AvalonBay Communities : 2020 Annual Report Version

2020

ANNUAL REPORT

Dear Fellow Stakeholders,

2020 was a challenging year for AvalonBay. The economic downturn that occurred due to the COVID- 19 pandemic dramatically impacted apartment market fundamentals, particularly in our coastal and urban markets. Public health concerns, work-from- home mandates, shuttered store fronts and civil unrest presented significant challenges for apartment living. As demand for apartments fell, we experienced unprecedented declines in rental rates and occupancy across most of our markets.

While it was a challenging year for the business, we responded effectively as a company to protect our customers, associates, and communities. We reacted swiftly and creatively to address safety concerns of customers and associates, find new ways to serve residents and prospects, develop new safety protocols at construction sites, and insure we maintained adequate liquidity and access to capital to fulfill our commitments and reassure our financial stakeholders.

By the end of the year, we began to see some early signs of stabilization in our business, and, we even began to look forward to the next expansion as the rollout of COVID-19 vaccines held promise for a return to the office, a recovery of urban centers and renewed economic growth.

FINANCIAL & OPERATING PERFORMANCE

In 2020, full year:

• Core FFO per share declined by 7.0%.
• Same-storerental revenue declined by 3.7%, primarily due to an increase in uncollectible lease revenue and a decline in occupancy.
• Same-storeexpense growth was modest, at 2.9%.
• Same-storenet operating income ("NOI") decreased by 6.4%.

INVESTMENT ACTIVITY

Over the course of 2020, we completed the development of eight new communities containing nearly 2,100 apartment homes for an aggregate Total Capital Cost of approximately $800 million. We project these communities will generate a weighted average Initial Stabilized Yield of 5.2%, which is above our estimate of market capitalization rates for existing like-product in our markets.

We also commenced construction on three wholly- owned development communities and one joint venture development community, which are expected to contain over 1,000 apartment homes, for an aggregate Total Capital Cost of approximately $290 million (at share).

CAPITAL & BALANCE SHEET MANAGEMENT

We raised over $2 billion of new capital in 2020, consisting of approximately $1.3 billion of new debt issued at a weighted average effective interest rate of 2.6% per annum, and over $800 million of asset sales.

The proceeds from this activity were used to repay approximately $1 billion of debt scheduled to mature in 2020 and 2021 that carried a weighted average effective interest rate of 3.2%, and to fund ongoing investment activity.

At year-end 2020:

• Leverage, as measured by Net Debt-to-Core EBITDAre, was 5.4x - well within our target range of 5x to 6x.
• Unencumbered NOI stood at 94%.
• The weighted average years to maturity on our outstanding debt was 9.3 years.
• We had approximately $215 million of cash and cash equivalents available for use.
• We had no amounts outstanding on our $1.75 billion unsecured credit facility.
• We had less than $40 million of debt maturities and amortization in 2021.

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ENVIRONMENTAL, SOCIAL & GOVERNANCE

In 2020, we remained an industry leader in corporate responsibility by establishing inclusion and diversity goals and by making progress towards our science- based emissions reduction targets.

In addition, in 2020, we:

• Were named the Global and U.S. Leader in the Residential Sector by the Global Real Estate Sustainability Benchmark (GRESB) for a second consecutive year.
• Received an A- grade from the Carbon Disclosure Project (CDP) for our carbon emission disclosure practices for a second consecutive year.
• Were included in Newsweek's list of America's
  Most Responsible Companies.
• Ranked #1 for online reputation among public multifamily REITs by J. Turner Research for a fourth consecutive year.
• Remained in the top quartile for associate engagement among companies surveyed by Perceptyx(1).

LEADERSHIP TRANSITION

In December, we announced that Benjamin (Ben) W. Schall would become President of AvalonBay and a member of the Company's Board of Directors in early 2021, and that, upon my planned retirement as CEO at the end of 2021, he would succeed me as CEO and I would become Executive Chair.

Ben is an exceptionally talented executive who brings a breadth of experience to AvalonBay. Over the course of his career, Ben has successfully driven growth and transformative strategies with his teams. His experience in multiple sectors, across more than 40 states, and 24 of the top 25 MSAs in the U.S., combined with his experience in leading development, operations, asset management, and leasing and marketing, make Ben the ideal choice as the next leader of AvalonBay.

I am confident that Ben and the rest of our seasoned executive team will be excellent stewards for AvalonBay's next phase of growth, and I look forward to supporting them in my new role as Executive Chair in 2022.

CONCLUSION

2020 was a challenging year for the Company from a financial and operating performance perspective. However, we were able to continue to create value through our investment and capital markets activities, and we made progress in other important areas of our business.

We enter 2021 with some hope and optimism. Vaccines are being rolled out with goals of guarding our health and serving as the impetus to open the economy more broadly.

Towards the end of 2020, we began to see the early signs of a stabilization in apartment fundamentals in our markets. Monthly average same-store physical occupancy reached a low point in September, and subsequently improved in each of the succeeding five months, and we began to see a modest improvement in rents during this period as well.

Further, our history suggests that many of the best investment opportunities are discovered early in economic expansions, and we believe our balance sheet is extremely well-positioned to pursue these opportunities.

In summary, while 2021 will likely be another challenging year, I believe AvalonBay is well-prepared to capitalize on accretive investment opportunities as apartment fundamentals improve and we enter the next phase of growth at AvalonBay.

Thank you for your continued support.

Sincerely,

Timothy J. Naughton

Chairman and CEO

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NOTES

1. Perceptyx is a third-party service provider that surveys associates of leading companies to measure workforce engagement.

DEFINITIONS AND RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES

AND OTHER TERMS USED IN THIS LETTER

EBITDA, EBITDAre and Core EBITDAreare considered by management to be supplemental measures of our financial performance. EBITDA is defined by the Company as net income or loss attributable to the Company before interest income and expense, income taxes, depreciation, and amortization. EBITDAre is calculated by the Company in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"), as EBITDA plus or minus losses and gains on the disposition of depreciated property, plus impairment write-downs of depreciated property, with adjustments to reflect the Company's share of EBITDAre of unconsolidated entities. Core EBITDAre is the Company's EBITDAre as adjusted for non-core items outlined in the table below. By further adjusting for items that are not considered part of the Company's core business operations, Core EBITDAre can help one compare the core operating and financial performance of the Company between periods. A reconciliation of EBITDA, EBITDAre and Core EBITDAre to net income is as follows (dollars in thousands):

		Q4
		2020
Net income	$	341,114
Interest expense, net		51,589
Income tax benefit		(2,178)
Depreciation expense		177,823
EBITDA	$	568,348
Gain on sale of communities		(249,106)
Joint venture EBITDAre adjustments		3,294
EBITDAre	$	322,536
Gain on other real estate transactions		(112)
Business interruption insurance proceeds		-
Advocacy contributions		5,484
Severance related costs		27
Development pursuit write-offs and expensed transaction costs, net		7,907
Gain on for-sale condominiums		(39)
For-sale condominium marketing, operating and administrative costs		1,650
Asset management fee intangible write-off		-
Legal settlements		455
Core EBITDAre	$	337,908

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