AvalonBay Communities Annual Report 2001

FY2001 Annual Report · AvalonBay Communities
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A V A L O N B A Y

C O M M U N I T I E S ,   I N C .  

A N N U A L   R E P O R T   2 0 0 1

O u r   c o m m i t m e n t   t o

Planned Evolution

i s   a   k e y   t o   o u r   s u c c e s s

AvalonBay’s success is a reflection of our commitment to

four principles known collectively as Planned Evolution.

These principles drive our thinking and define our

leadership position in the REIT sector.

C O V E R P H O T O :
Avalon Towers on the Peninsula
Mountain View, CA

S T E P S

T O

P L A N N E D

E V O L U T I O N

S T R A T E G I C

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R E F I N I N G

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F O C U S

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C U S T O M E R

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K N O W I N G

A N D

S E R V I N G

O U R C U S T O M E R

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P R O D U C T

O P T I M I Z I N G

E V O L U T I O N
A S S E T

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B A S E

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E V O L U T I O N

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A S S O C I A T E
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F I N A N C I A L

F O U N D A T I O N

F O R

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E V O L U T I O N

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T O O U R

S H A R

E H O L D E

R

S

AvalonBay performed exceptionally well in
2001, a year of many changes and challenges.
The economy officially entered a recession,
the ﬁrst in a decade; the real estate investment
trust (REIT) industry saw continued consol-
idation; customer demands shifted; and
priorities were re-evaluated as the events of
this year caused an internal and external
assessment for everyone.

The conﬂuence of these factors created new
hurdles not only for AvalonBay and the entire
REIT sector, but for companies in every
industry. Despite these hurdles, our perform-
ance in 2001 is best described through our
achievements, which are a result of a commit-
ment to thoughtful change and continuous
improvement, or as we view it, Planned
Evolution. Throughout this letter I will update
you on our Accomplishments in 2001 and
our commitment to Planned Evolution as
well as discuss our Outlook for the Future.

Accomplishments in 2001 
Management succession was an important
achievement for the year. Dick Michaux, our
Chairman and one of the original founders
of the Company, retired. Dick is a tremendous
leader, a man of strong character and a great
mentor. He will be missed both here at 

AvalonBay and by the multifamily industry 
as a whole, for which he served in many
leadership capacities.

Dick’s retirement was the last step in a
planned management succession that, in 
early 2001, included the promotions of
Tim Naughton to Chief Operating Officer,
Sam Fuller to Executive Vice President of
Development and Construction, and Leo
Horey to Senior Vice President of Property
Operations, each of whom has over ten years
tenure with AvalonBay. I have great conﬁ-
dence in this team, a conﬁdence that has also
been expressed by investors and associates
and validated by our performance in 2001.

I thank our associates for their dedication and
commitment during a demanding year that
collectively tested our intellect and capabilities.

AvalonBay’s performance in 2001

can be characterized by great

accomplishments that are a result of

a commitment to thoughtful change

and continuous improvement, or as

we view it, Planned Evolution.

A V A L O N B A Y 2 0 0 1

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AvalonBay’s 2001 achievements included:

1. Outsized Performance. AvalonBay’s growth
in per share funds from operations (FFO) and
net operating income (NOI) from Established
Communities again outpaced the multifamily
sector averages.We achieved nearly 10%
growth in FFO per share, rising to $4.06 in
2001 from $3.70 in 2000, and recorded
Established Communities NOI growth of
7.5% in 2001. Our growth rates for both FFO
and NOI have signiﬁcantly outperformed the
multifamily sector average in 2001 and, more
importantly, over the last seven years.

E s ta b l i s h e d
C o m m u n i t i e s
N O I   G r ow t h

7.5%




7.2%

5.2%

3.3%


F F O   P e r   S h a r e  
G r ow t h

10.7%

9.7%

7.4%

-0.7%

15%

12%

9%

6%

3%

0%

8%

7%

6%

5%

4%

3%

2%

1%

0%

2001

7-Year 
Average

2001

7-Year
Average

AvalonBay          
Multifamily Sector Average



AvalonBay          

Multifamily Sector Average

Source: NAREIT and 
individual company data

Source: Green Street Advisors, Inc.

B R Y C E B L A I R C H A I R M A N ,   C E O ,   A N D P R E S I D E N T

2. Balance sheet optimization. Adjustments to
our capital structure contributed to outsized
earnings growth in 2001 that will extend into
2002. As part of our ongoing commitment to
a strong ﬁnancial foundation, we continued
to match our long-term assets with long-term
capital.We also maintained sufficient equity
in our capital structure to address current
business and economic risks.We seek to 
efficiently manage these fundamentals, and in
2001, we rebalanced our debt and preferred
levels through the redemption of $220 million
of relatively high-cost preferred stock.This
was replaced with 10-year unsecured debt 
at historically low interest rates, improving
coverage ratios while maintaining ﬁnancial
and operational ﬂexibility. Finally, we ended
the year with approximately $123 million in
cash and full capacity on our line-of-credit
that will beneﬁt earnings in 2002 as this cash
is invested in accretive assets.

A V A L O N B A Y 2 0 0 1

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3. Sector-leading value creation. In 2001 we 
pursued our high barrier-to-entry strategy by
expanding our presence in our core markets,
constructing six new communities consisting
of approximately 1,700 apartment homes.
These communities were completed for a
total cost of $274 million and are expected to
generate property level net operating income,
on a weighted average basis, that is 10.7% 
of the capital invested in developing these
assets, creating signiﬁcant value. As part of
AvalonBay’s ongoing effort to focus our
portfolio in markets where we have strong
competitive advantages, we sold seven 
communities in 2001, exiting two non-core
markets (Portland, Oregon and Hartford,

E s t i m at e d   N AV  
p e r   S h a r e   G r ow t h

12%

11.5%

9%

6%

3%

0%

4%


7-Year Average 
Annual Growth

AvalonBay          
Multifamily Sector

Source: Green Street Advisors, Inc.

Connecticut) and disposing of certain older,
non-core assets.These sales raised $240
million, which is being reinvested into newer
assets in our core markets to enhance our
overall portfolio. Our focus on value 
creation is illustrated by our sector-leading
growth in estimated net asset value (NAV).

Planned Evolution  
The success of AvalonBay is based on our
ability to build an organization that thrives by
practicing disciplined analysis, measured risk
taking, and continuous learning. Change is
inevitable, reﬂecting the often-shifting prefer-
ences of our current and future residents, as
well as changes in our markets and ﬂuctuations
in the economy.We believe, however, that
change should occur within the context of a
strategic plan and then be executed in accor-
dance with that plan.We believe that change
should not be broad and sweeping—that
change should be evolutionary, not revolu-
tionary. Revolutionary change is usually the
product of ﬂawed business models or poor
business planning. Evolutionary change is the
characteristic of a long-term market leader.

At AvalonBay, we work not only to keep
pace with change, but also to embrace it,
anticipate it, stay ahead of it, and most
importantly, ﬁnd opportunity in it.This is
Planned Evolution.

A V A L O N B A Y 2 0 0 1

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The concept of Planned Evolution is based on
four key elements or principles. By focusing
on these principles, we create an environ-
ment of consistent and continuous
improvement in all aspects of the Company.

Our commitment to these principles
provides competitive advantages, which we
believe contribute to outsized ﬁnancial returns
over the long term.These principles facilitate
steady and strategic adjustments that keep the
Company positioned at the forefront of the
REIT industry. These principles, as described
below, guide our thinking and represent the
essence of our Company.

Strategic Evolution Enhancing Our Strategic
Focus—Strategic planning has always been an
integral part of our business activities. In 2000,
we completed a comprehensive strategic plan.
In 2001, we spent considerable time review-
ing and updating our plan in order to
sharpen its focus, given the changes in the

external environment, as well as to more pre-
cisely reﬂect our increased focus on customer
knowledge and service.The outcome of this
review was a reinforced commitment to our
strategic vision of more deeply penetrating 
our core markets through a broader range of
products and services with an increased commit-
ment to our customer. In short, to be the
Customer-Focused Market Leader.

Customer Evolution Knowing and Serving
Our Customer —During 2001, we expanded
our commitment in this area and have chal-
lenged the entire organization to rethink
many aspects of our customer relationship.
This initiative is far reaching and will have
many implications for how we approach our
associates and our residents. Not only will
our customer-centric approach impact our
product selections and the services we offer,
but it will also inﬂuence how we recruit,
train, and compensate our associates, as well
as the types of systems we use to receive 
feedback from and communicate with our
residents.This is a major long-term commit-
ment of the Company that is critical to our
future success. I look forward to continuing
to update you on our progress in this 
important area.

A V A L O N B A Y 2 0 0 1

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Product Evolution Broadening Our Product
Offering —As our customer evolves, so does
our product line.The communities that we
create and acquire reﬂect the input from our
customers and the collective experience 
we have gained through the successful
completion of over $3.0 billion in property
development and acquisitions over the past
eight years. Our product line has evolved
gradually and will continue to evolve as we
strive to always improve and enhance our
portfolio of communities without moving
beyond our core competencies. Our products
today range from suburban garden apartments
to urban high-rises. Our goal is to continue
to offer a varied product line to meet the
diverse needs of our customer.

Associate Evolution Cultivating Our Talent—
Developing our associates is a long-standing
foundation of the AvalonBay culture.We hire
the best and the brightest people, from both
inside and outside the real estate sector.We
provide comprehensive training, professional
development opportunities and encourage
associates to learn and grow with the
Company. We strive to ﬁnd challenging and
stimulating assignments that will expand their
capabilities so they are ready to advance in
their careers within AvalonBay.

The impact of these efforts is reﬂected in 
the extensive tenures of our associates, who
provide invaluable legacy knowledge and
understanding of our business, philosophy,
and culture.We are proud of our associates
and their accomplishments, and we will 
continue to work hard to ensure that our
people remain one of our most valuable 
competitive advantages.

These four principles of our Company’s
evolution—Strategy, Customer, Product,
and Associates—are the essence of past
and future success. These principles are
who we are and what we do.

Outlook for the Future
While the near-term outlook remains chal-
lenging, the long-term outlook has never
looked brighter.Through much of 2002, the
effect of the current recession will continue 

Our goal is not to be exclusively

focused on suburban or urban

products, but to offer a varied

product line to meet the diverse

needs of our customers.

A V A L O N B A Y 2 0 0 1

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to impact our markets and our property
performance. Downturns are an inevitable
part of the business cycle.They cannot be
avoided, but they can be mitigated. It is often
said that the best test of management and of
management’s strategy is how they perform
through all phases of the business cycle.
During 2001, we demonstrated our ability 
to navigate through difficult economic
conditions, delivering sector-leading FFO
growth while maintaining one of the strongest
balance sheets in the sector. During 2002, we
will again remain proactive in anticipating the
changing economic and market conditions.
Our focus on optimizing near-term results,
however, will not come at the expense of
long-term prospects.

I believe extraordinary opportunities lie ahead
for AvalonBay. Positive demographic and
lifestyle trends, underlying market fundamen-
tals in our core markets, and the attractiveness
of our Class A communities are all elements
that have led to and will continue to sustain
our market leadership position. AvalonBay
will meet future opportunities with an
unmatched focus on the customer, superior
products, and the ﬁnancial strength necessary

to optimize near-term results, while position-
ing us for long-term growth.

With the principles of Planned Evolution as
our guide, we will continue to pursue our
strategic vision of becoming the Customer-
Focused Market Leader in our select markets.
Your support and commitment, combined
with that of management and our associates,
will ensure we remain an industry leader. In
this report we share with you our focus on
Planned Evolution, as we believe it is a key to
our past and future success.Throughout the
following pages, you will learn more about
our principles of Planned Evolution and how
these principles, together with our dedication
to ﬁnancial strength, produce strong results.
Our hope is that you will be left with a better
understanding of who we are, what we stand
for, and our vision for success.

Thank you for your continued support.

Sincerely,

Bryce Blair
Chairman, CEO and President

A V A L O N B A Y 2 0 0 1

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AvalonBay’s strategic evolution encompasses
every aspect of customer, product, and 
associate evolution. Strategic evolution also
encompasses the changes in our markets 
and the economy. At AvalonBay we believe
strategic evolution becomes Planned Evolution
through forward-thinking and preparedness.
It requires a commitment to our ﬁnancial
principles and our business strategy. It requires
a commitment to delivering the highest 
quality product to our chosen markets and a
commitment to delivering superior service to
our customers. Strategic evolution ensures we
succeed at our corporate purpose of
Enhancing the Lives of our Residents today and
in the future.To effectively accomplish this,
we must continually Refine our Strategic
Focus, through which we will provide 

Our strategic evolution constantly

conﬁrms the trueness of our 

course, even under changing 

market conditions. Our goal

remains to become the Customer-

Focused Market Leader.

growth opportunities for our associates,
enhance performance, and provide attractive
long-term risk-adjusted returns.

Market Intelligence Leads to Stronger 

Competitive Position 
To sustain long-term success, we must stay
ahead of changing market conditions. Our
strategic plan includes a preparedness strategy
that helps us respond to possible shifts in the
economy, our markets or customer prefer-
ences.This strategy provides guidance based
on certain ‘tripwires’ or leading indicators,
including economic, capital markets and real
estate metrics, that could impact our business
or strategy.The market intelligence we gain
enables us to respond quickly to growth
opportunities or scale back development
ahead of a slowing market.

In 2001, we adjusted to changing economic
conditions by sharpening our strategic 
focus and reﬁning our preparedness plan.
We established more sophisticated tools 
to systematically assess leading indicators.
These tools assist in monitoring certain
indicators for both the broader economy 
and AvalonBay’s core markets.

A V A L O N B A Y 2 0 0 1

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A V A L O N O N T H E S O U N D N E W R O C H E L L E , N E W Y O R K

A V A L O N O N T H E S O U N D N E W R O C H E L L E , N E W Y O R K

A 24-story high-rise building with views of Long Island Sound, Avalon on

A 24-story high-rise building with views of Long Island Sound, Avalon on

the Sound contains 412 apartment homes and ground floor retail space.

the Sound contains 412 apartment homes and ground floor retail space.

Located adjacent to the Metro-North rail station, residents are in Midtown

Located adjacent to the Metro-North rail station, residents are in Midtown

Manhattan in only 30 minutes. Avalon on the Sound provides a luxurious

Manhattan in only 30 minutes. Avalon on the Sound provides a luxurious

living environment with the best amenity of all—the time to enjoy it.

living environment with the best amenity of all—the time to enjoy it.

Our Purpose is to

Our purpose is to

Enhance the Lives
Enhance the
of our Residents.
Lives of our
Residents.

We pursue our purpose with a 

• Commitment to Integrity

• Spirit of Caring

We pursue our purpose with a 
• Focus on Continuous Improvement

• Commitment to Integrity

• Spirit of Caring

• Focus on Continuous Improvement

The comprehensive inputs produce values
and trends that provide a general summary of
existing market conditions and act as a short-
term forecast of performance, which allows
us to adapt our strategy accordingly. This
furthers AvalonBay’s goal of optimizing our
performance during all phases of the business
cycle, while remaining true to our vision of
more deeply penetrating our chosen markets
with an increased focus on the customer.

Geographic Focus Facilitates 
Market Leadership
Over the last several years, we have narrowed
our focus to 17 core markets from 27 in
1998, with the goal of establishing a market
leadership position in each one. In each
market, we have teams that understand the
local economy and the dynamics of the local
luxury apartment market, demographics and
customer requirements, enabling them to
identify local developing trends.These ‘local
sharp-shooters’ are essential to our high
barrier-to-entry strategy as they have the
inherent knowledge to identify local market
opportunities, manage the approval process,
and deliver products and services that exceed
customer expectations.

Our ‘local sharp-shooters,’ with their

local market knowledge, are essential

to our high barrier-to-entry strategy.

As we have demonstrated in the past, we
apply the same discipline to our development
activities as we do to our markets, not hesi-
tating to delay or even suspend construction
in changing market conditions. However, we
ﬁrmly believe that difficult times provide
opportunities for those companies that are
prepared.We have one of the strongest
balance sheets in the industry and are posi-
tioned to initiate prudent expenditures for
land, development, acquisitions and property
rehabilitation.While acknowledging short-
term economic softness, we are positioning
for growth by selectively building today in
key markets with strong fundamentals that
we expect will improve late 2002 and 2003.

As we continue to adhere to the principle of
Strategic Evolution, we believe AvalonBay will
continue to achieve outsized performance in
the future.

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K N O W I N G

A N D S E R V I N G

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C U S T O M E R

A guiding principle of Planned Evolution
is Knowing and Serving our Customer. To 
more deeply penetrate our high barrier-to-
entry markets requires a customer-centric
approach. As such, we seek to understand the
demographics of our existing customers,
the demographics of potential customers,
and how they will change over time.We
continually research and monitor the needs
of our customers to offer the most desirable
products and related services. From our
research, we learned how diverse our resi-
dents really are, revealing a large population
in our core markets that we will attract as
we expand our presence.

A n n ua l   G r ow t h   i n   N u m b e r   o f   R e n ta l
H o u s e h o l d s   b y  A g e   G r o u p

56-65

46-55

Under 25

26-35

36-45

66+

2000

1500

1000

500

0

-500

-1000

-1500

Th o u s a n d s

1999-2000       Projected 2000-2010

Source: U.S. Census Bureau

Our Customer Base Will Evolve with
Changing Demographics 
Historically, AvalonBay’s target customer has
been between the ages of 25 and 44. However,
over the next ten years the projected growth
in rental households will come from ‘empty
nester’ baby boomers aged 46 to 65 and, to a
lesser extent, by ‘echo boomers’ under age
25. Strong household growth in the over
$50,000 income level bodes well for the dis-
cretionary renter segment. Additionally,
robust growth in singles and married couples
without children should also fuel rental-
housing demand over the next ten years.We
see the renter population becoming increas-
ingly diverse and segmented in terms of age,
income, household type and ethnicity. In
addition to creating growth opportunities,
these demographic shifts will require the
development of new, more targeted product
and service offerings. Regardless of their 
age, income or ethnicity, these emerging
customers show consistent appreciation 
for high-quality communities in premier
locations, putting AvalonBay’s communities 
in an ideal position.

A V A L O N B A Y 2 0 0 1

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A V A L O N AT A R L I N G T O N S Q U A R E A R L I N G T O N , V I R G I N I A

With 510 apartment homes completed, Avalon at Arlington Square is

a neo-traditionally designed community built around a “town square,”

creating the spirit of an old-fashioned neighborhood. The community

consists of four-story stacked flats, townhomes with private garages

and unique live/work townhomes that allow small-business owners to

live above their ground floor office/retail space.

B R Y C E B L A I R
C H A I R M A N ,   C E O A N D P R E S I D E N T

Q We understand that AvalonBay is undertaking a large customer-focused initiative. Describe

this initiative.

A Our focus on the customer is a challenge we have made to the entire organization to rethink

all aspects of our business and ensure all our actions, internally and externally, drive

AvalonBay towards excellence in our customer relationships. As our customer is continually

evolving, we must adapt in our thinking or we risk weakening the relationships we value.

That is not a risk we are willing to take.

Q What do you hope to gain from AvalonBay’s increased focus on the customer?

A There are many beneﬁts to our initiatives—some are easily quantiﬁable, others are driven by our

instinct and judgment. Some of the beneﬁts we expect from our increased customer focus include:

• Lower resident turnover at the community level, which should result in lower redecorating

and marketing costs.

• Greater rental rate growth as we deliver on what residents value.

• Increased referrals from satisfied customers.

This increased focus on customer knowledge and service translates into enhanced

performance, ultimately driving greater shareholder return.

Q How do you ensure AvalonBay stays ahead of customer demands?

A We conduct annual resident surveys to determine how we are doing and to identify customers’

needs. We also conduct focus groups in each of our markets to make sure that we hear our

customers directly, face to face. The survey data, when combined with the personal customer

interaction, gives us the feedback necessary to stay ahead of our customers’ needs and wants.

N e t   R e n ta l   H o u s e h o l d   G r o w t h  
P r o j e c t e d   b y   I n c o m e   D i s t r i b u t i o n

Income
Segment
(in thousands)

AvalonBay
Residents 
2001

US Renter
Household
Increase
(in thousands)
2000-2010

Annual 
Growth
Rate
2000-2010

$25

$25-50

$50-75

$75-100

>$100

Total

6.7%

20.0%

24.4%

20.0%

28.9%

100%

680

1,201

782

379

346

3,338

0.4%

1.1%

1.8%

2.5%

2.8%

1.0%

Sources: RFA/Economy.com and AVB Resident Survey (November 2001)

Focusing on the Customer
Over the past year AvalonBay has put a high
priority on understanding our customers.
We conducted focus groups with existing
and prospective residents, completed compre-
hensive resident surveys, and are incorporating
the results of our research into new product
designs and service offerings.We appointed
our ﬁrst-ever Vice President for Customer
Service and created an Executive Steering
Committee for Customer Service to ensure
Company initiatives are customer focused.

The knowledge we gain from our residents
impacts the products we develop and the
services we offer. AvalonBay continues to
widen its product line to serve an increas-
ingly diverse customer base—one size does
not ﬁt all. However, our product line exten-
sions are evolving from a solid base of core
capabilities. As we listen to our customers,
we learn. For example, our 2001 Resident
Survey tells us business centers are not as
important to our residents today as they 
were in the past.This reﬂects the increased
percentage of computers in the home.With
information like this, amenities can be
changed or added in order to enhance the
lives of our residents with modest incremental
risk to AvalonBay. As we further penetrate
our markets, foremost in our mind is the
AvalonBay customer.

Our commitment to Knowing and Serving
Our Customer will always remain a core part
of our business and an essential component
of every community we build and operate.

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A S S E T

B A S E

AvalonBay’s strategy has always been to target
high barrier-to-entry markets that have the
best long-term demand and supply funda-
mentals. Our core markets are areas where
AvalonBay has both competitive advantages
and where there are signiﬁcant constraints to
new supply.We continue to expand our
product in these markets to create high
returns while serving the needs and demands
of our residents.This product evolution has
expanded our original skill set from develop-
ers and operators of garden communities,
to now include townhome, mid-rise and
high-rise communities in our portfolio of
developments.The broadening of our portfolio
was based on our core competencies and has
occurred in response to changing customer
needs over the past ﬁve years.

P r o d u c t   M i x   o f   P o r t f o l i o







Garden
86%

Garden
64%

Mid/High-Rise
14%

Townhome
6%

Mid/High-Rise
30%

Diversification of Products
This expansion in the types of communities
we build is a reﬂection of the evolving desires
of upscale renters in our markets and sub-
markets.With different types of communities
located in suburban and urban settings, and
varying packages of on-site amenities and
services, we are able to tailor our products 
to different segments of our customer base.
Meeting the highest standards for design,
amenities, location and service, all of our
product offerings provide the discretionary
renter with a well-designed, well-located
apartment that is truly upscale.

AvalonBay Products and Communities 
Within this annual report, you will ﬁnd 
photographs of four communities that we 
completed in 2001, each unique in its product
type and in the consumer insight it represents.
These communities reﬂect how we continue
to evolve and enhance our products and
capabilities in our effort to provide the highest
quality living experience to our residents.

Avalon at Arlington Square, Arlington,VA
Avalon at Arlington Square, with 510 homes
completed, brings the traditional neighbor-
hood back, offering diverse residential and
live/work townhomes in a neo-traditional
plan.The majority of residents are ‘renters-

A V A L O N B A Y 2 0 0 1

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A V A L O N AT F L O R H A M P A R K F L O R H A M P A R K ,   N E W J E R S E Y

Avalon at Florham Park consists of 270 townhomes, featuring

one-, two- and three-bedroom townhomes, designed around

beautifully landscaped courtyards. Avalon at Florham Park is

ideal for both young professionals and empty nesters.

T I M N A U G H T O N
C H I E F O P E R A T I N G O F F I C E R

Q How do you manage your communities to maximize operating performance?

A At AvalonBay, we use numerous tools and systems that allow us to take action, seeking to 

continuously optimize performance. To understand the marketplace we use competitive survey

data and monitor a variety of cross-sectional data, including economic, real estate, and

portfolio related information. This information is then used by the community and portfolio

managers to adjust property business plans and to make effective pricing decisions. 

Q What process do you go through in pursuing sites for new development?

A We are unique in employing a decentralized business model in selecting, building, and operating

our communities. Our regional offices are staffed with highly competent, locally based profes-

sionals in the areas of development, construction, and property operations. Their proximity to

and familiarity with the markets and the assets are critical in creating and adding value.

Q Once communities are identified, how do you decide which ones to develop?

A Local professionals pursue their business with a good understanding of what the organization

will support. While site selection essentially occurs at the local level, the ultimate investment

decision is made at the senior management level through a Management Investment Committee.

Deals of a certain size or of a unique nature require further review and approval by our Board

of Directors.

Deals are funded based upon their projected returns relative to their inherent market quality

and risk factors. Every investment has a unique target return that we expect to generate

based upon a myriad of market quality and deal risk factors. The investments that provide the

greatest projected returns relative to this “target” return are those that get funded.

by-choice,’ upwardly mobile professionals who
choose the beneﬁts and convenience of
upscale apartment living.Avalon at Arlington
Square is situated around mass transit corridors
and near centers of employment, shopping
and entertainment. Facilities at this urban
village include a large airport club-style 
business center, basketball courts and a coffee
lounge, all housed within the largest club-
house ever in an AvalonBay community.

Avalon at Florham Park, Florham Park, NJ
Inspired by Florham Park’s Colonial heritage,
the all townhome community of Avalon at
Florham Park combines the warmth and
charm of a 19th century village with a state-
of-the art living space and the most modern
amenities and services.The 270 Colonial-
style townhomes feature large ﬂoor plans
inside and beautiful landscaped gardens out-
side, offering our residents a truly elegant
lifestyle. Representing a new product type for
AvalonBay, the community offers exceptional
quality housing to support the rapid growth
of the Morristown area as well as the area’s
return-to-renting empty nesters.

Avalon Bellevue, Bellevue,WA
This mid-rise community is located in
downtown Bellevue, just outside of Seattle,

Washington. An urban sub-market, Bellevue
has historically been focused on commerce
with few residences and even fewer residen-
tial amenities. Located just two blocks from
Bellevue’s Central Business District, Avalon
Bellevue provides easy access to employment,
shopping and entertainment. Featuring 
high-speed Internet access and built-in com-
puter desks, Avalon Bellevue was designed 
to leave a lasting positive impact on this
high-tech community.

Avalon on the Sound, New Rochelle, NY 
Avalon on the Sound, located in downtown
New Rochelle, is a 24-story high-rise build-
ing with spectacular views of the Long Island
Sound and the New York City skyline. Our
Manhattan-style product, with 412 homes,
provides a high-rise living experience with-
out the stress of the city. The Avalon on the
Sound community was designed to cater to
the needs of a range of people, from young
dual-income couples to empty nesters, in the
Westchester area.This community elevates
luxury apartment living in Westchester
County to new heights, combining spacious
ﬂoor plans, world-class views and high-end
amenities with a location that gives residents
the time to enjoy it.

A V A L O N B A Y 2 0 0 1

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C U L T I V A T I N G
T A L E N T

O U R

At AvalonBay we strive to Cultivate our Talent
—another principle of Planned Evolution.
First we work hard to attract the brightest
people, from both inside and outside the real
estate sector.We look for people with a
voracious appetite to learn, a desire to
achieve, and an ability to produce results.
We then provide them with the training and
the professional development opportunities
that enable self-motivated, high performing
associates to ﬁnd success in their careers.

Management Strength 
AvalonBay’s organizational structure combines
a centralized strategy and systems with decen-
tralized local development, construction and
property operations.This means that while
senior management provides the vision,
strategy, ﬁnancial resources, and administrative
support at the national level, our on-site
associates are empowered to make the right
decisions at the customer level.This empow-
erment establishes the trust that is critical to
the human relationships that give AvalonBay
its culture, a culture based on a Commitment
to Integrity, a Spirit of Caring, and a
Focus on Continuous Improvement—
what we call our Core Values.

Through this approach, we have developed
deep bench strength that is a fundamental
competitive advantage.This depth of manage-
ment talent has enabled our current growth
and will help fuel our future growth. It is the
caliber of our management that distinguishes
AvalonBay from our peers and that drives
our consistent record of success. Our bench
strength reaches from the top echelons of
management to our local associates.The
recent smooth transition of several of our
senior executives is a tribute to the depth and
breadth of our management team and to the
effectiveness of our succession planning. As
we look out to the future, we are conﬁdent
that AvalonBay has proven, seasoned executives
in place to leverage market opportunities and
lead the Company through any challenge.

It is the caliber of our management

that distinguishes AvalonBay from

our peers. Our bench strength

reaches from the top echelons of

management to our local associates.

A V A L O N B A Y 2 0 0 1

1 4

AVALONBAY’S TRAINING AND DEVELOPMENT TEAM SAN JOSE, CALIFORNIA

A S S O C I AT E C O P Y H E R E

James Perry, Audrey Scott, Chris Madsen, Sherwin DeLeon and Grace Naylor

working on the development of an orientation program for all new hires. The

objective of the program is for all new associates to learn about AvalonBay’s 

history, culture and employee benefits while getting to know other associates 

in a relaxed environment.

C H A R L E N E R O T H K O P F
S E N I O R V I C E P R E S I D E N T H U M A N R E S O U R C E S

Q When recruiting for prospective associates, what qualities do you look for that are unique to

AvalonBay?

A The most important thing that we look for in a prospective associate is how that individual will

ﬁt into our culture. AvalonBay’s values are an integral part of our culture, and we look for

people that share the same values: a commitment to integrity, a spirit of caring, and a focus

on continuous improvement. Our focus on customer service means we look for individuals

who are customer service oriented, results driven, and who are quick learners. 

Q What is AvalonBay University? 

A AvalonBay University is a comprehensive curriculum of training opportunities, ranging from

new-hire orientation to executive-level programs, available to all AvalonBay associates.

AvalonBay University offers both technical and management training, including extensive

classes for all levels of maintenance technicians, leasing consultants, and community

managers. We offer classroom training at training centers established in each of our

operating regions, as well as e-learning opportunities. We believe training our associates

provides us with a clear competitive advantage. 

Q How do you train and develop the leaders in your company?

A Leadership development is highly valued at AvalonBay, and we spend a considerable amount of

time cultivating the talents of our leaders. High performing, motivated associates are recognized

early in their careers and are nurtured within the company. They are given opportunities to

work cross-functionally with increasing responsibilities. Many have individual development

plans to target skills they want to build and are provided with training, coaching, and

professional experiences to help them succeed. 

Most importantly, our associates have expressed
conﬁdence in our executives’ ability to face
future challenges. In our 2001 Associate
Opinion Survey, 86% of associates rated the
leadership of our senior executives favorably,
which was 38 points higher than the norm
for other companies in the service industry.

Recruiting and Training Are the Keys 
Our commitment to the customer is an inte-
gral part of the way we hire and train
associates.We look for associates who have a
desire to serve others, possess a strong sense
of urgency, and enjoy solving problems.They
need to understand that satisfying our residents
is our business.To ensure our associates are
equipped to deal with the evolving needs of
our residents and deliver against our exacting
customer service standards, we provide in-
house training through AvalonBay University.

AvalonBay University offers a comprehensive
curriculum in a wide variety of technical and
managerial skills that range from leadership
training to community maintenance. Our 
program of classes and resources provide the
skills necessary to effectively manage and
operate an AvalonBay community as well as
reinforce the AvalonBay mission, vision and
values.We know that our training is working,

as the results of our Associate Opinion Survey
indicated that 90% of all associates understood
AvalonBay’s purpose and core values, a dramatic
46 points above the service industry norm.

Cultivating Our Talent
AvalonBay’s practice has been to promote from
within when possible and to provide a wide
range of opportunities for our associates.We
motivate our associates through challenging
assignments, and ensure they are rewarded 
for meeting their objectives. The diversity of
our locations and our products provides our
associates with a variety of career opportunities
and professional experiences. Many of our
executives worked their way up within the
organization by learning new skills, taking on
additional responsibilities, and proving they
could achieve outstanding results in a
dynamic, stimulating environment.

AvalonBay’s combination of selective recruit-
ing, rigorous training, signiﬁcant career growth
opportunities, and a merit-based reward system
creates a team of associates that we believe is
second to none.These associates provide
superior service to our customers and embody
AvalonBay principles and values every day.
The Planned Evolution of our talent is one of
the cornerstones for our future success.

A V A L O N B A Y 2 0 0 1

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F I N A N C I A L F O U N D A T I O N F O R
P L A N N E D E V O L U T I O N

The elements comprising Planned Evolution
require a ﬁnancial plan that can ﬂex, grow or
contract as dictated by our business strategy.
Our capital structure supports AvalonBay’s 
overall strategy by enabling the extension of
our products and services, the advancement
of our investment activities, and the develop-
ment of our team and their core competencies.
It also allows us to pause and alter course
depending on changes in markets, economics
or customer needs.

The balance sheet ﬂexibility we enjoy today
is a product of Planned Evolution. It was born
out of our commitment to be an evergreen
company and the need to prepare for new
opportunities, risks and changes.The guiding
principles of our ﬁnancial plan were devel-
oped to enable us to take advantage of
opportunities and mitigate risks.

These principles serve as a foundation.
They support our plan, provide a platform
for future growth and never waiver. The
principles are simple.We limit ﬂoating rate
debt, match long-term assets with long-term
capital, match equity capital to business risks,
balance debt maturities, limit secured ﬁnance
and provide detailed ﬁnancial disclosures. And
we do not compromise these principles for
short-term gain.

These principles produce a balance sheet with
notable attributes. At December 31, 2001 total
debt and preferred stock as a percentage of
debt and equity market capitalization was
41%, ﬂoating rate debt was nominal and our
ﬁxed charge coverage ratio for the year was
3.3x. Clearly, our balance sheet is positioned
for opportunity through all phases of the
business cycle.

Aligning our ﬁnancial plan with our business
strategy results in sector-leading performance.
In 2001, FFO per share increased nearly 10%,
to $4.06. This performance placed AvalonBay
as one of the top performers in the multi-
family sector and in the REIT industry.

We also achieved sector-leading growth in
Established Communities net operating
income (NOI) of 7.5% in 2001. This places
the Company at the top of more than 15
REIT peers. Approximately 79% of
AvalonBay’s NOI in 2001 was derived from
assets that are unencumbered, providing the
opportunity for additional unsecured debt
issuances or increased options for asset
dispositions.

As our FFO has grown, dividend increases
have followed. Last year, we increased our
dividend by over 14%, well above the multi-

A V A L O N B A Y 2 0 0 1

1 6

A V A L O N B E L L E V U E B E L L E V U E , W A S H I N G T O N

Avalon Bellevue is a mid-rise community in downtown Bellevue

with 202 apartment homes. Combining views of 

the Cascade and Olympic mountain ranges with high-speed

Internet access and built-in computer desks, Avalon Bellevue

offers a peaceful oasis to tech-savvy professionals. 

T O M S A R G E A N T
E X E C U T I V E V I C E P R E S I D E N T
C H I E F F I N A N C I A L O F F I C E R

Q What will be the key drivers to earnings growth in 2002 and beyond?

A   We expect to achieve positive earnings growth in 2002 that will accelerate into 2003. Key drivers

include an assumed economic recovery late in 2002, delivery of new development communities

that will fully stabilize in 2003 and tight expense controls. We will also beneﬁt from preferred

stock redemptions completed last year. Finally, with $123 million of cash on hand and no short-

term debt, deploying this excess liquidity into new investments will contribute to earnings growth.

Q  How has the economic downturn changed the way you operate financially? 

A We manage our finances to be prepared for the downside. As such, we added liquidity last year

that we will put to work in 2002. Limited use of floating rate debt provides financial flexibility

to pursue investment opportunities that may emerge from the downturn. And should our

business plan need to shift with changing economics, our financial structure provides great

operational flexibility to optimize both short- and long-term results.

Q What are your views considering stock repurchase?

A This is a capital allocation alternative we actively consider along with other alternatives such 

as new investments, higher dividends and preferred stock buybacks. We chose to allocate

capital to these other alternatives in 2001. Capital is allocated to achieve the highest risk-

adjusted returns while advancing our strategic objectives. As such, there are both quantitative

and qualitative measures to consider. Under the right conditions, we would favor a stock

buyback ahead of other alternatives.

family average of 5.9%. In February 2002, we
increased our dividend an additional 9.4%.
We remain committed to the safety of the
dividend, which is underscored by our low
payout ratio of 63% of FFO and our com-
mitment to stable cash ﬂows.We believe the
safety of our dividend, combined with future
FFO growth, will support continued divi-
dend increases and stable returns for our
shareholders.

Aligning our ﬁnancial plan with our business
strategy, creating ﬂexibility, and holding to our
principles are not new for 2001, and these
remarkable ﬁnancial results are not one-time
events.We look to optimize short-term 
performance as we maximize long-term 

Ava l o n B ay   D i v i d e n d s
S a f e t y   a n d   G r o w t h

88.4%

84.0%

77.2%

$1.90

$1.94

$2.00

$2.04

$2.06

71.1%

69.4%



$2.80

$2.56

$2.24

63.0%

60.5%

1995

1996

1997

1998

1999

2000

2001

2002

Dividends           Payout Ratio          

$3.00

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00

20%

15%

10%

5%

0%

At t rac t ive   R i sk - A dj u ste d   R eturn s



Compound Annual Growth Return 
Dec. 31, 1994-Dec. 31, 2001

19.7%

15.9%

15.0%

14.0%

11.4%

5.6%

U.S. 
Treasury
10-Year 
Note

AVB

Equity
REITs

Apt.
Equity
REITs

S&P
500

NAS
DAQ
Comp.

Source: NAREIT

results.That is how we evaluate our assets,
our markets, and the success of our strategy.
Since 1994, the year of our IPO, total share-
holder return has outpaced multifamily
sector and industry averages, achieving a
compound annual growth rate of 19.7%.
That return exceeded growth in the S&P
500, the NASDAQ composite, and related
REIT indexes during the same period.

We believe our unwavering commitment to
core ﬁnancial principles has and will continue
to deliver outsized risk-adjusted returns for
our shareholders.

A V A L O N B A Y 2 0 0 1

1 7

Notes

1. 2001 and 7-year average Funds from Operations
(“FFO”) per share growth computed based on
FFO per share data provided by NAREIT and
individual company reports. FFO per share used is
determined in accordance with a deﬁnition
adopted by the Board of  Governors of the
National Association of Real Estate Investment
Trusts (NAREIT). FFO per share obtained from
individual company reports was adjusted to con-
form to NAREIT’s deﬁnition where appropriate.
For further discussion of FFO, see the section titled
“Funds from Operations” in the discussion preced-
ing the ﬁnancial statements included in this report.

2. Multifamily Sector Average consists of 15 publicly

traded multifamily companies.

3. AVB 7-year average Net Operating Income

(“NOI”) growth is presented on a pro forma basis
as if the 1998 merger of Avalon Properties, Inc. and
Bay Apartment Communities, Inc. had occurred at
the beginning of 1994. NOI growth for Avalon
Properties, Inc. Established Communities was 4.4%,
4.3%, 4.7% and 5.5% for the years ended 1995,
1996, 1997 and 1998, respectively. NOI growth for
Bay Apartment Communities, Inc. Established
Communities during the period was 6.1%, 13.6%,
12.6% and 8.8% for the years ended 1995, 1996,
1997 and 1998, respectively.

4. Multifamily Sector 2001 and 7-year average based
on data provided by Green Street Advisors, Inc.

5. 7-year average based on NAV per share estimated by
Green Street Advisors, Inc. for both AVB and the
multifamily sector. The multifamily sector includes
companies with December 31 NAV per share
history available for the years 1994 through 2001.
Estimated NAV per share calculated by others may
differ from Green Street Advisors’ estimates.

6. Based on number of homes for all stabilized
communities, development communities and
development rights at December 31, 1994 and
December 31, 2001, respectively.

7. First quarter 2002 dividend per share of $0.70

annualized.

8. Compound Annual Growth Return from

December 31, 1994 to December 31, 2001. Actual
total shareholder return for any given year during
the period December 31, 1994 to December 31,
2001 varies. Past performance is no guarantee of
future results.

Glossary

Net Operating Income (NOI)  Community net
operating income does not include either a manage-
ment fee or any allocation of corporate overhead, and
it is not a measure that can be determined in accor-
dance with GAAP. Community net operating
income should not be considered as an alternative to
operating income, as determined in accordance with
GAAP, as an indicator of the Company’s or a com-
munity’s operating performance, or to cash ﬂows
from operating activities (as determined in accordance
with GAAP) as a measure of liquidity. Community
net operating income as disclosed by other REITs
may not be comparable to the Company’s calculation.

Established Communities  An “Established
Communities” comparison means a comparison of the
performance of those communities that the Company
owned in each of the last two years and that had stabi-
lized operating costs at the beginning of the ﬁrst year,
such that a comparison of the performance between
years is meaningful. Established Communities are
sometimes referred to as “Same-Store” communities.

Estimated Net Asset Value (NAV per Share)
Estimated NAV is the estimated market value of a
Company’s assets less all current and long-term
liabilities divided by the number of outstanding
common shares and operating partnership units. The
calculation of estimated NAV by others may not be
comparable to the calculation prepared by Green
Street Advisors, Inc. and used for computing averages
in this report.

A V A L O N B A Y 2 0 0 1

1 8

2 0 0 1 F I N A N C I A L

R E V I E W

C O N T E N T S

S E L E C T E D F I N A N C I A L D A T A

M A N A G E M E N T D I S C U S S I O N &   A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S

C O N S O L I D A T E D B A L A N C E S H E E T S

C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S A N D
C O M P R E H E N S I V E I N C O M E

C O N S O L I D A T E D S T A T E M E N T S O F S T O C K H O L D E R S ’   E Q U I T Y

C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N T A N T S

M A R K E T F O R R E G I S T R A N T ’ S C O M M O N E Q U I T Y A N D
R E L A T E D S T O C K H O L D E R M A T T E R S

C O R P O R A T E I N F O R M A T I O N

20

22

36

37

38

39

41

58

59

60

S E L E C T E D F I N A N C I A L D A T A

The following table provides historical consolidated ﬁnancial, operating and other data for AvalonBay
Communities, Inc. You should read the table with our Consolidated Financial Statements and the Notes
included in this report.

(Dollars in thousands, except per share information)

12-31-01

12-31-00

12-31-99

12-31-98

12-31-97

Years ended

Revenue:

Rental income
Management fees
Other income
Total revenue

Expenses:

$ 637,379
1,325
2,953
641,657

$ 571,943
1,051
401
573,395

$ 504,567
1,176
236
505,979

$ 369,945
1,377
81
371,403

$ 169,442
1,029
633
171,104

Operating expenses, excluding property taxes
Property taxes
Interest expense
Depreciation 
General and administrative
Non-recurring items
Total expenses

Equity in income of unconsolidated entities
Interest income
Minority interest in consolidated partnerships

Income before gain on sale of communities 

and extraordinary item
Gain on sale of communities

Income before extraordinary item

Extraordinary item

161,887
52,201
103,203
130,079
15,224
—
462,594

856
6,823
(597)

186,145
62,852

248,997
—

142,664
46,958
83,609
122,610
13,013
—
408,854

2,428
4,764
(1,908)

169,825
40,779

210,604
—

135,517
42,701
74,699
109,759
9,592
16,782
389,050

2,867
7,362
(1,975)

125,183
47,093

172,276
—

Net income
Dividends attributable to preferred stock
Net income available to common stockholders

248,997
(32,497)
$ 216,500

210,604
(39,779)
$ 170,825

172,276
(39,779)
$ 132,497

$

Per Common Share and Share Information:
Per common share—basic

104,346
31,775
54,650
77,374
9,124
—
277,269

2,638
3,508
(1,770)

98,510
25,270

123,780
(245)

123,535
(28,132)
95,403

47,279
14,429
16,977
29,113
5,093
—
112,891

5,689
1,346
174

65,422
677

66,099
(1,183)

64,916
(19,656)
45,260

$

Income before extraordinary item 
(net of preferred dividends)

$
Extraordinary item
$
Net income available to common stockholders $
Weighted average common shares outstanding

3.19
—
3.19
67,842,752

2.58
$
—
$
$
2.58
66,309,707

2.05
$
—
$
$
2.05
64,724,799

1.89
$
—
$
$
1.89
50,387,258

1.64
$
(0.04)
$
$
1.60
28,244,845

Per common share—diluted

Income before extraordinary item 
(net of preferred dividends)

$
Extraordinary item
$
Net income available to common stockholders $
Weighted average common shares and 

3.12
—
3.12

$
$
$

2.53
—
2.53

$
$
$

2.03
—
2.03

$
$
$

1.88
—
1.88

$
$
$

1.63
(0.04)
1.59

units outstanding

Cash dividends declared
Other information:
Net income
Depreciation 
Interest expense
Interest income
Non-recurring items
Gain on sale of communities
Extraordinary item

69,781,719
2.56
$

68,140,998
2.24
$

66,110,664
2.06
$

51,771,247
2.04
$

28,431,823
2.00
$

$ 248,997
130,079
103,203
(6,823)
—
(62,852)
—

$ 210,604
122,610
83,609
(4,764)
—
(40,779)
—

$ 172,276
109,759
74,699
(7,362)
16,782
(47,093)
—

$ 123,535
77,374
54,650
(3,508)
—
(25,270)
245

$

64,916
29,113
16,977
(1,346)
—
(677)
1,183

Gross EBITDA(1)

$ 412,604

$ 371,280

$

319,061

$ 227,026

$ 110,166

Funds from Operations(2)
Number of Current Communities(3)
Number of apartment homes

$ 283,293
126
37,228

$ 252,013
126
37,147

$ 196,058
122
36,008

$ 148,487
127
37,911

$

73,525
64
19,318

A V A L O N B A Y 2 0 0 1

2 0

12-31-01

12-31-00

12-31-99

12-31-98

12-31-97

Years ended

Balance Sheet Information:

Real estate, before accumulated depreciation
Total assets
Notes payable and unsecured credit facilities

$ 4,837,869
$4,664,289
$2,082,769

$4,535,969
$ 4,397,255
$1,729,924

$4,266,426
$4,154,662
$ 1,593,647

$4,006,456
$ 4,005,013
$ 1,484,371

$1,534,986
$1,529,703
$ 506,129

Cash Flow Information:

Net cash ﬂows provided by operating activities
Net cash ﬂows used in investing activities
Net cash ﬂows provided by (used in) 

$ 308,723
$ (259,391)

$ 296,462
$ (252,534)

$
251,779
$ (236,687)

$ 192,339
$ (566,516)

$
93,584
$ (421,355)

ﬁnancing activities

$ (33,580)

$

5,685

$

(16,361)

$ 376,345

$ 320,252

Notes to Selected Financial Data
(1) Gross EBITDA represents earnings before interest, income taxes, depreciation and amortization, non-recurring items, gain
on sale of communities and extraordinary items. Gross EBITDA is relevant to an understanding of the economics of
AvalonBay because it is one indication of cash ﬂow available from continuing operations to service ﬁxed obligations. Gross
EBITDA should not be considered as an alternative to operating income (as determined in accordance with generally
accepted accounting principles, or “GAAP”), as an indicator of our operating performance, or to cash ﬂows from operating
activities (as determined in accordance with GAAP) as a measure of liquidity. Our calculation of gross EBITDA may not be
comparable to gross EBITDA as calculated by other companies.

(2) We generally consider Funds from Operations, or FFO, to be an appropriate measure of our operating performance because
it helps investors understand our ability to incur and service debt and to make capital expenditures.We believe that to gain
a clear understanding of our operating results, FFO should be examined with net income as presented in the Consolidated
Statements of Operations included elsewhere in this report. FFO is determined based on a deﬁnition adopted by the Board
of Governors of the National Association of Real Estate Investment Trusts® and is deﬁned as:

• net income or loss computed in accordance with GAAP, except that excluded from net income or loss are gains or
losses on sales of property and extraordinary (as determined by GAAP) gains and losses on debt restructuring;

• plus depreciation of real estate assets; and
• after adjustments for unconsolidated partnerships and joint ventures.

FFO does not represent cash generated from operating activities in accordance with GAAP.Therefore it should not be
considered as an alternative to net income as an indication of performance. FFO should also not be considered an alternative
to net cash ﬂows from operating activities, as determined by GAAP, or as a measure of liquidity. Additionally, it is not neces-
sarily indicative of cash available to fund cash needs. Further, FFO as calculated by other REITs may not be comparable to
our calculation of FFO. Calculations for FFO are presented below:

Net income available to 
common stockholders

Depreciation (real estate related)
Joint venture adjustments
Minority interest
Gain on sales of communities
Extraordinary items
Funds from Operations

12-31-01

12-31-00

12-31-99

12-31-98

12-31-97

Years ended

$ 216,500
126,984
1,102
1,559
(62,852)
—
$ 283,293

$ 170,825
119,416
792
1,759
(40,779)
—
$ 252,013

$ 132,497
107,928
751
1,975
(47,093)
—
$ 196,058

$ 95,403
75,614
725
1,770
(25,270)
245
$ 148,487

$ 45,260
27,360
399
—
(677)
1,183
$ 73,525

Net cash provided by operating activities

$ 308,723

$ 296,462

$ 251,779

$ 192,339

$ 93,584

Net cash used in investing activities

$(259,391)

$(252,534)

$(236,687)

$(566,516)

$(421,355)

Net cash provided by (used in) 

ﬁnancing activities

$ (33,580)

$

5,685

$ (16,361)

$ 376,345

$ 320,252

(3) Current Communities consist of all communities other than those which are still under construction and have not received

a ﬁnal certiﬁcate of occupancy.

A V A L O N B A Y 2 0 0 1

2 1

M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S O F
F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S

Forward-Looking Statements

This Annual Report, including the footnotes to our Consolidated Financial Statements which immediately
follows, contains “forward-looking statements” as that term is deﬁned under the Private Securities Litigation
Reform Act of 1995. You can identify forward-looking statements by our use of the words “believe,”
“expect,” “anticipate,” “intend,” “estimate,” “assume,” “project,” and other similar expressions in this Annual
Report, that predict or indicate future events and trends or that do not report historical matters. In addition,
information concerning the following are forward-looking statements:

~ the timing and cost of completion of apartment communities under construction, reconstruction,

development or redevelopment;

~ the timing of lease-up and occupancy of apartment communities;

~ the pursuit of land on which we are considering future development;

~ cost, yield and earnings estimates; and

~ the development of management information systems by companies in which we have an investment 

and our implementation and use of those systems.

We cannot assure the future results or outcome of the matters described in these statements; rather, these
statements merely reﬂect our current expectations of the approximate outcomes of the matters discussed.
You should not rely on forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, some of which are beyond our control.These risks, uncertainties and other
factors may cause our actual results, performance or achievements to differ materially from the anticipated
future results, performance or achievements expressed or implied by these forward-looking statements. Some
of the factors that could cause our actual results, performance or achievements to differ materially from those
expressed or implied by these forward-looking statements include, but are not limited to, the following:

~ we may fail to secure development opportunities due to an inability to reach agreements with third

parties or to obtain desired zoning and other local approvals;

~ we may abandon or defer development opportunities for a number of reasons, including changes in local
market conditions which make development less desirable, increases in costs of development and increases
in the cost of capital;

~ construction costs of a community may exceed our original estimates;

~ we may not complete construction and lease-up of communities under development or redevelopment
on schedule, resulting in increased interest expense and construction costs and reduced rental revenues;

~ occupancy rates and market rents may be adversely affected by local economic and market conditions

which are beyond our control;

A V A L O N B A Y 2 0 0 1

2 2

~ ﬁnancing may not be available on favorable terms or at all, and our cash ﬂow from operations and access
to cost effective capital may be insufficient for the development of our pipeline and could limit our
pursuit of opportunities;

~ our cash ﬂow may be insufficient to meet required payments of principal and interest, and we may be

unable to reﬁnance existing indebtedness or the terms of such reﬁnancing may not be as favorable as the
terms of existing indebtedness;

~ we may be unsuccessful in managing our current growth in the number of apartment communities; and

~ software applications and ancillary services being developed by companies in which we have invested may
be unsuccessful in achieving their business plans or unsuccessful in obtaining additional funding, which
could lead to a partial or complete loss of our investment in these companies.

You should read our Consolidated Financial Statements and notes included in this report in conjunction
with the following discussion.These forward-looking statements represent our estimates and assumptions
only as of the date of this report.We do not undertake to update these forward-looking statements, and you
should not rely upon them after the date of this report.

Business Description and Community Information

AvalonBay is a Maryland corporation that has elected to be treated as a real estate investment trust, or
REIT, for federal income tax purposes.We focus on the ownership and operation of upscale apartment
communities (which generally command among the highest rents in their submarkets) in high barrier-
to-entry markets of the United States.This is because we believe that, long term, the limited new supply 
of upscale apartment homes in these markets will result in larger increases in cash ﬂows relative to other
markets.These barriers-to-entry generally include a difficult and lengthy entitlement process with local
jurisdictions and dense in-ﬁll locations where zoned and entitled land is in limited supply.These markets are
located in the Northeast, Mid-Atlantic, Midwest, Paciﬁc Northwest, and Northern and Southern California
regions of the United States.

We are a fully-integrated real estate organization with in-house expertise in the following areas:

~ development and redevelopment;

~ construction and reconstruction;

~ leasing and management;

~ acquisition and disposition;

~ ﬁnancing;

~ marketing; and

~ information technologies.

A V A L O N B A Y 2 0 0 1

2 3

We believe apartment communities present an attractive investment opportunity compared to other real
estate investments because a broad potential resident base results in relatively stable demand during all phases
of a real estate cycle.With our expertise and in-house capabilities, we believe we are well-positioned to
continue to pursue opportunities to develop and acquire upscale apartment homes in our target markets.
Our ability to identify or pursue attractive opportunities, however, is affected by capital market conditions,
including prevailing interest rates, and by the availability of attractively priced opportunities. Given current
capital market and real estate market conditions, we are carefully considering the appropriate allocation 
of capital investment among development and redevelopment communities as well as the acquisition of
established communities.We intend to pursue these investments in markets where constraints to new supply
exist and where new household formations have out-paced multifamily permit activity in recent years.

Our real estate investments consist primarily of current operating apartment communities, communities in
various stages of development, and development rights (i.e., land or land options held for development). Our
current operating communities are further distinguished as Established, Other Stabilized, and Redevelopment.
A description of these categories and operating performance information can be found in Note 9, “Segment
Reporting,” in our Consolidated Financial Statements included in this report.

On December 31, 2001, we owned or had an ownership interest in these categories as follows:

Number of
communities

Number of
apartment homes

Current Communities

Established Communities:

Northeast
Mid-Atlantic
Midwest
Paciﬁc Northwest
Northern California
Southern California

Total Established

Other Stabilized Communities:

Northeast
Mid-Atlantic
Midwest
Paciﬁc Northwest
Northern California
Southern California

Total Other Stabilized
Redevelopment Communities

Total Current Communities

Development Communities

Development Rights

20
18
6
2
27
11

84

16
3
3
10
3
4

39
3

126

15

30

5,416
5,297
1,591
486
7,851
3,112

23,753

4,313
1,125
1,033
2,673
1,038
1,397

11,579
1,896

37,228

3,963

8,918

A V A L O N B A Y 2 0 0 1

2 4

Results of Operations and Funds From Operations

A comparison of our operating results for the years 2001, 2000, and 1999 follows:

(dollars in thousands)

2001

2000

$

%

2000

1999

$

%

Change

Change

$ 637,379
1,325
2,953

$571,943
1,051
401

$65,436
274
2,552

11.4% $571,943
1,051
26.1%
401
636.4%

$504,567
1,176
236

$67,376
(125)
165

13.4%
(10.6%)
69.9%

641,657

573,395

68,262

11.9%

573,395

505,979

67,416

13.3%

Revenue:

Rental income
Management fees
Other income

Total revenue

Expenses:

Operating, excluding 

property taxes

Property taxes

161,887
52,201

142,664
46,958

19,223
5,243

13.5%
11.2%

142,664
46,958

135,517
42,701

7,147
4,257

5.3%
10.0%

6.4%

Total operating expenses

214,088

189,622

24,466

12.9%

189,622

178,218

11,404

Net operating income
Interest expense
Depreciation expense
General and administrative
Non-recurring charges

427,569
103,203
130,079
15,224
—

383,773
83,609
122,610
13,013
—

Total other expenses

248,506

219,232

43,796
19,594
7,469
2,211
—

29,274

11.4%
23.4%
6.1%
17.0%
—

383,773
83,609
122,610
13,013
—

327,761
74,699
109,759
9,592
16,782

56,012
8,910
12,851
3,421
(16,782)

17.1%
11.9%
11.7%
35.7%
(100.0%)

13.4%

219,232

210,832

8,400

4.0%

Equity in income of 

unconsolidated entities

Interest income
Minority interest of unitholders 
in consolidated partnerships

Income before gain on sale 

of communities

Gain on sale of communities

Net income
Preferred dividends

Net income available to 
common stockholders

856
6,823

2,428
4,764

(1,572)
2,059

(64.7%)
43.2%

2,428
4,764

2,867
7,362

(439)
(2,598)

(15.3%)
(35.3%)

(597)

(1,908)

1,311

(68.7%)

(1,908)

(1,975)

67

(3.4%)

186,145
62,852

169,825
40,779

248,997
(32,497)

210,604
(39,779)

16,320
22,073

38,393
7,282

9.6%
54.1%

169,825
40,779

125,183
47,093

18.2%
(18.3%)

210,604
(39,779)

172,276
(39,779)

44,642
(6,314)

38,328
—

35.7%
(13.4%)

22.2%
0.0%

$216,500

$170,825

$45,675

26.7% $170,825

$132,497

$38,328

28.9%

Net income available to common stockholders increases in 2001 and 2000 over the prior years are primarily
attributable to gain on sale of communities, additional net operating income from newly developed and
redeveloped communities as well as growth in operating income from Established Communities. Net
operating income from newly developed and redeveloped communities exceeded the corresponding cost 
of capital (primarily debt) used to develop or redevelop these communities.

During each of the last three years, we have funded a portion of our development and redevelopment
activities through the sale of assets that did not meet our long-term investment criteria.The short-term
effect of a sale of a community is that net operating income will be negatively impacted because that
community’s contribution to net operating income has been eliminated and the development or redevelop-
ment community in which the proceeds from the sale are being invested is not yet complete.There will also
be less interest expense than would otherwise be incurred as the proceeds from the sale of communities are
initially used to repay amounts outstanding on our unsecured credit facility.We believe that, once stabilized,
the net operating income generated by the newly developed and redeveloped communities will be higher
than the net operating income from the assets sold.

A V A L O N B A Y 2 0 0 1

2 5

Net operating income increases generated in 2001 and 2000 over the prior years resulted from changes in the
following categories:

Established Communities
Other Stabilized Communities
Communities sold
Development and Redevelopment Communities
Central operating overhead

Total net operating income increase 

2001
Increase

2000
Increase

$21,783,000
27,922,000
(14,649,000)
13,596,000
(4,856,000)

$22,162,000
39,575,000
(19,629,000)
19,228,000
(5,324,000)

$43,796,000

$56,012,000

These net operating income increases were largely due to the relatively high occupancy and market rents
experienced in 2000, which were carried into 2001. As we begin to experience the full effects of the
recession, we expect net operating income from Established Communities to decline during the ﬁrst half 
of 2002, while total net operating income will increase modestly. If the economy recovers as anticipated in
the second half of 2002, we expect to experience modest net operating income growth from Established
Communities during that period.

Rental income increases in 2001 and 2000 over the prior year are primarily due to an increase in the
weighted average monthly rental income per occupied apartment home and an increase in the weighted
average number of occupied apartment homes.

~ Overall Portfolio—The weighted average number of occupied apartment homes increased to 34,417
apartment homes for 2001 compared to 33,976 apartment homes for 2000 and 33,726 in 1999. These
changes are primarily the result of development, redevelopment and acquisition of new communities
partially offset by (i) the sale of communities and (ii) for 2001, occupancy declines related to the national
recession and softening conditions in certain of our markets.The weighted average monthly revenue per
occupied apartment home increased to $1,543 in 2001 compared to $1,402 in 2000 and $1,242 in 1999.
Monthly revenue per occupied apartment home and occupancy levels may decline in 2002 as our
portfolio is affected by the national recession.

~ Established Communities—Rental revenue increased $26,268,000 (6.6%) in 2001 and $25,911,000

(8.9%) in 2000. The increase in 2001 is due to market conditions during the past year that allowed for
higher average rents partially offset by lower economic occupancy levels. Economic occupancy takes into
account the fact that apartment homes of different sizes and locations have different economic impacts 
on a community’s gross revenue and measures the percentage impact on gross revenue that the vacant
apartments would have if the community were otherwise fully leased at current market rents. For 2001,
the weighted average monthly revenue per occupied apartment home increased $130 (9.1%) to $1,558
compared to $1,432 for 2000. The average economic occupancy decreased from 97.6% in 2000 to 95.4%
for 2001.

Although most of our markets have been effected by the current recession, we have observed the most
volatility in market rents and occupancy in certain Northern California sub-markets over the past two
years, which accounts for approximately 37.2% of current Established Community rental revenue.This
volatility in rents and occupancy was partially related to volatility in the technology sector that comprises 
a signiﬁcant portion of the Northern California economy.While market rental rates increased substantially
in 2000, we have experienced a 22.0% decline in market rental rates for that region during 2001. Economic
occupancy decreased in the Northern California region, from 97.8% for 2000 to 93.9% for 2001. We could
see further declines in occupancy and market rents as this market resets to more sustainable levels. Also in
2001, we experienced greater volatility in occupancy related to our corporate and furnished apartment

A V A L O N B A Y 2 0 0 1

2 6

homes throughout our portfolio, partially due to reduced business travel. Our exposure to these homes fell
from a peak of approximately 7.0% to approximately 4.5% of our current portfolio at year end.

Operating expenses, excluding property taxes increased primarily due to the addition of newly developed,
redeveloped and acquired apartment homes. In 2001, separation costs of $2,493,000 due to the departure of
a senior executive during the ﬁrst quarter contributed to the increase for that year. Maintenance, insurance
and other costs associated with Development and Redevelopment Communities go from being capitalized
when the community is under construction to expensed when and as homes within the community receive
a certiﬁcate of occupancy. Insurance expense has increased over the past two years, particularly during 2001
as the insurance and reinsurance markets deteriorated, resulting in higher insurance costs for the entire real
estate sector.We renewed our general liability policy on August 1, 2001 and our property coverage on
November 1, 2001. While the terms of our insurance coverage has not materially changed, the level of our
deductible and premium costs increased signiﬁcantly.We expect that our insurance costs will increase in
2002 by approximately $9.2 million (of which $4 million is for the primary layer of property coverage)
including the cost of deductible allocations, which now represents uninsured losses that previously would
have been covered by insurance.The remaining $5.2 million increase is for the upper layers of property
coverage and casualty coverage.

For Established Communities, 2001 operating expenses, excluding property taxes and unallocated overhead
expenses, increased $3,559,000 (4.8%) to $76,995,000 due to increases in insurance, utilities, marketing and
office and administration expenses. During 2000, operating expenses increased $2,754,000 (4.7%) due to
higher payroll, insurance, decorating and maintenance costs which were partially offset by lower utility and
marketing costs.

Property taxes increased due to higher assessments and the addition of newly developed, redeveloped or
acquired apartment homes, partially offset by the sale of communities. Property taxes on Development and
Redevelopment Communities are capitalized while the community is under construction.We begin to
expense these costs as homes within the community receive a certiﬁcate of occupancy.

For Established Communities, the increase in property taxes in 2001 of $969,000 was primarily due to
higher assessments throughout all regions.The increase in 2000 was primarily due to an adjustment made in
1999 to eliminate accrued but unassessed taxes and payments made in 2000 to settle prior year assessments.

Interest expense increased in 2001 primarily due to the issuance of $350,000,000 of unsecured notes during
the second half of 2000 and the issuance of $300,000,000 of unsecured notes in September 2001. The
increase in interest expense in 2000 compared to 1999 was due to the issuance of unsecured notes, an
increase in short term interest rates and a decrease in capitalized interest.We expect to issue $200,000,000 or
more of unsecured debt in 2002, of which $100,000,000 will be used to reﬁnance maturing unsecured debt.

Depreciation expense changes are primarily related to the timing of asset sales, acquisitions and completion
of development or redevelopment activities. Depreciation expense increased $7,469,000 and $12,851,000 in
2001 and 2000, respectively.We expect that depreciation expense will continue to increase during 2002 as
we anticipate a reduction in asset sales compared to prior years.

General and administrative expense increased in 2001 primarily due to an increase in office personnel and
related payroll costs and compensation expense of $784,000 related to the retirement of a senior executive.
Contributing to the increase in 2000, there was an increase in compensation expense for a senior officer,
whose salary was expensed in 2000 but capitalized in 1999 while he served the company in a different
capacity and consulting costs related to services provided by a former senior officer.

Equity in income of unconsolidated joint ventures represents our share of net income or loss from joint
ventures.The decrease in 2001 related primarily to our pro rata share of net losses from a technology

A V A L O N B A Y 2 0 0 1

2 7

investment accounted for under the equity method as well as a valuation allowance of $934,000 for an
investment in a technology company accounted for under the cost method.

Interest income during 2001 increased due to higher average cash balances invested.The decrease in interest
income during 2000 related primarily to the sale of the Fairlane Woods participating mortgage note in the
fourth quarter of 1999.

Gain on sale of communities of $62,852,000, $40,779,000, and $47,093,000 were realized in 2001, 2000,
and 1999, respectively.These gains are the result of our strategy to sell communities that do not meet our
long-term strategic objectives and redeploy the proceeds to current Development and Redevelopment
Communities.The amount of gains realized depend on many factors, including the number of communities
sold, the size and carrying value of those communities, and the market conditions in the local area. In 2002,
we expect to decrease our disposition activity compared to recent years.

Funds from Operations

We consider Funds from Operations (“FFO”) to be an appropriate measure of our operating performance
because it helps investors understand our ability to incur and service debt and to make capital expenditures.
We believe that to understand our operating results, FFO should be examined with net income as presented
in the Consolidated Statements of Operations and Comprehensive Income included elsewhere in this report.
FFO is determined in accordance with a deﬁnition adopted by the Board of Governors of the National
Association of Real Estate Investment Trusts‚ and is deﬁned as:

~ net income or loss computed in accordance with generally accepted accounting principles (“GAAP”),
except that excluded from net income or loss are gains or losses on sales of property and extraordinary 
(as deﬁned by GAAP) gains or losses on debt restructuring;

~ plus depreciation of real estate assets; and

~ after adjustments for unconsolidated partnerships and joint ventures.

FFO does not represent cash generated from operating activities in accordance with GAAP.Therefore it
should not be considered an alternative to net income as an indication of our performance. FFO should also
not be considered an alternative to net cash ﬂows from operating activities, as determined by GAAP, or as a
measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs. Further,
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 and a presentation of GAAP based cash ﬂow metrics:

(dollars in thousands)

Funds from Operations
Net income
Preferred dividends
Depreciation—real estate assets
Joint venture adjustments
Minority interest expense
Gain on sale of communities

Funds from Operations

GAAP based Cash Flow Metrics

Net cash provided by operating activities

Net cash used in investing activities

Years ended

2001

2000

1999

$ 248,997
(32,497)
126,984
1,102
1,559
(62,852)

$ 210,604
(39,779)
119,416
792
1,759
(40,779)

$ 172,276
(39,779)
107,928
751
1,975
(47,093)

$ 283,293

$ 252,013

$ 196,058

$ 308,723

$ 296,462

$ 251,779

$(259,391)

$(252,534)

$(236,687)

Net cash provided by (used in) ﬁnancing activities

$ (33,580)

$

5,685

$ (16,361)

A V A L O N B A Y 2 0 0 1

2 8

Capitalization of Fixed Assets and Community Improvements

Our policy with respect to capital expenditures is generally to capitalize only non-recurring expenditures.
We capitalize improvements and upgrades only if the item:

~ exceeds $15,000;

~ extends the useful life of the asset; and

~ is not related to making an apartment home ready for the next resident.

Under this policy, virtually all capitalized costs are non-recurring, as recurring make-ready costs are
expensed as incurred. Recurring make-ready costs include the following:

~ carpet and appliance replacements;

~ ﬂoor coverings;

~ interior painting; and

~ other redecorating costs.

We capitalize purchases of personal property, such as computers and furniture, only if the item is a new
addition and the item exceeds $2,500. We generally expense purchases of personal property made for
replacement purposes. For Established and Other Stabilized Communities, we recorded non-revenue
generating capitalized expenditures of approximately $251 per apartment home in 2001 and $225 per
apartment home in 2000. The average maintenance expense, including carpet and appliance replacements,
related to these communities was $1,196 per apartment home in 2001 and $1,145 in 2000. We anticipate that
capitalized costs per apartment home will gradually increase as the average age of our communities increases.

Liquidity and Capital Resources

Liquidity The primary source of liquidity is our cash ﬂows from operations. Operating cash ﬂows have
historically been determined by:

~ the number of apartment homes;

~ rental rates;

~ occupancy levels; and

~ our expenses with respect to these 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. Changes in the
capital markets environment affect our plans for undertaking construction and development as well as
acquisition activity.

Cash and cash equivalents totaled $72,986,000 on December 31, 2001, an increase of $15,752,000 for the
year.The following discussion relates to changes in cash due to operating, investing and ﬁnancing activities,
which are presented in our Consolidated Statements of Cash Flows included in this report.

Operating Activities—Net cash provided by operating activities increased to $308,723,000 in 2001 from
$296,462,000 in 2000 primarily due to additional operating income from newly developed and redeveloped
communities as well as growth in operating income from Established Communities, partially offset by the
loss of operating income from communities sold.

A V A L O N B A Y 2 0 0 1

2 9

Investing Activities—Net cash used in investing activities of $259,391,000 in 2001 related to investments in
assets through development and redevelopment of apartment communities partially offset by proceeds from
the sales of apartment communities.

During 2001, we invested $484,604,000 in the purchase and development of real estate.

~ We began the development of nine new communities.These communities are expected to contain a
total of 2,135 apartment homes upon completion, and the total investment, including land acquisition
costs, is projected to be approximately $362,000,000. Also, we completed the development of six new
communities containing a total of 1,656 apartment homes for a total investment of $274,000,000.

~ We acquired six land parcels during 2001 on which construction has not yet commenced. If developed
in the manner expected, we expect that the six new communities developed on these parcels would
contain a total of 1,615 apartment homes at an investment, including land acquisition costs of
$52,110,000, of approximately $331,000,000. In addition, we continue to hold three parcels of land
purchased prior to January 2001 that if developed in the manner expected would contain three new
communities with a total of 537 apartment homes.Total land held for future development, including
carrying cost, totals $66,608,000.

~ We completed the redevelopment of one community containing 294 apartment homes during 2001

for a total investment in redevelopment (i.e. excluding acquisition costs) of $24,400,000.

~ We acquired three communities, containing 995 apartment homes, for approximately $129,300,000.

We acquired these communities in connection with a ﬁxed price forward purchase agreement signed
in 1997 with an unaffiliated party.

The development and redevelopment of communities involves risks that the investment will fail to perform
in accordance with expectations. See “Risks of Development and Redevelopment” in Part I of our Form
10-K for the year ended December 31, 2001, ﬁled with the Securities and Exchange Commission, for a
further discussion of these and other risks inherent in developing or redeveloping communities.

We sold seven apartment communities during 2001 as we seek to optimize the level of our geographical
concentration in selected high barrier-to-entry markets when market conditions are favorable.The net
proceeds of $238,545,000 generated by these sales are being used to develop and redevelop communities
currently under construction or reconstruction.We deposited the proceeds from two of these sales into a
cash escrow account to facilitate a like-kind exchange transaction.The remaining proceeds were invested
or used to reduce amounts outstanding under our variable rate unsecured credit facility until needed to
fund development or redevelopment activities.

Financing Activities—Net cash used in ﬁnancing activities totaled $33,580,000 for the year ended
December 31, 2001, primarily due to dividends paid and the redemption of our Series F and Series G
Preferred Stock, partially offset by the proceeds from the issuance of $300,000,000 of senior notes in
September 2001. See Note 3 “Notes Payable, Unsecured Notes and Credit Facility” and Note 4
“Stockholders Equity” in our Consolidated Financial Statements, for additional information.

We regularly review our short and long-term liquidity needs, the adequacy of Funds from Operations, as
deﬁned above, 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 payments;

~ the distributions required with respect to preferred stock;

A V A L O N B A Y 2 0 0 1

3 0

~ the minimum dividend payments required to maintain our REIT qualiﬁcation under the Internal

Revenue Code of 1986;

~ opportunities for the acquisition of improved property; and

~ development and redevelopment activity in which we are currently engaged.

We anticipate that we can fully satisfy these needs from a combination of cash ﬂows provided by operating
activities and capacity under the unsecured credit facility.

One of our principal long-term liquidity needs is the repayment of medium and long-term debt at the 
time at which such debt matures. For unsecured senior notes, we anticipate that no signiﬁcant portion 
of the principal of these notes will be repaid prior to maturity. The balance of our unsecured notes at
December 31, 2001 was $1,635,000,000 and the balance of our mortgage notes payable at December 31, 2001
was $447,769,000. Scheduled payments and maturities of notes payable and unsecured notes approximate
$150,000,000 per year over the next ﬁve years. See Note 3 “Notes Payable, Unsecured Notes and Credit
Facility” in our Consolidated Financial Statements for a schedule of these payments. If we do not have 
funds on hand sufficient to repay our indebtedness, it will be necessary for us to reﬁnance this debt.This
reﬁnancing may be accomplished by additional debt ﬁnancing that is collateralized by mortgages on
individual communities or groups of communities, by uncollateralized private or public debt offerings or 
by additional equity offerings.We also anticipate having signiﬁcant retained cash ﬂow in each year so that
when a debt obligation matures, some or all of each maturity can be satisﬁed from this retained cash.
Although we believe we will have the capacity to meet our long-term liquidity needs, we cannot assure you
that additional debt ﬁnancing or debt or equity offerings will be available or, if available, that they will be on
terms we consider satisfactory.

Capital Resources We intend to match the long-term nature of our real estate assets with long-term cost
effective capital to the extent permitted by prevailing market conditions. Since January 1, 2000, external
sources of debt capital used to fund investment activities totaled $650,000,000, representing issuances of ten
year senior unsecured debt. During this same two year period, cash ﬂow from operating activities exceeded
dividends paid by $216,000,000. We expect both sources of capital to remain available to meet our capital
needs for the foreseeable future.

Variable Rate Unsecured Credit Facility

Our unsecured revolving credit facility is furnished by a consortium of banks and provides $500,000,000 in
short-term credit. Under the terms of the credit facility, if the Company elects to increase the facility up to
$650,000,000, the consortium of banks cannot prohibit such an increase of the facility and the increased
lending commitment could be provided by one or more banks (from the consortium or otherwise) to the
extent they choose to commit to lend additional funds.We pay participating banks an annual facility fee of
$750,000 in equal quarterly installments.The unsecured credit facility bears interest at varying levels tied to
the London Interbank Offered Rate (LIBOR) based on ratings levels achieved on our unsecured notes and
on a maturity schedule selected by us.The current stated pricing is LIBOR plus 0.60% per annum (2.5% 
on March 1, 2002). A competitive bid option is available for borrowings of up to $400,000,000. This option
allows banks that are part of the lender consortium to bid to provide us loans at a rate that is lower than the
stated pricing provided by the unsecured credit facility.The competitive bid option may result in lower pricing
if market conditions allow. Pricing under the competitive bid option resulted in average pricing of LIBOR
plus 0.43% for amounts most recently borrowed under the competitive bid option. At March 1, 2002, zero was
outstanding, $85,820,000 was used to provide letters of credit and $414,180,000 was available for borrowing
under the unsecured credit facility.

A V A L O N B A Y 2 0 0 1

3 1

Interest Rate Protection Agreements

We are not a party to any long-term interest rate agreements, other than interest rate protection and 
swap agreements on approximately $167,000,000 of our variable rate tax-exempt indebtedness.We intend,
however, to evaluate the need for long-term interest rate protection agreements as interest rate market
conditions dictate, and we have engaged a consultant to assist in managing our interest rate risks and exposure.

Future Financing and Capital Needs

As of December 31, 2001, we had 15 new communities under construction. Also, one additional community
is being built by an unaffiliated third party with whom we have entered into a ﬁxed price forward purchase
commitment. As of December 31, 2001, a total estimated cost of $404,682,000 remained to be invested in these
communities. In addition, we had three other communities under reconstruction, for which an estimated
$10,191,000 remained to be invested.

Substantially all of the capital expenditures necessary to complete the communities currently under
construction and reconstruction will be funded from:

~ the remaining capacity under our current $500,000,000 unsecured credit facility;

~ the net proceeds from sales of existing communities;

~ retained operating cash; and/or

~ the issuance of debt or equity securities.

We expect to continue to fund development costs related to pursuing Development Rights from retained
operating cash and borrowings under the unsecured credit facility.We believe these sources of capital will 
be adequate to take the proposed communities to the point in the development cycle where construction
can begin. Before planned reconstruction activity or the construction of a Development Right begins,
we intend to arrange adequate ﬁnancing to complete these undertakings, although we cannot assure you
that we will be able to obtain such ﬁnancing. In the event that ﬁnancing cannot be obtained, we may have
to abandon Development Rights, write-off associated pursuit costs that were capitalized and/or forego
reconstruction activity. In such instances, we will not realize the increased revenues and earnings that we
expected from such pursuits, and the related write-off of costs will increase current period expenses.

Our liquidity could be adversely impacted by expanding development and acquisition activities and/or
reduced capital (as compared to prior years) available from asset sales.To meet the balance of our liquidity
needs under such conditions, we would need to arrange additional capacity under our existing unsecured
credit facility, sell additional existing communities and/or issue additional debt or equity securities.While 
we believe we have the ﬁnancial position to expand our short-term credit capacity and support our capital
markets activity, we cannot assure you that we will be successful in completing these arrangements, sales or
offerings.The failure to complete these transactions on a cost-effective basis could have a material adverse
impact on our operating results and ﬁnancial condition, including the abandonment of development pursuits
and a resulting charge to earnings.

It is our policy to sell assets that do not meet our long-term investment criteria when market conditions 
are favorable, and to redeploy the proceeds. Under our disposition program, we solicit competing bids from
unrelated parties for these individual assets and consider the sales price and tax ramiﬁcations of each proposal.
We intend to actively seek buyers for communities that we determine to hold for sale. However, we cannot
assure you that the assets can be sold on terms that we consider satisfactory.We expect to signiﬁcantly curtail
our disposition program in 2002 in response to anticipated real estate and capital markets conditions.

We have minority interest investments in ﬁve technology companies, including Constellation Real
Technologies LLC, an entity formed by a number of real estate investment trusts and real estate operating

A V A L O N B A Y 2 0 0 1

3 2

companies for the purpose of investing in multi-sector real estate technology opportunities. Our original
commitment to Constellation was $4 million. Constellation has proposed a reduction in the aggregate
amount of capital commitments from its members. If that proposal is accepted, our revised commitment
would fall to $2.6 million. As of March 1, 2002, we have contributed approximately $959,000. In January 2002,
we invested an additional $2.3 million in Realeum, Inc., a company involved in the development and
deployment of a property management and leasing automation system. Pursuant to an agreement with
Realeum, Inc., we will utilize the property management and leasing automation system in exchange for
payments under a licensing arrangement. Realeum, Inc. is negotiating licensing arrangements with other real
estate companies unaffiliated with AvalonBay. As of March 1, 2002, the total remaining carrying value of our
investments in the ﬁve technology companies was $4.8 million.We have no obligation to contribute additional
funds, other than the commitment to Constellation described above.

Redemption of Preferred Stock

In June 2001, we redeemed all 4,455,000 outstanding shares of our 9.00% Series F Cumulative Redeemable
Preferred Stock at a price of $25.00 per share, plus $0.1625 in accrued and unpaid dividends, for an aggregate
redemption price of $25.1625 per share. In October 2001, we redeemed all 4,300,000 outstanding shares of
our 8.96% Series G Cumulative Redeemable Preferred Stock at a price of $25.00 per share, plus $0.4418 in
accrued and unpaid dividends, for an aggregate redemption price of $25.4418 per share.We currently have
other series of redeemable preferred stock outstanding having an aggregate stated value of $239,192,500.
These series become redeemable at our option at various times over the next seven years. As such series
become redeemable, we will evaluate the requirements necessary for such redemptions as well as the cost-
effectiveness based on the existing market conditions.The following preferred stock series remain outstanding:

Series

Shares outstanding
March 1, 2002

Payable
quarterly

Annual
rate

Liquidation
preference

Non-redeemable
prior to

C

D

H

2,300,000

3,267,700

4,000,000

Inflation

March, June, September,
December
March, June, September,
December
March, June, September,
December

8.50%

8.00%

8.70%

$25

$25

$25

June 20, 2002

December 15, 2002

October 15, 2008

Substantially all of our leases are for a term of one year or less.This may enable us to realize increased rents
upon renewal of existing leases or the beginning of new leases. Short-term leases generally minimize our
risk from the adverse effects of inﬂation, although these leases generally permit residents to leave at the end
of the lease term without penalty.We believe that short-term leases, combined with relatively consistent
demand, results in rents and cash ﬂow which provide an attractive inﬂation hedge.

Critical Accounting Policies

Our accounting policies are in conformity with GAAP.The preparation of ﬁnancial statements in conformity
with GAAP requires management to use judgment in the application of accounting policies, including
making estimates and assumptions.These judgments 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. If our judgment or interpretation of the facts and
circumstances relating to various transactions had been different, it is possible that different accounting
policies would have been applied resulting in a different presentation of our ﬁnancial statements. Below is a
discussion of accounting policies which we consider critical in that they may require complex judgment in
their application or require estimates about matters which are inherently uncertain. Additional discussion of

A V A L O N B A Y 2 0 0 1

3 3

accounting policies which we consider signiﬁcant, including further discussion of the critical accounting
policies described below, can be found in the notes to our Consolidated Financial Statements.

Real Estate Development Rights With few exceptions, we capitalize pre-development costs incurred in
pursuit of new development opportunities.These costs include legal fees, design fees and related overhead
costs.The accompanying Consolidated Financial Statements include a charge to expense to provide an
allowance for unrecoverable capitalized pre-development costs that may be written off if we determine that
a pre-development community is unlikely to be developed.

If there is an event or change in circumstance that indicates an impairment in the value of a

Real Estate
community, our policy is to assess the impairment by making a comparison of the current and projected
operating cash ﬂows 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 ﬂows of the community, we would recognize an impairment loss equivalent to an amount required to
adjust the carrying amount to its estimated fair market value.We have not recognized an impairment loss in
2001, 2000 or 1999 on any real estate.

Investments in Technology Companies The Company has minority interest investments in ﬁve technology
companies. As of March 1, 2002, the total remaining carrying value of these investments, net of an allowance
of $934,000, was $4,819,000. If there is an event or change in circumstance that indicates a loss in the value
of an investment, our 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 we 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.
Due to the nature of these investments, an impairment in value can be difficult to determine.

Legal Contingencies We are subject to various legal proceedings and claims that arise in the ordinary
course of business. These matters are frequently covered by insurance.While the resolution of these matters
cannot be predicted with certainty, we believe the ﬁnal outcome of such matters will not have a material
adverse effect on our ﬁnancial position or the results of operations. Once it has been determined that a loss
is probable to occur, the estimated amount of the loss is recorded in the ﬁnancial statements. Both the
amount of the loss and the point at which its occurrence is considered probable can be difficult to determine.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain ﬁnancial market risks, the most predominant being ﬂuctuations in interest rates.
Interest rate ﬂuctuations are monitored by us as an integral part of our overall risk management program,
which recognizes the unpredictability of ﬁnancial markets and seeks to reduce the potentially adverse effect
on our results of operations.The effect of interest rate ﬂuctuations historically has been small relative to
other factors affecting operating results, such as rental rates and occupancy.The speciﬁc market risks and the
potential impact on our operating results are described below.

Our operating results are affected by changes in interest rates as a result of borrowings under our variable
rate unsecured credit facility as well as outstanding bonds with variable interest rates.We had $125,274,000
and $67,960,000 in variable rate debt outstanding as of December 31, 2001 and 2000, respectively. If interest
rates on the variable rate debt had been 100 basis points higher throughout 2001 and 2000, our annual
interest costs would have increased by approximately $1,500,000 and $2,500,000, respectively, based on
balances outstanding during the applicable years.

A V A L O N B A Y 2 0 0 1

3 4

We currently use interest rate swap agreements to reduce the impact of interest rate ﬂuctuations on certain
variable rate indebtedness. Under swap agreements,

~ we agree to pay to a counterparty the interest that would have been incurred on a ﬁxed principal

amount at a ﬁxed interest rate (generally, the interest rate on a particular treasury bond on the date the
agreement is entered into, plus a ﬁxed increment), and

~ the counterparty agrees to pay to us the interest that would have been incurred on the same principal

amount at an assumed ﬂoating interest rate tied to a particular market index.

As of December 31, 2001, the effect of swap agreements is to ﬁx the interest rate on approximately
$167,272,000 of our variable rate tax-exempt debt. Furthermore, swap agreements ﬁx the interest rate 
on approximately $23,500,000 of unconsolidated variable rate debt as of December 31, 2001. The swap
agreements were not electively entered into by us but, rather, were a requirement of either the bond issuer
or the credit enhancement provider related to certain of our tax-exempt bond ﬁnancings. Because the
counterparties providing the swap agreements are major ﬁnancial institutions which have an A+ or better
credit rating by the Standard & Poor’s Ratings Group and the interest rates ﬁxed by the swap agreements 
are signiﬁcantly higher than current market rates for such agreements, we do not believe there is exposure 
at this time to a default by a counterparty provider.

A V A L O N B A Y 2 0 0 1

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C O N S O L I D A T E D B A L A N C E S H E E T S

(Dollars in thousands, except per share data)

12-31-01

12-31-00

$ 825,118
3,465,166
113,278

4,403,562
(447,026)

3,956,536
434,307
—

4,390,843

72,986
49,965
20,370
15,066
20,357
26,038
21,483
47,181

$ 742,863
3,047,560
98,880

3,889,303
(316,045)

3,573,258
418,583
208,118

4,199,959

57,234
16,733
18,281
12,215
15,265
16,359
21,483
39,696

$4,664,289

$4,397,225

$1,635,000
—
447,769
49,007
43,656
51,052
38,841
29,216

$1,335,000
—
394,924
47,572
19,997
46,771
32,829
28,138

2,294,541

1,905,231

55,193

49,501

96

183

687
2,333,241
(7,489)
(3,497)
(8,483)

672
2,493,033
(3,550)
(47,845)
—

2,314,555

2,442,493

$4,664,289

$4,397,225

Assets
Real estate:
Land
Buildings and improvements
Furniture, ﬁxtures and equipment

Less accumulated depreciation

Net operating real estate
Construction in progress (including land)
Communities held for sale, net

Total real estate, net

Cash and cash equivalents
Cash in escrow
Resident security deposits
Investments in unconsolidated real estate joint ventures
Deferred ﬁnancing costs, net
Deferred development costs, net
Participating mortgage notes
Prepaid expenses and other assets

Total assets

Liabilities And Stockholders’ Equity
Unsecured notes
Variable rate unsecured credit facility
Mortgage notes payable
Dividends payable
Payables for construction
Accrued expenses and other liabilities
Accrued interest payable
Resident security deposits

Total liabilities

Minority interest of unitholders in consolidated partnerships

Commitments and contingencies

Stockholders’ equity:

Preferred stock, $.01 par value; $25 liquidation preference; 50,000,000 shares authorized
at both December 31, 2001 and December 31, 2000; 9,567,700 and 18,322,700 shares
outstanding at December 31, 2001 and December 31, 2000, respectively.

Common stock, $.01 par value; 140,000,000 shares authorized at both December 31, 2001

and December 31, 2000; 68,713,384 and 67,191,542 shares both issued and
outstanding at December 31, 2001 and December 31, 2000, respectively.

Additional paid-in capital
Deferred compensation
Dividends in excess of accumulated earnings
Accumulated other comprehensive loss

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to Consolidated Financial Statements.

A V A L O N B A Y 2 0 0 1

3 6

C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S A N D C O M P R E H E N S I V E I N C O M E

(Dollars in thousands, except per share data)

12-31-01

12-31-00

12-31-99

Year ended

Revenue:

Rental income
Management fees
Other income

Total revenue

Expenses:

Operating expenses, excluding property taxes
Property taxes
Interest expense
Depreciation expense
General and administrative
Non-recurring charges

Total expenses

Equity in income of unconsolidated entities
Interest income
Minority interest in consolidated partnerships

Income before gain on sale of communities
Gain on sale of communities

Net income
Dividends attributable to preferred stock

$ 637,379
1,325
2,953

641,657

161,887
52,201
103,203
130,079
15,224
—

462,594

856
6,823
(597)

186,145
62,852

248,997
(32,497)

$571,943
1,051
401

573,395

142,664
46,958
83,609
122,610
13,013
—

408,854

2,428
4,764
(1,908)

169,825
40,779

210,604
(39,779)

$504,567
1,176
236

505,979

135,517
42,701
74,699
109,759
9,592
16,782

389,050

2,867
7,362
(1,975)

125,183
47,093

172,276
(39,779)

Net income available to common stockholders

$216,500

$170,825

$132,497

Other comprehensive loss:

Cumulative effect of change in accounting principle
Unrealized loss on cash ﬂow hedges

Other comprehensive loss

Comprehensive income

Net income available to common stockholders:

Per common share—basic
Per common share—diluted

See accompanying notes to Consolidated Financial Statements.

(6,412)
(2,071)

(8,483)
$208,017

—
—

—
—

—
$170,825

—
$132,497

$
$

3.19
3.12

$
$

2.58
2.53

$
$

2.05
2.03

A V A L O N B A Y 2 0 0 1

3 7

C O N S O L I D A T E D S T A T E M E N T S O F S T O C K H O L D E R S ’   E Q U I T Y

(Dollars in thousands,
except share data)

Preferred
Stock

Common Preferred Common
Stock

Stock

Stock

Shares issued

Amount

Additional Deferred
compen-
sation

paid-in
capital

Dividends in Accumulated
other com-
prehensive
loss

excess of
accumulated
earnings

Stock-
holders’
equity

18,322,700
—

63,887,126
—

$183
—

$639
—

$2,386,087 $ (4,356)
—
—

$ (68,116)
172,276

$ — $ 2,314,437
172,276

—

Balance at December 31, 1998
Net income
Dividends declared to common
and preferred stockholders
Issuance of Common Stock
Amortization of deferred 

compensation

—
—
— 1,870,883

—

—

—
—

—

—
19

—

—
56,423

—
(3,167)

(173,667)
—

— 3,964

—

Balance at December 31, 1999

18,322,700

65,758,009

183

658

2,442,510

(3,559)

(69,507)

Net income
Dividends declared to common
and preferred stockholders
Issuance of Common Stock
Amortization of deferred 

compensation

—

—

—
—
— 1,433,533

—

—

—

—
—

—

—

—
14

—

—

—

210,604

—
50,523

—
(3,408)

(188,942)
—

— 3,417

—

Balance at December 31, 2000

18,322,700

67,191,542

183

672

2,493,033

(3,550)

(47,845)

—
—

—

—

—

—
—

—

—

(173,667)
53,275

3,964

2,370,285

210,604

(188,942)
47,129

3,417

2,442,493

Cumulative effect of change
in accounting principle

Net income
Unrealized loss on 
cash ﬂow hedges

Dividends declared to common
and preferred stockholders
Redemption of Series F and G 

Preferred Stock

Issuance of Common Stock
Amortization of deferred 

compensation

Stockholders’ equity,
December 31, 2001

—
—

—

—

—
—

—

—

—
—

—

—

(8,755,000)

—
— 1,521,842

(87)
—

—

—

—

—
—

—

—

—
15

—

—
—

—

—

—
—

—

—

(218,908)
59,116

—
(7,545)

— 3,606

—
248,997

(6,412)
—

(6,412)
248,997

—

(2,071)

(2,071)

(204,649)

—
—

—

—

—
—

—

(204,649)

(218,995)
51,586

3,606

9,567,700 68,713,384

$ 96

$687

$2,333,241 $(7,489)

$ (3,497)

$(8,483)

$2,314,555

See accompanying notes to Consolidated Financial Statements.

A V A L O N B A Y 2 0 0 1

3 8

C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S

(Dollars in thousands)

Cash ﬂows from operating activities:

Net income
Adjustments to reconcile net income to cash provided

by operating activities:

Depreciation expense
Amortization of deferred ﬁnancing costs
Amortization of deferred compensation
Income allocated to minority interest in consolidated

partnerships

Gain on sale of communities
Decrease (increase) in cash in operating escrows
Increase in resident security deposits, accrued interest
receivable on participating mortgage notes, prepaid
expenses and other assets

Increase in accrued expenses, other liabilities

and accrued interest payable

Net cash provided by operating activities

Cash ﬂows used in investing activities:

Purchase and development of real estate
Proceeds from sale of communities, net of selling costs
Increase (decrease) in payables for construction
Sale of participating mortgage note
Increase in cash in section 1031 exchange escrows
Decrease (increase) in investments in unconsolidated

real estate joint ventures

Proceeds received from real estate joint venture partners
Redemption of operating units in DownREIT partnerships

For the year ended

12-31-01

12-31-00

12-31-99

$248,997

$210,604

$172,276

130,079
3,716
3,606

597
(62,852)
41

122,610
2,924
3,417

1,908
(40,779)
1,144

109,759
2,668
3,964

1,975
(47,093)
(348)

(20,386)

(21,059)

(2,775)

4,925

308,723

(484,604)
238,545
23,656
—
(33,273)

(2,851)
—
(864)

15,693

296,462

(435,332)
156,086
1,123
—
(9,076)

1,280
33,385
—

11,353

251,779

(516,261)
285,263
(29,276)
25,097
—

(1,510)
—
—

Net cash used in investing activities

(259,391)

(252,534)

(236,687)

Cash ﬂows from ﬁnancing activities:

Issuance of common stock
Redemption of preferred stock and related costs
Dividends paid
Net repayments of unsecured credit facility
Issuance of secured mortgage notes payable
Proceeds from sale of unsecured notes
Repayments of notes payable
Payment of deferred ﬁnancing costs
Contributions from (distributions to) minority partners
Reﬁnancings of notes payable

Net cash provided by (used in) ﬁnancing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of year

50,912
(218,995)
(203,214)
—
75,110
300,000
(22,265)
(8,808)
(6,320)
—

(33,580)

15,752

57,234

36,203
—
(185,509)
(178,600)
—
350,000
(35,123)
(4,428)
23,142
—

5,685

49,613

7,621

53,275
—
(172,333)
(150,400)
—
275,000
(33,579)
(3,654)
(3,425)
18,755

(16,361)

(1,269)

8,890

Cash and cash equivalents, end of year

$ 72,986

$ 57,234

$

7,621

Cash paid during year for interest, net of amount capitalized

$ 88,996

$ 72,712

$ 60,705

See accompanying notes to Consolidated Financial Statements.

A V A L O N B A Y 2 0 0 1

3 9

C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S ( C O N T I N U E D )

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

During the year ended December 31, 2001:

• 762 units of limited partnership, valued at $36, were presented for redemption to the DownREIT partnership 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 issued 619 units of limited partnership in DownREIT partnerships valued at $30 as consideration for

acquisitions of apartment communities that were acquired pursuant to the terms of a forward purchase contract agreed to 
in 1997 with an unaffiliated party. In addition, the Company issued 256,940 units of limited partnership in a DownREIT
partnership valued at $12,274 in connection with the formation of a DownREIT partnership and the acquisition by that
partnership of land.

• 186,877 shares of restricted common stock were issued at a value of $8,570 and 19,646 shares of restricted stock were

forfeited at a value of $235.

• $67 of deferred stock units were converted into 1,803 shares of common stock.

• the Company recorded a liability and a corresponding charge to Other comprehensive loss of $8,483 to adjust the Company’s

Swap Agreements (as deﬁned in Note 5 of the notes to the Consolidated Financial Statements) to their fair value.

• Common and preferred dividends declared but not paid were $49,007.

During the year ended December 31, 2000:

• 1,520 units of limited partnership in DownREIT partnerships, valued at $60, were issued in connection with an acquisition

for cash and units pursuant to a forward purchase contract agreed to in 1997 with an unaffiliated party.

• 304,602 units of limited partnership in DownREIT partnerships, valued at $10,926, were exchanged for an equal number of

shares of the Company’s common stock.

• 139,336 shares of restricted common stock were issued at a value of $4,703 and 50,310 shares of restricted stock were forfeited

at a value of $1,668.

• Real estate assets valued at $5,394 were contributed to a limited liability company in exchange for a 25% membership interest.

• Common and preferred dividends declared but not paid totaled $47,572.

During the year ended December 31, 1999:

• 117,178 units of limited partnership in DownREIT partnerships, valued at $4,614, were issued in connection with an
acquisition for cash and units pursuant to a forward purchase contract agreed to in 1997 with an unaffiliated party.

• 22,623 units of limited partnership in DownREIT partnerships, valued at $868, were exchanged for an equal number of

shares of the Company’s common stock.

• 97,456 shares of restricted common stock were issued at a value of $3,167.

• Common and preferred dividends declared but not paid totaled $44,139.

A V A L O N B A Y 2 0 0 1

4 0

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
(Dollars in thousands, except per share data)

1. Organization and Significant Accounting Policies

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

At December 31, 2001, the Company owned or held a direct or indirect ownership interest in 126
operating apartment communities containing 37,228 apartment homes in eleven states and the District of
Columbia, of which three communities containing 1,896 apartment homes were under reconstruction. In
addition, the Company owned 15 communities with 3,963 apartment homes under construction and rights
to develop an additional 30 communities that, if developed as expected, will contain an estimated 8,918
apartment homes.

Principles of Consolidation The Company is the surviving corporation from the merger (the “Merger”) 
of Bay Apartment Communities, Inc. (“Bay”) and Avalon Properties, Inc. (“Avalon”) on June 4, 1998, where
Avalon shareholders received a 0.7683 share of common stock of the Company for each share owned of
Avalon common stock.The Merger was accounted for under the purchase method of accounting, with 
the historical ﬁnancial statements for Avalon presented prior to the Merger. At that time, Avalon ceased 
to legally exist, and Bay as the surviving legal entity adopted the historical ﬁnancial statements of Avalon.
Consequently, Bay’s assets were recorded in the historical ﬁnancial statements of Avalon at an amount equal
to Bay’s debt outstanding at that time plus the value of capital stock retained by the Bay stockholders,
which approximates fair value. In connection with the Merger, the Company changed its name from Bay
Apartment Communities, Inc. to AvalonBay Communities, Inc.

The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-
owned partnerships and certain joint venture partnerships in addition to subsidiary partnerships structured as
DownREITs. All signiﬁcant intercompany balances and transactions have been eliminated in consolidation.

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 distributions before any distribution is made to the general partner.
Although the partnership agreements for each of the DownREITs are different, generally the distributions
per unit paid to the holders of units of limited partnership interests have approximated the Company’s
current common stock dividend per share. Each DownREIT partnership has been structured so that it is
unlikely the limited partners will be entitled to a distribution greater than the initial distribution provided
for in the partnership agreement.The holders of units of limited partnership interest have the right to present
each unit of limited partnership interest for redemption for cash equal to the fair market value of a share of
the Company’s common stock on the date of redemption. In lieu of a cash redemption of a limited partner’s
unit, the Company may elect to acquire any unit presented for redemption for one share of common stock.

The Company has minority interest investments in ﬁve technology companies.The Company accounts for
these unconsolidated entities in accordance with Accounting Principles Board (“APB”) Opinion No. 18,
“The Equity Method of Accounting for Investments in Common Stock.” In 2001, the Company applied the
equity method of accounting to its investment in Realeum, Inc., a company involved in the development
and deployment of a property management and leasing automation system.The remaining investments are

A V A L O N B A Y 2 0 0 1

4 1

accounted for under the cost method of accounting. As of December 31, 2001, the aggregate carrying value
of our investment in these ﬁve companies, net of an allowance of $934, was $2,519. If there is an event or
change in circumstance that indicates a loss in the value of the 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.

Revenue Recognition Rental income related to leases is recognized on an accrual basis when due from
residents in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements.” 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 life of the
lease—generally one year.

The following reconciles total revenue in conformity with generally accepted accounting principles (“GAAP”)
to total revenue adjusted to state concessions on a cash basis for the years ended December 31, 2001, 2000,
and 1999:

Total revenue (GAAP basis)
Concessions amortized
Concessions granted

Total revenue adjusted to state concessions on a cash basis

Year ended

12-31-01

12-31-00

12-31-99

$641,657
4,036
(6,431)

$639,262

$573,395
3,043
(2,349)

$574,089

$505,979
4,828
(6,528)

$504,279

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

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

The capitalization of costs during the development of assets (including interest and related loan fees, property
taxes and other direct and indirect costs) begins when active development commences and ends when the
asset is delivered and a ﬁnal certiﬁcate of occupancy is issued. Cost capitalization during redevelopment of
apartment homes (including interest and related loan fees, property taxes and other direct and indirect costs)
begins when an apartment home is taken out-of-service for redevelopment and ends when the apartment
home redevelopment is completed and the apartment home is placed in-service.

In accordance with Statement of Financial Accounting Standards (“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. Future development of these communities is dependent upon various factors,
including zoning and regulatory approval, rental market conditions, construction costs and availability of

A V A L O N B A Y 2 0 0 1

4 2

capital. The accompanying Consolidated Financial Statements include a charge to expense to provide an
allowance for unrecoverable deferred development costs related to pre-development communities that are
unlikely to be developed.

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.

Lease terms for apartment homes are generally one year or less. Rental income and operating costs incurred
during the initial lease-up or post-redevelopment lease-up period are fully recognized as they accrue.

If there is an event or change in circumstance that indicates an impairment in the value of a community,
the Company’s policy is to assess any impairment in value by making a comparison of the current and
projected operating cash ﬂows of the community over its remaining useful life, on an undiscounted basis, to
the carrying amount of the community. If such carrying amounts are in excess of the estimated projected
operating cash ﬂows of the community, the Company would recognize an impairment loss equivalent to an
amount required to adjust the carrying amount to its estimated fair market value.The Company has not
recognized an impairment loss in 2001, 2000 or 1999 on any of its real estate.

Income Taxes The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended, for the year ended December 31, 1994 and has not revoked such election. A corporate REIT 
is a legal entity which holds real estate interests and must meet a number of organizational and operational
requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income
to stockholders. As a REIT, the Company generally will not be subject to corporate level federal income tax
on taxable income it distributes currently to its stockholders. Management believes that all such conditions
for the avoidance of income taxes have been met for the periods presented. Accordingly, no provision for
federal and state income taxes has been made. If the Company fails to qualify as a REIT in any taxable year,
it will be subject to federal income taxes at regular corporate rates (including any applicable alternative
minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the
Company qualiﬁes for taxation as a REIT, the Company may be subject to certain state and local taxes on
its income and property, and to federal income and excise taxes on its undistributed taxable income. In
addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to
federal, state and local income taxes.

The following reconciles net income available to common stockholders to taxable net income for the years
ended December 31, 2001, 2000 and 1999:

Net income available to common stockholders
Dividends attributable to Preferred Stock,

not deductible for tax

GAAP gain on sale of communities in excess of tax gain
Depreciation/Amortization timing differences on real estate
Tax compensation expense in excess of (less than) GAAP
Other adjustments

Taxable net income

2001
Estimate

2000
Actual

1999
Actual

$216,500

$170,825

$132,497

32,497
(21,961)
11,421
(7,752)
(13,459)

39,779
(15,146)
10,593
(5,873)
(12,576)

39,779
(5,162)
6,248
1,285
(10,649)

$217,246

$187,602

$163,998

A V A L O N B A Y 2 0 0 1

4 3

The following summarizes the tax components of the Company’s common and preferred dividends declared
for the years ended December 31, 2001, 2000 and 1999:

Ordinary income
20% capital gain
Unrecaptured §1250 gain

2001

80%
14%
6%

2000

86%
9%
5%

1999

76%
11%
13%

Deferred Financing Costs Deferred ﬁnancing costs include fees and costs incurred to obtain debt ﬁnancing
and are amortized on a straight-line basis, which approximates the effective interest method, over the shorter
of the term of the loan or the related credit enhancement facility, if applicable. Unamortized ﬁnancing costs
are written-off when debt is retired before the maturity date. Accumulated amortization of deferred ﬁnancing
costs were $11,916 and $8,200 at December 31, 2001 and 2000, respectively.

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

Earnings per Common Share
basic earnings per share is computed by dividing earnings available to common shareholders 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.

In accordance with the provisions of SFAS No. 128, “Earnings per Share,”

The Company’s earnings per common share are determined as follows:

Basic and Diluted shares outstanding
Weighted average common shares—basic
Weighted average DownREIT units outstanding
Effect of dilutive securities

Year ended

12-31-01

12-31-00

12-31-99

67,842,752
682,134
1,256,833

66,309,707
861,755
969,536

64,724,799
933,122
452,743

Weighted average common shares and DownREIT units—diluted

69,781,719

68,140,998

66,110,664

Calculation of Earnings per Share—Basic
Net income available to common stockholders

Weighted average common shares—basic

Earnings per common share—basic

Calculation of Earnings per Share—Diluted
Net income available to common stockholders
Add: Minority interest of DownREIT unitholders

in consolidated partnerships

$216,500

$170,825

$132,497

67,842,752

66,309,707

64,724,799

$

3.19

$

2.58

$

2.05

$216,500

$170,825

$132,497

1,559

1,759

1,975

Adjusted net income available to common stockholders

$218,059

$172,584

$134,472

Weighted average common shares and DownREIT units—diluted

69,781,719

68,140,998

66,110,664

Earnings per common share—diluted

$

3.12

$

2.53

$

2.03

For each of the years presented, certain options to purchase shares of common stock were outstanding but
were not included in the computation of diluted earnings per share because the options’ exercise prices were
greater than the average market price of the common shares for the period.The number of options not
included totaled 18,269 in 2001, 7,500 in 2000 and 2,282,192 for 1999.

Executive Separation Costs
In February 2001, the Company announced certain management changes
including the departure of a senior executive who became entitled to severance beneﬁts in accordance 

A V A L O N B A Y 2 0 0 1

4 4

with the terms of his employment agreement with the Company.The Company recorded a charge of
approximately $2,500 in the ﬁrst quarter of 2001 related to the expected costs associated with such departure.

In December 2001, a senior executive of the Company retired from his management position. Upon
retirement, the Company recognized compensation expense of approximately $784, relating to the accelerated
vesting of restricted stock grants.

In August of 2001, the Financial Accounting Standards Board issued

Recently Issued Accounting Standards
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”This pronouncement
establishes accounting and reporting standards requiring that long-lived assets held for sale be classiﬁed as
discontinued operations.These assets will continue to be measured at the lower of the carrying amount 
or the fair value less the cost to sell. Operations, including the gain or loss on sale, for both the current 
and prior periods shall be reported in discontinued operations.The statement becomes effective for ﬁscal
years beginning after December 15, 2001. The Company will adopt this pronouncement beginning
January 1, 2002. In the opinion of management, the adoption of this statement will not have a material
effect on the Company’s Consolidated Financial Statements.

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 years’ ﬁnancial statements to
conform with current year presentations.

2.

Interest Capitalized

Capitalized interest associated with communities under development or redevelopment totaled $27,635,
$18,328 and $21,888 for the years ended December 31, 2001, 2000 and 1999, respectively.

3. Notes Payable, Unsecured Notes and Credit Facility

Mortgage notes payable are collateralized by certain apartment communities and mature at various dates
from March 2002 through February 2041. The weighted average interest rate of the Company’s variable rate
notes and unsecured credit facility, including certain ﬁnancing related fees, was 3.1% at December 31, 2001.
The weighted average interest rate of the Company’s ﬁxed rate mortgage notes (conventional and tax-exempt)
was 6.7% at December 31, 2001. The Company’s notes payable, unsecured notes payable and credit facility
are summarized as follows:

Fixed rate unsecured notes
Fixed rate mortgage notes payable—conventional and tax-exempt(1)
Variable rate mortgage notes payable—tax-exempt

Total notes payable and unsecured notes

Variable rate secured short term construction loan
Variable rate unsecured credit facility

12-31-01

12-31-00

$1,635,000
322,495

67,960
2,025,455
57,314
—

$1,335,000
326,964

67,960
1,729,924
—
—

Total mortgage notes payable, unsecured notes and unsecured credit facility

$2,082,769

$1,729,924

(1) Includes approximately $167,000 of variable rate notes in both years effectively ﬁxed through swap agreements, as described

in Note 5.

A V A L O N B A Y 2 0 0 1

4 5

Scheduled payments and maturities of notes payable and unsecured notes are as follows:

Year

2002
2003

2004
2005

2006
2007
2008

2009
2010
2011
Thereafter

Secured notes
payments

Secured notes
maturities

$
$

$
$

$
$
$

3,298
3,538

3,653
3,705

3,971
4,257
4,565

4,895
$
5,246
$
$
5,626
$ 219,655

$262,409

$ 57,314
—

$ 24,106
—

—
$ 35,980
—

$ 10,400
—
—
$ 57,560

$185,360

Unsecured
notes
maturities

$ 100,000
$
50,000
$ 100,000
$ 125,000
$ 100,000
$
50,000
$ 150,000
$ 110,000
50,000
$
$ 150,000
$ 150,000
$ 200,000
$ 300,000
—

$1,635,000

Interest rate of
unsecured notes

7.375%
6.250%
6.500%
6.580%
6.625%
6.500%
6.800%
6.875%
6.625%
8.250%
7.500%
7.500%
6.625%

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

The Company has a $500,000 variable rate unsecured credit facility with J.P. Morgan Chase and Fleet
National Bank serving as co-agents for a syndicate of commercial banks, which had zero outstanding on
December 31, 2001. Under the terms of the unsecured credit facility, if the Company elects to increase 
the facility up to $650,000, the consortium of banks cannot prohibit such an increase of the facility and the
increased lending commitment could be provided by one or more banks (from the consortium or otherwise)
to the extent they choose to commit to lend additional funds.The unsecured credit facility bears interest 
at a spread over the London Interbank Offered Rate (“LIBOR”) based on 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 0.6% per annum (2.5% on December 31, 2001). 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 $400,000. The Company is subject to certain customary covenants under the unsecured credit facility,
including, but not limited to, maintaining certain maximum leverage ratios, a minimum ﬁxed charges coverage
ratio, minimum unencumbered assets and equity levels and restrictions on paying dividends in amounts that
exceed 95% of the Company’s Funds from Operations, as deﬁned therein.The existing facility matures in
May 2005 after application of a one year renewal option by the Company.

4. Stockholders Equity

As of both December 31, 2001 and 2000, the Company had authorized for issuance 140,000,000 and
50,000,000 of Common and Preferred Stock, respectively. Dividends on all series of issued Preferred Stock
are cumulative from the date of original issue and are payable quarterly in arrears on or before the 15th 
day of each month as stated in the table below. None of the series of Preferred Stock are redeemable prior
to the date stated in the table below, but on or after the stated date, may be redeemed for cash at the option
of the Company in whole or in part at a redemption price of $25.00 per share, plus all accrued and unpaid

A V A L O N B A Y 2 0 0 1

4 6

dividends, if any. In June 2001, the Company redeemed all 4,455,000 outstanding shares of its 9.00% Series F
Cumulative Redeemable Preferred Stock at a price of $25.00 per share, plus $0.1625 in accrued and unpaid
dividends. In October 2001, the Company redeemed all 4,300,000 outstanding shares of its 8.96% Series G
Cumulative Redeemable Preferred Stock at a price of $25.00 per share, plus $0.4418 in accrued and unpaid
dividends.The series of Preferred Stock outstanding have no stated maturity and are not subject to any
sinking fund or mandatory redemptions. Preferred Stock outstanding as of December 31, 2001 were as follows:

Series

Shares outstanding
December 31, 2001

Payable
quarterly

Annual
rate

Liquidation
preference

Non-redeemable
prior to

C

D

H

2,300,000

3,267,700

4,000,000

March, June, September,
December
March, June, September,
December
March, June, September,
December

8.50%

8.00%

8.70%

$25

$25

$25

June 20, 2002

December 15, 2002

October 15, 2008

The Company also has 1,000,000 shares of Series E Junior Participating Cumulative Preferred Stock
authorized for issuance pursuant to the Company’s Shareholder Rights Agreement. As of December 31, 2001,
there were no shares of Series E Preferred Stock outstanding, and the Company has amended its Shareholder
Rights Agreement so that it will expire effective March 31, 2002.

Dividends per common share for the years ended December 31, 2001, 2000 and 1999 were $2.56, $2.24 and
$2.06, respectively. In 2001, dividends per preferred share for shares redeemed during the year were $1.41
and dividends per share for all non-redeemed preferred shares were $2.10. Dividends per preferred share
were $2.17 in both 2000 and 1999.

5. Derivative Instruments and Hedging Activities

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS No. 133, as amended by SFAS No. 137, “Accounting for
Derivative Instruments and Hedging Activities—Deferral of the Effective Date of SFAS No. 133,” and SFAS
No. 138, “Accounting for Certain Instruments and Certain Hedging Activities, an amendment of Statement
133,” was adopted by the Company on January 1, 2001. SFAS No. 133, as amended, establishes accounting
and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133 also requires that a change in the derivative’s fair
value be recognized currently in earnings unless speciﬁc hedge accounting criteria are met. For fair value
hedge transactions, changes in the fair value of the derivative instrument and changes in the fair value of the
hedged item due to the risk being hedged are recorded through the income statement. For cash ﬂow hedge
transactions, changes in the fair value of the derivative instrument are reported in other comprehensive
income. For hedges where the changes in the fair value of the derivative exceeds the change in fair value of
the hedged item, the ineffective portion is recognized in current period earnings. Derivatives which are not
part of a hedge relationship are recorded at fair value through earnings.

The Company has historically used interest rate swap agreements (the “Swap Agreements”) to reduce the
impact of interest rate ﬂuctuations on its variable rate tax-exempt bonds.The Company has not entered 
into any interest rate hedge agreements or treasury locks for its conventional unsecured debt.The Swap
Agreements are not held for trading or other speculative purposes. As of December 31, 2001, the effect of
these Swap Agreements is to ﬁx $167,272 of the Company’s tax-exempt debt at a weighted average interest
rate of 6.0% with an average maturity of 4.5 years. By using derivative ﬁnancial instruments to hedge
exposures to changes in interest rates, the Company exposes itself to credit risk and market risk.

A V A L O N B A Y 2 0 0 1

4 7

The credit risk is the risk of a counterparty not performing under the terms of the Swap Agreement. The
counterparties to these Swap Agreements are major ﬁnancial institutions which have an A+ or better credit
ratings by the Standard & Poor’s Ratings Group. The Company monitors the credit ratings of counterparties
and the amount of the Company’s debt subject to Swap Agreements with any one party.Therefore, the
Company believes the likelihood of realizing material losses from counterparty non-performance is remote.

Market risk is the adverse effect of the value of ﬁnancial instruments that results from a change in interest
rates.The market risk associated with interest-rate contracts is managed by the establishment and monitoring
of parameters that limit the types and degree of market risk that may be undertaken.These risks are managed
by the Company’s Chief Financial Officer and Vice President of Finance.

The Company has determined that its Swap Agreements qualify as effective cash-ﬂow hedges under SFAS
No. 133. When entering into hedging transactions, the Company documents the relationships between
hedging instruments and hedged items, as well as the risk management objective and strategy.The Company
assesses, both at inception and on an on-going basis, the effectiveness of all hedges in offsetting cash ﬂows of
hedged items. In accordance with SFAS No. 133, the Company records all changes in the fair value of the
Swap Agreements in other comprehensive income. Amounts recorded in other comprehensive income will
be reclassiﬁed into earnings in the period in which earnings are affected by the hedged cash ﬂows. For
example, the reduction in fair value on a cash ﬂow hedge due to the periodic payment of interest under
the Swap Agreements is recorded in earnings each period.The combination of this expense with the lower
interest expense we expect to pay on the underlying ﬂoating rate debt should result in overall interest
expense equal to the contractually ﬁxed amount resulting from the ﬁxed rate swaps. In all situations where
hedge accounting is discontinued, the derivative will be carried at fair value with changes in its fair value
recognized in income. Upon the termination of a hedging relationship, the amount in other comprehensive
income will be amortized over the remaining life of the hedged cash ﬂows.

At January 1, 2001, in accordance with the transition provisions of SFAS No. 133, the Company recorded 
a cumulative effect adjustment of $6,412 to other comprehensive loss to recognize at fair value all of the
derivatives that are designated as cash ﬂow hedging instruments.Through December 31, 2001, the Company
recorded additional unrealized losses to other comprehensive loss of $2,599 to adjust the Swap Agreements
to their fair value. In connection with the sale of a community during the ﬁrst quarter of 2001, a Swap
Agreement with a fair value of $528 was transferred to the new owner. Hedge ineffectiveness did not have 
a material impact on earnings and the Company does not anticipate that it will have a material effect in the
future. The Swap Agreements are included in accrued expenses and other liabilities on the accompanying
Consolidated Balance Sheets.

6.

Investments in Unconsolidated Real Estate Entities

The Company accounts for investments in unconsolidated real estate entities in accordance with Statement
of Position (“SOP”) 78-9, “Accounting for Investments in Real Estate Ventures” and APB Opinion No. 18.
The Company applies the equity method of accounting to an investment in an entity if it owns greater than
20% of the equity value or has signiﬁcant and disproportionate inﬂuence over that entity.

A V A L O N B A Y 2 0 0 1

4 8

At December 31, 2001, the Company’s investments in unconsolidated real estate entities accounted for under
the equity method of accounting consisted of:

• a 50% limited liability company membership interest in a limited liability company that owns the Falkland

Chase community;

• a 49% general partnership interest in a partnership that owns the Avalon Run community;

• a 50% limited liability company membership interest in a limited liability company that owns the Avalon

Grove community; and

• a 50% limited liability company membership interest in a limited liability company that owns the Avalon

Terrace community.

The following is a combined summary of the ﬁnancial position of these entities as of the dates presented:

Assets:
Real estate, net
Other assets

Total assets

Liabilities and partners’ equity:
Mortgage notes payable
Other liabilities
Partners’ equity

Total liabilities and partners’ equity

(Unaudited)

12-31-01

12-31-00

$151,590
10,971

$162,561

$ 47,195
10,040
105,326

$162,561

$132,832
10,400

$143,232

$ 48,400
8,656
86,176

$143,232

The following is a combined summary of the operating results of these entities for the periods presented:

Rental income
Other income
Operating and other expenses
Mortgage interest expense
Depreciation expense

Net income

Year ended
(unaudited)

12-31-01

12-31-00

12-31-99

$28,746
170
(9,098)
(2,571)
(4,262)

$12,985

$22,222
57
(6,110)
(1,107)
(3,202)

$ 11,860

$20,781
26
(5,657)
(773)
(3,091)

$11,286

The Company also holds an investment in a real estate entity which is accounted for under the cost method
of accounting. In addition, the Company holds a 25% limited liability company membership interest in the
limited liability company that owns Avalon on the Sound, which is presented on a consolidated basis in the
ﬁnancial statements in accordance with GAAP due to the Company’s control over that entity.

A V A L O N B A Y 2 0 0 1

4 9

7. Communities Held for Sale

The Company has a policy of disposing of assets that are not consistent with its long-term investment criteria
when market conditions are favorable. In connection with this strategy, the Company solicits competing bids
from unrelated parties for individual assets, and considers the sales price and tax ramiﬁcations of each proposal.

The communities sold during 2001 and the respective sales price and net proceeds are summarized below:

Community Name

Location

Period
of sale

Apartment
homes

Rohnert Park, CA
Manchester, CT
Beaverton, OR
Hillsboro, OR
Brookline, MA
West Covina, CA
Hacienda Heights, CA

1Q01
3Q01
3Q01
3Q01
4Q01
4Q01
4Q01

Crossbrook
Avalon Pavilions
Waterhouse Place
Avalon Palladia
Avalon Colchester
Timberwood
Arbor Heights

Total of all 2001 asset sales

Total of all 2000 asset sales

Total of all 1999 asset sales

226
932
279
497
57
209
351

2,551

1,932

4,464

Debt

$ 8,145
—
—
—
—
—
—

$ 8,145

$31,694

$29,645

Gross sales
price

$ 23,250
81,500
20,900
51,250
6,000
22,900
35,330

$241,130

$160,085

$316,512

Net
proceeds

$ 14,500
81,000
20,600
51,000
5,900
22,700
34,700

$230,400

$124,392

$280,918

There were no communities held for sale as of December 31, 2001, however, the Company will continue 
to evaluate market conditions and will dispose of communities to optimize its concentration of assets when
conditions are favorable.

8. Commitments and Contingencies

Presale Commitments The Company occasionally enters into ﬁxed price forward purchase commitments
with unrelated third parties, which allow the Company to purchase communities upon completion of
construction. The Company has an agreement to purchase a community with an estimated 306 apartment
homes for an aggregate purchase price of approximately $70,000. The Company expects the acquisition 
to close in the second quarter of 2002. However, there can be no assurance that such acquisition will be
consummated on the terms currently contemplated or at all, or on the schedule currently contemplated.

Insured Fire at Development Community During 2000, a ﬁre occurred at one of the Company’s development 
communities, which was under construction and unoccupied at the time.The book value of the destroyed
assets was reduced to zero from a balance of approximately $13,900 at the time of the ﬁre. The Company
recorded an insurance receivable for the same amount which was subsequently collected from the insurance
company. The Company has property damage and business interruption insurance and prepared an
insurance claim for the cost of replacing the destroyed assets as well as for business interruption losses. The
Company does not anticipate this event will have a material adverse impact on the ﬁnancial condition or
results of operations of the Company. At December 31, 2001, the Company had an insurance receivable
balance of $2,500 for business interruption through December 31, 2001. Income of $2,500 relating to the
business interruption insurance claim is recorded in Other income in the accompanying Consolidated
Statements of Operations and Comprehensive Income for 2001. In 2002, the Company expects to ﬁnalize
the settlement of its insurance claim related to this ﬁre and to recognize additional income from business
interruption insurance which cannot be reasonably estimated at this time.

Employment Agreements and Arrangements As of December 31, 2001, the Company has employment
agreements with two executive officers that it entered into in 1998. In addition, during 2000 and 2001, six
other senior officers entered into employment agreements, which are generally similar in structure to those
entered into in 1998 but which generally do not provide for the same level of severance payments.The

A V A L O N B A Y 2 0 0 1

5 0

employment agreements provide for severance payments and generally also provide for accelerated vesting of
stock options and restricted stock in the event of a termination of employment (except for a termination by
the Company with cause or a voluntary termination by the employee).The current term of these agreements
ends on dates that vary between March 2003 and April 2004. The employment agreements provide for
one-year automatic renewals after the initial term unless an advance notice of non-renewal is provided by
either party. Under ﬁve of the agreements, upon a notice of non-renewal by the Company, the officer may
terminate his employment and receive a severance payment. Upon a change in control, the agreements
provide for an automatic extension of up to three years from the date of the change in control.The
employment agreements provide for base salary and incentive compensation in the form of cash awards,
stock options and stock grants subject to the discretion of, and attainment of performance goals established
by, the Compensation Committee of the Board of Directors.

During the fourth quarter of 1999, the Company adopted an Officer Severance Program (the “Program”)
for the beneﬁt of those officers of the Company who do not have employment agreements. Under the
Program, in the event an officer who is not otherwise covered by a severance arrangement is terminated
without cause in connection with a change in control (as deﬁned) of the Company, such officer will
generally receive a cash lump sum payment equal to the amount of such officer’s base salary and cash bonus
as well as accelerated vesting of stock options and restricted stock.

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

9. Segment Reporting

The Company’s reportable operating segments include Established Communities, Other Stabilized
Communities, and Development/Redevelopment Communities. Annually on January 1st, the Company
determines which of its communities fall into each of these categories and maintains that classiﬁcation
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 costs as of the beginning of the prior year.These communities
are divided into geographic regions. For the year 2001, the Established Communities were communities
that had stabilized occupancy and costs as of January 1, 2000. A community is considered to have stabilized
occupancy at the earlier of (i) attainment of 95% occupancy or (ii) the one-year anniversary of completion
of development or redevelopment.

• Other Stabilized includes all other completed communities that have stabilized occupancy, as deﬁned

above, and communities held for sale.

• Development/Redevelopment consists of communities that are under construction and have not

received a ﬁnal certiﬁcate of occupancy and communities where substantial redevelopment is in progress
or is planned to take place during the current year.

The primary ﬁnancial measure for Established and Other Stabilized Communities is Net Operating 
Income (“NOI”), which represents total revenue less operating expenses and property taxes.The primary
performance measure for communities under development or redevelopment depends on the stage of

A V A L O N B A Y 2 0 0 1

5 1

completion.While under development, management monitors actual construction costs against budgeted
costs as well as economic occupancy.While under lease-up, the primary performance measures for these
assets are lease-up pace compared to budget and rent levels compared to budget.

(Dollars in thousands)

For the year ended December 31, 2001
Segment Results
Established

Northeast
Mid-Atlantic
Midwest
Paciﬁc Northwest
Northern California
Southern California

Total Established

Other Stabilized
Development / Redevelopment
Land Held for Future Development
Non-Allocated

Total
revenue

Net operating
income

% NOI change
from prior year

Gross
real estate

$113,564
81,976
21,069
6,784
157,736
42,462

423,591

161,297
56,769
n/a
n/a

$ 81,777
60,256
13,089
4,985
121,923
30,188

312,218

113,786
34,532
n/a
n/a

8.4%
8.4%
1.7%
3.3%
6.9%
9.2%

7.5%

n/a
n/a
n/a
n/a

$ 570,551
438,010
145,025
60,426
1,216,489
294,625

2,725,126

1,025,704
991,667
66,608
28,764

Total AvalonBay

$641,657

$460,536

11.8%

$4,837,869

For the year ended December 31, 2000
Segment Results
Established

Northeast
Mid-Atlantic
Midwest
Paciﬁc Northwest
Northern California
Southern California

Total Established

Other Stabilized
Development / Redevelopment
Land Held for Future Development
Non-Allocated

$ 92,094
68,646
20,455
3,778
107,342
23,458

315,773

198,444
59,178
n/a
n/a

$ 65,047
49,694
12,869
2,751
82,126
16,635

229,122

141,270
41,492
n/a
n/a

6.6%
9.2%
5.0%
17.1%
15.9%
11.6%

10.7%

n/a
n/a
n/a
n/a

$ 486,217
392,758
144,550
34,382
938,630
158,165

2,154,702

1,441,767
882,043
33,161
24,296

Total AvalonBay

$573,395

$ 411,884

18.5%

$ 4,535,969

For the year ended December 31, 1999
Segment Results
Established

Northeast
Mid-Atlantic
Midwest
Northern California
Southern California

Total Established

Other Stabilized
Development / Redevelopment
Land Held for Future Development
Non-Allocated

$ 84,786
64,645
5,347
96,182
6,557

257,517

164,884
83,578
n/a
n/a

$ 60,098
45,863
3,049
70,662
4,512

184,184

111,637
54,725
n/a
n/a

5.9%
7.6%
7.6%
1.1%
15.2%

4.7%

n/a
n/a
n/a
n/a

$ 475,430
390,573
36,912
942,892
51,085

1,896,892

1,039,150
1,266,989
40,459
22,936

Total AvalonBay

$505,979

$ 350,546

38.3%

$4,266,426

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

A V A L O N B A Y 2 0 0 1

5 2

the operating segments described above are the same as those described in the summary of signiﬁcant
accounting policies.

Operating expenses as reﬂected on the Consolidated Statements of Operations and Comprehensive Income
include $32,967, $28,111 and $22,786 for the years ended December 31, 2001, 2000 and 1999, respectively,
of property management overhead costs that are not allocated to individual communities.These costs are
not reﬂected in NOI as shown in the above tables.While there were no communities held for sale at
December 31, 2001, the amount reﬂected for “Communities held for sale” on the Consolidated Balance
Sheets at December 31, 2000 is net of $19,965 for accumulated depreciation.

10. Stock-Based Compensation Plans

The Company has adopted the 1994 Stock Incentive Plan, as amended and restated on March 31, 2001 (the
“1994 Plan”), for the purpose of encouraging and enabling the Company’s officers, associates and directors 
to acquire a proprietary interest in the Company and as a means of aligning management and stockholder
interests and as a retention incentive for key associates. 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 under Section 422 of the Internal Revenue Code (“ISOs”), (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.

Under the 1994 Plan, a maximum of 6,576,859 shares of Common Stock, plus upon the passing of each
December 31st starting with December 31, 2001, up to 1.0% of the total number of shares of common stock
and DownREIT units actually outstanding on such date, may be issued. 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. For purposes of this
limitation, shares of Common Stock which are forfeited, canceled and reacquired by the Company, satisﬁed
without the issuance of Common Stock or otherwise terminated (other than by exercise) shall be added
back to the shares of Common Stock available for issuance under the 1994 Plan. Stock Options with respect
to no more than 300,000 shares of stock may be granted to any one individual participant during any one
calendar year period. Options granted to officers and employees under the 1994 Plan vest over periods (and
may be subject to accelerated vesting under certain circumstances) as determined by the Compensation
Committee of the Board of Directors and must expire no later than ten years from the date of grant. Options
granted to non-employee directors under the 1994 Plan are subject to accelerated vesting under certain
limited circumstances, become exercisable on the ﬁrst anniversary of the date of grant, and expire ten years
from the date of grant. Restricted stock granted to officers and employees under the 1994 Plan vest over
periods (and may be subject to accelerated vesting under certain circumstances) as determined by the
Compensation Committee of the Board of Directors. Generally, the restricted stock grants that have been
awarded to officers and employees vest over four years, with 20% vesting immediately on the grant date and
the remaining 80% vesting equally over the next four years from the date of grant. Restricted stock granted
to non-employee directors vests 20% on the date of issuance and 20% on each of the ﬁrst four anniversaries
of the date of issuance. Options to purchase 2,780,757, 3,123,713, and 3,637,724 shares of Common Stock
were available for grant under the 1994 Plan at December 31, 2001, 2000 and 1999, respectively.

Before the Merger, Avalon had adopted its 1995 Equity Incentive Plan (the “Avalon 1995 Incentive Plan”).
Under the Avalon 1995 Incentive Plan, a maximum number of 3,315,054 shares (or 2,546,956 shares as
adjusted for the Merger) of Common Stock were issuable, plus any shares of Common Stock represented by

A V A L O N B A Y 2 0 0 1

5 3

awards under Avalon’s 1993 Stock Option and Incentive Plan (the “Avalon 1993 Plan”) that were forfeited,
canceled, reacquired by Avalon, satisﬁed without the issuance of Common Stock or otherwise terminated
(other than by exercise). Options granted to officers, non-employee directors and associates under the
Avalon 1995 Incentive Plan generally vested over a three-year term, expire ten years from the date of grant
and are exercisable at the market price on the date of grant.

In connection with the Merger, the exercise prices and the number of options under the Avalon 1995
Incentive Plan and the Avalon 1993 Plan were adjusted to reﬂect the equivalent Bay shares and exercise
prices based on the 0.7683 share conversion ratio used in the Merger. Officers, non-employee directors and
associates with Avalon 1995 Incentive Plan or Avalon 1993 Plan options may exercise their adjusted number
of options for the Company’s Common Stock at the adjusted exercise price. As of June 4, 1998, the date of
the Merger, options and other awards ceased to be granted under the Avalon 1993 Plan or the Avalon 1995
Incentive Plan. Accordingly, there were no options to purchase shares of Common Stock available for grant
under the Avalon 1995 Incentive Plan or the Avalon 1993 Plan at December 31, 2001, 2000 or 1999.

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

Options outstanding, December 31, 1998

Exercised
Granted
Forfeited

Options outstanding, December 31, 1999

Exercised
Granted
Forfeited

Options outstanding, December 31, 2000

Exercised
Granted
Forfeited

Options outstanding, December 31, 2001

Options exercisable:

December 31, 1999

December 31, 2000

December 31, 2001

1994 Plan
shares

1,886,082
(311,989)
993,084
(533,903)

2,033,274
(172,376)
631,795
(66,736)

2,425,957
(367,652)
946,612
(111,639)

2,893,278

682,110

1,183,551

1,537,194

Weighted
average
exercise price
per share

Avalon 1995
and Avalon
1993 Plan
shares

Weighted
average
exercise price
per share

$32.74
25.44
32.24
36.25

$32.63
34.78
34.56
33.50

$32.96
33.05
45.90
40.34

$36.91

$30.33

$32.05

$33.58

2,052,254
(172,977)
—
(50,940)

1,828,337
(327,582)
—
(16,410)

1,484,345
(487,312)
—
(4,836)

992,197

1,268,520

1,313,219

976,830

$34.05
26.97
—
37.61

$34.63
28.65
—
35.84

$35.94
35.79
—
36.61

$36.03

$33.22

$ 35.71

$35.99

For options outstanding at December 31, 2001 for the 1994 plan, 246,666 options had exercise prices ranging
between $18.37 and $29.99 and a weighted average contractual life of 3.1 years, 1,692,300 options had
exercise prices ranging between $30.00 and $39.99 and a weighted average contractual life of 7.1 years, and
954,312 options had exercise prices ranging between $40.00 and $47.50 and a weighted average contractual
life of 9.1 years. Options outstanding at December 31, 2001 for the Avalon 1993 and Avalon 1995 plans had
exercise prices ranging from $26.68 to $39.86 and a weighted average contractual life of 5.3 years.

The Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations in accounting for its Plans. Accordingly, no compensation expense has been recognized for
the stock option portion of the stock-based compensation plan.

A V A L O N B A Y 2 0 0 1

5 4

Had compensation expense for the Company’s stock option plan been determined based on the fair value at
the grant date for awards under the Plan consistent with the methodology prescribed under SFAS No. 123,
“Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would
have been reduced to the following pro forma amounts (unaudited):

Net income available to common stockholders
Per common share—basic
Per common share—diluted

Year ended
12-31-01

$212,924
3.14
$
3.07
$

Pro Forma

Year ended
12-31-00

$168,058
2.53
$
2.49
$

Year ended
12-31-99

$130,882
2.02
$
2.01
$

The fair value of the options granted during 2001 is estimated at $4.83 per share on the date of grant using
the Black-Scholes option pricing model with the following assumptions: dividend yield of 5.58%, volatility
of 16.47%, risk-free interest rates of 5.07%, actual number of forfeitures, and an expected life of approximately
3 years.The fair value of the options granted during 2000 is estimated at $3.76 per share on the date of
grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of
6.51%, volatility of 15.93%, risk-free interest rates of 6.61%, actual number of forfeitures, and an expected 
life of approximately 3 years.The fair value of the options granted during 1999 is estimated at $3.40 per
share on the date of grant using the Black-Scholes option pricing model with the following assumptions:
dividend yield of 6.10%, volatility of 17.04%, risk-free interest rates of 5.54%, actual number of forfeitures,
and an expected life of approximately 3 years.

In connection with the Merger, the Company adopted the 1996 Non-Qualiﬁed Employee Stock Purchase
Plan, as amended and restated (the “1996 ESP Plan”).The primary purpose of the 1996 ESP Plan is to
encourage Common Stock ownership by eligible directors, officers and associates (the “Participants”) in 
the belief that such ownership will increase each Participant’s interest in the success of the Company. Until
January 1, 2000, the 1996 ESP Plan provided for two purchase periods per year. A purchase period was a six
month period beginning each January 1 and July 1 and ending each June 30 and December 31, respectively.
Starting January 1, 2000, there is one purchase period per year, which begins May 1 and ends October 31.
Participants may contribute portions of their compensation during a purchase period and purchase Common
Stock at the end thereof. One million shares of Common Stock were initially reserved for issuance under
the 1996 ESP Plan. Participation in the 1996 ESP Plan entitles each Participant to purchase Common Stock
at a price which is equal to the lesser of 85% of the closing price for a share of stock on the ﬁrst day of such
purchase period or 85% of the closing price on the last day of such purchase period.The Company issued
14,917, 34,055 and 35,408 shares under the 1996 ESP Plan for 2001, 2000 and 1999, respectively.

11. Fair Value of Financial Instruments

Cash and cash equivalent balances are held with various ﬁnancial institutions and may at times exceed the
applicable Federal Deposit Insurance Corporation limit.The Company monitors credit ratings of these
ﬁnancial institutions and the concentration of cash and cash equivalent balances with any one ﬁnancial
institution and believes the likelihood of realizing material losses from the excess of cash and cash equivalent
balances over insurance limits is remote.

The following estimated fair values of ﬁnancial instruments were determined by management using available
market information and established valuation methodologies, including discounted cash ﬂows. Accordingly, the
estimates presented are not necessarily indicative of the amounts the Company could realize on disposition
of the ﬁnancial instruments.The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.

A V A L O N B A Y 2 0 0 1

5 5

• Cash equivalents, rents receivable, accounts payable and accrued expenses, and other liabilities are

carried at their face amounts, which reasonably approximate their fair values.

• Bond indebtedness and notes payable with an aggregate carrying value of $2,082,769 and $1,729,924 had
an estimated aggregate fair value of $2,191,115 and $1,765,402 at December 31, 2001 and 2002, respec-
tively.

12. Related Party Arrangements

Purchase of Mortgage Loan An executive officer and former executive officer of the Company are
partners of an entity that is the general partner of Arbor Commons Associates Limited Partnership
(“Arbor Commons Associates”). Concurrently with Avalon’s initial public offering in November 1993,
Avalon purchased an existing participating mortgage loan made to Arbor Commons Associates that was
originated by CIGNA Investments, Inc.The mortgage loan is secured by the borrower’s interests in the
Avalon Arbor community. This loan accrues interest at a ﬁxed rate of 10.2% per annum, payable at 9%
per annum. The balance of the note receivable at both December 31, 2001 and 2000 was $21,483. The
balance of accrued interest on the note receivable as of December 31, 2001 and 2000, respectively, was
$5,231 and $4,450. Related interest income of $3,081, $3,009 and $2,943 was recorded for 2001, 2000
and 1999, respectively. Under the terms of the loan, the Company (as successor to Avalon) receives (as
contingent interest) 50% of the cash ﬂow after the 10.2% accrual rate is paid and 50% of the residual
proﬁts upon the sale of the community.

Sublease of San Jose Office Space to Greenbriar Homes From September 1, 1999 to August 31, 2001, the
Company subleased approximately 8,500 square feet of space in its San Jose office to Greenbriar Homes,
for approximately $20,552 per month. A director of the Company holds a controlling interest in Greenbriar
Homes. The lease has expired and Greenbriar no longer subleases office space from the Company.

Unconsolidated Entities The Company manages several unconsolidated entities for which it receives
management fee revenue. From these entities the Company received management fee revenue of $1,011,
$691 and $612 in 2001, 2000 and 1999, respectively.

Indebtedness of Management The Company has adopted a recourse loan program under which the
Company lends amounts to or on behalf of employees (“Stock Loans”) equivalent to the estimated
employees’ tax withholding liabilities related to the vesting of restricted stock under the 1994 Plan.
The balance of the extended Stock Loans to employees was $1,133 and $770 as of December 31, 2001
and 2000, respectively. The balance of accrued interest on the notes receivable was $100 and $59 as 
of December 31, 2001 and 2000, respectively. Interest income on the notes of $62, $76, and $38 was
recorded for 2001, 2000 and 1999, respectively.

Pursuant to a Promissory Note and Pledge and Security Agreement dated June 15, 2000, the Company
advanced a senior officer $457. Until the ﬁfth anniversary of this loan, the loan bears interest at the rate
of 6.49%, which was the Long Term Applicable Federal Rate in effect at the time the loan was made.
After the ﬁfth anniversary, the loan will bear interest at 6.49%, or, if the prevailing Short Term Applicable
Federal Rate then in effect is greater than 10.49% or less than 2.49%, then at the prevailing Short Term
Applicable Federal Rate thereafter in effect from time to time.This is a full recourse loan, and in addition
is secured by Common Stock and rights to employee stock options owned by the officer. Dividends on
the Common Stock securing the loan are applied to payment of interest and principal on the loan. The
outstanding balance of the loan, including accrued interest, was $428 and $448 as of December 31, 2001
and 2000, respectively. Interest income of $28 and $14 relating to the loan was recorded for 2001 and 2000,
respectively. If this loan is not repaid in full by June 15, 2005, then at any time thereafter the Company 

A V A L O N B A Y 2 0 0 1

5 6

in its sole discretion may demand repayment. In addition, the officer will be required to repay the loan in
full within sixty days following his termination of employment with the Company for any reason.

In March 2000, the Company and Mr. Meyer announced that

Consulting Agreement with Mr. Meyer
Mr. Meyer would retire as Executive Chairman of the Company in May 2000. Although Mr. Meyer
ceased his day-to-day involvement with the Company as an executive officer, he continues to serve as a
director. In addition, pursuant to a consulting agreement, Mr. Meyer agreed to serve as a consultant to
the Company for three years following his retirement for an annual fee of $1,395. In such capacity he
assists with respect to transitional matters that may arise in connection with his retirement, he responds
to requests for assistance or information concerning business matters with which he became familiar
while employed, and he provides business advice and counsel to the Company with respect to business
strategies and acquisitions, disposition, development and redevelopment of multifamily rental properties.

Director Compensation A director of the Company who is also an employee receives no additional
compensation for his services as a director. Under the Stock Incentive Plan, on the ﬁfth business day
following each annual meeting of stockholders, each of the Company’s non-employee directors
automatically receives options to purchase 7,000 shares of Common Stock at the last reported sale price
of the Common Stock on the NYSE on such date, and a restricted stock (or deferred stock award) grant
of 2,500 shares of Common Stock. Subject to accelerated vesting under certain limited circumstances,
all of such stock options will become exercisable one year after the date of grant and will expire ten
years after the date of grant, and such shares of restricted stock (or deferred stock awards) granted to
non-employee directors will vest at the rate of 20% on the date of issuance and on each of the ﬁrst four
anniversaries of the date of issuance. If a director elects to receive a deferred stock award in lieu of
restricted stock, then at the time of such election, the director also elects at what time in the future he 
or she will receive shares of stock in respect of the vested portion of the deferred stock award.The
Company recorded compensation expense relating to these awards in the amount of $624, $525 and $438
in 2001, 2000 and 1999, respectively. Deferred compensation relating to the Board of Directors was $688
and $507 on December 31, 2001 and 2000, respectively.

13. Quarterly Financial Information (Unaudited)

The following summary represents the quarterly results of operations for the years ended December 31,
2001 and 2000:

Three months ended

3-31-01

6-30-01

9-30-01

12-31-01

Total revenue
Net income available to common stockholders
Net income per common share—basic
Net income per common share—diluted

$155,757
$ 41,654
0.62
$
0.61
$

$162,359
$ 39,131
0.58
$
0.57
$

$163,269
$ 79,229
1.16
$
1.14
$

$160,272
$ 56,486
0.83
$
0.81
$

Three months ended

3-31-00

6-30-00

9-30-00

12-31-00

Total revenue
Net income available to common stockholders
Net income per common share—basic
Net income per common share—diluted

$ 135,088
$ 37,227
0.57
$
0.56
$

$ 139,958
$ 40,712
0.62
$
0.61
$

$ 146,351
$ 48,550
0.73
$
0.71
$

$ 151,998
$ 44,336
0.66
$
0.65
$

14. Subsequent Events

In January 2002, the Company invested an additional $2,300 in Realeum, Inc., a company involved in
the development and deployment of a property management and leasing automation system.

A V A L O N B A Y 2 0 0 1

5 7

R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N T A N T S

To the Board of Directors and Stockholders of
AvalonBay Communities, Inc.:

We have audited the accompanying consolidated balance sheets of AvalonBay Communities, Inc. (a
Maryland corporation, the “Company”) and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations and comprehensive income, stockholders’ equity and cash ﬂows for
each of the three years in the period ended December 31, 2001. These consolidated ﬁnancial statements 
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
ﬁnancial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing
the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the
overall ﬁnancial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated ﬁnancial statements referred to above present fairly, in all material respects,
the ﬁnancial position of AvalonBay Communities, Inc. and subsidiaries as of December 31, 2001 and 2000,
and the results of their operations and their cash ﬂows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in the United States.

As explained in Note 5 to the ﬁnancial statements, effective January 1, 2001, the Company changed its
method of accounting for derivative instruments and hedging activities.

Vienna,Virginia
January 22, 2002

A V A L O N B A Y 2 0 0 1

5 8

M A R K E T F O R R E G I S T R A N T ’ S C O M M O N E Q U I T Y
A N D R E L A T E D S T O C K H O L D E R M A T T E R S

Our common stock is traded on the New York Stock Exchange (NYSE) and the Paciﬁc Exchange (PCX)
under the ticker symbol AVB.The following table sets forth the quarterly high and low sales prices per 
share of our common stock on the NYSE for the years 2001 and 2000, as reported by the NYSE. On
March 1, 2002 there were 617 holders of record of an aggregate of 68,780,976 shares of our outstanding
common stock. The number of holders does not include individuals or entities who beneﬁcially own 
shares but whose shares are shares held of record by a broker or clearing agency, but does include each 
such broker or clearing agency as one recordholder.

2001

2000

Sales Price

High

Low

Dividends
declared

Sales Price

High

Low

Dividends
declared

Quarter ended March 31
Quarter ended June 30
Quarter ended September 30
Quarter ended December 31

$50.000
$47.450
$51.900
$49.700

$45.200
$42.450
$43.800
$44.010

$0.64
$0.64
$0.64
$0.64

$36.688
$43.125
$48.250
$50.625

$ 32.625
$ 36.125
$42.000
$44.000

$0.56
$0.56
$0.56
$0.56

We expect to continue our policy of paying regular quarterly cash dividends. However, dividend distributions
will be declared at the discretion of the Board of Directors and will depend on actual cash from operations,
our ﬁnancial condition, capital requirements, the annual distribution requirements under the REIT provisions
of the Internal Revenue Code and other factors as the Board of Directors may consider relevant.The Board
of Directors may modify our dividend policy from time to time.

A V A L O N B A Y 2 0 0 1

5 9

A V A L O N B A Y C O R P O R A T E I N F O R M A T I O N

Board of Directors
Bryce Blair
Chairmain of the Board,
CEO and President
AvalonBay Communities, Inc.

Bruce A. Choate
Chief Financial Officer
Watson Land Corporation

John J. Healy, Jr.
Founder and CEO
Hyde Street Holdings, Inc.

Gilbert M. Meyer
Founder and President
Greenbriar Homes 
Communities, Inc.

Richard L. Michaux
Chairman Emeritus
AvalonBay Communities, Inc.

Charles D. Peebler, Jr.
Managing Director
Plum Capital LLC 

Lance R. Primis
Managing Partner
Lance R. Primis and Partners, LLC 

Allan D. Schuster
Private Investor

Amy P. Williams
Vice President 
Finance and Planning
Allstate Insurance Company

Officers
Bryce Blair
Chairman of the Board,
CEO and President

Timothy J. Naughton
Chief Operating Officer

Samuel B. Fuller
Executive Vice President
Development/Construction

Thomas J. Sargeant
Executive Vice President
Chief Financial Officer and
Treasurer

Leo S. Horey
Senior Vice President
Property Operations

James R. Liberty
Senior Vice President
Construction

Charlene Rothkopf
Senior Vice President
Human Resources

David W. Bellman
Regional Vice President
Construction

Matthew H. Birenbaum
Regional Vice President
Development

Gwyneth Jones Coté
Regional Vice President
Property Operations

Lili F. Dunn
Regional Vice President
Investments

William M. McLaughlin
Regional Vice President
Development

J. Richard Morris
Regional Vice President
Construction

Tracey B. Appelbaum
Vice President
Development

Miguel A. Azua
Vice President
Controller

Walter W. Braun
Vice President
Construction 

Shannon E. Brennan
Vice President
Customer Service

Scott W. Dale
Vice President
Development

Frederick S. Harris
Vice President
Development

Dirk V. Herrman
Vice President
Chief Marketing Officer

Andrew C. Kilbourne
Vice President
Strategic Technology Initiatives

David L. Kirzinger
Vice President
Property Operations

Lyn C. Lansdale
Vice President
Strategic Business Services

Joanne M. Lockridge
Vice President
Finance

Janice A. Miner
Vice President
Property Operations

Edward M. Schulman
Vice President
General Counsel and Secretary

Lawrence A. Scott
Vice President
Development

Gary S. Steinﬁeld
Vice President
Development

Bernard J. Ward
Vice President
Property Operations

James R. Willden
Vice President
Engineering

Stephen W. Wilson
Vice President
Development

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Offices
Headquarters
Washington, DC
2900 Eisenhower Avenue,
Suite 300
Alexandria,VA 22314
Phone: (703) 329-6300
Fax: (703) 329-1459

Regional Offices
Boston, MA
1250 Hancock Street, Suite 804n
Quincy, MA 02169
Phone: (617) 472-9491
Fax: (617) 472-5553

Chicago, IL
P.O. Box 5303
Wheaton, IL 60189-5303
Phone: (630) 653-7470
Fax: (630) 653-7504

Newport Beach, CA
4440 Von Karman Avenue,
Suite 300
Newport Beach, CA 92660
Phone: (949) 955-6200
Fax: (949) 955-6235

New York, NY
535 Fifth Avenue, 18th Floor
New York, NY 10017
Phone: (212) 370-9269
Fax: (212) 370-1511 

San Francisco, CA
4340 Stevens Creek Boulevard,
Suite 275
San Jose, CA 95129-1148
Phone: (408) 983-1500
Fax: (408) 984-7060

Seattle, WA
11808 Northup Way, Suite W311
Bellevue,WA 98005
Phone: (425) 576-2100
Fax: (425) 576-8447

Wilton, CT
15 River Road, Suite 210
Wilton, CT 06897-4064
Phone: (203) 761-6500
Fax: (203) 761-6575

Woodbridge, NJ
Woodbridge Place
517 Route One South, Suite 5500
Iselin, NJ 08830
Phone: (732) 404-4800
Fax: (732) 283-9105

Transfer Agent
First Union National Bank
Charlotte, NC

Form 10-K
A copy of the Company’s annual
report on Form 10-K as ﬁled with
the Securities and Exchange
Commission may be obtained
without charge by writing to:

Investor Relations
AvalonBay Communities, Inc.
2900 Eisenhower Avenue,
Suite 300
Alexandria,VA 22314

Stock Listings
NYSE – AVB
PCX – AVB

This Annual Report, including the Letter
to Shareholders, contains “forward-looking
statements” within the meaning of the
Securities Act of 1933 and the Securities
Exchange Act of 1934. Please see our 
discussion titled “Forward-Looking
Statements” included in this report for a
discussion regarding risks associated with
these statements. A discussion of our use 
of the non-GAAP term “Funds from
Operations” or “FFO” also appears in 
this report in our discussion of results 
of operations.

2900 Eisenhower Avenue   Suite 300 Alexandria   VA   22314 www.avalonbay.com