2021 ANNUAL REPORT

DEAR FELLOW STAKEHOLDERS,

Thank you for your continued commitment and engagement as we focus on fulfilling our mission of Creating a Better Way to Live.

In 2021, apartment market fundamentals improved throughout the course of the year, and we embarked on our next phase of growth by increasing our development and investment activity, all while navigating the challenges presented by the ongoing pandemic. Thanks to the dedication of our associates, we also furthered our commitment to delivering excellent service to residents, reinforcing the importance of our culture, championing inclusion and diversity, leading in environmental sustainability, and giving back to the communities in which we do business.

As we look forward in 2022, there are several tailwinds that we believe will support some of the strongest full year Core FFO per share growth and Same Store Residential rental revenue growth in the Company's history. We expect the strong occupancy and rent growth trends from the second half of 2021 to continue in 2022, with most lease expirations providing opportunities to capture significant Loss-to-Lease. We anticipate that this internal backdrop, coupled with what we believe to be an undersupplied U.S. housing market, will bode well for our performance in 2022.

Key themes driving our priorities in 2022 include:

  • ƒ Investing in our operating platform to increase efficiencies and provide enhanced value to prospects and residents.

  • ƒ Growing the portfolio by increasing development activity.

  • ƒ Optimizing long-term performance through active asset and portfolio management.

  • ƒ Leading on corporate responsibility and sustainability.

  • ƒ Investing in our people and our culture.

The 2021 Review and Looking Ahead sections in this letter provide a more comprehensive review of our successes in 2021 and our priorities for 2022 and beyond.

2021 REVIEW

We entered 2021 with some hope and optimism: vaccines were being rolled out, economic activity was increasing, and apartment demand was improving. These trends, for the most part, accelerated throughout the year and supported an improvement in our financial and operating performance in 2021.

Same Store Move-In Rent Values increased by approximately 23% between January and December of 2021, with Same Store Move-In Rent Values in our Suburban portfolio ending the year up over 7% relative to the pre-Covid peak in mid-2019. Same Store Move-In Rent Values in our Urban portfolio showed strong momentum but still ended the year 4% below the pre-Covid peak in mid-2019. In the fourth quarter of 2021, Same Store Like-Term Effective Rent Change was 11.1% and Economic Occupancy was 96.1%.

We also remained focused on providing quality service to our residents. Our Net Promoter Score rebounded to pre-Covid levels, and our online review sentiment remained strong. Throughout the year, we also continued to navigate a myriad of challenges presented by federal, state, and local orders regulating evictions and renewal increases on existing residents.

As apartment market fundamentals improved throughout 2021, we quickly shifted our focus toward growth, which included a significant increase in our planned investment activity, supported by our strong balance sheet and access to low-cost capital.

Highlights of our 2021 investment activity included:

  • ƒ Commencing the development of 10 communities, which in the aggregate will contain over 3,000 apartment homes when completed and will be developed for an estimated Total Capital Cost of approximately $1.25 billion. This level of development start volume was approximately $500 million above our initial 2021 Outlook(1) for development start volume and represented our highest level of development start volume in five years. The bulk of this activity is in our Established Markets, where our strong development platforms continued to source opportunities that we believe will provide attractive risk-adjusted investment returns.

  • ƒ Announcing our plan to enter four new markets, Raleigh-Durham and Charlotte, North Carolina, and Dallas and Austin, Texas. We believe these markets, along with our continued growth in our previously identified

    Expansion Markets of Southeast Florida and Denver, Colorado, will provide an expanded set of growth opportunities.

  • ƒ Acquiring seven communities, six of which are in our Expansion Markets, containing nearly 2,000 apartment homes and 90,000 square feet of commercial space for an aggregate total purchase price of approximately $725 million, which represented a recent high in acquisition volume.

We took advantage of the attractive capital markets to support our next phase of growth, which included:

  • ƒ Completing our first two Green Bond offerings, totaling $1.1 billion in the aggregate. By combining our

    Company's leadership in sustainability with our strong credit ratings, we secured this debt at a weighted average effective fixed interest rate of 2.1%.

  • ƒ Executing nearly $1 billion of asset sales to support our portfolio optimization strategy, through which we selectively prune older assets with slower-growth profiles and reallocate that capital to new development and the acquisition of recently built communities.

  • ƒ Reducing our Net Debt-to-Core EBITDAre to 5.1x by year-end 2021, which is at the low-end of our 5x to 6x target range for this leverage metric.

Environmental, Social, and Governance ("ESG") leadership continued to be a priority in 2021. The commitment of our associates to these ESG initiatives was recognized by many established ESG-focused firms. In 2021, we were:

  • ƒ Named to Newsweek's list of America's Most Responsible Companies for the third consecutive year.

  • ƒ Recognized on the "A list" by global environmental non-profit CDP for our leadership in corporate responsibility.

  • ƒ Received NAREIT's Leader in the Light award, as the ESG leader in the multifamily REIT industry, for the third consecutive year.

  • ƒ Earned the top score in the Human Rights Campaign Foundation's 2022 Corporate Equality Index, the nation's foremost benchmarking survey and report that measures corporate policies and practices related to LGBTQ+ workplace equality.

Finally, in early 2022, we completed our planned CEO succession, after working side-by-side throughout 2021 to ensure a smooth transition.

LOOKING AHEAD

We believe the outlook for the overall apartment sector is strong and anticipate that the undersupply of rental and for-sale housing in the U.S. and the prospect of further wage growth for our target renters will continue to support favorable apartment dynamics in 2022. Additionally, we believe the multifamily sector will continue to be one of the favored asset classes among investors based on the fundamental necessity of housing and the sector's proven resilience and growth over the long-term. We expect this backdrop will bode well for apartment values and growth in the value of AvalonBay.

In 2022, we are building upon a solid operating foundation, and we believe that the quality of our communities and the service we deliver will continue to be in high demand as residents spend more time in their homes. We expect our Suburban communities, representing approximately two-thirds of our portfolio(2), will continue to produce strong operating results, and that the performance of our Urban communities will improve as more workers return to the office and students to urban universities. We also project that new apartment supply in our markets will remain relatively stable, all of which we believe will support strong operating performance in 2022.

As is often the case, we face some headwinds. Some challenges this year may include heightened levels of uncollectable lease revenue resulting from a regulatory environment that provides more protection for delinquent tenants, and increased operating and construction costs resulting from higher inflation.

On balance, we believe we are entering 2022 from a position of strength. With that said, we also plan to remain nimble and prepared to adjust our plans accordingly.

The following five themes are driving our priorities in 2022:

1. INVESTING IN OUR OPERATING PLATFORM TO INCREASE EFFICIENCIES AND PROVIDE ENHANCED VALUE TO PROSPECTS AND RESIDENTS

We continue to evolve our operating platform by making significant investments in people, technology, and innovation to meet the needs of prospects, residents, and AvalonBay associates to achieve operating efficiencies.

Our goal is to "create seamless, personalized experiences made easy." And we are doing this by developing a range of digital, self-service experiences so customers can do business with us when and how they want, while giving associates the information they need to build impactful relationships with our prospects and residents.

We expect these investments will improve Same Store Net Operating Income ("NOI") margins, through a combination of expanded revenue opportunities and operating efficiencies. We are targeting a 200 basis point Same Store NOI margin improvement as a result of these initiatives, with approximately $10 million of savings captured so far, and an additional $35 million to $45 million in savings per year expected over the next two to three years.

Priority operating initiatives in 2022 include:

  • ƒ Deploying community-wide Wi-Fi to provide our residents with reliable, high-speed internet, that we believe will produce meaningful economic returns.

  • ƒ Growing revenue streams by increasing renters insurance offerings and sourcing new revenue streams by offering parking and amenity space usage to non-residents.

  • ƒ Revamping our website to make it easier for prospects to find a home that matches their needs, which will include the ability to fully apply and lease online.

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AvalonBay Communities Inc. published this content on 05 April 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 07 April 2022 20:43:28 UTC.