AvalonBay Communities
Annual Report 2010

Plain-text annual report

A P P R E C I A T I N G V A L U E 2010 ANNUAL REPORT AvalonBay Communities, Inc. is an equity REIT primarily and Northern and Southern California. At year-end, engaged in developing, redeveloping, acquiring, and our Total Market Capitalization was approximately managing quality apartment communities in high $13.7 billion. barrier-to-entry markets within the United States. Our strategy is to be leaders in customer insight, market AvalonBay Communities Inc. common shares are research and capital allocation, delivering a range of traded on the New York Stock Exchange under the ticker multifamily offerings tailored to serve the needs of symbol AVB and are included in the S&P 500 Index. the most attractive customer segments in the best- More information about AvalonBay may be found on performing US submarkets. Our markets are located in our website at www.avalonbay.com. the Northeast, Mid-Atlantic, Midwest, Pacific Northwest, F I N A N C I A L H I G H L I G H T S See page 13 for notes and defined terms, and page 15 for 5 year stock performance graph TOTAL SHAREHOLDER RETURN (1) NAV PE R SHARE GROW TH (2) 49.7% 42.1% e t a R h t w o r G l a u n n A d n u o p m o C 60% 50% 40% 30% 20% 10% 0% 9.7% 8.5% 13.9% 11.3% e t a R h t w o r G l a u n n A d n u o p m o C 60% 56.3% 40% 46.6% 20% 0% -20% 0.4% 6.6% 4.4% -0.6% 1 Year 5 Year 10 Year 1 Year 5 Year 10 Year AVB Multifamily Sector Avg. Source: SNL Financial, Green Street Advisors AVB Multifamily Sector Avg. COVER: AVALON TOWERS BELLEVUE, WA. THIS PAGE: AVALON NORWALK, CT A P P R E C I A T I N G V A L U E 2010 ANNUAL REPORT AVALONBAY COMMUNITIES, INC. 1 A V A L O N F O R T G R E E N E , N Y 2 AVALONBAY COMMUNITIES, INC. T O O U R S H A R E H O L D E R S It was a good year to invest with AvalonBay. Last year we said 2010 would be a transition year with both the economy and apartment markets in recovery. Indeed, it was. Modest job growth emerged while apartment rental demand surged to the strongest level in five years. Fundamentals other than employment were driving the apartment market recovery and this shift was recognized by investors. For the year, the S&P 500 Index was up 13% while the Morgan Stanley REIT Index rose h t w o r G b o J R Y / R Y S U 3% 2% 1% 0 -1% -2% -3% IMPROVING JOB OUTLOOK % 8 . 0 % 2 . 0 % 2 . 1 % 3 . 1 % 4 . 2 % 0 . 2 % 3 . 2 - % 5 . 0 - Q1’10 Q2’10 Q3’10 Q4’10 Q1’11E Q2’11E Q3’11E Q4’11E 24%. For AvalonBay, Total Shareholder Return was 42%. Source: Moody’s Analytics n o i t p r o s b A t n e m t r a p A t e N l a u n n A l a t o T ) s d n a s u o h t n i ( 300 200 100 0 STRONG U.S. NET RENTER AB SO RPTION (3) 227 78 1995-2009 Avg. 2010 Source: Witten Advisors As we move into 2011, apartment fundamentals look even stronger. Accelerating job growth, limited new supply, a declining homeownership rate, favorable de- mographics and expectations for an improving econ- omy all support improved operating performance. Accordingly, we expect absorption, occupancy and rental rates for our portfolio to rise. Moreover, attitudes among consumers, lenders, and lawmakers are shift- ing from homeownership towards renting. Given the key structural advantages of our markets, our ability to invest capital through multiple growth platforms, and a balance sheet that supports growth, AvalonBay is well-positioned to extend our industry-leading position for value creation in new apartment investment. Last year’s annual report, titled “Where You Want To Be”, describes an organization that is alert and responsive to challenging market conditions while prepared for the next phase of growth and opportunities. In this year’s report, we will review our accomplishments in 2010 and share with you our view of fundamentals that favor rental housing over the next several years. We will also provide a deeper look into our business. By understanding the value-creation opportunities available to us, we believe investors will better appreciate the potential for outsized returns going forward. “Appreciating Value” is the theme of our report this year. Looking Back at 2010 At the beginning of last year, the economic outlook was uncertain. The economy had lost 270,000 jobs in the last quarter of 2009. Rental rates and occupancies were falling. Our 2010 financial outlook called for the impact of these soft economic conditions on our portfolio to moderate and trend into a period of stronger demand/supply fundamen- tals for 2011 and beyond. In fact, the job market stabilized early in 2010, consumer confidence improved, and renters that had doubled up be- gan to establish their own households. This drove renter demand higher at a time when fewer of our residents were choosing to move. As a result, we began to recoup rental revenue lost during the recession sooner than expected. AVALONBAY COMMUNITIES, INC. 3 Fundamentals accelerated quickly. We updated investors • We sold three assets for an aggregate price of $190 in April and again in June, increasing our forecast for rev- million. These sales, at a weighted average Initial Year enue growth. At mid-year, we announced a 5% increase Market Capitalization Rate of 5.8%, provided a total in our full-year 2010 outlook for Funds From Operations Economic Gain to us of $22 million and a 9% per Share (FFO) and another 2% increase in the fall. We unleveraged IRR on our investment over a 12 year ended the year with Net Operating Income (NOI) from weighted average holding period - harvesting value our Same Store portfolio down 3% for the year com- that was reinvested into attractive new development. pared to a projected decline of 6% in our original outlook. Earnings per Share (EPS) increased 7%, primarily from • Through our second private discretionary real estate an increase in gains from community dispositions and investment fund, we acquired six communities with impairment charges reported in 2009 not present in 2010. just under 2,800 apartment homes for approximately FFO increased 3% for the full year. $400 million. We also increased our investment activity last year: • We completed five redevelopments during the year for a Total Capital Cost of approximately $80 million • We started 11 communities for a total budgeted cost (excluding costs incurred prior to redevelopment) and of $640 million. This was 60% more than we antici- started seven redevelopments with incremental pated at the beginning of the year and demonstrates estimated Total Capital Costs of $80 million. the multiple dimensions of our Company. Organiza- tional capacity, a willingness to be agile and balance This opportunistic and timely commitment to new in- street strength allow us to respond quickly to accelera- vestment required new capital from a variety of sources. ting fundamentals. We issued $340 million of common stock under our Continuous Equity Program (CEP) at an average price AVALO NB AY D E VE LO P ME NT A C TIV IT Y of $98 – 20% above the share price at the beginning of t s o C l a t i p a C l a t o T ) s n o i l l i m n i ( $2,200 $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 0 7 3 2 , 1 $ 4 6 7 $ 3 8 6 $ 0 5 8 $ 4 4 6 $ 4 8 4 $ 4 6 $ 5 6 3 $ 1 7 3 $ 7 4 2 $ 6 2 1 $ 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(E) Total Development Starts Total Development Under Construction the year. We sourced $250 million in ten-year unsecured notes at a coupon of 3.95% and lowered our cost of debt by repaying $64 million with a weighted average rate of 6.3%. The pricing on the ten-year note offering was reported to be the lowest coupon in modern REIT history on unsecured debt by any REIT in any sector, and reflects an appreciation by the credit markets of the strong finan- cial condition of AvalonBay and our overall credit qual- ity. This is especially meaningful given the severity of the recent credit crisis and our ability to preserve our strong credit profile during the downturn. Source: AVB (as of December 31, 2010) SOL ID CR EDIT ME TR ICS (4) • We completed and delivered four new communities totaling over 1,500 apartment homes for a Total Capital Cost of $570 million. At year-end 2010, we had 14 developments under construction – double the number underway at the prior year-end. Multifamily AVB Sector Avg. L ev era ge 2 9.6 % 4 2. 1% F ixe d Ch arg e Cov er ag e 2 .8 2 .3 Deb t/E BIT DA 7 .2x 8 .6x Source: SNL Financial (as of December 31, 2010) 4 AVALONBAY COMMUNITIES, INC. A V A L O N A N A H E I M S T A D I U M , C A A P P R E C I A T I N G F O C U S We see opportunities to improve growth and investment returns in our markets through greater focus on location, asset quality and customer segment. The Economy and Apartment Fundamentals With only limited job growth, the recovery in our sector is evidence that the drivers we believe support strong de- mand for rental housing for the next several years are now aligning: segment as potential buyers face tighter mortgage qualifications and lingering concerns regarding the risks and burdens of investing in a home. Some fore- casts suggest that by 2015, the U.S. homeownership rate could fall to 64%, potentially creating two million new renter households. • Demographics Younger age groups have a higher propensity to rent and today there are more U.S. residents age 20 to 29 than 30 to 39 years old. Further, the pace of hiring among young adults in the 20 to 34 years old age range is reportedly at its strongest pace since the mid-1980’s. Together, these trends help ex- plain some of the “unbundling” of households which occurred during 2010 that boosted renter demand. • New Supply Perhaps most importantly, a sharp reduction in new rental supply is now underway. Over the last ten years, nationwide construction starts for multifamily rental units averaged 200,000 per year. In 2010, only 75,000 multifamily rental units were started, a 60% drop. While new starts will likely increase this year, only 130,000 apartment homes are anticipated for completion in 2012. These are the lowest levels of new rental development in the last 40 years. O UT SIZ E D J OB GA INS AMO NG P RIM E R E N TE R S CONSTRAI NTS ON N EW SUPPLY I N AV B M ARK ET S 1,300 900 73% ) s d n a s u o h t n i ( 1,400 1,200 1,000 800 400 200 0 100% 80% 60% 40% 20% 0% 31% Total New Jobs in 2010 (All Ages) Total New Jobs in 2010 (20-34 Year Olds) Share of New 2010 Jobs (20-34 Year Olds) Share of Total 2010 Job Base (20-34 Year Olds) Source: Bureau of Labor Statistics k 2.0% c o t S l a t n e R l a t o T f o % s a s n o i t e p m o C l l a t n e R 1.5% 1.0% 0.5% 0.0% 2000 2002 2004 2006 2008 2010 2012 (E) AVB Markets U.S. Source: REIS, AVB • Homeownership The nation’s homeownership rate is • Government Policy Recent proposals to scale back approximately 67%, down from the 69% peak reached in early 2005. Not surprisingly, the percentage of our residents leaving to purchase a home is near historical lows. This reflects continued weakness in the for-sale the government’s footprint in the mortgage market send strong signals of a general shift towards a more balanced housing policy. The impact of this shift will likely be tougher lending hurdles and higher costs for homeowners, which will benefit rental housing HIGH HOUSE HO LD IN CO ME LO W HO U SING AF FORDABILITY (5) demand in the years to come. ) s d n a s u o h t $ ( $70 $60 $50 $40 $65.3 $49.8 i n a d e M o t e c i r P e s u o H n a d e M i 4.2x e m o c n I y l i m a F 4.5 4.0 3.5 3.0 2.5 2.0 2.6x AVB Markets U.S. AVB Markets U.S. Source: Moody’s Analytics, AVB 6 AVALONBAY COMMUNITIES, INC. The Road Ahead: Appreciating Value Our markets have a number of key structural advantages: higher household income, lower home affordability and constraints on new supply. This helps explain why many of our markets were among the top-performing in effective rent growth over the last ten years. These ad- vantages should continue to result in strong performance l e m o c n I d o h e s u o H n a d e M i A V A L O N W E S T L O N G B R A N C H , N J A P P R E C I A T I N G G R O W T H Whether through development, redevelopment or acquisitions, we will invest capital through multiple platforms as a means to grow Net Asset Value and optimize portfolio performance. going forward. As a result, we are likely to see other LEADING SHARE OF NEW DEVELOPMENT players enter or expand in our markets. An investor should ask: “How will you create value in a potentially more competitive environment?” Opportunity exists within our markets to improve growth and investment returns through greater focus on submarket selection, asset quality and customer segmentation. Portfolio performance can be enhanced by shifting AVB’s portfolio over time to the top-performing submarkets within each of our markets. With enhanced market research and local knowledge, a reasonable goal is to shift the portfolio so that approximately 70% is located in the top half of each MSA’s submarkets vs. T I E R y l i m a f i t l u M f o e r a h S B V A s t r a t S t n e m p o e v e D l 50% 40% 30% 20% 10% 0 41% 38% 2010 Starts 2011 Starts (E) Source: Industry reports approximately 50% today. Within individual submarkets, • Redevelopment Depending on the strategy, redevel- performance can vary by asset class. With a greater opment can range from remerchandising (essentially focus on segmenting our markets by customer, price upgrading finishes and furnishings) to a major point and, ultimately, product type, we can identify the reconstruction of an older asset. The value created most attractive pockets of growth at a more granular level from a redevelopment includes the higher rents we to optimize portfolio performance. With only a 1% share achieve from improving the asset and the incremental of the total rental inventory in our markets and only a NOI growth over time as a result of higher rents and 9% share of new development, we believe there is room lower expenses. Over the past decade, we have invested to expand our capabilities and capture return from these close to $300 million in redevelopment capital for 31 value-added activities. communities. Assuming favorable market conditions, To optimize portfolio positioning and grow NAV, ment opportunities exists in our portfolio for the next we believe about $100 million per year of redevelop- AvalonBay can invest capital through multiple growth few years. platforms: development (to grow the portfolio), rede- velopment (to position the portfolio), and transaction • Transaction Activity Acquisitions are also a platform activity (acquisitions and dispositions to shape the port- for growth. Combined with dispositions, they provide folio). Let’s look at each platform. a vehicle to achieve portfolio reshaping goals. Since 1998, we realized a 14.2% unleveraged IRR on $1.5 • Development From $6 billion in new development billion of acquired assets that were subsequently sold. invested since 1994, we have sold $1.1 billion We currently invest in and manage two acquisition funds and realized a 16.8% unleveraged IRR and an eco- through our Investment Management platform. By nomic gain of $96,000 per apartment home. With executing acquisition activity principally through the the ability to compete for any apartment opportu- funds, we are able to tap into an additional source of nity within our diverse geographic footprint, capital through the private equity market while we AvalonBay’s development capabilities are unmatched separately allocate capital into development activity. in our sector. At year-end 2010, we had $900 million of These activities provide both the potential for outsized new development underway at a projected weighted returns to inves-tors and an additional source of rev- average yield of 7%. Our future pipeline consists of 26 enue from fees and promotes, all while being good sites for an estimated Total Capital Cost cost of stewards of the capital provided by both our public and $2.2 billion. private investors. 8 AVALONBAY COMMUNITIES, INC. A V A L O N A T D E C O V E R L Y , M D A P P R E C I A T I N G C A P I T A L M A N A G E M E N T We have the strongest balance sheet in our sector. A largely unencumbered asset base and access to unsecured markets preserves financial flexibility and enhances liquidity. AVALONBAY COMMUNITIES, INC. 9 As a value-centric organization, we align our perfor- Conclusion mance measures with value creation over a period of Through the years, creating value has been our focus and Appreciating Value has been the outcome. We recognize that value and earnings growth align over time to gen- erate outsized returns and cash flow. Looking forward, our strategy of allocating capital to deliver a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best perform- ing US submarkets positions us well to improve growth and investment returns. We believe the fundamentals in our markets, our multiple growth platforms and our disciplined approach to capital management are all aligned to deliver outsized dividend growth, Total Share- holder Return and NAV growth. As always, thank you to our shareholders for your con- tinued support, to our associates for your extraordinary efforts, and to our residents who have chosen to make an AvalonBay community your home. time that may not necessarily be within a calendar year. As a result, we manage our capital structure by match- ing financing and investing activities. This disciplined approach helps guide the type and timing of capital markets activity by managing our credit metrics, liquid- ity and debt maturities. This helps mitigate the impact of recent capital markets volatility by increasing our financial flexibility. Through these efforts, we have expanded our financing options, avoiding unfavorable market conditions, reducing our cost of capital and creat- ing shareholder value. We have found that value-centric activities, characterized by low leverage, conservative accounting policies and a willingness to recycle capital back into our invest- ment platform are highly correlated to Total Shareholder Return. Not surprisingly, dividend growth and Total Shareholder Return are highly correlated. Our dividend has never been reduced and has always been covered by recurring cash flow. We can think of no better evidence of an organization’s long-term value creation capability than outsized cash flow growth as measured by dividend growth and retained cash. AVB FFO E XC E ED S DI VID END S PA I D $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 AVB FFO per Share AVB Dividends per Share Source: SNL Financial Bryce Blair Chairman and CEO 10 AVALONBAY COMMUNITIES, INC. 10 AVALONBAY COMMUNITIES, INC. A V A L O N C E N T E R P O I N T , M D A P P R E C I A T I N G V A L U E We have internal and external opportunities to create value, with attractive fundamentals in our markets and an ability to execute based on a strong balance sheet and an experienced management team. A V A L O N F A S H I O N V A L L E Y , C A 12 AVALONBAY COMMUNITIES, INC. NOTES 1. Total Shareholder Return: The change in value over the period stated with all dividends reinvested. Total Shareholder Return is sometimes presented as the compound annual growth rate. The Total Shareholder Return for each year within the timeframe presented may vary. 2. Estimated NAV per Share Growth: The compound annual growth rate of Estimated NAV per Share as estimated by Green Street Advisors, Inc. during the periods indicated. Estimated NAV per Share Growth for each year within the timeframe presented may vary. 3. Net Renter Absorption is a measure of renter demand and is defined as the year-over-year change in occupied apartments. Data based on US rental inventoty as calculated by Witten Advisors as of 4Q 2010. See “Definitions and Reconciliations of Non-GAAAP Financial Measures and Other Terms.” Home Affordability defined as the ratio of the current US median home sales price to US median household income (data as of 3Q 2010). A higher price-to-income ratio implies that homes are less affordable. Data from Moody’s Analytics. 4. 5. TABLE OF CONTENTS Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35 Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosure About Market Risk Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Consolidated Financial Statements 37 40 59 61 F-3 Form 10-K Page DEFINITIONS AND RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES AND OTHER TERMS This Annual Report contains certain non-GAAP financial measures and other terms. The definition and calculation of these non-GAAP financial measures and other terms may differ from the definitions and methodologies used by other REITs and, accordingly, may not be comparable. The non-GAAP financial measures referred to below should not be considered an alternative to net income as an indication of our performance. In addition, these non-GAAP financial measures do not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered as an alternative measure of liquidity or as indicative of cash available to fund cash needs. The definitions of Non-GAAP financial measures and other terms not included below (Funds from Operations, Net Operating Income, Established/Same Store Communities) are contained in our Annual Report on Form 10-K. Net Asset Value (NAV) Per Share The estimated market value of a company’s assets less the estimated market value of all current and long-term liabilities divided by the number of outstanding common shares (diluted) and operating partnership units per Green Street Advisors. Interest Coverage Interest Coverage is calculated by the Company as EBITDA from continuing operations, excluding land gains and gain on the sale of investments in real estate joint ventures, divided by the sum of interest expense, net, and preferred dividends. Interest Coverage is presented by the Company because it provides rating agencies and investors an additional means of comparing our ability to service debt obligations to that of other companies. EBITDA is defined by the Company as net income attributable to the Company before interest income and expense, income taxes, depreciation, and amortization. A reconciliation of EBITDA and a calculation of Interest Coverage for the full year 2010 are as follows (dollars in thousands): Net income attributable to common stockholders Interest expense, net Interest expense (discontinued operations) Depreciation expense Depreciation expense (discontinued operations) EBITDA EBITDA from continuing operations EBITDA from discontinued operations EBITDA EBITDA from continuing operations Interest charges Interest coverage $175,331 175,209 0 232,571 371 $583,482 $507,100 76,382 $583,482 $507,100 175,209 2.9 AVALONBAY COMMUNITIES, INC. 13 Initial Year Market Capitalization Rate (Cap Rate) Initial Year Market Cap Rate is defined by the Company as Projected NOI of a single community for the first 12 months of operations (assuming no repositioning), less estimates for non-routine allowance of approximately $200 - $300 per apartment home, divided by the gross sales price for the community. Projected NOI, as referred to above, represents management’s estimate of projected rental revenue minus projected operating expenses before interest, income taxes (if any), depreciation, amortization, and extraordinary items. For this purpose, management’s projection of operating expenses for the community includes a management fee of 3.0% - 3.5%. The Initial Year Market Cap Rate, which may be determined in a different manner by others, is a measure frequently used in the real estate industry when determining the appropriate purchase price for a property or estimating the value for a property. Buyers may assign different Initial Year Market Cap Rates to different communities when determining the appropriate value because they (i) may project different rates of change in operating expenses and capital expenditure estimates and (ii) may project different rates of change in future rental revenue due to different estimates for changes in rent and occupancy levels. The weighted average Initial Year Market Cap Rate is weighted based on the gross sales price of each community. Leverage and Total Market Capitalization Leverage is total debt as a percentage of Total Market Capitalization. Total Market Capitalization represents the aggregate of the market value of the Company’s common stock, the market value of the Company’s operating partnership units outstanding (based on the market value of the Company’s common stock) and the outstanding principal balance of the Company’s debt. Management believes that Leverage can be one useful measure of a real estate operating company’s long-term liquidity and balance sheet strength, because it shows an approximate relationship between a company’s total debt and the current total market value of its assets based on the current price at which the Company’s common stock trades. Changes in Leverage also can influence changes in per share results. A calculation of Leverage as of December 31, 2010 is as follows (dollars in thousands): Common stock Preferred stock Operating partnership units Total debt Total Market Capitalization $9,667,941 — 1,712 $4,068,417 $13,378,070 Debt as % of Total Market Capitalization 30.4% Because Leverage changes with fluctuations in the Company’s stock price, which occur regularly, the Company’s Leverage may change even when the Company’s earnings, interest and debt levels remain stable. Investors should also note that the net realizable value of the Company’s assets in liquidation is not easily determinable and may differ substantially from the Company’s Total Market Capitalization. Multifamily Sector Average Multifamily Sector Average is a weighted average based on Total Market Capitalization per SNL Financial. The weighted average for “Total Shareholder Return” includes AEC, AIV, BRE, CPT, EQR, ESS, HME, MAA, PPS, and UDR. The weighted average for “NAV per Share Growth” includes all apartment companies under Green Street Advisors, Inc.’s coverage for which data is available during each of the time periods presented and includes AEC, BRE, CPT, EQR, PPS, and UDR. The weighed average for “Leverage”, “Fixed Charge Coverage” and “Debt/EBITDA” includes AIV, BRE, CPT, EQR, ESS, HME and UDR. Total Capital Cost Total Capital Cost includes all capitalized costs projected to be actually incurred to develop the respective Development Community, Redevelopment Community or Development Right, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead, and other regulatory fees, all as determined in accordance with GAAP. For Redevelopment Communities, Total Capital Cost excludes costs incurred prior to the start of redevelopment when indicated. With respect to communities where development or redevelopment was recently completed in the prior or current period, Total Capital Cost reflects the actual cost incurred, plus any construction contingency estimate made by management. Total Capital Cost for communities identified as having joint venture ownership, either during construction or upon construction completion, represents the total projected joint venture contribution amount. For joint ventures not in construction, Total Capital Cost is equal to gross real estate cost. Economic Gain (Loss) Economic Gain (Loss) is calculated by the Company as the gain (loss) on sale in accordance with GAAP, less accumulated depreciation through the date of sale and any other non-cash adjustments that may be required under GAAP accounting. Management generally considers Economic Gain (Loss) to be an appropriate supplemental measure to gain (loss) on sale in accordance with GAAP because it helps investors to understand the relationship between the cash proceeds from a sale and the cash invested in the sold community. The Economic Gain (Loss) for each of the communities presented is estimated based on their respective final settlement statements. A reconciliation of Economic Gain (Loss) to gain on sale in accordance with GAAP for the full year ended December 31, 2010 and from 1998-2010 is shown below. Number of Communities Sold 2010 (3 Communities, 1 Office Building) 1998-2010 (19 Communities, 4,941 Apt. Homes) Gross Sales Price $198,600 $1,083,921 GAAP Gain $74,074 $583,344 Accumulated Depreciation and Other $51,977 $111,179 Economic Gain $21,767 $472,166 Unleveraged IRR Unleveraged IRR on sold communities refers to the internal rate of return calculated by the Company considering the timing and amounts of (i) total revenue during the period owned by the Company and (ii) the gross sales price net of selling costs, offset by (iii) the undepreciated capital cost of the communities at the time of sale and (iv) total direct operating expenses during the period owned by the Company. Each of the items (i), (ii), (iii), and (iv) are calculated in accordance with GAAP. The calculation of Unleveraged IRR does not include an adjustment for the Company’s general and administrative expense, interest expense, or corporate-level property management and other indirect operating expenses. Therefore, Unleveraged IRR is not a substitute for Net income as a measure of our performance. Management believes that the Unleveraged IRR achieved during the period a community is owned by the Company is useful because it is one indication of the gross value created by the Company’s acquisition, development or redevelopment, management and sale of a community, before the impact of indirect expenses and Company overhead. The Unleveraged IRR achieved on the communities as cited in this report should not be viewed as an indication of the gross value created with respect to other communities owned by the Company, and the Company does not represent that it will achieve similar Unleveraged IRRs upon the disposition of other communities. The weighted average Unleveraged IRR for sold communities is weighted based on all cash flows over the holding period for each respective community, including net sales proceeds. 14 AVALONBAY COMMUNITIES, INC. STOCK PERFORMANC E $200 $150 $100 $50 $0 2005 2006 2007 2008 2009 2010 AVB FTSE NAREIT Apartment REIT Index S&P 500 Index Source: NAREIT Benchmarked at 12/05=$100 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 AvalonBay FTSE NAREIT Apartment REIT Index S&P 500 Index $100 100 100 $150 140 116 $112 104 122 $77 78 77 $111 102 97 $ 158 150 112 Ten Year FFO Reconciliation For the Year Ended (Dollars in thousands) 12-31--10 12-31-09 12-31-08 12-31-07 12-31-06 12-31-05 12-31-04 12-31-03 12-31-02 12-31-01 Net income Dividends attributable to preferred stock Depreciation—real estate assets, including discontinued operations and joint venture adjustments Distributions to noncontrolling interests, including discontinued operations Cumulative effect of change in accounting principle Gain on sale of unconsolidated entities Gain on sale of operating communities Funds from Operations attributable to common stockholders Weighted average common shares outstanding—diluted $175,331 $155,647 $411,487 $358,160 $266,546 $310,468 $207,779 $262,503 $173,125 $248,997 — — (10,454) (8,700) (8,700) (8,700) (8,700) (10,744) (17,896) (40,035) 237,041 221,415 203,082 184,731 165,982 163,252 159,221 129,207 143,026 128,086 55 — — 66 — — 216 — 280 — 391 — (3,483) (59,927) (6,609) 1,363 — — 3,048 (4,547) — 1,263 1,601 1,559 — — — — — — (74,074) (63,887) (284,901) (106,487) (97,411) (195,287) (121,287) (159,756) (48,893) (62,852) $338,353 $313,241 $315,947 $368,057 $320,199 $271,096 $235,514 $222,473 $250,963 $275,755 84,632,869 80,599,657 77,578,852 79,856,927 75,586,898 74,759,318 73,354,956 70,203,467 70,674,211 69,781,719 EPS—diluted $2.07 $1.93 $5.17 $4.38 $3.42 $4.05 $2.75 $3.60 $2.22 $3.02 FFO per common share—diluted $4.00 $3.89 $4.07 $4.61 $4.24 $3.63 $3.21 $3.17 $3.55 $3.95 AVALONBAY COMMUNITIES, INC. 15 AVALONBAY CORPORATE INFORMATION William M. McLaughlin Executive Vice President Development–Northeast Stephen W. Wilson Executive Vice President Development–West Coast, Mid-Atlantic David W. Bellman Senior Vice President Construction-East Coast Kurt Conway Senior Vice President Brand Strategy Deborah A. Coombs Senior Vice President Property Operations– West Coast Jonathan B. Cox Senior Vice President Development–Mid-Atlantic Frederick S. Harris Senior Vice President Development–NY Joanne M. Lockridge Senior Vice President Finance, Assistant Treasurer and Assistant Secretary J. Richard Morris Senior Vice President Construction Kevin P. O’Shea Senior Vice President Investment Management Christopher L. Payne Senior Vice President Development–Southern CA Edward M. Schulman Senior Vice President General Counsel and Secretary Bernard J. Ward Senior Vice President Property Operations– East Coast, Midwest Danyell D. Alders Vice President Property Operations– Southern CA BOARD OF DIRECTORS Bryce Blair Chairman and CEO AvalonBay Communities, Inc. Bruce A. Choate (2,4,5) President and CEO Watson Land Company A real estate investment trust John J. Healy, Jr. (2,4,5) Private Investor Timothy J. Naughton (4) President AvalonBay Communities, Inc. Lance R. Primis (1,3,5) Managing Partner Lance R. Primis and Partners, LLC A management consulting firm Peter S. Rummel (3,4) Private Investor H. Jay Sarles (2,3) Private Investor W. Edward Walter (2,4) President and CEO Host Hotels & Resorts, Inc. A real estate investment trust 1 Lead Independent Director 2 Audit Committee 3 Compensation Committee 4 Investment and Finance Committee 5 Nominating and Corporate Governance Committee OFFICERS Bryce Blair Chairman and CEO Timothy J. Naughton President Thomas J. Sargeant Chief Financial Officer Leo S. Horey Executive Vice President Property Operations Sean J. Breslin Executive Vice President Investments and Asset Management 16 AVALONBAY COMMUNITIES, INC. Ronald S. Ladell Vice President Development–NJ Lyn C. Lansdale Vice President Strategic Business Services Sarah K. Mathewson Vice President Property Operations–MA, RI Mike F. Nootens Vice President Engineering Michael J. Roberts Vice President Development–MA Robert S. Salkovitz Vice President Construction–Southern CA Keri A. Shea Vice President Finance and Treasurer Meg Spriggs Vice President Development-Northern CA Mona R. Stahling Vice President Operations Craig Thomas Vice President Market Research B. Kevin Thompson Vice President Marketing Timothy M. Walters Vice President Investments-West Coast Matthew B. Whalen Vice President Development–Long Island Philip M. Wharton Vice President Development–NY Trinity M. Blue Vice President Property Operations– Metro NY, NJ Shannon E. Brennan Vice President Property Operations– Mid-Atlantic Alfred Brockunier III Vice President Construction–NY Duane W. Carlson Vice President Construction–Northern CA, Pacific NW Sean M. Clark Vice President Asset Management/ Redevelopment–West Coast Scott W. Dale Vice President Development–MA Heather Duffy Vice President Property Operations– CT, NY, Midwest Steve Fabian Vice President Customer Care Center Mark Forlenza Vice President Development–CT Brian E. Fritz Vice President Development–Pacific NW Patrick Gniadek Vice President Investments–East Coast Karen A. Hollinger Vice President Information Services Suzanne Jakstavich Vice President Human Resources Scott R. Kinter Vice President Construction–Northeast FOR M 10-K A copy of the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission is being distrib- uted with this Annual Report and also may be obtained without charge by contacting Investor Relations. S TOCK L IS TINGS NYSE–AVB FORWA RD -LOOK ING STAT EM ENTS This Annual Report contains “forward- looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Please see our discus- sion titled “Forward-Looking Statements” on page 55 of our Annual Report on Form 10-K for a discussion regarding risks associ- ated with these statements. AVALONBAY CORPORATE INFORMATION San Jose, CA 400 Race Street Suite 200 San Jose, CA 95126 Phone: Fax: (408) 983-1500 (408) 287-9167 Seattle, WA 11808 Northup Way Suite W311 Bellevue, WA 98005 Phone: Fax: (425) 576-2100 (425) 576-8447 Virginia Beach, VA 2901 Sabre Street Suite 100 Virginia Beach, VA 23452 (757) 631-5000 Phone: (757) 486-1063 Fax: Woodbridge, NJ Woodbridge Place 517 Route One South Suite 5500 Iselin, NJ 08830 Phone: Fax: (732) 404-4800 (732) 283-9105 IN VE STOR R ELAT IONS Investor Relations AvalonBay Communities, Inc. Ballston Tower 671 N. Glebe Road Suite 800 Arlington, VA 22203 Phone: ir@avalonbay.com (703) 329-6300 ext. 4747 WE BSIT E www.avalonbay.com T RAN SFE R AGE NT BNY Mellon Shareowner Services P.O. Box 358015 Pittsburgh, PA 15252-8015 (866) 230-0668 Phone: IN DE P END ENT AUD ITORS Ernst & Young, LLP 8484 Westpark Drive McLean, VA 22102 Phone: (703) 747-1000 HEADQU ARTER S Washington, DC Ballston Tower 671 N. Glebe Road Suite 800 Arlington, VA 22203 Phone: Fax: (703) 329-6300 (703) 329-9130 REGIONAL OF FIC ES Boston, MA 51 Sleeper Street Suite 750 Boston, MA 02210 Phone: Fax: (617) 654-9500 (617) 426-1610 Chicago, IL 200 North Arlington Heights Road Suite 15 Arlington Heights, IL 60004 Phone: Fax: (847) 342-0065 (847) 342-0075 Shelton, CT 1000 Bridgeport Avenue Suite 258 Shelton, CT 06484 Phone: Fax: (203) 926-2300 (203) 926-2355 Long Island, NY 135 Pinelawn Road Suite 130 South Melville, NY 11747 Phone: Fax: (631) 843-0736 (631) 843-0737 Los Angeles, CA 16255 Ventura Boulevard Suite 950 Encino, CA 91436 Phone: Fax: (818) 784-2800 (818) 784-2810 Newport Beach, CA 4440 Von Karman Avenue Suite 300 Newport Beach, CA 92660 (949) 955-6200 Phone: (949) 724-9208 Fax: New York, NY 275 Seventh Avenue 25th Floor New York, NY 10001 Phone: Fax: (212) 370-9269 (212) 370-1415 San Francisco, CA 185 Berry Street Suite 3500 San Francisco, CA 94107 (415) 284-9080 Phone: (415) 546-4138 Fax: O C S I C N A R F N A S , . C N I , G I A R C & Y E N I E H : N G I S E D Ballston Tower • 671 N. Glebe Road, Suite 800 Arlington • VA • 22203 Tel: (703) 329-6300 www.avalonbay.com 

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