AvalonBay Communities Annual Report 2002

FY2002 Annual Report · AvalonBay Communities

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A N N UA L R E P O RT 2 0 0 2

Focus

Our focus at AvalonBay is on developing, acquiring and operating superior apartment communities
in high barrier-to-entry markets, which are characterized by limited new supply and a difﬁcult
entitlement process. Our goal is to be the Customer-Focused Market Leader in each of our chosen
markets and to preserve and enhance shareholder value.

Our portfolio is focused in 11 states and the District of Columbia. We own or hold ownership
interest in 149 properties containing 43,608 apartment homes. More information about
AvalonBay may be found on our website at www.avalonbay.com.

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At AvalonBay, our focus
is on our customers,
associates and shareholders.

fo-cus (fo´k s) n., pl. foci
e

1. reﬁnements to achieve a clearer vision

S T R AT E G I C F O C U S page 8

2. primary center

C U S T O M E R F O C U S page 12

3. central point of activity

P R O D U C T F O C U S page 16

4. point at which commitments meet

F I N A N C I A L F O C U S page 20

To Our Shareholders

2002 was a challenging year for the apartment

industry and for AvalonBay. The effects of the weak
economy and the strength of the for-sale housing
market dramatically affected apartment fundamentals
throughout the country and particularly in our
markets. This resulted in declining earnings and net
operating income (NOI) during 2002 throughout
most of the apartment sector. Despite deteriorating
operating fundamentals, investor interest in apartment
sales was extremely strong, confirming investors’
continued belief in the long-term attractiveness of
apartments.

Despite a challenging 2002 and a cautious outlook for
2003, we have much to be proud of regarding our
performance this year and we continue to be optimistic
about our long-term prospects. During this past year,
we focused on those elements of our business that we
could control and that would enhance both current
and future performance. Our focus resulted in a num-
ber of achievements that position us well for the future.
In the balance of this letter, I will provide a Recap of
2002, discuss our ongoing Strategic Assessment, and
outline our thoughts and plans for 2003 and Beyond.

Recap
of 2002
AvalonBay achieved Funds from Operations (FFO)
of $3.65 per share in 2002 compared with $4.06 in
2001. NOI from established communities declined
9.9% for the full year 2002. These results reﬂect the
difficult operating environment in many of our
markets, as well as uncontrollable external cost

Despite a challenging 2002 and a cautious
outlook for 2003, we have much to be proud
of regarding our performance this year and
we continue to be optimistic about our
long-term prospects.

pressures, such as rising insurance costs, that are
impacting all businesses.

The job losses seen nationally in 2002 were more
pronounced in our markets. This represented a reset of
market fundamentals from the unsustainable levels
of growth in the late 1990’s and early 2000. Our
markets beneﬁted greatly during the past economic
expansion from some of the strongest growth
industries of the 1990’s. However, by early 2001, the
technology, ﬁnancial services and telecommunications
industries had entered a deep recession, and we felt the
full impact of these job losses on our ﬁnancial results
in 2002. As during past recessions, job losses
accelerated both nationally and in our markets. Job
losses in our markets totaled 335,000 during the year,
resulting in a rate of job loss 25% greater than that of
the nation as a whole.

However, unlike past recessions, this downturn
has been characterized by relatively high consumer
conﬁdence levels and strong home sales fueled by
historically low interest rates and relaxed underwriting
standards. Our business was further impacted by a

AvalonBay Communities, Inc.

shift in renter sentiment toward more affordable
apartment product—a classic recessionary consumer
reaction. While all apartment classes have been
negatively affected by this recession, the Class A
market, AvalonBay’s primary property segment, saw
considerable revenue pressure as consumers looked
for ways to “tighten their belts.” The convergence
of these factors altered the dynamics of the
current operating environment, resulting
in weak demand/supply fundamentals
in our markets.

an entire business cycle. We will continue to execute
this successful strategy, as it has delivered NOI, FFO,
estimated net asset value (NAV), dividend growth and
total shareholder returns in the top third of the
apartment sector since 1995, our ﬁrst full year as a
public company.

In light of the current economic challenges, AvalonBay
is more focused than ever before. This
focus has resulted in many notable

achievements:

AVA LO N O RC H A R D S
M A R L B O RO U G H , M A

Fortunately, we still enjoy one of the
strongest financial positions in the
apartment sector, which has allowed us to
manage through these events while having
sufﬁcient resources to execute our business plan.
AvalonBay has an enduring strategy with a goal to
perform in the top of our sector when measured over

We will continue to execute this successful
strategy, as it has delivered NOI, FFO, NAV,
dividend growth and total shareholder
returns in the top third of the apartment
sector since 1995, our ﬁrst full year as a
public company.

Investment Activity We com-
pleted ten communities with a total
capitalization of approximately
$470 million—on time and below
original cost estimates. Respectful of
the risk of delivering new development
into a difficult economic climate, we
made pricing and leasing adjustments early in
2002 to aggressively absorb new deliveries of commu-
nities under construction. This strategy paid off as
earlier absorption allowed us to attain many of our
occupancy and revenue goals.

We were active in acquisitions, completing $140
million of transactions. Our acquisitions were focused
in Southern California and Fairfield County,
Connecticut, as we continued to strengthen our
market presence and product offerings in both these
high barrier-to-entry markets. We
sold one
community in Brookline, Massachusetts for $80 mil-
lion, recognizing an economic gain of $43
million and generating an annualized unleveraged rate
of return on our investment of 22%.

AvalonBay Communities, Inc.

During the year, we took advantage of the favorable
interest rate environment by issuing $450 million
of long-term debt at an average interest rate of
5.8%. As a result of these ﬁnancings and asset sales, we
have the ﬁnancial ﬂexibility to delay a return to the
capital markets during 2003, should capital market
conditions be unfavorable.

Customer Focus We worked particularly
hard at better understanding our cus-
tomers, both those who choose to rent
with us, as well as those who decide
to rent elsewhere. During 2002,
numerous focus groups were con-
ducted and over 40,000 individual
residents were surveyed. The input
we received allows us to ensure that
our product and service offerings are
continually reﬁned to respond to the ever-
changing needs of our residents. Examples of some
of the adjustments we made as a result of this ongoing
customer feedback include the redesign of certain
apartment ﬂoor plans, the reprogramming of some
of our community amenities, and a major focus on
improving all forms of communications with our
residents.

In today’s market environment, our customers have
many choices. We need to ensure that we are captur-
ing the dominant share of potential customers. Also,
once they move in, we need to ensure that the quality
of their living experience exceeds their expectations,
resulting in longer stays and reduced turnover.

We improved our market research and
forecasting skills—important tools during all
phases of the business cycle, but especially
valuable during these volatile times.

AVA LO N O N T H E S O U N D
N EW RO C H E L L E , N Y

Market Research and Forecasting
We improved our market research
and forecasting skills—important
tools during all phases of the business
cycle, but especially valuable during
these volatile times. An example of our
efforts is the development of a revenue guidance
model that is used to help project future revenue
trends. This model uses historical relationships
between supply/demand ratios and actual revenue
changes to assist in projecting future revenues.

Operating Efﬁciencies We improved our operating
efﬁciency both at the property level and at the corporate
level. We were able to reduce total overhead (capitalized
and expensed) costs by approximately 5.5% even
though the number of communities in our portfolio
grew by 6% during the same period. We continue to be
impacted by significant property operating cost
increases over which we have less control, such as higher

AvalonBay Communities, Inc.

insurance expenses (up 70%). These types of increases
require us to be even more focused and efﬁcient in
those areas where we can exercise greater control.

The above accomplishments are the result of the
talents and hard work of our associates and demon-
strate how we have had to dig deeper into all aspects
of our business in order to optimize performance in
the current operating environment.

Strategic
Assessment
Each year, we review our strategy in the context of
existing
long-term
challenges or opportunities. Throughout 2002, we
took a disciplined approach to evaluating our industry

and potential

conditions

We believe that our job is to continually
refine, not radically alter, our strategy
with a goal of maximizing long-term value
creation for our shareholders. We believe
in the soundness of our long-term strategy
and have acted accordingly.

position and realigning several short-term operating
tactics. We wanted to ensure that we were utilizing
every tool available to optimize current performance
without compromising our long-term strategic goals.
For example, we suspended development in some of
our markets and executed common stock repurchases
and preferred stock redemptions. While we believe
reﬁning our tactics to respond to short-term market
conditions is the right thing to do, we remain
committed to our long-term strategic vision—“To
more deeply penetrate our chosen markets through a
broader range of products and services with an increased
focus on our customer.”

These short-term reﬁnements were needed to manage
through a tough operating climate. Additional adjust-
ments may be required if signiﬁcant job losses in our
markets persist. We will, however, continue to focus
on our high barrier-to-entry markets, as they were
selected to outperform over an entire business cycle—
not over a one- or two-year period. We believe the best
test of the quality of a strategy is how a company
responds during times of economic change. Changes
in strategy for short-term performance gain would be
shortsighted and we have avoided this temptation. We
believe that our job is to continually reﬁne, not
radically alter, our strategy with a goal of maximizing
long-term value creation for our shareholders. We
believe in the soundness of our long-term strategy and
have acted accordingly.

AvalonBay Communities, Inc.

2003
and Beyond
While some macro-economic
is
in 2003, the apartment sector and
expected
AvalonBay will continue to be impacted by weak
employment growth and continued new supply.
Signiﬁcant improvements in operating fundamen-
tals will not occur until material job growth
returns and home sales recede.

improvement

We do not expect any material job
growth in our markets during
2003, and to the extent there is
positive job growth, its impact on
2003 results will be negligible, as
it is likely to come late in the year.
While we cannot predict interest rate
movements, an increase in rates would
benefit the Company’s performance. High
single-family home prices in our markets, combined
with higher mortgage rates, would likely shift
rental demand back in our favor. Further, our low
exposure to ﬂoating rate debt limits the adverse
ﬁnancial impact of a rising interest rate environment.

Given our assessment for 2003, which assumes
another challenging year for AvalonBay and for the
apartment sector as a whole, how will we respond?

• We will accelerate disposition activity to capitalize
on an expected favorable sales environment. Sales of
properties dilute key short-term performance
measures, including FFO. But these sales will
help achieve some of our portfolio rebalancing

We will preserve and enhance our ﬁnancial
strength and ﬂexibility, matching our capital
structure with business risks.

AVA LO N AT E D G EWAT E R
E D G EWAT E R , N J

objectives, enhancing long-term
earnings and NAV growth, as well
as balance sheet strength.

• We will continue to selectively
develop new communities where market
conditions and investment economics justify,
but at signiﬁcantly reduced volumes. We recognize
that the economic forecast remains too cloudy to
continue to deliver new product into the market at
historical levels. New starts will require compelling
investment opportunities that provide both short-
and long-term value creation, while meeting even
tougher underwriting requirements.

• We will preserve and enhance our ﬁnancial strength
and flexibility, matching our capital structure
with business risks. We may opportunistically
redeem debt and equity securities during 2003 from
proceeds of asset sales and retained cash. Our
common stock dividends are expected to be
approximately 85% of our FFO in 2003. We

AvalonBay Communities, Inc.

expect to have one of the strongest dividend and
retained cash positions in the sector, achieved even
with dividend increases that have outpaced the
apartment sector over the past three years.

• We will continue to focus on our customer, study
who they are and what they desire from their rental
experience. We want to know our residents even
better in the future than we do today. Listening to
our residents and satisfying their needs with products
and services that exceed expectations are integral to
the success of the Company.

Clearly, this downturn has caused us to respond
operationally to the changing market fundamentals.
Yet our
long-term focus remains unchanged.
Throughout the following pages, you will learn about
our keen focus in the areas of our strategy, our
customer, our product, and ﬁnally our ﬁnancial
performance.

In closing, I would like to thank our shareholders for
their support, our associates for their tireless commit-
ment and the high quality of their efforts, and our
customers for choosing an AvalonBay community as
their home.

Thank you.

Bryce Blair
Chairman, CEO and President

B RYC 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

AvalonBay Communities, Inc.

Reﬁnements to Achieve
a Clearer Vision

e have a well-deﬁned strategy that we review and

reﬁne each year. In 2002, we maintained our focus on

portfolio management, seeking to further penetrate

our chosen markets and earn the highest risk-adjusted

returns from our assets. We continued to sharpen our

geographic focus through targeted development where

current economics justiﬁed construction, through

selective dispositions and through truly discriminating

acquisitions. By following this strategy, we achieved a

deeper presence in fewer markets, improving opera-

tions and lowering operating and management costs.

True to our strategy, we more deeply penetrated our

S T R A T E G I C
F O C U S

chosen markets through development in

Washington, DC, New York, New

Jersey, Connecticut and Northern

California, and through acquisition

activity in Stamford, Connecticut

and Burbank, California.

We also rebalanced and diversiﬁed

our portfolio in the greater Boston

market through the sale of Avalon

at Longwood Towers, in Brookline, and

the development of new communities in

Weymouth, Saugus, Newton and Westborough. The

new communities in Boston provide submarket

diversiﬁcation while offering attractive initial returns.

Additionally, we were active on the redevelopment

front, completing exterior and interior improvements

and updating amenities at Avalon Bedford in

Stamford, Connecticut and Avalon at Media Center

in Burbank, California.

We believe this disciplined geographic focus will

enable our portfolio of premium apartment homes to

outperform our competition over the full range of the
business cycle.

AvalonBay Communities, Inc.

Deeper Presence in Fewer Markets

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1998 2003

2003 data is a projection based on planned disposition
and development activity.

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AVALON AT ROCK SPRING
BETHESDA, MD

(cid:23)

AVA L O N AT R O C K S P R I N G I S L O C AT E D I N

S U BU R B A N WA S H I N G TO N , D C , A N A R E A W I T H

E D U C AT I O N A N D I N C O M E L EV E L S W E L L A B OV E

THE NATIONAL AVERAGE. STRONG DEMOGRAPHICS

C O M B I N E D W I T H A P R I M E L O C AT I O N C L O S E

TO E M P LOY M E N T C E N T E R S , K EY T R A N S P O RTA -

T I O N A RT E R I E S A N D M A S S T R A N S I T M A K E T H I S A

S O U G H T A F T E R A D D R E S S F O R P RO S P E C T I V E

R E S I D E N TS .

S T R A T E G I C
F O C U S

(cid:22)

AVALON ESTATES
HULL, MA

D EV E LO PI N G AVA LO N E S TAT E S R E QU I R E D T H E

A D A P T I V E R E U S E O F A 1 0 0 - Y E A R - O L D C A R R I AG E

HOUSE, SATISFYING NEIGHBORHOOD DESIRES FOR

H I S TO R I C A L P R E S E RVAT I O N W H I L E P ROV I D I N G

A N AT T R A C T I V E C O M M U N I T Y C E N T E R F O R

O U R R E S I D E N TS . WO R K I N G W I T H N E I G H B O R S ,

LISTENING TO OUR CUSTOMERS AND RESPECTING

LOCAL ARCHITECTURAL HERITAGE ENABLED US TO

C R E AT E A N AT T R AC T I V E L I V I N G E N V I RO N M E N T

T H AT O U R R E S I D E N TS VA LU E .

We strive to more deeply penetrate our
chosen markets through a broader range
of products and services with an increased
focus on our customer.

Primary Center

ur customers are the primary center of our focus as

we continuously work towards Enhancing the Lives

of Our Residents. We reafﬁrmed our commitment

to the customer in 2002 through our Customer

Focus Initiative. This initiative has two components,

“customer knowledge” and “customer service.” These

components help ensure that we deliver what the

customer wants, not what we think they want, allowing

us to exceed expectations at a lower cost and with

enhanced returns.

Customer knowledge is gained through focus groups,

individual customer surveys and ongoing demographic

C U S T O M E R
F O C U S

research. We capture additional resident

feedback and preferences at the key

resident touch points of move-in,

renewal and move-out.

Our residents are diverse in terms

of income and stage of career,

but are generally afﬂuent and well

educated. Establishing multiple

points of resident feedback keeps us

current on customer needs and provides

ideas for future products and services. For exam-

ple, based on input from our customers, we now offer

maid referral and online utility hook-up services at

many communities, as well as special shopping

discounts to all our residents through Avalon Access—

the resident-only section of our website.

This increased emphasis on our customer will play a

key role in positioning AvalonBay as the Customer-

Focused Market Leader in each of our chosen markets.

AvalonBay Communities, Inc.

Resident Proﬁle

Annual Household
Income

$100K+

24%

29%

less than $50K

$75K–$100K

21%

26%

$50K–$75K

Stage of Career

Retired

Late

11%

Mid

42%

41%

Early

Source: AvalonBay Resident Survey (October 2002)

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RESIDENT SATISFACTION

OVERALL SATISFACTION

RESIDENTS INTENDING TO
RENEW THEIR LEASE

UP 5%*

UP 21%*

COMMUNITIES RATED
‘GOOD’ TO ‘OUTSTANDING’

85%

*Changes Relative to 2001 Survey

Source: AVB Resident Survey (October 2002)

C U S TO M E R K N OW L E D G E L E A D S TO A S AT I S F I E D

A N D LOYA L R E S I D E N T B A S E . O U R M O S T R E C E N T

(cid:23)

A N N UA L S U RV EY I D E N T I F I E D I M P ROV E D S E RV I C E

T R E N D S , A S 8 5 % O F O U R C O M M U N I T I E S W E R E

R AT E D “ G O O D ” TO “ O U T S TA N D I N G ” B Y O U R

R E S I D E N TS .

C O N G R AT U L AT I O N S TO T H E T E A M AT AVA LO N

E S TAT E S , F RO M O U R B O S TO N R E G I O N , F O R

AC H I EV I N G T H E H I G H E S T C U S TO M E R S E RV I C E

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

C O N S E C U T I V E Y E A R !

C U S T O M E R
F O C U S

CHANGE IN RENTAL
HOUSEHOLDS BY AGE GROUP

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46-65

7
4
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2

(cid:22)

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

R E QU I R E D TO E N S U R E O U R P RO D U C T S A N D

under 26

8
5
8

9
9
7

66+

6
8
6

4
3
1

26-45

7
8
–

2
0
8
–

0
0
2
–

SERVICES ARE POSITIONED SQUARELY IN THE PATH

O F G ROW T H . B Y 2 0 1 0 , P RO J E C T I O N S A R E T H AT

R E N T E R D E M A N D W I L L G ROW P R E D O M I N A N T LY

I N T WO S E G M E N TS , “ E M P T Y N E S T E R S ” ( 4 6 - 6 5 )

AND “ECHO BOOMERS” (UNDER 25). AVALONBAY ’S

PI PE L I N E O F P RO D U C TS A N D S E RV I C E S C O N T I N -

U O U S LY EVO LV E S TO M E E T T H E N E E D S O F O U R

C U R R E N T A N D P RO S PE C T I V E R E S I D E N TS .

1990-2000 Projected 2000-2010

Source: Based on US Census Bureau Data

At AvalonBay, our core purpose is to
Enhance the Lives of Our Residents. We
pursue this purpose with a commitment to
integrity, a spirit of caring, and a focus on
continuous improvement.

Central Point of Activity

e employ a unique decentralized business model,

where developing the right product in the right place

is the central point of activity. We focus on creating

value by seeking out the best locations, determining

the optimal product type, and then adding features

and amenities the customer values most.

We accomplish this by stafﬁng regional ofﬁces with

local “sharp shooters”—highly competent, locally

based professionals who are connected to the commu-

nities where they live and do business. We leverage

their understanding of the local demographics,

employment trends and politics with centralized

support in the areas of ﬁnancial services,

marketing, human resources, market

research and customer knowledge.

Product Mix
% of Total Apartment Homes

1994

Mid/High-Rise

14%

Garden

86%

Townhomes

2003

Mid/High-Rise

25%

71%

Garden

2003 data is a projection based on planned disposition
and development activity.

P R O D U C T
F O C U S

Our goal is not to be exclusively

urban or suburban, nor to be

overly focused on one product

offering, but to meet the increas-

ingly diverse needs of our customers

with a broader range of products and

services. Meeting customer needs drove

our efforts to develop an expertise in the design

and construction of a wide variety of apartment prod-

uct. These efforts transformed our portfolio from a

homogenous set of largely garden apartments to a

substantial mix of garden, townhome, mid-rise and

high-rise communities.

By addressing changing customer preferences based on

market and consumer research, we continue to create

value by offering luxury communities in desirable

locations with amenities and services designed to

provide residents the “gift of time.”

AvalonBay Communities, Inc.

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VALUE HARVESTED(cid:23)

AVALON AT LONGWOOD TOWERS
BROOKLINE, MA

PURCHASE PRICE

RENOVATION CAPITAL

TOTAL INVESTMENT

SALE PRICE

VALUE CREATED 1

INTERNAL RATE
OF RETURN

$1 7 M

$2 0 M

$3 7 M

$8 0 M

$4 3 M

22 %

P R O D U C T
F O C U S

(cid:22)

VALUE GROWING

AVALON AT CAMERON COURT
ALEXANDRIA, VA

COMPLETION DATE

DEC. 1998

INVESTED CAPITAL

CURRENT
ESTIMATED VALUE

IMPLIED
VALUE CREATED 1

IMPLIED INTERNAL
RATE OF RETURN

$43 M

$84 M

$41 M

26%

We create value by combining customer
and market knowledge to develop superior
communities in prime locations that provide
our residents with the lifestyle they desire.

Point at Which
Commitments Meet

ltimately, creating shareholder value is the point at

which our commitments meet. A strong ﬁnancial

position, combined with a strategic focus on our

customers and our products, is integral to preserving

and creating shareholder value.

We entered this downturn with one of the strongest

balance sheets in the industry. We used our ﬁnancial

flexibility to regulate development starts while

preserving future development opportunities. Our

ﬁnancial strength has enabled us to increase common

stock dividends over the past three years by an average

rate of 11%, one of the highest levels in the sector,

while preserving one of the lowest payout

ratios in the industry.

F I N A N C I A L
F O C U S

In 2002, we took steps to optimize

our capital structure through

$107 million of common and

preferred stock repurchases. We

also took advantage of historically

low

interest rates and credit

spreads by issuing $450 million of

unsecured debt with an average term of

eight years and an average rate of only 5.8%.

Despite 2002’s signiﬁcant challenges and the difﬁcult

outlook for 2003, our ﬁnancial strength remains

intact. We outperformed our peers over past business

cycles and are well positioned to once again exceed

expectations over the next business cycle.

Attractive Shareholder Return2
Compound Annual Growth Rate

%
1
.
5
1

%
2
.
1
1

%
3
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A

T
I
E
R
y
t
i
u
q
E

.
t
p
A

%
8
.
7

p
m
o
C
Q
A
D
S
A
N

Source: National Association of Real Estate Investment
Trusts (NAREIT); Bloomberg

AvalonBay Communities, Inc.

Y
N

Y
T
I
C

D
N
A
L
S
I

G
N
O
L

W
E
I
V
R
E
V
I
R

N
O
L
A
V
A

BUSINESS CYCLE OUTPERFORMANCE
1995-2002

h
t
w
o
r
G

O
N

%
0
.
5

%
1
.
4

h
t
w
o
r
G
e
r
a
h
S

r
e
P
O
F
F

%
1
.
8

%
9
.
5

AvalonBay Multifamily Average

Sources: NOI Growth—AvalonBay calculated internally,
Multifamily Average provided by Green Street Advisors, Inc.; FFO
Per Share Growth—AvalonBay calculated internally, Multifamily
Average based on NAREIT and individual company data.

F I N A N C I A L
F O C U S

(cid:22)

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

TO SECTOR-LEADING PERFORMANCE. AVALONBAY ’S

AV E R AG E A N N UA L D I V I D E N D G ROW T H O F 8 . 9 %

OV E R T H E PA S T E I G H T Y E A R S I S T H E T H I R D

H I G H E S T W I T H I N T H E M U LT I FA M I LY S E C TO R .

O U R C O M P O U N D A N N UA L G ROW T H R AT E O F

1 5 . 1 % F O R T H E S A M E PE R I O D I S I N T H E TO P

T H I R D O F T H E S E C TO R , A N D T H E I N C R E A S E I N

O U R E S T I M AT E D N AV PE R S H A R E D U R I N G T H I S

E I G H T- Y E A R P E R I O D O U T P E R F O R M E D E L E V E N

O U T O F T W E LV E M U LT I FA M I LY C O M PA N I E S . 6

O U R G OA L

I S TO O U T P E R F O R M OV E R A N

E N T I R E B U S I N E S S C Y C L E . F O R T H E M O S T

(cid:23)

R E C E N T E I G H T- Y E A R P E R I O D , AVA L O N B AY ’ S

N E T O P E R AT I N G I N C O M E A N D F U N D S F RO M

O P E R AT I O N S G ROW T H N OT O N LY E XC E E D E D

I N D U S T RY AV E R AG E S , BU T A L S O R A N K E D I N T H E

TO P T H I R D O F A L L M U LT I FA M I LY R E I TS .

BUSINESS CYCLE OUTPERFORMANCE
1995-2002

h
t
w
o
r
G
d
n
e
d
i
v
i
D

%
9
.
8

%
9
.
4

h
t
w
o
r
G
e
r
a
h
S

r
e
P
V
A
N
d
e
t
a
m

i
t
s
E

%
5
.
7

%
2
.
2

AvalonBay Multifamily Average

Sources: Dividend Growth—AvalonBay calculated internally,
Multifamily Average based on NAREIT and individual company
data; Estimated NAV Per Share Growth—AvalonBay and
Multifamily Average provided by Green Street Advisors, Inc.

We believe in providing a high quality of
reported earnings and ﬁnancial disclosures
that help investors understand our current
results, our business opportunities and risks,
and how we measure our progress toward
achieving our long-term strategy.

Notes

Glossary

1. Value created (or implied value created) is calculated as
the difference between sales price (or current estimated
value), excluding costs of sale, and the total investment
(investment capital). Current estimated value is based on
AvalonBay’s internal appraisal of the value of a particular
community, which may differ from appraisals or valuations
calculated by others.

2. Represents the Compound Annual Growth Rate, including

reinvestment of dividends, for the period indicated. Total
shareholder return for any period within this timeframe
varies. Past performance is no guarantee of future results.

3. Represents NOI growth from Established Communities.
AVB average NOI growth for the years 1995 through
2002 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. 1995 was the ﬁrst full year in which both Avalon
Properties, Inc. and Bay Apartment Communities, Inc.
operated as public companies. Average NOI growth for
any year within this timeframe varies.

4. FFO per share obtained from individual company reports
was adjusted to conform to NAREIT’s deﬁnition where
appropriate. FFO per share growth for any year within
this timeframe varies.

5. Represents average annual dividend growth for the period
indicated. Dividend growth for any year within this time-
frame varies.

6. Estimated NAV per share growth provided by Green

Street Advisors, Inc. for both AVB and the multifamily
sector. Estimated NAV per share growth calculated by
others may differ from Green Street Advisors’ estimates.
Estimated NAV per share growth for any year within this
timeframe varies.

Funds from Operations (FFO). FFO is determined in accor-
dance with a deﬁnition adopted by the Board of Governors
of the National Association of Real Estate Investment
Trusts (NAREIT). For further discussion of FFO and for a
reconciliation of FFO to Net Income, see the section titled
“Funds from Operations” within “Management Discussion
and Analysis of Financial Condition and Results of
Operations” contained herein.

Net Operating Income (NOI). NOI represents aggregate
community level NOI and does not include a management
fee, any allocation of corporate overhead, or unallocated
property management costs, and it is not a measure that can
be determined in accordance with GAAP. NOI should not be
considered an alternative to operating income (as determined
in accordance with GAAP) as an indicator of the Company’s
or a community’s operating performance. NOI as disclosed
by other REITs may not be comparable to the Company’s
calculation. The determination of NOI and its reconciliation
to Net Income is set forth within “Management Discussion
and Analysis of Financial Condition and Results of
Operations” contained herein.

Established Communities. Established Communities are
communities that the Company owned in each of the last two
years and that had stabilized 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
per share 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 per share by others may not
be comparable to the calculation prepared by Green Street
Advisors, Inc. and used for computing averages in this report.

Internal Rate of Return (IRR). IRR is the rate of return earned
over the entire period of ownership of the community, after
considering our capitalized cost for the investment, the NOI
generated by the investment and the proceeds received at
disposition.

AvalonBay Communities, Inc.

Board of Directors

he AvalonBay Board of Directors is committed to
sound corporate governance practices. The Board,
consisting of eight members, has seven non-employee
directors. Directors observe a detailed ethics and
conﬂict of interest policy. The Board’s Nominating and
Corporate Governance Committee, Audit Committee

and Compensation Committee consist solely of
non-employee directors. To further promote sound
corporate governance practices and effective Board
management, the non-employee directors designated
Lance R. Primis to act as Lead Independent Director,
effective January 1, 2003.

John J. Healy, Jr.
Founder and
Chief Executive Ofﬁcer
Hyde Street Holdings, Inc.

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

Standing left to right

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

Bruce A. Choate
Chief Executive Ofﬁcer
and President
Watson Land Company

Bryce Blair
Chairman of the Board,
Chief Executive Ofﬁcer
and President
AvalonBay
Communities, Inc.

Seated left to right

Allan D. Schuster
Private Investor

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

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

AvalonBay Communities, Inc.

2002 Financial Review

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

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 LY 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 LT S O F O P E R AT I O N S

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

C O N S O L I D AT E D S TAT E M E N T S O F O P E R AT I O N S
A N D OT H E R 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 AT E D S TAT E M E N T S O F
S TO C K H O L D E R S ’ E QU I T Y

C O N S O L I D AT E D S TAT E M E N T S O F
C A S H F L OW S

N OT E S TO C O N S O L I D AT E D
F I N A N C I A L S TAT E M E N T S

R E P O RT O F I N D E P E N D E N T AU D I TO R 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 QU I T Y
A N D R E L AT E D S TO C K H O L D E R M AT T E R S

AVA L O N B AY C O R P O R AT E I N F O R M AT I O N

Selected Financial Data

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)

12-31-02

12-31-01

12-31-00

12-31-99

12-31-98

Years 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 items
Impairment loss
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 from continuing operations
before extraordinary item

Discontinued operations:
Operating income
Gain on sale of communities
Total discontinued operations
Income before extraordinary item
Extraordinary item
Net income
Dividends attributable to preferred stock
Net income available to common stockholders
Per Common Share and Share Information:
Per common share—basic
Income from continuing operations (net of
dividends attributable to preferred stock)
Discontinued operations
Net income available to common stockholders
Weighted average common shares outstanding
Per common share—diluted
Income from continuing operations (net of
dividends attributable to preferred stock)
Discontinued operations
Net income available to common stockholders
Weighted average common shares and units
outstanding

Cash dividends declared

$ 630,502
1,355
7,109

$ 629,545
1,325
2,953

$ 564,613
1,051
401

$ 497,824
1,176
236

$ 364,522
1,377
(403)

638,966

633,823

566,065

499,236

365,496

176,587
56,352
121,380
143,782
14,332
—
6,800

519,233

55
3,978
(2,570)

159,665
51,686
103,189
128,642
15,224
—
—

458,406

856
6,823
(597)

140,633
46,409
83,582
120,915
13,013
—
—

404,552

2,428
4,764
(1,908)

133,730
42,203
74,689
108,367
9,592
16,782
—

385,363

2,867
7,362
(1,975)

121,196
—

182,499
62,852

166,797
40,779

122,127
47,093

102,679
31,279
54,642
76,512
9,124
—
—

274,236

2,638
3,508
(1,770)

95,636
25,270

121,196

245,351

207,576

169,220

120,906

3,529
48,893

52,422

173,618
—

173,618
(17,896)

3,646
—

3,646

248,997
—

248,997
(32,497)

3,028
—

3,028

210,604
—

210,604
(39,779)

3,056
—

3,056

172,276
—

172,276
(39,779)

2,874
—

2,874

123,780
(245)

123,535
(28,132)

$ 155,722

$ 216,500

$ 170,825

$ 132,497

95,403

1.50

3.11

2.53

2.00

1.83

0.76
$
$
2.26
68,772,139

0.08
$
$
3.19
67,842,752

0.05
$
$
2.58
66,309,707

0.05
$
$
2.05
64,724,799

0.06
$
$
1.89
50,387,258

1.49

3.05

2.49

1.98

1.82

0.74
$
$
2.23
70,674,211

0.07
$
$
3.12
69,781,719

0.04
$
$
2.53
68,140,998

0.05
$
$
2.03
66,110,664

0.06
$
$
1.88
51,771,247

2.80

2.56

2.24

2.06

2.04

AvalonBay Communities, Inc.

12-31-02

12-31-01

12-31-00

12-31-99

12-31-98

Years ended

Other Information:
Net income
Depreciation—continuing operations
Depreciation—discontinued operations
Interest expense—continuing operations
Interest expense—discontinued operations
Interest income
Non-recurring items
Gain on sale of communities, net of
impairment loss on planned dispositions
Extraordinary item
Gross EBITDA(1)
Funds from Operations(2)
Number of Current Communities(3)
Number of apartment homes

Balance Sheet Information:
Real estate, before accumulated depreciation
Total assets
Notes payable and unsecured credit facilities

Cash Flow Information:
Net cash ﬂows provided by operating activities
Net cash ﬂows used in investing activities
Net cash ﬂows provided by (used in)

ﬁnancing activities

$ 173,618
143,782
695
121,380
2
(3,978)
—

$ 248,997
128,642
1,437
103,189
14
(6,823)
—

$ 210,604
120,915
1,695
83,582
27
(4,764)
—

$ 172,276
108,367
1,392
74,689
10
(7,362)
16,782

$ 123,535
76,512
862
54,642
8
(3,508)
—

(42,093)
—

(62,852)
—

(40,779)
—

(47,093)
—

(25,270)
245

$ 393,406

$ 412,604

$ 371,280

$ 319,061

$ 227,026

$ 258,210
137
40,179

$ 283,293
126
37,228

$ 252,013
126
37,147

$ 196,058
122
36,008

$ 148,487
127
37,911

$5,369,453
$4,950,835
$2,471,163

$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

$ 308,109
$ (440,331)

$ 320,606
$ (270,406)

$ 302,083
$ (258,155)

$ 251,779
$ (236,687)

$ 192,339
$ (566,516)

72,589

$ (34,444)

5,685

$ (16,361)

$ 376,345

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,
impairment loss on planned dispositions 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 under-
stand 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. Consistent
with the deﬁnition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts®, we calculate FFO 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

(including any impairment loss on planned dispositions) and extraordinary gains or losses (as deﬁned by GAAP);

• 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 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. Calculations for FFO are presented below:

Net income
Dividends attributable to preferred stock
Depreciation—real estate assets
Depreciation—discontinued operations
Joint venture adjustments
Minority interest expense
Gain on sale of communities, net of
impairment loss on planned dispositions
Extraordinary items
Funds from Operations
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in)
ﬁnancing activities

Years ended

12-31-02

12-31-01

12-31-00

12-31-99

12-31-98

$ 173,618
(17,896)
140,964
695
1,321
1,601

$ 248,997
(32,497)
125,547
1,437
1,102
1,559

$ 210,604
(39,779)
117,721
1,695
792
1,759

$ 172,276
(39,779)
106,536
1,392
751
1,975

$ 123,535
(28,132)
74,752
862
725
1,770

(42,093)
—

(62,852)
—

(40,779)
—

(47,093)
—

(25,270)
245

$ 258,210

$ 283,293

$ 252,013

$ 196,058

$ 148,487

$ 308,109

$ 320,606

$ 302,083

$ 251,779

$ 192,339

$ (440,331)

$ (270,406)

$ (258,155)

$ (236,687)

$ (566,516)

72,589

$ (34,444)

5,685

$ (16,361)

$ 376,345

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

AvalonBay Communities, Inc.

Management Discussion and Analysis of
Financial Condition and Results of Operations

Forward-Looking Statements

This Annual Report, including the footnotes to our Consolidated Financial Statements which immediately
follow, 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,” “plan,” “will” 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, occupancy and stabilization 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;

• 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
• companies developing software applications and ancillary services 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.

AvalonBay Communities, Inc.

Management Discussion and Analysis of
Financial Condition and Results of Operations (continued)

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

We are 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 and lower
housing affordability in these markets will result in larger increases in cash ﬂows relative to other markets over
an entire business cycle. However, we are in a period of a business cycle where rents are resetting to lower levels,
resulting in a decline in cash ﬂows in 2002 compared to 2001. These barriers-to-entry generally include a difﬁcult
and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and
entitled land (“in-ﬁll locations”) is in limited supply. Our 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.

We believe apartment communities present an attractive long-term investment opportunity compared to other
real estate investments because a broad potential resident base should result in relatively stable demand over a real
estate cycle. We intend to pursue real estate investments in markets where constraints to new supply exist and
where new household formations are expected to out-pace multifamily permit activity over the course of the real
estate cycle. A number of our markets are experiencing economic contraction due to continuing job losses,
particularly in the technology, telecom and ﬁnancial services sectors. We expect these conditions to continue for
most of 2003.

AvalonBay Communities, Inc.

Although we believe we are well-positioned to continue to pursue opportunities to develop and acquire upscale
apartment homes based on our in-house capabilities and expertise, we expect to decrease acquisition and
development activity during 2003 as compared to prior years and plan to increase disposition activity. The level
of disposition, acquisition or development volume is heavily inﬂuenced by capital market conditions, including
prevailing interest rates. Given current capital market and real estate market conditions, we are evaluating the
appropriate allocation of capital investment among development and redevelopment communities, the acquisition
of existing communities, and stock redemptions/repurchases. In addition, we expect to increase disposition activity
to realize a portion of the value created over the past business cycle as well as to provide additional liquidity. See
“Liquidity and Capital Resources” and “Future Financing and Capital Needs.”

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, Lease-Up 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, 2002, 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

Lease-Up Communities

Redevelopment Communities

Total Current Communities

Development Communities

Development Rights

27
18
9
3
29
11

11
2
—
8
2
6

137

7,196
5,154
2,624
907
8,601
3,404

27,886

3,040
960
—
2,152
499
2,253

8,904

2,300

1,089

40,179

3,429

9,950

AvalonBay Communities, Inc.

Management Discussion and Analysis of
Financial Condition and Results of Operations (continued)

Results of Operations and Funds From Operations

A comparison of our operating results for the years 2002, 2001 and 2000 follows:

(dollars in thousands)

2002

2001

2000

Change

Revenue:

Rental income
Management fees
Other income

$630,502
1,355
7,109

$629,545
1,325
2,953

957
30
4,156

0.2% $629,545
1,325
2.3%
2,953
140.7%

$564,613
1,051
401

$ 64,932
274
2,552

11.5%
26.1%
636.4%

Total revenue

638,966

633,823

5,143

0.8%

633,823

566,065

67,758

12.0%

Expenses:

Direct property operating
expenses, excluding
property taxes
Property taxes

Total community
operating expenses

144,424
56,352

126,698
51,686

17,726
4,666

14.0%
9.0%

126,698
51,686

112,522
46,409

14,176
5,277

12.6%
11.4%

200,776

178,384

22,392

12.6%

178,384

158,931

19,453

12.2%

Net operating income

438,190

455,439

(17,249)

(3.8%)

455,439

407,134

48,305

11.9%

Property management
and other indirect
operating expenses
Interest expense
Depreciation expense
General and administrative
expense
Impairment loss

32,163
121,380
143,782

32,967
103,189
128,642

(804)
18,191
15,140

(2.4%)
17.6%
11.8%

32,967
103,189
128,642

28,111
83,582
120,915

14,332
6,800

15,224
—

(892)
6,800

(5.9%)
100.0%

15,224
—

13,013
—

4,856
19,607
7,727

2,211
—

17.3%
23.5%
6.4%

17.0%
—

Total other expenses

318,457

280,022

38,435

13.7%

280,022

245,621

34,401

14.0%

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

Income from continuing
operations
Discontinued operations:
Operating income
Gain on sale of communities

Total discontinued
operations

Net income
Dividends attributable to
preferred stock

Net income available to
common stockholders

55
3,978

856
6,823

(801)
(2,845)

(93.6%)
(41.7%)

856
6,823

2,428
4,764

(1,572)
2,059

(64.7%)
43.2%

(2,570)

(597)

(1,973)

330.5%

(597)

(1,908)

1,311

(68.7%)

121,196
—

182,499
62,852

(61,303)
(62,852)

(33.6%)
(100.0%)

182,499
62,852

166,797
40,779

15,702
22,073

9.4%
54.1%

121,196

245,351

(124,155)

(50.6%)

245,351

207,576

37,775

18.2%

3,529
48,893

3,646
—

(117)
48,893

(3.2%)
100.0%

3,646
—

3,028
—

618
—

20.4%
—

52,422

3,646

48,776 1,337.8%

3,646

3,028

618

20.4%

173,618

248,997

(75,379)

(30.3%)

248,997

210,604

38,393

18.2%

(17,896)

(32,497)

14,601

(44.9%)

(32,497)

(39,779)

7,282

(18.3%)

$155,722

$216,500

$(60,778)

(28.1%)

$216,500

$170,825

$45,675

26.7%

AvalonBay Communities, Inc.

Net income available to common stockholders decreased $60,778,000 (28.1%) to $155,722,000 in 2002. This
decrease is primarily attributable to fewer gains on sales of communities in 2002, coupled with a decline in net
operating income due to deteriorating market conditions in several of our principal markets and increases in
interest and depreciation expenses. Net income available to common stockholders increased by $45,675,000
(26.7%) to $216,500,000 in 2001 due to additional net operating income from newly developed and redeveloped
communities, as well as growth in net operating income from Established Communities and increased gain on sale
of communities.

Net operating income (“NOI”) is calculated at the community level and represents total revenue less direct
property operating expenses, including property taxes, and excludes property management and other indirect
operating expenses, interest expense, depreciation expense, general and administrative expense and impairment
losses. We believe that NOI is an appropriate supplemental measure of our operating performance because it
helps investors to understand the recurring operations of our real estate portfolio, as well as provide insight into
how management evaluates operations on a segment basis. NOI does not represent cash generated from
operating activities in accordance with generally accepted accounting principles (“GAAP”). Therefore, it should
not be considered an alternative to net income as an indication of our performance. NOI should also not be
considered an alternative to net cash ﬂows from operating activities, as determined by GAAP, as a measure of
liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs. A calculation of NOI,
along with a reconciliation to net income, is provided in the preceding table.

The NOI decrease of $17,249,000 for the year ended December 31, 2002 and the increase of $48,305,000 for
the year ended December 31, 2001 as compared to the prior years consist of changes in the following categories:

2002
Increase (Decrease)

2001
Increase (Decrease)

Established Communities
Other Stabilized Communities
Communities sold
Development and Redevelopment Communities

Total NOI

$(36,680,000)
10,830,000
(13,037,000)
21,638,000

$(17,249,000)

$21,783,000
23,267,000
(12,841,000)
16,096,000

$48,305,000

The NOI decrease in Established Communities in 2002 was largely due to the effects of the weakened economy
in many of our submarkets. Strong single family home sales, partially fueled by a low mortgage rate environment,
in addition to continuing job losses in many of our submarkets, have aggravated a weak demand environment,
causing market rental rates and occupancies to decline. We currently expect to continue to experience weak
demand during most of 2003. We also anticipate that any growth or improvement that we may experience in late
2003 will be at a slower rate than that experienced by the overall market and economy, if any, due to the types of
industries (technology, telecom, ﬁnancial services) that make up a large proportion of the jobs in our markets.

Rental income increased due to rental income generated from acquired and newly developed communities offset
by a decline in occupancies and effective rental rates for Established Communities.

Overall Portfolio—The weighted average number of occupied apartment homes increased to 34,888 apartment
homes for 2002 compared to 34,417 apartment homes for 2001 and 33,976 in 2000. This change in 2002 is
primarily the result of increased homes available from acquired and newly developed communities, offset
by occupancy declines related to the weakened demand in certain of our submarkets. The weighted average
monthly revenue per occupied apartment home decreased to $1,522 in 2002 compared to $1,543 in 2001 and
$1,402 in 2000.

Established Communities—Rental revenue decreased $30,679,000 (6.1%) in 2002 and increased by $26,268,000
(6.6%) in 2001. The decrease in 2002 is due to both declining effective rental rates and declining economic
occupancy. The increase in 2001 is due to market conditions during the year that allowed for higher average rents

AvalonBay Communities, Inc.

Management Discussion and Analysis of
Financial Condition and Results of Operations (continued)

partially offset by lower economic occupancy. For 2002, the weighted average monthly revenue per occupied
apartment home decreased (4.1%) to $1,511 compared to $1,576 for 2001, partially due to increased concessions
granted in 2002. The average economic occupancy decreased from 95.5% in 2001 to 93.5% for 2002. Economic
occupancy takes into account the fact that apartment homes of different sizes and locations within a community
have different economic impacts on a community’s gross revenue. Economic occupancy is deﬁned as gross potential
revenue less vacancy loss as a percentage of gross potential revenue. Gross potential revenue is determined by
valuing occupied homes at contract rates and vacant homes at market rents.

Although most of our markets have experienced weak demand, we have observed the most signiﬁcant declines
in average rental rates and occupancy during 2002 in certain Northern California and Northeast submarkets.
Northern California, which accounts for approximately 32.0% of current Established Community rental
revenue, experienced a decline in rental revenue in 2002, partially related to job losses in the technology sector.
Although economic occupancy remained ﬂat in Northern California in 2002 as compared to 2001, average rental
rates dropped 12.6% from $1,788 to $1,562 for those same periods.

The Northeast region also accounts for approximately 32.0% of current Established Community rental revenue
and has been experiencing a decline in rental revenue, primarily the result of job losses in the ﬁnancial services
sector. Economic occupancy decreased in the Northeast, from 96.9% in 2001 to 92.6% for 2002, while average
rental rates improved slightly during 2002.

Other income increased primarily due to the recognition of $5,800,000 and $2,500,000 in 2002 and 2001,
respectively, of business interruption insurance related to the settlement of a ﬁre insurance claim that occurred
during the construction of Avalon at Edgewater. In addition, we recognized $711,000 in the ﬁrst quarter of 2002
in construction management fees in connection with the redevelopment of a community owned by a limited
liability company in which we have a membership interest.

Direct property operating expenses, excluding property taxes increased due to the addition of newly developed,
redeveloped and acquired apartment homes coupled with increased insurance, marketing and bad debt.
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, 2002 and our property coverage on November 1, 2002. Insurance and other costs
associated with Development and Redevelopment Communities are expensed as communities move from the
initial construction and lease-up phase to the stabilized operating phase. Marketing initiatives have been
expanded in response to the weak demand, and bad debt expense has increased as a direct result of continuing
job losses and the weakened economy.

For Established Communities, direct property operating expenses, excluding property taxes, increased $5,579,000
(6.1%) to $97,082,000 due to the increases in insurance, marketing and bad debt expenses discussed above.
During 2001, operating expenses increased $3,559,000 (4.8%) due to increases in insurance, utilities, marketing
and ofﬁce and administration expenses.

Property taxes increased due to higher assessments and the addition of newly developed and redeveloped
apartment homes. 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
ﬁnal certiﬁcate of occupancy.

For Established Communities, the increases in property taxes in 2002 and 2001 of $550,000 and $969,000,
respectively, were primarily due to higher assessments throughout all regions.

Property management and other indirect operating expenses decreased in 2002 and increased in 2001 as a result
of executive separation costs that were recognized in 2001 but not in 2002 or 2000. The decrease in 2002 is
partially offset by increases in unallocated central marketing costs and abandoned pursuit costs. Similar to the
community level, central marketing initiatives have been expanded in response to the weak demand. Abandoned
pursuit costs increased $600,000 from $2,200,000 in 2001 to $2,800,000 in 2002 related to development rights
which may not be developed as planned.

AvalonBay Communities, Inc.

Interest expense increased in 2002 due to the issuance of $750,000,000 of unsecured notes between September 2001
and December 2002, partially offset by the repayment of $100,000,000 of unsecured notes in September 2002 and
overall lower interest rates on both short-term and long-term borrowings. In addition, higher average outstanding
balances on our unsecured credit facility resulted in higher interest expense between years. Interest expense
increased in 2001 due to the issuance of $650,000,000 of unsecured notes during 2000 and 2001.

Depreciation expense increased primarily related to acquisitions and completion of development or redevelopment
activities. We expect depreciation expense to continue to increase as we complete additional development and
redevelopment communities, partially offset by the elimination of depreciation of communities that are sold or
designated as held for sale during 2003.

General and administrative expense decreased in 2002 and increased in 2001 as a result of additional compensation
expense recognized in the fourth quarter of 2001 due to the retirement of a senior executive. Unﬁlled positions
and lower incentive compensation also contributed to the decrease in 2002.

Impairment loss of $6,800,000 was recorded during 2002 related to two land parcels that as of December 31, 2002
were determined not likely to proceed to development and therefore were planned for disposition. This loss was
recorded to reﬂect the parcels at fair market value (based on their entitlement status as of December 31, 2002),
less estimated selling costs. In February 2003, we won an appeal regarding the entitlement status of one of these
parcels. If we decide to continue with the planned disposition, this change in entitlement status may increase the
potential value of the land and therefore decrease the previously estimated loss that would be recognized at
the date of disposal. However, we are currently reevaluating our plans for this parcel, which may result in 2003
in the partial recovery of the impairment loss recognized in 2002, if we decide to hold the land for development.

Equity in income of unconsolidated entities decreased during 2002 primarily due to losses recorded for an
investment in a technology company accounted for under the equity method. During 2002 and 2001, we
recorded losses of $3,166,000 and $1,730,000, respectively, related to this investment, bringing the carrying
value of this investment to zero as of December 31, 2002. In addition, a $934,000 valuation allowance was
recorded during 2001 for an investment in a different technology company which contributed to the decrease in
2001 over the prior year period.

Interest income during 2002 decreased due to lower average cash balances invested and lower interest rates. The
increase in interest income during 2001 resulted from higher average cash balances invested.

Gain on sale of communities, including discontinued operations, of $48,893,000, $62,852,000 and $40,779,000
were realized in 2002, 2001 and 2000, respectively. These gains on the sale of communities 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 2003, we expect to increase our disposition activity as compared to 2002.

Funds from Operations

We consider Funds from Operations (“FFO”) to be an appropriate supplemental 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 in order to understand our operating results, FFO should be examined with net
income as presented in the Consolidated Statements of Operations and Other Comprehensive Income included
elsewhere in this report. Consistent with the deﬁnition adopted by the Board of Governors of the National
Association of Real Estate Investment Trusts®‚ we calculate FFO 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 (including any impairment loss on planned dispositions) and extraordinary
gains or losses (as deﬁned by GAAP);
• plus depreciation of real estate assets; and
• after adjustments for unconsolidated partnerships and joint ventures.

AvalonBay Communities, Inc.

Management Discussion and Analysis of
Financial Condition and Results of Operations (continued)

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, 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
Dividends attributable to preferred stock
Depreciation—real estate assets
Depreciation—discontinued operations
Joint venture adjustments
Minority interest expense
Gain on sale of communities, net of impairment loss on
planned dispositions

Funds from Operations

GAAP based
Cash Flow Metrics
Net cash provided by operating activities

Years ended

2002

2001

2000

$ 173,618
(17,896)
140,964
695
1,321
1,601

$ 248,997
(32,497)
125,547
1,437
1,102
1,559

$ 210,604
(39,779)
117,721
1,695
792
1,759

(42,093)

(62,852)

(40,779)

$ 258,210

$ 283,293

$ 252,013

$ 308,109

$ 320,606

$ 302,083

Net cash used in investing activities

$(440,331)

$(270,406)

$(258,155)

Net cash provided by (used in) ﬁnancing activities

$ 72,589

$ (34,444)

5,685

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 $302 per apartment home in 2002 and $251 per apartment home in 2001.
The average maintenance costs charged to expense, including carpet and appliance replacements, related to

AvalonBay Communities, Inc.

these communities was $1,224 per apartment home in 2002 and $1,196 in 2001. We anticipate that capitalized
costs per apartment home will gradually increase as the average age of our communities increases. We expect
expensed maintenance costs to increase as the average age of our communities increases, and to ﬂuctuate with
changes in turnover.

We have expanded our Consolidated Statements of Cash Flows included elsewhere in this report to include
additional information on capital expenditures. For the years ended December 31, 2002 and 2001, the amounts
capitalized (excluding land costs) related to (i) acquisitions, development and redevelopment were $457,851,000
and $401,359,000, respectively, (ii) revenue generating expenditures, such as water sub-metering equipment and
cable installations were $697,000 and $1,675,000, respectively, and (iii) non-revenue generating expenditures
were $11,375,000 and $12,234,000, respectively.

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 and
disposition activity.

Cash and cash equivalents totaled $13,357,000 at December 31, 2002, a decrease of $59,633,000 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 decreased to $308,109,000 in 2002 from
$320,606,000 in 2001 primarily due to the decline in operating income from Established Communities and the
loss of operating income from communities sold during 2002 and 2001, partially offset by additional operating
income from newly developed and redeveloped communities.

Investing Activities—Net cash used in investing activities of $440,331,000 in 2002 related to investments in assets
through development, redevelopment and acquisition of apartment communities, partially offset by proceeds
from the sales of apartment communities.

During 2002, we invested $545,202,000 in the purchase and development of real estate and capital expenditures.

• We began the development of seven new communities. These communities, if developed as expected, will contain
a total of 1,987 apartment homes, and the total investment, including land acquisition costs, is projected to be
approximately $371,200,000. We also completed the development of ten new communities containing a total
of 2,521 apartment homes for a total investment, including land acquisition cost, of $466,600,000.

• We completed the redevelopment of two communities containing 1,116 apartment homes for a total investment

in redevelopment (excluding acquisition costs) of $44,200,000.

• We acquired two communities containing 706 apartment homes for a total investment of $140,200,000,

including the assumption of $33,900,000 in debt.

• We had capital expenditures relating to current communities’ real estate assets of $10,930,000 and non-real

estate capital expenditures of $1,142,000.

AvalonBay Communities, Inc.

Management Discussion and Analysis of
Financial Condition and Results of Operations (continued)

The development and redevelopment of communities involve 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, 2002, ﬁled with the Securities and Exchange Commission, for our discussion of
these and other risks inherent in developing or redeveloping communities.

We sold one community during 2002, generating net proceeds of $78,454,000. These proceeds are being used
to develop and redevelop communities currently under construction and reconstruction, as well as to repay and
redeem certain debt and equity securities, as discussed below.

Financing Activities—Net cash provided by ﬁnancing activities totaled $72,589,000 for the year ended
December 31, 2002, primarily due to the issuance of unsecured notes and an increase in borrowings under our
unsecured credit facility, partially offset by dividends paid, common stock repurchases, and the redemption of
the Series C Preferred Stock. 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 and maturity payments;
• the distributions required with respect to preferred stock;
• 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,
proceeds from asset dispositions and borrowing 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 that
such debt matures. For unsecured notes, we anticipate that no signiﬁcant portion of the principal of these notes
will be repaid prior to maturity. On January 15, 2003, $50,000,000 in unsecured notes matured and was paid,
including the balance of accrued interest. During the remainder of 2003, we have $100,000,000 in maturing
unsecured notes. 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 uncollateralized private or public debt
offerings, additional debt ﬁnancing that is collateralized by mortgages on individual communities or groups of
communities, draws on our credit facility, or by additional equity offerings. We also anticipate having retained
cash ﬂow available 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. From January 1, 2000 through February 1, 2003,
we issued $1,100,000,000 of unsecured notes through public offerings. We expect this source of capital, together
with cash ﬂow from operating activities, dispositions, and other sources of capital, to remain available to meet
our capital needs, for the foreseeable future, although no assurance can be provided that the debt capital markets
will remain available or that such debt will be available on attractive terms.

AvalonBay Communities, Inc.

Variable Rate Unsecured Credit Facility

Our unsecured revolving credit facility is furnished by a syndicate of banks and provides up to $500,000,000 in
short-term credit. Under the terms of the credit facility, if we elect to increase the facility up to $650,000,000,
and one or more banks (from the syndicate or otherwise) voluntarily agree to provide the additional
commitment, then we will be able to increase the facility up to $650,000,000, and no member of the syndicate
of banks can prohibit such increase; such an increase in the facility will only be effective to the extent banks (from
the syndicate or otherwise) choose to commit to lend additional funds. We pay participating banks, in the
aggregate, an annual facility fee of $750,000 in equal quarterly installments. The unsecured credit facility bears
interest at varying levels based on the London Interbank Offered Rate (“LIBOR”), rating 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 (1.94% on February 28, 2003). Pricing could vary if there is a change in rating by either of the two
leading national rating agencies; a change in rating of one level would impact the unsecured credit facility pricing
by 0.05% to 0.15%. 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
0.34% for amounts most recently borrowed under the competitive bid option. The existing facility matures in
May 2005 assuming exercise of a one-year renewal at our option. At February 28, 2003, $155,470,000 was
outstanding, $15,529,000 was used to provide letters of credit and $329,001,000 was available for borrowing
under the unsecured credit facility.

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 $166,000,000 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, 2002, we had 12 new communities under construction, for which a total estimated cost of
$254,146,000 remained to be invested. In addition, we had two communities under reconstruction, for which
a total estimated cost of $7,656,000 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.

AvalonBay Communities, Inc.

Management Discussion and Analysis of
Financial Condition and Results of Operations (continued)

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.

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. When we decide to sell a community, we generally 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. We expect to
accelerate our disposition program during 2003 in response to current and anticipated real estate and capital
markets conditions. However, we cannot assure you that assets can be sold on terms that we consider satisfactory
or that market conditions will continue to make the sale of assets an appealing strategy. Because the proceeds
from the sale of communities may not be immediately redeployed into revenue generating assets, the immediate
effect of a sale of a community is to reduce total revenues, total expenses and funds from operations. Therefore,
an acceleration of our disposition program in 2003 may adversely impact total revenues and funds
from operations. As of February 28, 2003, we have six communities classiﬁed as held for sale under GAAP.
We are actively pursuing the disposition of these communities and expect to close during the ﬁrst and second
quarters of 2003. However, we cannot assure you that these communities will be sold as planned.

We have minority interest investments in three technology companies, including Constellation Real Technologies
LLC, (“Constellation”), an entity formed by a number of real estate investment trusts and real estate operating
companies for the purpose of investing in multi-sector real estate technology opportunities. Our original com-
mitment to Constellation was $4,000,000 but, as a result of an agreement among the members reducing the
commitment due from each member, our commitment is currently $2,600,000, of which we have contributed
$959,000 to date. The remaining unfunded commitment of $1,641,000 is expected to be funded over the next
ﬁve years. In January 2002, we invested an additional $2,300,000 in Realeum, Inc., (“Realeum”), a company
involved in the development and deployment of a property management and leasing automation system.
Pursuant to an agreement with Realeum, we utilize the property management and leasing automation system in
exchange for payments under a licensing arrangement. Realeum is negotiating licensing arrangements with other
real estate companies that we are unafﬁliated with. If unsuccessful in negotiating additional licensing agreements,
Realeum may be required to obtain additional sources of funding. Our third technology investment is in
Rent.com, an internet-based rental housing information provider. We have no obligation to contribute additional
funds to these technology investments, other than the commitment to Constellation as previously described.

Stock Repurchase Program

In July 2002 we announced that our Board of Directors had authorized a common stock repurchase program.
Under this program, we may acquire shares of our common stock in open market or negotiated transactions
up to an aggregate purchase price of $100,000,000. Actual purchases of stock will vary with market conditions.
The size of the stock repurchase program was designed so that retained cash ﬂow, as well as the proceeds from
sales of existing apartment communities and a reduction in planned acquisitions, will provide the source of
funding for the program, with our unsecured credit facility providing temporary funding as needed. Through
February 28, 2003, we have acquired 2,042,600 shares at an aggregate cost of $77,381,000 under this program.

AvalonBay Communities, Inc.

Redemption of Preferred Stock

In July 2002, we redeemed all 2,300,000 outstanding shares of our 8.50% Series C Cumulative Redeemable
Preferred Stock at a price of $25.00 per share, plus $0.1417 in accrued and unpaid dividends, for an aggregate
redemption price of $57,826,000, including accrued dividends of $326,000. The redemption price was funded
in part by the sale on July 11, 2002 of 592,000 shares of Series I Cumulative Redeemable Preferred Stock through
a private placement to an institutional investor for a net purchase price of $14,504,000. The dividend rate
on such shares was initially equal to 3.36% per annum (three month LIBOR plus 1.5%) of the liquidation
preference. As permitted under the terms of such preferred stock, we redeemed all of the Series I Cumulative
Redeemable Preferred Stock on August 29, 2002 for an aggregate redemption price of $14,609,000 including
accrued dividends of $68,000.

As of February 1, 2003, we currently have the following series of redeemable preferred stock outstanding at an
aggregate stated value of $181,692,500. These series have no stated maturity and are not subject to any sinking
fund or mandatory redemptions. As these series become redeemable, we will evaluate the requirements necessary
for such redemptions as well as the cost-effectiveness based on the existing market conditions.

Series

Shares outstanding
February 1, 2003

Payable
quarterly

3,267,700

4,000,000

March, June, September,
December

Annual
rate

8.00%

8.70%

Liquidation
preference

Non-redeemable
prior to

$25

December 15, 2002 —
Currently Redeemable

October 15, 2008

On February 18, 2003, we gave notice of our intent to redeem all 3,267,700 outstanding shares of our 8.00%
Series D Cumulative Redeemable Preferred Stock. We anticipate closing this redemption on March 20, 2003 at
a price of $25.00 per share, plus $0.0167 in accrued and unpaid dividends, for an aggregate redemption price of
$81,747,000, including accrued dividends of $55,000. This redemption will be funded by the sale of shares
of Series J Cumulative Redeemable Preferred Stock through a private placement to an institutional investor. The
dividend rate on such shares will initially be based on three month LIBOR plus 1.5%. The Series J Cumulative
Redeemable Preferred Stock will be redeemable at any time at our option.

Inﬂation and Deﬂation

Substantially all of our apartment leases are for a term of one year or less. In the event of signiﬁcant inﬂation,
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 and therefore expose us to the effect of a decline
in market rents. In a deﬂationary rent environment, as is currently being experienced, we are exposed to declining
rents more quickly under these shorter-term leases.

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 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.

AvalonBay Communities, Inc.

Management Discussion and Analysis of
Financial Condition and Results of Operations (continued)

Real Estate Development Rights We capitalize pre-development costs incurred in pursuit of new development
opportunities for which we currently believe future development is probable. 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 potentially unrecoverable capitalized pre-development costs. The determination
of the charge to expense involves management judgment regarding the probability that a pursuit will not proceed
to development.

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 our standard lease terms, rental payments are generally due on a monthly basis. Any cash concessions
given at the inception of the lease are amortized over the approximate life of the lease—generally one year.

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

Discontinued Operations On January 1, 2002, we adopted Statement of Financial Accounting Standards
(“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires that the
assets and liabilities and the results of operations of any communities which have been sold during 2002, or
otherwise qualify as held for sale as of December 31, 2002, be presented as discontinued operations in our
Consolidated Financial Statements in both current and prior periods presented. The community speciﬁc
components of net income that are presented as discontinued operations include net operating income,
depreciation and interest expense. In addition, the net gain or loss (including any impairment loss) on the
eventual disposal of communities held for sale is presented as discontinued operations when recognized. Real
estate assets held for sale are measured at the lower of the carrying amount or the fair value less the cost to sell,
and are presented separately in our Consolidated Balance Sheets. Subsequent to classiﬁcation of a community as
held for sale, no further depreciation is recorded on the assets.

Investments in Technology Companies We account for our investments in technology companies in
accordance with Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock.” 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.

Stock-Based Compensation During the periods presented in this report, we applied APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations, in accounting for our employee stock
options. No stock-based employee compensation cost is reﬂected in net income, as all options granted under
those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
See Note 10, “Stock-Based Compensation Plans,” in our Consolidated Financial Statements for information
regarding the effect on net income and earnings per share if we had applied the fair value recognition provisions
of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

AvalonBay Communities, Inc.

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. We
monitor interest rate ﬂuctuations 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 $173,840,000 and
$125,274,000 in variable rate debt outstanding as of December 31, 2002 and 2001, respectively. If interest rates
on the variable rate debt had been 100 basis points higher throughout 2002 and 2001, our annual interest costs
would have increased by approximately $2,557,000 and $1,500,000, respectively, based on balances outstanding
during the applicable years.

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, 2002, the effect of swap agreements is to ﬁx the interest rate on approximately $166,000,000
of our variable rate tax-exempt debt. Furthermore, a swap agreement to ﬁx the interest rate on approximately
$22,500,000 of unconsolidated variable rate debt exists as of December 31, 2002. The swap agreements on the
consolidated variable rate tax-exempt debt 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.

AvalonBay Communities, Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

12-31-02

12-31-01

Assets
Real estate:
Land, including land held for development
Buildings and improvements
Furniture, ﬁxtures and equipment

Less accumulated depreciation

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

Total real estate, net

Cash and cash equivalents
Cash in escrow
Resident security deposits
Investments in unconsolidated real estate entities
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, 2002 and 2001; 7,267,700 and
9,567,700 shares issued and outstanding at December 31, 2002 and
December 31, 2001, respectively.

Common stock, $.01 par value; 140,000,000 shares authorized at both
December 31, 2002 and 2001; 68,202,926 and 68,713,384 shares issued and
outstanding at December 31, 2002 and December 31, 2001, 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.

AvalonBay Communities, Inc.

$ 929,397
3,999,826
127,643

$ 821,808
3,432,330
112,378

5,056,866
(584,022)

4,366,516
(440,259)

4,472,844
312,587
—

3,926,257
433,944
30,642

4,785,431

4,390,843

13,357
10,239
21,839
14,591
20,424
31,461
21,483
32,010

72,990
49,965
20,370
15,066
20,357
26,038
21,483
47,177

$4,950,835

$4,664,289

$1,985,342
28,970
456,851
51,553
29,768
51,652
42,954
31,762

$1,635,000
—
447,769
49,007
43,656
51,627
38,841
28,641

2,678,852

2,294,541

77,443

55,193

682
2,266,130
(7,855)
(51,850)
(12,640)

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

2,194,540

2,314,555

$4,950,835

$4,664,289

Consolidated Statements of Operations
and Other Comprehensive Income

(Dollars in thousands, except per share data)

12-31-02

12-31-01

12-31-00

For the 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 expense
Impairment loss

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

$630,502
1,355
7,109

$629,545
1,325
2,953

$564,613
1,051
401

638,966

633,823

566,065

176,587
56,352
121,380
143,782
14,332
6,800

159,665
51,686
103,189
128,642
15,224
—

140,633
46,409
83,582
120,915
13,013
—

519,233

458,406

404,552

55
3,978
(2,570)

121,196
—

856
6,823
(597)

182,499
62,852

2,428
4,764
(1,908)

166,797
40,779

Income from continuing operations

121,196

245,351

207,576

Discontinued operations:
Operating income
Gain on sale of communities

Total discontinued operations

Net income
Dividends attributable to preferred stock

3,529
48,893

52,422

173,618
(17,896)

3,646
—

3,646

3,028
—

3,028

248,997
(32,497)

210,604
(39,779)

Net income available to common stockholders

$155,722

$216,500

$170,825

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

Other comprehensive loss

Comprehensive income

Earnings per common share—basic:
Income from continuing operations
(net of dividends attributable to preferred stock)
Discontinued operations

Net income available to common stockholders

Earnings per common share—diluted:
Income from continuing operations
(net of dividends attributable to preferred stock)
Discontinued operations

Net income available to common stockholders

See accompanying notes to Consolidated Financial Statements.

—
(4,157)

(4,157)

(6,412)
(2,071)

(8,483)

—
—

—

$151,565

$208,017

$170,825

1.50
0.76

2.26

1.49
0.74

2.23

3.11
0.08

3.19

3.05
0.07

3.12

2.53
0.05

2.58

2.49
0.04

2.53

AvalonBay Communities, Inc.

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands,
except share data)

Preferred
stock

Common
stock

Preferred Common

stock

Shares issued

Amount

Additional Deferred
compen-
sation

paid-in
capital

Dividends Accumulated
other com-
in excess of
prehensive
accumulated
loss
earnings

Stock-
holders’
equity

Balance at
December 31, 1999
Net income
Dividends declared to
common and preferred
stockholders
Issuance of common stock
Amortization of deferred
compensation

Balance at
December 31, 2000

Cumulative effect of change
in accounting principle
Net income
Unrealized loss on
cash ﬂow hedges
Dividends declared to
common and preferred
stockholders
Issuance of common stock
Redemption of preferred
stock
Amortization of deferred
compensation

Balance at
December 31, 2001

Net income
Unrealized loss on
cash ﬂow hedges
Dividends declared to
common and preferred
stockholders
Issuance of common stock,
net of withholdings
Repurchase of common
stock, including repurchase
costs of $39
Issuance of preferred stock,
net of offering costs of $407
Redemption of preferred
stock
Amortization of deferred
compensation

Stockholders’ equity,
December 31, 2002

18,322,700
—

65,758,009
—

$183
—

$658
—

$2,442,510
—

$(3,559)
—

$ (69,507)
210,604

— $2,370,285
210,604
—

—
—
— 1,433,533

—

—
—

—

—
14

—

—
50,523

—
(3,408)

(188,942)
—

—

3,417

—

—
—

—

(188,942)
47,129

3,417

18,322,700

67,191,542

183

672

2,493,033

(3,550)

(47,845)

— 2,442,493

—
—

—

—
—

—

—
—
— 1,521,842

(8,755,000)

—

9,567,700

68,713,384

—

771,142

— (1,281,600)

—

(2,300,000)

—

—
—

—

—
—

(87)

—

(29)

—

—
—

—

—
15

—

—
—

—

—
—

—

—
248,997

(6,412)
—

(6,412)
248,997

—

(2,071)

—
59,116

—
(7,545)

(204,649)
—

(218,908)

—

3,606

—

—
—

—

(204,649)
51,586

(218,995)

3,606

687

2,333,241

(7,489)

(3,497)

(8,483)

2,314,555

—

173,618

—

173,618

—

(4,157)

—

(209,996)

28,795

(4,463)

(508)

(13)

(38,281)

—

(11,467)

—

14,387

(72,012)

—

4,097

—

(209,996)

23,832

(49,761)

14,393

(72,041)

4,097

—

7,267,700

68,202,926

$ 73

$682

$2,266,130

$(7,855)

$(51,850)

$(12,640) $2,194,540

See accompanying notes to Consolidated Financial Statements.

AvalonBay Communities, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)

12-31-02

12-31-01

12-31-00

For the year ended

Cash ﬂows from operating activities:
Net income
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation expense
Depreciation expense from discontinued operations
Amortization of deferred ﬁnancing costs
Amortization of deferred compensation
Income allocated to minority interest in consolidated partnerships
Gain on sale of communities, net of impairment loss on
planned dispositions
Decrease (increase) in cash in operating escrows
Decrease (increase) in resident security deposits, prepaid
expenses and other assets
Increase in accrued expenses, other liabilities
and accrued interest payable

$ 173,618

$ 248,997

$ 210,604

143,782
695
3,913
4,097
2,570

(42,093)
(104)

18,644

2,987

128,642
1,437
3,716
3,606
597

(62,852)
41

120,915
1,695
2,924
3,417
1,908

(40,779)
1,144

(8,503)

(15,438)

4,925

15,693

Net cash provided by operating activities

308,109

320,606

302,083

Cash ﬂows used in investing activities:
Development/redevelopment of real estate assets including
land acquisitions and deferred development costs
Acquisition of real estate assets
Capital expenditures—current real estate assets
Capital expenditures—non-real estate assets
Proceeds from sale of communities, net of selling costs
Increase (decrease) in payables for construction
Decrease (increase) in cash in section 1031 exchange escrows
Decrease (increase) in investments in unconsolidated
real estate entities

(426,830)
(106,300)
(10,930)
(1,142)
78,454
(13,888)
39,830

(353,351)
(129,300)
(9,649)
(4,183)
238,545
23,656
(33,273)

(171,985)
(252,400)
(15,209)
(1,359)
156,086
1,123
(9,076)

475

(2,851)

34,665

Net cash used in investing activities

(440,331)

(270,406)

(258,155)

Cash ﬂows from ﬁnancing activities:
Issuance of common stock
Repurchase of common stock
Issuance of preferred stock, net of related costs
Redemption of preferred stock and related costs
Dividends paid
Net borrowings (repayments) under unsecured credit facility
Issuance of mortgage notes payable
Repayments of mortgage notes payable
Proceeds from sale of unsecured notes, net of repayments
Payment of deferred ﬁnancing costs
Redemption of units for cash by minority partners
Contributions from (distributions to) minority partners

22,296
(49,761)
14,393
(72,041)
(207,450)
28,970
—
(24,818)
350,342
(3,980)
(1,663)
16,301

50,912
—
—
(218,995)
(203,214)
—
75,110
(22,265)
300,000
(8,808)
(864)
(6,320)

Net cash provided by (used in) ﬁnancing activities

72,589

(34,444)

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of year

(59,633)

72,990

15,756

57,234

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

5,685

49,613

7,621

Cash and cash equivalents, end of year

$ 13,357

$ 72,990

$ 57,234

Cash paid during year for interest, net of amount capitalized

$ 108,903

$ 88,996

$ 72,712

See accompanying notes to Consolidated Financial Statements.

AvalonBay Communities, Inc.

Consolidated Statements of Cash Flows (continued)

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

During the year ended December 31, 2002:

• The Company issued 102,756 units of limited partnership interest in DownREIT partnerships valued at
$5,000 in connection with the formation of a DownREIT partnership and the acquisition by that partnership
of land. See Note 1, “Organization and Signiﬁcant Accounting Policies,” of the Consolidated Financial
Statements for a description of DownREIT partnerships.

• As described in Note 4, “Stockholders’ Equity,” of the Consolidated Financial Statements, 144,718 shares
of common stock were issued, 34,876 shares were withheld to satisfy employees’ tax withholding and other
liabilities and 2,818 shares were forfeited, for a net value of $5,999.

• The Company assumed $33,900 in variable rate, tax-exempt debt related to the acquisition of one community.
• The Company recorded a liability and a corresponding charge to other comprehensive loss of $4,157 to
adjust the Company’s Hedged Derivatives (as deﬁned in Note 5, “Derivative Instruments and Hedging
Activities,” of the Consolidated Financial Statements) to their fair value.
• Common and preferred dividends declared but not paid totaled $51,553.

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 common stock were issued at a value of $8,570 and 19,646 shares 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 Hedged Derivatives 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 common stock were issued at a value of $4,703 and 50,310 shares 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.

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements
(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, 2002, the Company owned or held a direct or indirect ownership interest in 137 operating
apartment communities containing 40,179 apartment homes in eleven states and the District of Columbia,
of which two communities containing 1,089 apartment homes were under reconstruction. In addition, the
Company owned or held a direct or indirect ownership interest in 12 communities under construction that are
expected to contain an aggregate of 3,429 apartment homes when completed. The Company also owned a direct
or indirect ownership interest in rights to develop an additional 38 communities that, if developed in the manner
expected, will contain an estimated 9,950 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, in which Avalon
shareholders received 0.7683 of a 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 an initial distribution before any distribution is made to the general partner. Although the
partnership agreements for each of the DownREITs are different, generally the distributions per unit paid to
the holders of units of limited partnership interests have approximated the Company’s current common stock
dividend per share. Each DownREIT partnership has been structured so that it is unlikely the limited partners
will be entitled to a distribution greater than the initial distribution provided for in the partnership agreement.
The holders of units of limited partnership interest have the right to present 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 accounts for investments in unconsolidated entities in accordance with Accounting Principles
Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” and
Statement of Position (“SOP”) 78-9, “Accounting for Investments in Real Estate Ventures.” The Company uses
the equity method to account for investments in which it owns greater than 20% of the equity value or has
signiﬁcant and disproportionate inﬂuence over that entity. Investments in which the Company owns 20% or less
of the equity value and does not have signiﬁcant and disproportionate inﬂuence are accounted for using
the cost method. If there is an event or change in circumstance that indicates a loss in the value of an investment,
the Company’s policy is to record the loss and reduce the value of the investment to its fair value. A loss in
value would be indicated if the Company could not recover the carrying value of the investment or if the investee
could not sustain an earnings capacity that would justify the carrying amount of the investment. The Company
did not recognize an impairment loss on any of its investments in unconsolidated entities during the year ended

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements (continued)

December 31, 2002. However, during the year ended December 31, 2001, the Company recorded an impairment
loss of $934 related to a technology investment in which the Company no longer owns an equity interest.

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 approximate life of the lease, which is
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, 2002, 2001 and 2000:

Total revenue (GAAP basis)
Concessions amortized
Concessions granted

For the year ended

12-31-02

12-31-01

12-31-00

$638,966
11,044
(17,356)

$633,823
4,005
(6,362)

$566,065
3,043
(2,349)

Total revenue adjusted to state concessions on a cash basis

$632,654

$631,466

$566,759

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 capital. A charge to expense
is included in operating expenses, excluding property taxes on the accompanying Consolidated Statements of
Operations and Other Comprehensive Income to provide an allowance for potentially unrecoverable deferred
development costs.

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.

AvalonBay Communities, Inc.

If there is an event or change in circumstance that indicates an impairment in the value of an operating
community, the Company’s policy is to assess any impairment in value by making a comparison of the current
and projected operating cash 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 2002, 2001 or 2000 on any of its operating communities. However, the Company recognized
an impairment loss in 2002 related to land planned for disposition as of December 31, 2002. See Note 7,
“Discontinued Operations—Real Estate Assets Held for Sale” of the Consolidated Financial Statements.

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, 2002, 2001 and 2000:

Net income available to common stockholders
Dividends attributable to Preferred Stock, not deductible for tax
GAAP gain on sale of communities less than (in excess of ) tax gain
Depreciation/Amortization timing differences on real estate
Tax compensation expense in excess of GAAP
Other adjustments

2002
Estimate

$155,722
17,896
5,164
(5,893)
(8,568)
1,395

2001
Actual

$216,500
32,497
(21,223)
(4,899)
(11,129)
(124)

2000
Actual

$170,825
39,779
(15,146)
(826)
(5,873)
(1,157)

Taxable net income

$165,716

$211,622

$187,602

The following summarizes the tax components of the Company’s common and preferred dividends declared for
the years ended December 31, 2002, 2001 and 2000:

Ordinary income
20% capital gain
Unrecaptured §1250 gain

2002

74%
23%
3%

2001

80%
14%
6%

2000

86%
9%
5%

Deferred Financing Costs Deferred ﬁnancing costs include fees and costs incurred to obtain debt ﬁnancing
and are amortized on a straight-line basis, which approximates the effective interest method, over the shorter of
the term of the loan or the related credit enhancement facility, if applicable. Unamortized ﬁnancing costs are
written-off when debt is retired before the maturity date. Accumulated amortization of deferred ﬁnancing costs
was $15,765 and $11,916 at December 31, 2002 and 2001, respectively.

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements (continued)

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

Interest Rate Contracts The Company utilizes derivative ﬁnancial instruments to manage interest rate risk and
has designated these ﬁnancial instruments as hedges under the guidance of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and SFAS No. 138, “Accounting for Certain Instruments and
Certain Hedging Activities, an Amendment of Statement No. 133.” For fair value hedge transactions, changes
in the fair value of the derivative instrument and changes in the fair value of the hedged item due to the risk
being hedged are recognized in current period earnings. For cash ﬂow hedge transactions, changes in the fair
value of the derivative instrument are reported in other comprehensive income. For cash ﬂow hedges where the
changes in the fair value of the derivative 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. As of December 31, 2002, the Company has approximately $166,000
in variable rate tax-exempt debt subject to cash ﬂow hedges. See Note 5, “Derivative Instruments and Hedging
Activities,” of the Consolidated Financial Statements.

Comprehensive Income Comprehensive income, which is deﬁned as all changes in equity during each period
except for those resulting from investments by or distributions to shareholders, is displayed in the accompanying
Consolidated Statements of Stockholders’ Equity. Accumulated other comprehensive loss reﬂects the changes in
the fair value of effective cash ﬂow hedges.

Earnings per Common Share
In accordance with the provisions of SFAS No. 128, “Earnings per Share,” basic
earnings per share is computed by dividing earnings available to common 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. 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

For the year ended

12-31-02

12-31-01

12-31-00

68,772,139
988,747
913,325

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

66,309,707
861,755
969,536

Weighted average common shares and DownREIT units—diluted

70,674,211

69,781,719

68,140,998

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

$ 155,722

$ 216,500

$ 170,825

Weighted average common shares—basic

68,772,139

67,842,752

66,309,707

Earnings per common share—basic

2.26

3.19

2.58

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

$ 155,722

$ 216,500

$ 170,825

1,601

1,559

1,759

Adjusted net income available to common stockholders

$ 157,323

$ 218,059

$ 172,584

Weighted average common shares and DownREIT units—diluted

70,674,211

69,781,719

68,140,998

Earnings per common share—diluted

2.23

3.12

2.53

AvalonBay Communities, Inc.

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
1,410,397, 18,269 and 7,500 in 2002, 2001 and 2000, respectively.

In 2002, 42,697 units of limited partnership (“DownREIT units”) were presented for redemption and were
purchased by the Company for $1,663. In addition, the Company issued 102,756 DownREIT units valued at
$5,000 in connection with the acquisition of land. In 2001, 762 DownREIT units, valued at $36, were
exchanged for an equal number of shares of the Company’s common stock, and 22,076 DownREIT units
were presented for redemption and purchased by the Company for $864. The Company also issued 257,559
DownREIT units valued at $12,304 as consideration for acquisitions of apartment communities and land. In
2000, 1,520 DownREIT units, valued at $60, were issued as partial consideration for the acquisition of an
apartment community. In addition, 304,602 DownREIT units, valued at $10,926, were exchanged for an equal
number of shares of the Company’s common stock.

Stock-Based Compensation During the years ended December 31, 2002, 2001 and 2000, the Company
applied the intrinsic value method as provided in APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations, in accounting for its employee stock options. No stock-based employee
compensation cost is reﬂected in net income, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant. See Note 10, “Stock-Based
Compensation Plans,” for information regarding the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,”
to stock-based employee compensation.

Business Interruption Insurance During 2000, a ﬁre occurred at one of the Company’s development
communities, which was under construction and unoccupied at the time. The Company had property damage
and business interruption insurance which covered this event. Business interruption insurance proceeds of
$5,800 and $2,500 are included in other income in the accompanying Consolidated Statements of Operations
and Other Comprehensive Income for the years ended December 31, 2002 and 2001, respectively. This
settlement was ﬁnalized in 2002.

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 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 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.

Recently Issued Accounting Standards
In May 2002, SFAS No. 145, “Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” was issued. SFAS No. 145,
among other items, rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt,” which
provided that gains and losses from early debt retirements be treated as extraordinary items. Under SFAS
No. 145, gains and losses from early debt retirements will only be treated as extraordinary items if they meet the
criteria for extraordinary items under APB No. 30. This statement is effective for ﬁscal years beginning after
May 15, 2002. The Company will adopt this pronouncement effective January 1, 2003, but does not expect it
to have a material impact on its ﬁnancial condition or results of operations.

In June 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” was issued. This
statement addresses ﬁnancial accounting and reporting for costs associated with exit or disposal activities and
nulliﬁes Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination
Beneﬁts and Other Costs to Exit an Activity.” Under SFAS No. 146, a liability for costs associated with exit or

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements (continued)

disposal activities is only to be recognized when the liability is incurred and the deﬁnition of a liability under
Concepts Statement No. 6 is met, rather than at the date of an entity’s commitment to an exit or disposal plan.
This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company
will adopt this pronouncement effective January 1, 2003, but does not expect it to have a material impact on its
ﬁnancial condition or results of operations.

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. (“FIN”) 45,
“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of
Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and
annual ﬁnancial statements about its obligations under certain guarantees that it has issued. It also clariﬁes that
a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company will apply the initial recognition and initial measurement
provisions of FIN 45 on a prospective basis for any guarantees issued or modiﬁed after December 31, 2002,
but does not expect the adoption of FIN 45 to have a material impact on its ﬁnancial condition or results of
operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition
and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148
provides alternative methods of transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 on both an annual and interim basis to require more prominent and more frequent disclosures
in ﬁnancial statements about the effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS No. 148 are effective for ﬁscal years ending after December 15, 2002 while the
interim disclosure provisions are effective for interim periods beginning after December 15, 2002.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities,” which changes the
guidelines for consolidation of and disclosure related to unconsolidated entities, if those unconsolidated entities
qualify as variable interest entities, as deﬁned in FIN 46. The provisions of FIN 46 are to be applied effective
immediately for variable interest entities created after January 31, 2003, and effective July 1, 2003 for variable
interest entities created prior to February 1, 2003. If it is reasonably possible that an enterprise will consolidate
or disclose information about a variable interest entity when FIN 46 becomes effective, the enterprise should
make certain disclosures in all ﬁnancial statements initially issued after January 31, 2003, regardless of the date
on which the variable interest entity was created. The Company does not believe that it is reasonably possible
that the adoption of FIN 46 will result in the consolidation of any previously unconsolidated entities. The
adoption of FIN 46 may result in additional disclosure about a limited number of investments in variable interest
entities, but such disclosure is not expected to be material.

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.

Discontinued Operations On January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” which requires that the assets and liabilities and the results of
operations of any communities which have been sold during 2002, or otherwise qualify as held for sale as
of December 31, 2002, be presented as discontinued operations in the Company’s Consolidated Financial
Statements in both current and prior periods presented. The community speciﬁc components of net income that
are presented as discontinued operations include net operating income, depreciation and interest expense. In
addition, the net gain or loss (including any impairment loss) on the eventual disposal of communities held for
sale will be presented as discontinued operations when recognized. This change in presentation will not have any

AvalonBay Communities, Inc.

impact on the Company’s ﬁnancial condition or results of operations. Real estate assets held for sale will continue
to be measured at the lower of the carrying amount or the fair value less the cost to sell, and are presented
separately in the accompanying Consolidated Balance Sheets. Subsequent to classiﬁcation of a community as
held for sale, no further depreciation is recorded on the assets.

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 $29,937, $27,635
and $18,328 for the years ended December 31, 2002, 2001 and 2000, respectively.

3. Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes and variable rate unsecured credit facility as of
December 31, 2002 and 2001 are summarized as follows:

Fixed rate unsecured notes(1)
Fixed rate mortgage notes payable—conventional and tax-exempt(2)
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

12-31-02

12-31-01

$1,985,342
311,981
108,781

2,406,104
36,089
28,970

$1,635,000
322,495
67,960

2,025,455
57,314
—

Total mortgage notes payable, unsecured notes and unsecured credit facility

$2,471,163

$2,082,769

(1) Balance at December 31, 2002 includes $342 of debt premium received at issuance of unsecured notes.
(2) Includes approximately $166,000 of variable rate notes in both years effectively ﬁxed through Hedged Derivatives, as

described in Note 5, “Derivative Instruments and Hedging Activities,” of the Consolidated Financial Statements.

During the year ended December 31, 2002, the Company assumed $33,900 in variable rate, tax-exempt debt
related to a community acquisition and repaid $21,225 related to a short-term construction loan, in addition to
normal monthly principal and interest payments. In the aggregate, mortgage notes payable, excluding the short-
term construction loan, mature at various dates from May 2004 through February 2041 and are collateralized
by certain apartment communities. As of December 31, 2002, the Company has guaranteed approximately
$149,000 of mortgage notes payable held by subsidiaries; all such mortgage notes payable are consolidated for
ﬁnancial reporting purposes. The weighted average interest rate of the Company’s ﬁxed rate mortgage notes
payable (conventional and tax-exempt) was 6.6% and 6.7% at December 31, 2002 and 2001, respectively. The
weighted average interest rate of the Company’s variable rate mortgage notes payable and its unsecured
credit facility (as discussed below), including the effect of certain ﬁnancing related fees, was 3.5% and 3.1% at
December 31, 2002 and 2001, respectively.

During the year ended December 31, 2002, the Company issued $450,000 in additional unsecured notes. The
Company repaid $100,000 of previously issued unsecured notes pursuant to their scheduled maturity, and no
prepayment fees were incurred. 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.

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements (continued)

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at December 31,
2002 are as follows:

Secured notes
payments

Secured notes
maturities

Unsecured notes
maturities

Interest rate of
unsecured notes

4,104

$ 36,089

4,055
4,341

4,647
4,976

5,327

5,704
5,293
5,664

5,401
123,425

$172,937

24,106
—

—
35,980

—

10,400
29,388
—

12,095
135,856

$283,914

50,000
100,000
125,000
100,000
50,000
150,000
110,000
150,000
50,000
150,000
150,000
200,000
300,000
50,000
250,000
—

6.250%
6.500%
6.580%
6.625%
6.500%
6.800%
6.875%
5.000%
6.625%
8.250%
7.500%
7.500%
6.625%
6.625%
6.125%

$1,985,000

Year

2003

2004
2005

2006
2007

2008

2009
2010
2011

2012
Thereafter

The Company has a $500,000 revolving 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 $28,970 and $0 outstanding
and $79,999 and $85,420 in letters of credit on December 31, 2002 and 2001, respectively. Under the terms of
the unsecured credit facility, if the Company elects to increase the facility up to $650,000, and one or more banks
(from the syndicate or otherwise) voluntarily agree to provide the additional commitment, then the Company
will be able to increase the facility up to $650,000, and no member of the syndicate of banks can prohibit such
increase; such an increase in the facility will only be effective to the extent banks (from the syndicate or otherwise)
choose to commit to lend additional funds. The Company pays participating banks, in the aggregate, an annual
facility fee of $750 in equal quarterly installments. The unsecured credit facility bears interest at varying levels
based on the London Interbank Offered Rate (“LIBOR”), rating levels achieved on the Company’s unsecured
notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 0.60% per
annum (1.98% on December 31, 2002). Pricing could vary if there is a change in rating by either of the two
leading national rating agencies; a change in rating of one level would impact the unsecured credit facility pricing
by 0.05% to 0.15%. 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 assuming exercise of a one-year renewal
option by the Company.

4. Stockholders’ Equity

As of both December 31, 2002 and 2001, the Company had authorized for issuance 140,000,000 and
50,000,000 shares 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 dividends, if any.

AvalonBay Communities, Inc.

In July 2002, the Company redeemed all 2,300,000 outstanding shares of its 8.50% Series C Cumulative
Redeemable Preferred Stock at a price of $25.00 per share, plus $0.1417 in accrued and unpaid dividends, for
an aggregate redemption price of $57,826, including accrued dividends of $326. The redemption price was
funded in part by the sale on July 11, 2002 of 592,000 shares of Series I Cumulative Redeemable Preferred Stock
through a private placement to an institutional investor for a net purchase price of $14,504. The dividend rate
on such shares was initially equal to 3.36% per annum (three month LIBOR plus 1.5%) of the liquidation
preference. As permitted under the terms of such preferred stock, the Company redeemed all of the Series I
Cumulative Redeemable Preferred Stock on August 29, 2002 for an aggregate redemption price of $14,609
including accrued dividends of $68. 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, 2002
were as follows:

Series

Shares outstanding
December 31, 2002

Payable
quarterly

3,267,700

4,000,000

March, June, September,
December

Annual
rate

8.00%

8.70%

Liquidation
preference

Non-redeemable
prior to

$25

December 15, 2002 —
Currently Redeemable

October 15, 2008

During the year ended December 31, 2002, the Company (i) issued 664,118 shares of common stock in
connection with stock options exercised, (ii) issued 144,718 common shares in connection with stock grants to
employees of which 80% are restricted, (iii) had forfeitures of 2,818 shares of restricted stock grants to employees
and (iv) withheld 34,876 shares to satisfy employees’ tax withholding and other liabilities.

In addition, the Company announced in July 2002 that its Board of Directors had authorized a common stock
repurchase program. Under this program, the Company may acquire shares of its common stock in open market
or negotiated transactions up to an aggregate purchase price of $100,000. Actual purchases of stock will vary
with market conditions. The size of the stock repurchase program was designed so that retained cash ﬂow, as
well as the proceeds from sales of existing apartment communities and a reduction in planned acquisitions, will
provide the source of funding for the program, with the Company’s unsecured credit facility providing temporary
funding as needed. As of December 31, 2002, the Company had repurchased 1,281,600 shares of common stock
at an aggregate cost of $49,722 through this program.

Dividends per common share for the years ended December 31, 2002, 2001 and 2000 were $2.80, $2.56 and
$2.24 per share, respectively. In 2002, dividends for preferred shares redeemed during the year were $0.92
per share and dividends for all non-redeemed preferred shares were $2.10 per share. In 2001, dividends for
preferred shares redeemed during the year were $1.41 and dividends for all non-redeemed preferred shares were
$2.10 per share. Dividends per preferred share were $2.17 in 2000.

5. Derivative Instruments and Hedging Activities

The Company has historically used interest rate swap and cap agreements (collectively, the “Hedged Derivatives”)
to reduce the impact of interest rate ﬂuctuations on its variable rate tax-exempt bonds. The Company has not
entered into any interest rate hedge agreements or treasury locks for its conventional unsecured debt and does
not hold interest rate hedge agreements for trading or other speculative purposes. As of December 31, 2002, the
effect of Hedged Derivatives is to ﬁx approximately $166,000 of the Company’s tax-exempt debt at a weighted
average interest rate of 5.9% with an average maturity of 3.7 years. In addition, a Hedged Derivative exists to
ﬁx the interest rate on approximately $22,500 of the Company’s unconsolidated variable rate debt as of
December 31, 2002. These Hedged Derivatives are accounted for in accordance with SFAS No. 133, which as
amended, was adopted by the Company on January 1, 2001. SFAS No. 133 requires that every derivative
instrument be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes
in fair value recognized currently in earnings unless speciﬁc hedge accounting criteria are met.

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements (continued)

The Company has determined that its Hedged Derivatives qualify as effective cash-ﬂow hedges under SFAS
No. 133, resulting in the Company recording all changes in the fair value of the Hedged Derivatives in other
comprehensive income. Amounts recorded in other comprehensive income will be reclassiﬁed into earnings in
the period in which earnings are affected by the hedged cash 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. During the years ended December 31, 2002 and 2001, the Company recorded additional unrealized
losses to other comprehensive loss of $4,157 and $2,599, respectively, to adjust the Hedged Derivatives to their
fair value. In addition, a Swap Agreement with a fair value of $528 was transferred in connection with the sale
of a community during the ﬁrst quarter of 2001. The estimated amount, included in accumulated other
comprehensive loss as of December 31, 2002, expected to be reclassiﬁed into earnings within the next twelve
months to offset the variability of cash ﬂows during this period is not material.

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

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

6. Investments in Unconsolidated Entities

Investments in Unconsolidated Real Estate Entities As of December 31, 2002, the Company had investments
in the following unconsolidated real estate entities, which are accounted for under the equity method of accounting,
except as described below:

• Falkland Partners, LLC was formed as a general partnership in July 1985 to own and operate Falkland Chase,
a 450 apartment-home community located in Silver Spring, Maryland. In 1993, Avalon acquired a 50%
ownership and economic interest in the partnership for an investment of $2,200. The Company, as successor
by merger to Avalon in 1998, became the managing member of the limited liability company in 2000 after
conversion from a general partnership. The Company has responsibility for the day-to-day operations of the
Falkland Chase community and is the management agent subject to the terms of a management agreement. As
of December 31, 2002, Falkland Chase has $24,695 of tax-exempt ﬂoating rate debt outstanding (1.0% as of
December 31, 2002), which matures in December 2030.

• Town Run Associates was formed as a general partnership in November 1994 to develop, own and operate
Avalon Run, a 426 apartment-home community located in Lawrenceville, New Jersey. Since formation of this
venture, the Company has invested $1,803 and, following a preferred return on all contributed equity (which
was achieved in 2002), has a 40% ownership and cash ﬂow interest with a 49% residual economic interest. The
Company is responsible for the day-to-day operations of the Avalon Run community and is the management
agent subject to the terms of a management agreement. The development of Avalon Run was funded entirely
through equity contributions from Avalon as well as the other venture partner, and therefore Avalon Run is not
subject to any outstanding debt as of December 31, 2002.

AvalonBay Communities, Inc.

• Town Grove, LLC was formed as a limited liability corporation in December 1997 to develop, own and operate
Avalon Grove, a 402 apartment-home community located in Stamford, Connecticut. Since formation of this
venture, the Company has invested $14,653 and, following a preferred return on all contributed equity (which
was achieved in 2002), has a 49% ownership and a 50% cash ﬂow and residual economic interest. The
Company is responsible for the day-to-day operations of the Avalon Grove community and is the management
agent subject to the terms of a management agreement. The development of Avalon Grove was funded through
contributions from the Company and the other venture partner, and therefore Avalon Grove is not subject to
any outstanding debt as of December 31, 2002.

• Avalon Terrace, LLC—The Company acquired Avalon Bedford, a 388 apartment-home community located in
Stamford, Connecticut in December 1998. In May 2000, the Company transferred Avalon Bedford to Avalon
Terrace, LLC and subsequently admitted a joint venture partner, while retaining a 25% ownership interest
in this limited liability company for an investment of $5,394 and a right to 50% of cash ﬂow distributions
after achievement of a threshold return (which was not achieved in 2002). The Company is responsible for
the day-to-day operations of the Avalon Bedford community and is the management agent subject to the
terms of a management agreement. As of December 31, 2002, Avalon Bedford has $22,500 in variable rate
debt outstanding, which came due in November 2002, but was extended until November 2005. The interest
rate on this debt is ﬁxed through a Hedged Derivative as discussed in Note 5, “Derivative Instruments and
Hedging Activities.”

• Arna Valley View Limited Partnership—In connection with the municipal approval process for the development
of two consolidated communities, the Company agreed to participate in the formation of a limited partnership
in February 1999 to develop, ﬁnance, own and operate Arna Valley View, a 101 apartment-home community
located in Arlington, Virginia. This community has affordable rents for 100% of apartment homes related to
the tax-exempt bond ﬁnancing and tax credits used to ﬁnance construction of the community. A subsidiary of
the Company is the general partner of the partnership, with a 0.01% ownership interest. The Company is
responsible for the day-to-day operations of the community, and is the management agent subject to the terms
of a management agreement. As of December 31, 2002, Arna Valley View has $6,150 of variable rate tax-exempt
bonds outstanding, which mature in June 2032. In addition, Arna Valley View has $4,134 of 4% ﬁxed rate
county bonds outstanding that mature in December 2030. Due to the Company’s limited ownership and
investment in this venture, it is accounted for using the cost method.

The following is a combined summary of the ﬁnancial position of the entities accounted for using the equity
method, 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)

12-31-02

12-31-01

$136,096
5,323

$136,679
10,886

$141,419

$147,565

$ 47,195
3,820
90,404

$ 47,195
5,172
95,198

$141,419

$147,565

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements (continued)

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

Rental income
Operating and other expenses
Interest expense, net
Depreciation expense

Net income

For the year ended
(unaudited)

12-31-02

12-31-01

12-31-00

$27,678
(9,604)
(2,125)
(4,988)

$28,746
(9,098)
(2,402)
(4,253)

$22,653
(6,295)
(1,209)
(3,287)

$10,961

$12,993

$11,862

The ﬁnancial position and operating results in the preceding tables reﬂect reclassiﬁcations made to amounts in
prior years’ ﬁnancial statements to conform with current year presentations. The Company also 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.

Investments in Unconsolidated Non-Real Estate Entities At December 31, 2002, the Company holds minority
interest investments in ﬁve non-real estate entities, three of which are technology companies. Based on ownership
and control criteria, the Company accounts for two of these investments using the equity method, with the
remaining non-real estate investments accounted for at cost. During the years ended December 31, 2002, 2001
and 2000, the Company recorded losses of $3,166, $1,730 and $719, respectively, related to Realeum, Inc., one
of the two investments accounted for under the equity method, bringing the carrying value of this investment to
zero as of December 31, 2002. The aggregate carrying value of the Company’s investment in unconsolidated
non-real estate entities was $1,855 and $2,737 as of December 31, 2002 and 2001, respectively.

The following is a summary of the Company’s equity in income of unconsolidated entities for the years presented:

Town Grove, LLC
Falkland Partners, LLC
Town Run Associates
Avalon Terrace, LLC
Realeum, Inc.
Other unconsolidated non-real estate entities

Total

For the year ended

12-31-02

12-31-01

12-31-00

$ 1,391
1,058
481
253
(3,166)
38

$ 1,977
924
606
(3)
(1,730)
(918)

$ 1,977
577
555
38
(719)
—

856

$ 2,428

AvalonBay Communities, Inc.

7. Discontinued Operations—Real Estate Assets 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.
During the year ended December 31, 2002, the Company sold one community, as summarized below:

Community Name

Location

Period
of sale

Apartment
homes

Debt

Gross sales
price

Net
proceeds

Longwood

Brookline, MA

4Q02

Total of all 2002 asset sales

Total of all 2001 asset sales

Total of all 2000 asset sales

277

2,551

1,932

$ —

$ 80,100

$ 78,454

$ —

$ 80,100

$ 78,454

$ 8,145

$241,130

$230,400

$31,694

$160,085

$124,392

As of December 31, 2002, the Company did not have any communities that qualiﬁed as held for sale under the
provisions of SFAS No. 144. However, as required under SFAS No. 144, the operations for the community sold in
2002 have been presented as discontinued operations. Accordingly, certain reclassiﬁcations have been made in prior
years to reﬂect the results of operations for this community as discontinued operations, consistent with current
year presentation. The following is a summary of income from discontinued operations for the years presented:

Rental income
Operating and other expenses
Interest expense, net
Depreciation expense
Gain on sale

For the year ended
(unaudited)

12-31-02

12-31-01

12-31-00

$ 6,707
(2,481)
(2)
(695)
48,893

$ 7,834
(2,737)
(14)
(1,437)
—

$ 7,330
(2,580)
(27)
(1,695)
—

Income from discontinued operations

$52,422

$ 3,646

$ 3,028

In addition, the accompanying Consolidated Balance Sheets include net real estate of $30,642, other assets
(excluding net real estate) of $103 and liabilities of $820 as of December 31, 2001 relating to this community.

As of December 31, 2002, the Company has determined that two land parcels with an aggregate carrying value
(prior to adjustment) of $26,739 would not likely proceed to development and are planned for disposition.
Although these assets do not qualify as held for sale under the provisions of SFAS No. 144, the Company
performed an analysis of the carrying value of these assets in connection with this change in anticipated use. As
a result, the Company recorded an impairment loss of $6,800 during the year ended December 31, 2002 to
reﬂect these parcels at fair market value (based on their entitlement status as of December 31, 2002), less
estimated selling costs. See Note 14, “Subsequent Events,” of the Consolidated Financial Statements.

8. Commitments and Contingencies

Employment Agreements and Arrangements As of December 31, 2002, the Company has employment
agreements with six executive ofﬁcers. The 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 December 2003 and December 2006. The employment
agreements provide for one-year automatic renewals (two years in the case of the CEO) after the initial term

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements (continued)

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 (other than for cause)
within two years of a change in control (as deﬁned) of the Company, such ofﬁcer will generally receive a cash
lump sum payment equal to the sum 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 as of 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 2002, the Established Communities were communities that had stabilized
occupancy and costs as of January 1, 2001. A community is considered to have stabilized occupancy at the earlier
of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development
or redevelopment.

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

deﬁned above.

• Development/Redevelopment Communities consists of communities that are under construction and have not
received a ﬁnal certiﬁcate of occupancy, communities where substantial redevelopment is in progress or is
planned to begin during the current year and communities under lease-up, that have not reached stabilized
occupancy, as deﬁned above, as of January 1, 2002.

The primary ﬁnancial measure for Established and Other Stabilized Communities is Net Operating Income
(“NOI”), which is calculated at the community level and represents total revenue less direct property oper-
ating expenses, including property taxes, and excludes property management and other indirect operating
expenses, interest expense, depreciation expense, general and administrative expense and impairment losses. The
primary performance measure for communities under development or redevelopment depends on
the stage of completion. While under development, management monitors actual construction costs against
budgeted costs as well as lease-up pace and rent levels compared to budget.

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

AvalonBay Communities, Inc.

For the year ended December 31, 2002

Segment Results
Established
Northeast
Mid-Atlantic
Midwest
Paciﬁc Northwest
Northern California
Southern California

Total Established

Total
revenue

NOI

% NOI change
from prior year

Gross
real estate

$151,565
77,811
32,998
10,664
151,619
48,372

$104,782
55,695
19,665
6,550
110,845
34,505

(8.5%)
(3.6%)
(5.2%)
(12.2%)
(17.5%)
1.9%

$ 840,939
423,229
251,590
96,738
1,340,846
340,656

473,029

332,042

(9.9%)

3,293,998

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

95,009
70,928
n/a
n/a

66,992
39,156
n/a
n/a

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

823,242
1,143,623
78,688
29,902

Total AvalonBay

$638,966

$438,190

(3.8%)

$5,369,453

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

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

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

423,591

312,218

153,463
56,769
n/a
n/a

108,689
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

988,295
991,667
66,608
28,764

Total AvalonBay

$633,823

$455,439

11.9%

$4,800,460

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

$ 84,764
68,646
20,455
3,778
107,342
23,458

$60,297
49,694
12,869
2,751
82,126
16,635

308,443

224,372

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

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

6.5%
9.2%
5.0%
17.1%
15.9%
11.6%

10.8%

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

$ 444,158
392,758
144,550
34,382
938,630
158,165

2,112,643

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

Total AvalonBay

$566,065

$407,134

18.7%

$4,493,910

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements (continued)

Operating expenses as reﬂected on the accompanying Consolidated Statements of Operations and Other
Comprehensive Income include $32,163, $32,967 and $28,111 for the years ended December 31, 2002, 2001
and 2000, respectively, of property management and other indirect operating expenses that are not allocated to
individual communities. These costs are not reﬂected in NOI as shown in the above tables. Gross real estate as
shown above does not include communities held for sale of $30,642 as reﬂected on the accompanying
Consolidated Balance Sheets as of December 31, 2001. Segment information for the periods ending December
31, 2001 and 2000 have been adjusted for the communities that were designated as held for sale or sold in 2002
as described in Note 7, “Discontinued Operations—Real Estate Assets Held for Sale,” of the Consolidated
Financial Statements.

10. Stock-Based Compensation Plans

The Company 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.

As of December 31, 2002, under the 1994 Plan a maximum of 1,415,862 shares of common stock were available
for issuance. On each January 1, the maximum number available for issuance under the 1994 Plan is increased
by between 0.48% and 1.00% of the total number of shares of common stock and DownREIT units actually
outstanding on such date. On January 1, 2003, the maximum number available for issuance was increased by
664,115 to 2,079,977. 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 1,497,504, 2,780,757, and 3,123,713 shares of common stock were
available for grant under the 1994 Plan at December 31, 2002, 2001 and 2000, 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 awards under
Avalon’s 1993 Stock Option and Incentive Plan (the “Avalon 1993 Plan”) that were forfeited, canceled,

AvalonBay Communities, Inc.

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, 2002, 2001 or 2000.

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, 1999
Exercised
Granted
Forfeited

Options outstanding, December 31, 2000
Exercised
Granted
Forfeited

Options outstanding, December 31, 2001
Exercised
Granted
Forfeited

Weighted
average
exercise price
per share

Avalon 1995
and Avalon
1993 Plan
shares

Weighted
average
exercise price
per share

$32.63
34.78
34.56
33.50

$32.96
33.05
45.90
40.34

$36.91
31.65
45.63
42.72

1,828,337
(327,582)
—
(16,410)

1,484,345
(487,312)
—
(4,836)

992,197
(350,157)
—
(1,534)

$34.63
28.65
—
35.84

$35.94
35.79
—
36.61

$36.03
37.39
—
39.86

1994 Plan
shares

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

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

2,893,278
(281,206)
719,198
(165,263)

Options outstanding, December 31, 2002

3,166,007

$39.05

640,506

$35.27

Options exercisable:
December 31, 2000

December 31, 2001

December 31, 2002

1,183,551

$32.05

1,313,219

$35.71

1,537,194

$33.58

976,830

$35.99

2,003,395

$35.95

640,506

$35.27

For options outstanding at December 31, 2002 under the 1994 Plan, 170,600 options had exercise prices
ranging between $18.37 and $29.99 and a weighted average contractual life of 2.2 years, 1,473,010 options had
exercise prices ranging between $30.00 and $39.99 and a weighted average contractual life of 6.2 years, and
1,522,397 options had exercise prices ranging between $40.00 and $49.90 and a weighted average contractual
life of 8.6 years. Options outstanding at December 31, 2002 for the Avalon 1993 and Avalon 1995 Plans had
exercise prices ranging from $26.68 to $39.70 and a weighted average contractual life of 4.1 years.

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements (continued)

The Company applies the intrinsic value method as provided in APB Opinion No. 25 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.

The following table illustrates the effect on the Company’s net income available to common stockholders and
earnings per share if the Company had applied the fair value recognition provisions prescribed under SFAS
No. 123, “Accounting for Stock-Based Compensation,” to the Plans (unaudited):

Net income available to common stockholders, as reported
Deduct: Total compensation expense determined under fair
value based method, net of related tax effects

For the year ended

12-31-02

12-31-01

12-31-00

$155,722

$216,500

$170,825

(2,904)

(3,576)

(2,767)

Pro forma net income available to common stockholders

$152,818

$212,924

$168,058

Earnings per share:
Basic—as reported

Basic—pro forma

Diluted—as reported

Diluted—pro forma

2.26

2.22

2.23

2.18

3.19

3.14

3.12

3.07

2.58

2.53

2.49

The fair value of the options granted during 2002 is estimated at $4.52 per share on the date of grant using
the Black-Scholes option pricing model with the following assumptions: dividend yield of 6.15%, volatility of
18.90%, risk-free interest rates of 4.81%, actual number of forfeitures, and an expected life of approximately
7 years. 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.

In October 1996, the Company adopted the 1996 Non-Qualiﬁed Employee Stock Purchase Plan (as amended,
the “ESPP”). Initially, 1,000,000 shares of common stock were reserved for issuance under this plan. There are
currently 702,342 shares remaining available for issuance under the plan. Full-time employees of the Company
generally are eligible to participate in the ESPP if, as of the last day of the applicable election period, they have
been employed by the Company for at least one month. All other employees of the Company are eligible to
participate provided that as of the applicable election period they have been employed by the Company for
twelve months. Under the ESPP, eligible employees are permitted to acquire shares of the Company’s common
stock through payroll deductions, subject to maximum purchase limitations. The ESPP provides for a series of
“purchase periods.” Prior to 2000, there were two purchase periods per year of six months each. Since 2000, there
has been one purchase period per year. Beginning in 2003, the purchase period will be a period of seven months
beginning each May 1 and ending each November 30. The purchase price for common stock purchased under
the plan is 85% of the lesser of the fair market value of the Company’s common stock on the ﬁrst day of the
applicable purchase period or the last day of the applicable purchase period. The offering dates, purchase dates
and duration of purchase periods may be changed by the Board of Directors, if the change is announced prior
to the beginning of the affected date or purchase period. The Company issued 29,345, 14,917 and 34,055 shares
under the ESPP for 2002, 2001 and 2000, respectively.

AvalonBay Communities, Inc.

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.

• 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 $2,442 and $2,083 had an estimated

aggregate fair value of $2,639 and $2,191 at December 31, 2002 and 2001, respectively.

12. Related Party Arrangements

Purchase of Mortgage Loan The Company’s Chairman and CEO, and the Company’s former Chairman and
CEO, are partners of an entity that is the general partner of Arbor Commons Associates Limited Partnership
(“Arbor Commons Associates”). Arbor Commons Associates owns Avalon Arbor, a 302 apartment home
community in Shrewsbury, Massachusetts. Concurrently with its 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 Arbor Commons Associates’ interest in Avalon
Arbor. This loan accrues interest at a ﬁxed rate of 10.2% per annum, payable at 9.0% per annum. The balance
of the note receivable at both December 31, 2002 and 2001 was $21,483. The balance of accrued interest on the
note receivable as of December 31, 2002 and 2001, respectively, was $4,965 and $5,231, and is included in other
assets on the accompanying Consolidated Balance Sheets. Related interest income of $3,091, $3,081 and $3,009
was recorded for the years ended December 31, 2002, 2001 and 2000, 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.

Unconsolidated entities The Company manages several unconsolidated real estate joint venture entities for
which it receives management fee revenue. From these entities the Company received management fee revenue
of $1,019, $1,011 and $691 in the years ended December 31, 2002, 2001 and 2000, respectively.

Indebtedness of Management The Company has 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 Stock Incentive Plan, as amended and restated
on March 31, 2001. In accordance with the Sarbanes-Oxley Act of 2002, no loans to senior ofﬁcers will be
renewed and the Company intends to phase out the Stock Loan program for all other participants over a period
of approximately one year. The principal balance outstanding under the Stock Loans to employees was $1,133
at both December 31, 2002 and 2001. The balance of accrued interest on the notes receivable was $45 and $100
as of December 31, 2002 and 2001, respectively. Interest income on the notes of $61, $62 and $76 was recorded
for the years ended December 31, 2002, 2001 and 2000, respectively. Each Stock Loan is made for a one-year
term, is a full personal recourse obligation of the borrower and is secured by a pledge to the Company of the
stock that vested and gave rise to the tax withholding liability for which the loan was made. In addition,
dividends on the pledged stock are automatically remitted to the Company and applied toward repayment of the
Stock Loan.

AvalonBay Communities, Inc.

Notes to Consolidated Financial Statements (continued)

Consulting Agreement with Mr. Meyer
In March 2000, the Company and Gilbert M. Meyer announced that
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 which terminates in May 2003, 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 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, dispositions, development and redevelopment of multifamily rental properties.

Director Compensation The Company’s Stock Incentive Plan provides that directors of the Company who are
also employees receive no additional compensation for their 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. The Company recorded compensation expense relating to these deferred stock awards
in the amount of $743, $624 and $525 in the years ended December 31, 2002, 2001 and 2000, respectively.
Deferred compensation relating to these deferred stock awards was $757 and $688 on December 31, 2002 and
2001, respectively.

Investment in Realeum, Inc. As an employee incentive and retention mechanism, the Company arranged for
ofﬁcers of the Company to hold direct or indirect economic interest in Realeum, Inc. Realeum, Inc. is a company
involved in the development and deployment of a property management and leasing automation system, in
which the Company invested $2,300 in January 2002. The Company currently utilizes this property management
and leasing automation system and has paid $480, $80 and $0 to Realeum, Inc. under the terms of its licensing
arrangements during the years ended December 31, 2002, 2001 and 2000, respectively.

13. Quarterly Financial Information (Unaudited)

The following summary represents the quarterly results of operations for the years ended December 31, 2002
and 2001:

For the three months ended

3-31-02

6-30-02

9-30-02

12-31-02

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

$158,296
$ 35,690
0.52
$
0.51
$

$158,966
$ 32,315
0.47
$
0.46
$

$160,358
$ 24,685
0.36
$
0.35
$

$161,346
$ 63,033
0.92
$
0.91
$

For the 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

$153,810
$ 41,654
0.62
$
0.61
$

$160,368
$ 39,131
0.58
$
0.57
$

$161,219
$ 79,229
1.16
$
1.14
$

$158,426
$ 56,486
0.83
$
0.81
$

AvalonBay Communities, Inc.

14. Subsequent Events (Unaudited)

As of February 28, 2003, six communities previously held for operating purposes were classiﬁed as held for sale
under SFAS No. 144. These communities had an aggregate net real estate carrying value of $129,032 and debt
of $27,305 as of December 31, 2002. The Company is actively pursuing the disposition of these communities
and expects to close during the ﬁrst and second quarters of 2003.

For the period January 1, 2003 through February 28, 2003, the Company has repurchased an additional 761,000
shares of common stock at an aggregate cost of $27,659 through its common stock repurchase program.

On January 15, 2003, $50,000 in unsecured notes matured and were paid, including the balance of accrued interest.

On February 18, 2003, the Company gave notice of its intent to redeem all 3,267,700 outstanding shares of
its 8.00% Series D Cumulative Redeemable Preferred Stock. The closing of this redemption is anticipated on
March 20, 2003 at a price of $25.00 per share, plus $0.0167 in accrued and unpaid dividends, for an aggregate
redemption price of $81,747, including accrued dividends of $55. This redemption will be funded by the sale
of shares of Series J Cumulative Redeemable Preferred Stock through a private placement to an institutional
investor. The dividend rate on such shares will initially be based on three month LIBOR plus 1.5%. The Series
J Cumulative Redeemable Preferred Stock will be redeemable at any time at the Company’s option.

In February 2003, the Company won an appeal regarding the entitlement status of one of the two land parcels
planned for disposition as of December 31, 2002. If the Company decides to continue with the planned
disposition, this change in entitlement status may increase the potential value of the land and therefore decrease
the previously estimated loss that would be recognized at the date of disposal. However, the Company is currently
reevaluating the planned disposal of this parcel, which may result in 2003 in the partial recovery of the
impairment loss recognized in 2002, if the Company decides to hold the land for development.

AvalonBay Communities, Inc.

Report of Independent Auditors

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

We have audited the accompanying consolidated balance sheets of AvalonBay Communities, Inc. (the “Company”)
as of December 31, 2002 and 2001, and the related consolidated statements of operations and other
comprehensive income, stockholders’ equity and cash ﬂows for each of the three years in the period ended
December 31, 2002. These 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 ﬁnancial statements referred to above present fairly, in all material respects, the consolidated
ﬁnancial position of AvalonBay Communities, Inc. at December 31, 2002 and 2001, and the consolidated results
of their operations and their cash ﬂows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the consolidated ﬁnancial statements, in 2002 the Company adopted Financial
Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In addition, as
discussed in Note 5 to the consolidated ﬁnancial statements, in 2001 the Company changed its method of
accounting for derivative instruments and hedging activities.

McLean, Virginia
January 21, 2003

AvalonBay Communities, Inc.

Market for Registrant’s Common Equity
and Related Stockholder Matters

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 2002 and 2001, as reported by the NYSE. On February 1, 2003 there
were 795 holders of record of an aggregate of 68,149,232 shares of our outstanding common stock. The number
of holders does not include individuals or entities who beneﬁcially own shares but whose shares are held of record
by a broker or clearing agency, but does include each such broker or clearing agency as one recordholder.

2002

2001

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

$50.660
$52.650
$46.150
$41.830

$44.440
$45.660
$40.480
$36.720

$0.70
$0.70
$0.70
$0.70

$50.000
$47.450
$51.900
$49.700

$45.200
$42.450
$43.800
$44.010

$0.64
$0.64
$0.64
$0.64

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.

AvalonBay Communities, Inc.

AvalonBay Corporate Information

Board of Directors

Ofﬁcers

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

Bruce A. Choate
CEO and President
Watson Land Company

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

Gilbert M. Meyer
Founder and President
Greenbriar Homes 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

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

Stephen W. Wilson
Regional Vice President
Development

Tracey B. Appelbaum
Vice President
Development

Miguel A. Azua
Vice President
Controller

Shannon E. Brennan
Vice President
Customer Service

Sean J. Breslin
Vice President
Investments

Scott W. Dale
Vice President
Development

Mark J. Forlenza
Vice President
Development

Frederick S. Harris
Vice President
Development

Dirk V. Herrman
Vice President
Chief Marketing Ofﬁcer

David L. Kirzinger
Vice President
Property Operations

Ronald S. Ladell
Vice President
Development

Lyn C. Lansdale
Vice President
Strategic Business Services

Joanne M. Lockridge
Vice President
Finance and Assistant Treasurer

Janice A. Miner
Vice President
Property Operations

Edward M. Schulman
Vice President
General Counsel and Secretary

Lawrence A. Scott
Vice President
Development

Bernard J. Ward
Vice President
Property Operations

James R. Willden
Vice President
Engineering

AvalonBay Communities, Inc.

Ofﬁces

Headquarters

Washington, DC
2900 Eisenhower Avenue,
Suite 300
Alexandria, VA 22314
Phone:
Fax:

(703) 329-6300
(703) 329-1459

Regional Ofﬁces

Boston, MA
1250 Hancock Street, Suite 804N
Quincy, MA 02169
Phone:
Fax:

(617) 472-9491
(617) 472-5553

Chicago, IL
P.O. Box 5303
Wheaton, IL 60189
Phone:
Fax:

(630) 653-7470
(630) 653-7504

New Canaan, CT
220 Elm Street, Suite 200
New Canaan, CT 06840
(203) 801-3302
Phone:
(203) 801-3310
Fax:

Newport Beach, CA
4440 Von Karman Avenue,
Suite 300
Newport Beach, CA 92660
Phone:
Fax:

(949) 955-6200
(949) 955-6237

New York, NY
535 Fifth Avenue, 17th Floor
New York, NY 10017
Phone:
Fax:

(212) 370-9269
(212) 370-1511

San Francisco, CA
4340 Stevens Creek Boulevard,
Suite 275
San Jose, CA 95129
Phone:
Fax:

(408) 983-1500
(408) 984-7060

Seattle, WA
11808 Northup Way, Suite W311
Bellevue, WA 98005
Phone:
Fax:

(425) 576-2100
(425) 576-8447

Woodbridge, NJ
Woodbridge Place
517 Route One South, Suite 5500
Iselin, NJ 08830
Phone:
Fax:

(732) 404-4800
(732) 283-9105

Investor Relations

Investor Relations
AvalonBay Communities, Inc.
2900 Eisenhower Avenue,
Suite 300
Alexandria, VA 22314
(703) 329-6300 ext. 4632
ir@avalonbay.com

Website

www.avalonbay.com

Transfer Agent

Wachovia Bank, N.A.
1525 West W.T. Harris Boulevard,
3C3
Charlotte, NC 28288
(800) 829-8432

Form 10K

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 contacting
Investor Relations.

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 the results of operations.

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