2014 ANNUAL REPORT 1 AVALONBAY COMMUNITIES, INC. is an equity REIT in the business of developing, redeveloping, acquiring and managing multifamily communities primarily in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California. We focus on leading metropolitan areas in these regions that we believe are characterized by growing employment in high wage sectors of the economy, lower housing affordability and a diverse and vibrant quality of life. We believe these market characteristics offer the opportunity for superior risk-adjusted returns on apartment community investment relative to other markets. FINANCIAL HIGHLIGHTS TOTAL SHAREHOLDER RETURN Source: SNL Financial (1) 42.7% 40.7% 19.4 % 18.5% 12.3% 10.8% 15.9% 13.8% 1 YEAR 5 YEAR 10 YEAR 15 YEAR • AvalonBay • Multifamily Sector Weighted Average CORE FFO PER SHARE GROWTH Source: SNL Financial (2) 8.8% 8.0% 8.6 % 7.0% 7.4 % 5.7% 3.4 % 2.3% 1 YEAR 5 YEAR 10 YEAR 15 YEAR • AvalonBay • Multifamily Sector Weighted Average DIVIDEND GROWTH Indexed to 100 in 1994 Source: SNL Financial 300 225 150 75 0 1994 1998 2002 2006 2010 2014 • AvalonBay • Multifamily Sector Weighted Average 2 2 AVALON BAY | 2014 Annual Report AVA 55 Ninth, San Francisco, CA 3 3 AVALONBAY | 2014 Annual Report 2014 AT A GLANCE: 8.8% $1.1 Billion 42.7% CORE FFO PER SHARE GROWTH DEVELOPMENT COMPLETIONS TOTAL SHAREHOLDER RETURN A LOOK BACK AvalonBay achieved another year of strong performance in 2014. In our stabilized portfolio, we generated healthy rental revenue growth for a fourth consecutive year, while at the same time we continued to provide outstanding customer service, as evidenced by a resident satisfaction rating that is 700 basis-points above the Kingsley Multifamily Customer Satisfaction Index. We completed the development of 17 new communities containing over 4,100 apartment homes, representing $1.1 billion in total investment. We completed these communities at an attractive cost basis of approximately $275,000 per apartment home, or roughly 20% below the market value of our existing 19-year-old stabilized portfolio(3). We also commenced construction on 14 new projects that, if developed as expected, will contain nearly 4,000 new apartment homes and represent $1.3 billion in Total Capital Costs. To fund this investment activity, we raised $1.4 billion of attractively-priced capital which enabled us to lock-in attractive investment spreads on our new investment activity. And importantly, we were able to grow our business while enhancing our commitment to environmental sustainability and strategic community investment, as demonstrated by the attainment of two new community LEED certifications and five new community EnergyStar certifications. In 2014, as a result of our strong operational and investment performance, we achieved an 8.8% 4 increase in Core FFO per Share from 2013 and generated a Total Shareholder Return of 42.7%. In January 2015, reflecting both past performance and our expectation for future growth, we announced a 7.8% increase in our quarterly dividend to $1.25 per Share. Our performance in 2014 reflects not only the strength of the current apartment cycle, which began in 2010, but also the benefits of our disciplined adherence to a strategy focused on more deeply penetrating our target markets with a brand portfolio, delivered primarily through new development. We believe our strategy has enabled us to deliver attractive financial returns over the long-term. Since the Company’s Initial Public Offering in 1994, we’ve grown Core FFO 6.7% and the dividend 5.3%, both on a compound annualized basis, and we’ve delivered annualized Total Shareholder Return of 16.2%. Our Total Shareholder Return over the 20- year period ending in 2014 ranks 6th among the 65 exchange-listed REITs that have been in existence since 1994. Disciplined execution of our strategy has also produced attractive financial performance in the current apartment cycle, which is proving to be one of the healthiest and most durable cycles in our Company’s history. Since 2010, our same-store revenues have grown by over 20%. We’ve completed $2.5 billion of new development at a weighted average initial stabilized yield of approximately 7%, which is well above prevailing market capitalization rates in our markets. This operational and investment performance has, in turn, driven exceptional cash flow growth, with Core FFO per Share increasing over 70% and the dividend increasing 40%. 2015 AND BEYOND Looking ahead we expect healthy U.S. economic growth to continue. The National Association of Business Economics forecast calls for stronger job and income growth in 2015 relative to 2014, and Moody’s Analytics projects an increase in household formation. Collectively, we expect these economic drivers will continue to support healthy apartment demand in our markets. We also expect favorable demographics to continue supporting apartment demand. The prime renter cohort, those ages 25 – 34, will increase by more than 1.1 million over the next three years. Furthermore, lifestyle changes among young adults have resulted in extended rental tenure. Specifically, the average age of first marriage has increased nearly two years in the last decade, and the average age of a mother at first birth has increased by one year in the last decade. Taken together, these demographic and lifestyle changes have increased the propensity of young adults to rent instead of own their homes, as evidenced by the 830 basis- point decline in the homeownership rate of young adults since mid-2004, from 43.6% to 35.3%. We believe these demographic trends and lifestyle shifts will continue to benefit apartment demand for the next several years. We expect our stabilized portfolio to produce another year of strong revenue and net operating income growth in 2015. We anticipate completing construction of another 11 communities, containing over 3,500 apartment homes, representing $1.2 billion in projected Total Capital Costs. We also expect to start approximately $1.5 billion in new development in 2015. This investment activity is consistent with our “mid-cycle” outlook for our markets and should help support our effort to deliver outsized value creation during the balance of the cycle. Nonetheless, as we move ahead, we will remain disciplined in pursuing and allocating capital to new opportunities. We intend to remain focused on match-funding investment activity with long-term capital, so as to maintain our strong balance sheet position and preserve our capacity to pursue investment opportunities from a position of financial strength. As we enter 2015, we are 100% match-funded against outstanding investment commitments, allowing us to lock-in healthy investment spreads between the projected investment return on development projects currently under construction and our long- term cost of capital. In addition, our balance sheet remains strong, with net Debt-to-Adjusted EBITDA declining to 5.2x from 6.8x thus far in this apartment cycle. Lastly, we continue to source attractively priced capital. Since 2010, we have reduced the weighted average interest rate on total debt outstanding by 130 basis-points to 3.9%. In summary, we are encouraged by the strong momentum in the U.S. economy and improving apartment demand in our markets. We believe these drivers will continue to support strong growth in our existing portfolio and provide ample demand to absorb the delivery of our new communities. And, we believe AvalonBay is well-positioned to extend our track record of delivering outsized earnings and NAV growth and shareholder returns in the years ahead. On behalf of the entire AvalonBay team, I’d like to thank our existing shareholders, business partners and residents for your contributions to our ongoing success. TIMOTHY J. NAUGHTON Chairman and CEO Avalon Mosaic Fairfax, VA Avalon Stratford Stratford, CT Avalon Huntington Station Huntington Station, NY AVA U District Seattle, WA Avalon Morrison Park San Jose, CA Avalon Baker Ranch Lake Forest, CA Avalon Bloomingdale Bloomingdale, NJ 5 Avalon Ossining Ossining, NY AVALONBAY | 2014 Annual Report FINANCIALS 6 6 AVALON BAY | 2014 Annual Report Avalon Exeter, Boston, MA 7 AVALONBAY | 2014 Annual Report TABLE OF CONTENTS Form 10-K Page Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 39 40 43 65 65 Consolidated Financial Statements F-3 DEFINITIONS AND RECONCILIATIONS Of Non-GAAP Financial Measures and Other Terms This Annual Report contains certain non-GAAP financial measures and other terms. The definitions and calculations 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 or FFO, Net Operating Income or NOI, Established/Same-Store Communities) are contained in our annual report on Form 10-K, which is distributed with and is a part of this Annual Report. The Multifamily Sector Weighted Average is a weighted average based on Total Market Capitalization per SNL Financial as of December 31, 2014. The weighted average for Total Shareholder Return and Core FFO per Share Growth includes AEC, AIV, CPT, EQR, ESS, HME, MAA, PPS and UDR. Dividend Growth includes AEC, AIV, CPT, EQR, ESS, HME, MAA, PPS and UDR but excludes AIV and HME in 1995. 8 8 AVALON BAY | 2014 Annual Report Net Debt-to-Adjusted EBITDA is calculated by the Company as total debt that is consolidated for financial reporting purposes, less consolidated cash and cash in escrow, divided by annualized fourth quarter EBITDA, as adjusted. A calculation of net Debt-to-Adjusted EBITDA as of December 31, 2014 and December 31, 2010 is as follows: FFO RECONCILIATION TO NET INCOME (Dollars in thousands, except per Share data) For the year ending: 2014 2013 2010 (1) Net income attributable to common stockholders $683,567 $353,141 $175,331 Deprecitation - real estate assets, including discontinued operations and joint venture adjustments 449,769 582,325 237,041 NET DEBT-TO-ADJUSTED EBITDA (Dollars in thousands) Distributions to noncontrolling interest, including discontinued operations 35 32 For the quarter ending: 12/31/2014 12/31/2010 Gain on sale of unconsolidated entities holding previously depreciated real estate assets (73,674) (14,453) 55 - Total debt $6,448,138 $4,068,417 Cash and cash in escrow (605,085) (479,769) Net Debt $5,843,053 $3,588,648 Net income attributable to common stockholders Interest expense, net Income tax expense $142,642 $27,030 47,987 46,948 9,332 - Depreciation expense 114,084 60,614 EBITDA $314,045 $134,592 NOI from discontinued operations and real estate assets sold or held for sale, not classified as discontinued operations $2,257 $23 Gain on sale of communities 23,980 1,854 EBITDA after disposition activity $287,808 $132,715 Joint venture income $(5,241) $(397) EBITDA as adjusted $282,567 $132,318 EBITDA as adjusted, annualized $1,130,268 $529,272 Net Debt-to-Adjusted EBITDA 5.2x 6.8x NOTES 1. TOTAL SHAREHOLDER RETURN: The change in the value over the period stated with all dividends reinvested. Total Shareholder Return is sometimes presented as the compound annual growth rate. Total Shareholder Return for each year within the timeframe presented may vary. 2. CORE FFO PER SHARE GROWTH: The compound annual growth rate of Operating FFO per Share, as Reported per SNL Financial during the periods indicated. Core FFO per Share Growth for each year within the timeframe presented may vary. 3. MARKET VALUE PER HOME OF EXISTING COMMUNITIES: Derived from Company Net Asset Value from Green Street Advisors, Inc. as of December 31, 2014. Gain on sale of previously depreciated real estate assets(2) (108,662) (278,231) (74,074) FFO attributable to common stockholders $951,035 $642,814 $338,353 Average shares outstanding - diluted Earnings per Share - diluted FFO per Common Share - diluted 131,237,502 127,265,903 84,632,869 $5.21 $7.25 $2.77 $5.05 $2.07 $4.00 (1) 2010 data included as additional background for the Company’s statements made in this report regarding performance since 2010. (2) Full Year 2014 includes the impact of the non-controlling interest portion of the gain on sale of a community owned by Fund I that was consolidated for financial reporting purposes. CORE FFO RECONCILIATION TO FFO (Dollars in thousands, except per Share data) For the year ending: FFO attributable to common stockholders Non-Routine Items Archstone and other acquistion costs Joint venture (gains) losses and costs(3) Loss on interest rate protection agreement Write-off of Development Rights and retail assets(4) Compensation plan redesign & severance related costs Business interruption insurance proceeds Early extinguishment of consolidated debt Gain on sale of land Income taxes Extreme weather costs incurred Legal Settlements Severance reversals Excise Taxes Core FFO Core FFO per Share 2014 2013 (1) 2010 (2) $951,035 $642,814 $338,353 (7,682) (63,322) - 2,564 815 (2,494) 412 (490) 9,243 - - - - 44,052 35,554 51,000 1,506 3,580 (299) 14,921 (240) - - - - - - 811 - - - - - - - 672 (927) (1,550) (205) $890,081 $792,888 $337,154 $6.78 $6.23 $3.98 (1) The Company issued unsecured notes and common stock for purposes of funding the Archstone acquistion in advance of closing the purchase. This capital markets activity resulted in interest expense of $834 associated with the unsecured notes, and incremental weighted average shares of the Company’s common stock outstanding of 2,741,096 during the year ended December 31, 2013. The Company has not included the impact of this capital markets activity as a non-routine adjustment for Core FFO. (2) 2010 data included as additional background for the Company’s statements made in this report regarding performance since 2010. (3) Amounts include the Company’s proportionate share of gains and losses from joint vetures formed with Equity Residential as part of the Archstone acquistion, joint venture dispositions including the Company’s promoted interests, costs associated with the extinguishment of debt, and acqusition costs including certain costs incurred related to the Archstone acquisition. (4) Represents write-offs expensed by the Company during the year-to-date period for Development Rights and retail tenants individually in excess of $1,000. 9 AVALONBAY | 2014 Annual Report BOARD OF DIRECTORS Timothy J. Naughton Chairman of the Board, Chief Executive Officer & President, AvalonBay Communities, Inc. Investment and Finance Committee Glyn F. Aeppel Chief Executive Officer & President, Glencove Capital Audit; Investment and Finance Committees Terry S. Brown Chief Executive Officer, EDENS Audit; Investment and Finance Committees Alan B. Buckelew Chief Operating Officer, Carnival Corporation & plc Audit; Investment and Finance Committees EXECUTIVE OFFICERS Timothy J. Naughton Chairman, Chief Executive Officer & President Kevin P. O’Shea Chief Financial Officer Matthew H. Birenbaum Chief Investment Officer Bruce A. Choate Chief Executive Officer & President, Watson Land Company Investment and Finance; Nominating and Corporate Governance Committees Ronald L. Havner, Jr. Chairman of the Board, Chief Executive Officer & President, Public Storage, Inc. Audit; Investment and Finance Committees John J. Healy, Jr. Private Investor Audit; Nominating and Corporate Governance Committees Lance R. Primis Managing Partner, Lance R. Primis and Partners, LLC Lead Independent Director Compensation; Nominating and Corporate Governance Committees Peter S. Rummell Private Investor Compensation; Investment and Finance Committees H. Jay Sarles Private Investor Audit; Compensation Committees W. Edward Walter Chief Executive Officer & President, Host Hotels & Resorts, Inc. Compensation; Investment and Finance Committees Sean J. Breslin Chief Operating Officer Michael M. Feigin Chief Construction Officer Leo. S. Horey III Chief Administrative Officer William M. McLaughlin Executive Vice President Development – Northeast Edward M. Schulman Executive Vice President General Counsel & Secretary Stephen W. Wilson Executive Vice President Development – West Coast & Mid-Atlantic our purpose: CREATING A BETTER WAY TO LIVE our core values: Commitment to Integrity Focus on Continuous Improvement Spirit of Caring INVESTOR INFORMATION Corporate Office AvalonBay Communities, Inc. 671 North Glebe Road, Suite 800 Arlington, VA 22203 Phone: 703.329.6300 Website www.avalonbay.com Common Stock Listing (Symbol: AVB) New York Stock Exchange Investor Relations Contact Jason Reilley AvalonBay Communities, Inc. 671 North Glebe Road, Suite 800 Arlington, VA 22203 Phone: 703.329.6300 Email: ir@avalonbay.com Form 10-K A copy of the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission is being distributed with this Annual Report and also may be obtained without charge by contacting Investor Relations. Transfer Agent Computershare Shareowner Services Regular Mail P.O. Box 30170 College Station, TX 77842 Overnight Delivery 211 Quality Circle, Suite 210 College Station, TX 77842 Phone: 866.230.0668 www.computershare.com Forward-Looking Statements 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 discussion titled “Forward- Looking Statements” on page 61 of our accompanying Annual Report on Form 10-K for a discussion regarding risks associated with these statements. The Stock Performance Graph provides a comparison, from December 2009 through December 2014, of the cumulative total shareholder return (assuming reinvestment of dividends) among the Company, a peer group index (the FTSE NAREIT Apartment REIT Index) composed of 14 publically traded apartment REITs, including the Company, and the S&P 500 based on an initial purchase price of $100. The FTSE NARIET Apartment REIT Index includes only REITs that invest directly or indirectly primarily in the equity ownership of multifamily residential apartment communities. Upon written request to the Company’s secretary, the Company will provide any stockholder with a list of REITs included in the FTSE NAREIT Apartment REIT Index. The historical information set forth below is not necessarily indicative of future performance. Data for the FTSE NAREIT Apartment REIT Index and the S&P 500 Index were provided to the Company by SNL Financial. STOCK PERFORMANCE $250 $200 $150 $100 $50 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 • AvalonBay • FTSE NAREIT Apartment • S&P 500 Period Ending 12-31-09 12-31-10 12-31-11 12-31-12 12-31-13 12-31-14 AvalonBay Communities, Inc. FTSE NAREIT Apartment REIT Index S&P 500 $100 100 100 142 147 115 170 169 117 181 181 136 163 170 180 233 237 205 10 11 AVALONBAY | 2014 Annual Report 12 AVALONBAY | 2014 Annual Report