,659           100,804           130,174
Loss on extinguishment of debt, net                     -                 -             1,179                 -
General and administrative expense                  8,372             6,087            26,398            21,524
Equity in income of unconsolidated
entities                                           (5,553 )          (2,615 )          (9,801 )          (3,513 )
Depreciation expense                               65,998            60,893           193,434           180,953
Impairment loss                                         -            14,052                 -            14,052
Gain on sale of real estate assets                      -           (13,716 )         (95,329 )         (21,391 )
Income from discontinued operations                     -              (327 )          (2,870 )            (631 )
Gain on acquisition of unconsolidated
entity                                            (14,194 )               -           (14,194 )               -
Net operating income                       $      184,941    $      161,414    $      531,123    $      468,559

The NOI changes for the three and nine months ended September 30, 2012, as compared to the prior year periods, consist of changes in the following categories (unaudited, dollars in thousands):

                                        For the three months ended      For the nine months ended
                                                 9-30-12                         9-30-12

Established Communities                $                      8,876    $                    29,934

Other Stabilized Communities                                  4,704                         14,294

Development and Redevelopment
Communities                                                   9,947                         18,336

Total                                  $                     23,527    $                    62,564

The increases in our Established Communities' NOI for the three and nine months ended September 30, 2012 are due to a combination of increased rental revenues offset somewhat by increased operating expenses. For the balance of 2012, we expect continued rental revenue growth over the prior year period, offset partially by an expected increase in operating expenses.

Rental and other income increased in the three and nine months ended September 30, 2012 as compared to the prior year periods due to additional rental income generated from newly developed and acquired communities and increases in rental rates at our Established Communities.

Overall Portfolio - The weighted average number of occupied apartment homes for consolidated communities increased to 43,597 apartment homes for the nine months ended September 30, 2012 as compared to 42,502 homes for the prior year period. This increase is primarily due to new homes from increased development activity and acquisitions, offset by communities sold in 2011 and 2012. The

weighted average monthly revenue per occupied apartment home increased to $1,983 for the nine months ended September 30, 2012 as compared to $1,895 in the prior year period.

Established Communities - Rental revenue increased $10,418,000, or 5.6% and $32,431,000, or 6.0%, for the three and nine months ended September 30, 2012, respectively, over the prior year periods. The increase for the three months ended September 30, 2012 is due to increases in both rental rates of 5.1% and economic occupancy of 0.5%. The increase for the nine months ended September 30, 2012, is due to an increase in rental rates of 5.8% and economic occupancy of 0.2%. 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 rental revenue from Established Communities in all six of our regions for the nine months ended September 30, 2012 over the prior year period. Information for each of our regions is discussed in more detail below.

The Metro New York/New Jersey region, which accounted for 30.5% of Established Community rental revenue for the nine months ended September 30, 2012, experienced an increase in rental revenue of 5.6% as compared to the prior year period. Average rental rates increased 5.3% to $2,550, and economic occupancy increased 0.3% to 96.4% for the nine months ended September 30, 2012. On a sequential basis, Metro New York/New Jersey reported rental revenue growth of 2.0% during the third quarter of 2012. Our Metro New York/New Jersey portfolio includes assets located in Central and Northern New Jersey, New York City and its northern suburbs, and Long Island. Solid job growth in the technology sector continues to support the improvement in apartment fundamentals in New York City and Northern New Jersey. Revenue growth for the region may be impacted somewhat by the ongoing contraction in the financial services sector, primarily in the suburbs of Westchester, Central New Jersey and Long Island.

The New England region accounted for 21.9% of the Established Community rental revenue for the nine months ended September 30, 2012 and experienced a rental revenue increase of 4.6% over the prior year period. Average rental rates increased 5.2% to $2,067, offset partially by a decrease in economic occupancy of 0.6% to 95.5% for the nine months ended September 30, 2012, as compared to the prior year period. Sequential revenue increased over the prior quarter by 2.4% during the three months ended September 30, 2012. The New England region's growth is driven by a renewed expansion in employment for the technology sector, primarily in the greater Boston area, offset somewhat by weakness in the financial services sector impacting the Fairfield-New Haven area. We expect continued but moderating revenue growth, with the increasing affordability of home ownership and future supply from new development impacting the longer term outlook.

Northern California accounted for 16.8% of the Established Community rental revenue for the nine months ended September 30, 2012 and experienced a rental revenue increase of 10.3% over the prior year period. Average rental rates increased 10.3% to $2,125, while maintaining economic occupancy at 96.1% for the nine months ended September 30, 2012 as compared to the prior year period. The Northern California region also continued to show strong sequential rental revenue growth in our markets, increasing 3.2% over the second quarter of 2012. The growth in rental revenue is driven by the strength of Northern California's . . .