# AVALONBAY COMMUNITIES INC (AVB) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AVALONBAY COMMUNITIES INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/915912/000091591223000004/avb-20221231.htm
Accession: 0000915912-23-000004
Filing date: 2023-02-24
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AVB/
All MD&A years: /company/AVB/mda/
Previous year: /company/AVB/mda/fy2021/ (FY 2021)
Next year: /company/AVB/mda/fy2023/ (FY 2023)

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our business, financial condition and results of operations. This MD&A should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under “Forward-Looking Statements” included in this report. Actual results or developments could differ materially from those projected in such statements as a result of the factors described under “Forward-Looking Statements” as well as the risk factors described in Part I, Item 1A. “Risk Factors” of this report.

Capitalized terms used without definition have the meanings provided elsewhere in this Form 10-K.

Executive Overview

2022 Financial Highlights

Net income attributable to common stockholders for the year ended December 31, 2022 was $1,136,775,000, an increase of $132,476,000, or 13.2%, over the prior year. The increase is primarily attributable to an increase in NOI from communities, over the prior year. These amounts were partially offset by an increase in depreciation expense and decrease in gains related to real estate sales in the current year.

Same Store NOI attributable to our apartment rental operations, including parking and other ancillary residential revenue ("Residential"), for the year ended December 31, 2022 was $1,540,390,000, an increase of $179,941,000, or 13.2%, over the prior year. The increase was due to an increase in Residential rental revenue of $218,692,000, or 10.9%, partially offset by an increase in Residential property operating expenses of $39,015,000, or 6.0%, over 2021.

During 2022, we raised approximately $1,445,710,000 of gross capital through the sale of nine consolidated operating communities, the sale of condominiums at The Park Loggia and other real estate, the issuance of unsecured notes and the settlement of outstanding forward contracts entered into under our current continuous equity program. This amount does not include our share of proceeds from joint venture dispositions. We believe that our current capital structure will continue to provide financial flexibility to access capital on attractive terms.

We believe our portfolio management activity through dispositions, development and acquisitions will continue to create long-term value. During 2022, we:

•sold nine consolidated apartment communities containing an aggregate of 2,062 apartment homes for $924,450,000;

•completed the construction of five consolidated apartment communities containing an aggregate of 1,858 apartment homes for an aggregate total capitalized cost of $692,000,000;

•completed the construction of one unconsolidated apartment community containing 328 apartment homes for a total capitalized cost of $110,000,000, or $55,000,000 when including only our 50.0% interest;

•started the construction of five consolidated apartment communities containing an aggregate of 1,845 apartment homes, which are expected to be completed for an estimated total capitalized cost of $729,000,000; and

•acquired four consolidated apartment communities containing an aggregate of 1,313 apartment homes and 16,000 square feet of commercial space for an aggregate purchase price of $536,200,000.

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We believe that our balance sheet strength, as measured by our current level of indebtedness, our current ability to service interest and other fixed charges, and our current moderate use of financial encumbrances (such as secured financing), provide us with adequate access to liquidity from the capital markets. We expect to be able to meet our reasonably foreseeable liquidity needs, as they arise, through a combination of one or more of the following sources: existing cash on hand; operating cash flows; borrowings under our Credit Facility and Commercial Paper Program; secured debt; the issuance of corporate securities (which could include unsecured debt, preferred equity, including amounts through the planned settlement of the outstanding forward contracts to sell 2,000,000 shares of common stock by no later than December 31, 2023 and/or common equity); the sale of apartment communities; or through the formation of joint ventures. See the discussion under "Liquidity and Capital Resources."

Communities Overview

As of December 31, 2022 we owned or held a direct or indirect ownership interest in 294 apartment communities containing 88,475 apartment homes in 12 states and the District of Columbia, of which 18 communities were under development and one community was under redevelopment. We have an indirect interest in nine of the 294 apartment communities which were owned by entities that were not consolidated for financial reporting purposes, including one that is being developed within a joint venture. In addition, we held a direct or indirect ownership interest in Development Rights to develop an additional 39 communities that, if developed as expected, will contain an estimated 13,312 apartment homes.

Our real estate investments consist primarily of Current Communities, Development communities, Unconsolidated Development communities and Development Rights. Our Current Communities are further classified as Same Store communities, Other Stabilized communities, Redevelopment communities and Unconsolidated communities.

Same Store communities are consolidated communities that were owned and had stabilized occupancy as of the beginning of the prior year, allowing for a meaningful comparison of operating results between years. Other Stabilized communities are generally all other completed consolidated communities that have stabilized occupancy at the beginning of the current year or were acquired during the year. Redevelopment communities are consolidated communities where substantial redevelopment is in progress or is probable to begin during the fiscal year. Unconsolidated communities are communities in which we have an indirect ownership interest through our investment interest in an unconsolidated entity. A more detailed description of our reportable segments and other related operating information can be found in Note 8, “Segment Reporting,” of our Consolidated Financial Statements.

Although each of these categories is important to our business, we generally evaluate overall operating, industry and market trends based on the operating results of Same Store communities, for which a detailed discussion can be found in “Results of Operations” as part of our discussion of overall operating results. We evaluate our current and future cash needs and future operating potential based on acquisition, disposition, development, redevelopment and financing activities within Other Stabilized, Redevelopment and Development communities. Discussions related to current and future cash needs and financing activities can be found under "Liquidity and Capital Resources."

NOI of our current operating communities is one of the financial measures that we use to evaluate the performance of our communities. NOI is affected by the demand and supply dynamics within our markets, our rental rates and occupancy levels and our ability to control operating costs. Our overall financial performance is also impacted by the general availability and cost of capital and the performance of newly developed, redeveloped and acquired apartment communities.

Results of Operations

Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and apartment fundamentals and is reflected in changes in Same Store NOI; NOI derived from acquisitions, development completions and development under construction and in lease-up; loss of NOI related to disposed communities; and capital market and financing activity. See also Part I, Item 1A, “Risk Factors.” Discussion of our operating results for 2021 and comparison to 2020 can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K filed with the SEC on February 25, 2022. A comparison of our operating results for 2022 and 2021 follows (dollars in thousands).

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[[GREPCENT_TABLE]]
[["","For the year ended December 31,","","2022 vs. 2021"],["","2022","","2021","","$ Change","","% Change"],["Revenue:"],["Rental and other income","$","2,587,113","","","$","2,291,766","","","$","295,347","","","12.9","%"],["Management, development and other fees","6,333","","","3,084","","","3,249","","","105.4","%"],["Total revenue","2,593,446","","","2,294,850","","","298,596","","","13.0","%"],["Expenses:"],["Direct property operating expenses, excluding property taxes","509,529","","","469,123","","","40,406","","","8.6","%"],["Property taxes","288,960","","","283,089","","","5,871","","","2.1","%"],["Total community operating expenses","798,489","","","752,212","","","46,277","","","6.2","%"],["Corporate-level property management and other indirect operating expenses","(120,625)","","","(101,730)","","","(18,895)","","","18.6","%"],["Expensed transaction, development and other pursuit costs, net of recoveries","(16,565)","","","(3,231)","","","(13,334)","","","412.7","%"],["Interest expense, net","(230,074)","","","(220,415)","","","(9,659)","","","4.4","%"],["Loss on extinguishment of debt, net","(1,646)","","","(17,787)","","","16,141","","","(90.7)","%"],["Depreciation expense","(814,978)","","","(758,596)","","","(56,382)","","","7.4","%"],["General and administrative expense","(74,064)","","","(69,611)","","","(4,453)","","","6.4","%"],["Casualty loss","\u2014","","","(3,119)","","","3,119","","","100.0","%"],["Income from investments in unconsolidated entities","53,394","","","38,585","","","14,809","","","38.4","%"],["Gain on sale of communities","555,558","","","602,235","","","(46,677)","","","(7.8)","%"],["Gain on other real estate transactions, net","5,039","","","2,097","","","2,942","","","140.3","%"],["Net for-sale condominium activity","88","","","(977)","","","1,065","","","N/A (1)"],["Income before income taxes","1,151,084","","","1,010,089","","","140,995","","","14.0","%"],["Income tax expense","(14,646)","","","(5,733)","","","(8,913)","","","155.5","%"],["Net income","1,136,438","","","1,004,356","","","132,082","","","13.2","%"],["Net loss (income) attributable to noncontrolling interests","337","","","(57)","","","394","","","N/A (1)"],["Net income attributable to common stockholders","$","1,136,775","","","$","1,004,299","","","$","132,476","","","13.2","%"]]
[[/GREPCENT_TABLE]]

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(1)     Percent change is not meaningful.

Net income attributable to common stockholders increased $132,476,000, or 13.2%, to $1,136,775,000 in 2022 over 2021, primarily due to increases in NOI from communities in the current year.

NOI is considered by management to be an important and appropriate supplemental performance measure to net income because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easier comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impact to overhead as a result of acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. We define NOI as total property revenue less direct property operating expenses (including property taxes), and excluding corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, expensed transaction, development and other pursuit costs, net of recoveries, interest expense, net, loss on extinguishment of debt, net, general and administrative expense, income from investments in unconsolidated entities, depreciation expense, income tax expense, casualty loss, gain on sale of communities, gain on other real estate transactions, net, net for-sale condominium activity and net operating income from real estate assets sold or held for sale.

NOI does not represent cash generated from operating activities in accordance with GAAP, and NOI 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 flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI indicative of cash available to fund cash needs. Residential NOI represents results attributable to our apartment rental operations, including parking and other

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ancillary residential revenue. Reconciliations of NOI and Residential NOI for the years ended December 31, 2022 and 2021 to net income for each year are as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["","2022","","2021"],["Net income","$","1,136,438","","","$","1,004,356"],["Property management and other indirect operating expenses, net of corporate income","114,200","","","98,665"],["Expensed transaction, development and other pursuit costs, net of recoveries","16,565","","","3,231"],["Interest expense, net","230,074","","","220,415"],["Loss on extinguishment of debt, net","1,646","","","17,787"],["General and administrative expense","74,064","","","69,611"],["Income from investments in unconsolidated entities","(53,394)","","","(38,585)"],["Depreciation expense","814,978","","","758,596"],["Income tax expense","14,646","","","5,733"],["Casualty loss","\u2014","","","3,119"],["Gain on sale of communities","(555,558)","","","(602,235)"],["Gain on other real estate transactions, net","(5,039)","","","(2,097)"],["Net for-sale condominium activity","(88)","","","977"],["Net operating income from real estate assets sold or held for sale","(22,746)","","","(61,105)"],["NOI","1,765,786","","","1,478,468"],["Commercial NOI (1)","(36,144)","","","(25,326)"],["Residential NOI","$","1,729,642","","","$","1,453,142"]]
[[/GREPCENT_TABLE]]

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(1)Represents results attributable to the commercial and other non-residential operations at our communities ("Commercial").

The Residential NOI changes for 2022 as compared to 2021 consists of changes in the following categories (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Full Year"],["","2022"],["Same Store","$","179,941"],["Other Stabilized","59,954"],["Development / Redevelopment","36,605"],["Total","$","276,500"]]
[[/GREPCENT_TABLE]]

The increase in our Same Store Residential NOI in 2022 is due to an increase in Residential rental revenue of $218,692,000, or 10.9%, partially offset by an increase in property operating expenses of $39,015,000, or 6.0%, over 2021.

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Our results of operations in future periods may be impacted directly or indirectly by uncertainties such as the lingering effects of the COVID-19 pandemic (the "Pandemic") and the recent increases in inflation. If the financial condition of our residents and commercial tenants deteriorates, and/or regulations that limit our ability to evict residents and tenants continue or are adopted in response to future developments related to the Pandemic, that may result in higher than normal uncollectible lease revenue. The Pandemic may also depress consumer demand for our apartments for a variety of reasons, including (i) if consumers decide to live in markets that are less costly than ours for one or more reasons, such as a decline in their income or remote working arrangements; (ii) consumers who would otherwise rent may seek home ownership; and (iii) ongoing downward pressures on demand for certain types of housing (e.g., corporate apartment homes) or by certain consumers (e.g., students or consumers who require seasonal job-related demand such as in the entertainment industry).

Increases in inflation can result in an increase in our operating costs, including utilities and payroll, both at our communities and at the corporate level. Substantially all of our apartment leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally reduce our risk from the adverse effect of inflation, although these leases also permit residents to leave at the end of their lease term. In addition, inflation could cause our construction costs and cost of other capitalized expenditures to increase, impacting the expected economic return of, and expected operating results for, current and planned development activity.

Rental and other income increased $295,347,000, or 12.9%, in 2022 compared to the prior year primarily due to the increased rental revenue from our stabilized wholly-owned communities, discussed below.

Consolidated Communities—The weighted average number of occupied apartment homes for consolidated communities increased to 77,319 apartment homes for 2022, as compared to 75,744 homes for 2021. The weighted average monthly rental revenue per occupied apartment home increased to $2,784 for 2022 as compared to $2,518 in 2021.

The increase in Same Store rental revenue is due to (i) an increase in Same Store Residential rental revenue of $218,692,000, or 10.9%, for the year ended December 31, 2022, compared to the prior year, and (ii) an increase in Same Store Commercial rental revenue of $3,873,000, or 18.8%, for the year ended December 31, 2022, compared to the prior year.

The following table presents the change in Same Store Residential rental revenue, including the attribution of the change between average rental revenue per occupied home and Economic Occupancy for the year ended December 31, 2022 (dollars in thousands).

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["","Residential rental revenue","","Average monthly rental revenue per occupied home","","Economic Occupancy (1)"],["","","","","$ Change","% Change","","","","","% Change","","","","% Change"],["","2022","","2021","","2022 to 2021","","2022 to 2021","","2022","","2021","","2022 to 2021","","2022","","2021","","2022 to 2021"],["New England","$","343,179","","","$","305,040","","","$","38,139","","","12.5","%","","$","3,064","","","$","2,744","","","11.7","%","","97.0","%","","96.2","%","","0.8","%"],["Metro NY/NJ","460,774","","","410,726","","","50,048","","","12.2","%","","3,423","","","3,048","","","12.3","%","","96.4","%","","96.5","%","","(0.1)","%"],["Mid-Atlantic","330,272","","","307,529","","","22,743","","","7.4","%","","2,297","","","2,140","","","7.3","%","","95.3","%","","95.2","%","","0.1","%"],["Southeast Florida","38,206","","","31,644","","","6,562","","","20.7","%","","2,734","","","2,253","","","21.3","%","","95.9","%","","96.5","%","","(0.6)","%"],["Denver, CO","26,845","","","23,739","","","3,106","","","13.1","%","","2,151","","","1,896","","","13.4","%","","95.8","%","","96.1","%","","(0.3)","%"],["Pacific Northwest","140,384","","","121,791","","","18,593","","","15.3","%","","2,555","","","2,218","","","15.2","%","","95.2","%","","95.1","%","","0.1","%"],["Northern California","399,152","","","368,419","","","30,733","","","8.3","%","","2,860","","","2,640","","","8.3","%","","95.9","%","","95.9","%","","\u2014","%"],["Southern California","485,313","","","436,545","","","48,768","","","11.2","%","","2,555","","","2,296","","","11.3","%","","96.4","%","","96.5","%","","(0.1)","%"],["Total Same Store","$","2,224,125","","","$","2,005,433","","","$","218,692","","","10.9","%","","$","2,774","","","$","2,504","","","10.8","%","","96.1","%","","96.0","%","","0.1","%"]]
[[/GREPCENT_TABLE]]

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(1) Economic Occupancy considers 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 leased rates and vacant homes at market rents. Vacancy loss is determined by valuing vacant units at current market rents.

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The following table details the increase in Same Store Residential rental revenue by component for the year ended December 31, 2022, compared to the prior year:

[[GREPCENT_TABLE]]
[["","For the year ended"],["","December 31, 2022"],["Residential rental revenue"],["Lease rates","7.8","%"],["Concessions and other discounts","1.9","%"],["Economic Occupancy","0.1","%"],["Other rental revenue","1.0","%"],["Uncollectible lease revenue (excluding rent relief)","(0.1)","%"],["Rent relief","0.2","%"],["Total Residential rental revenue","10.9","%"]]
[[/GREPCENT_TABLE]]

The increase for Same Store Residential rental revenue for the year ended December 31, 2022, compared to the prior year, was impacted by (i) uncollectible lease revenue, net of amounts received from government rent relief programs and (ii) concessions.

Same Store uncollectible lease revenue decreased for the year ended December 31, 2022 by $3,556,000. The change in uncollectible lease revenue for the year ended December 31, 2022 was impacted by amounts received from government rent relief programs. Adjusting to remove the impact of rent relief, uncollectible lease revenue as a percentage of Same Store Residential rental revenue decreased to 3.4% in the year ended December 31, 2022 from 3.7% in the year ended December 31, 2021. We recognized $36,778,000 and $31,823,000 from government rent relief programs during the years ended December 31, 2022 and 2021, respectively.

During the Pandemic, we increased our use of residential concessions relative to concessions granted prior to 2020. While concessions granted remained slightly elevated relative to periods prior to 2020, concessions for our Same Store communities granted in the year ended December 31, 2022 decreased from the prior year by $31,618,000 to $10,514,000. We amortize concessions on a straight-line basis over the life of the respective leases (generally one year), reducing the income recognized over the lease term. For the year ended December 31, 2022, amortized concessions decreased by $39,932,000 contributing to the increase in revenue as compared to the prior year. The remaining net unamortized balance of Same Store residential concessions as of December 31, 2022 and 2021 was $5,671,000 and $14,081,000, respectively.

Management, development and other fees increased $3,249,000, or 105.4%, in 2022 as compared to the prior year, primarily due to the net construction and development fee income for work performed at joint ventures.

Direct property operating expenses, excluding property taxes, increased $40,406,000, or 8.6%, in 2022 as compared to the prior year, primarily due to the addition of newly developed and acquired apartment communities, as well as increased operating expenses at our Same Store communities as discussed below.

Same Store Residential direct property operating expenses, excluding property taxes, represents substantially all of total Same Store operating expenses for the year ended December 31, 2022. Residential direct property operating expenses, excluding property taxes, increased $33,171,000, or 8.1%, in 2022 as compared to the prior year, primarily due to increased utilities and maintenance costs as well as bad debt associated with resident expense reimbursements.

Property taxes increased $5,871,000, or 2.1%, in 2022 as compared to the prior year, primarily due to the addition of newly developed and acquired apartment communities and increased assessments for our stabilized portfolio, partially offset by decreased property taxes from dispositions.

Same Store Residential property taxes represents substantially all of total Same Store property taxes for the year ended December 31, 2022. Same Store Residential property taxes increased $5,844,000, or 2.5%, in 2022 as compared to the prior year, primarily due to increased assessments across the portfolio and the expiration of property tax incentive programs at certain of our properties in New York City, partially offset by successful appeals in the current year in excess of the prior year.

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Corporate-level property management and other indirect operating expenses increased $18,895,000, or 18.6%, for the year ended December 31, 2022 compared to the prior year, primarily due to increased compensation related costs as well as costs related to increased investment in technology and other initiatives in the current year to improve future efficiency in services for residents and prospects.

Expensed transaction, development and other pursuit costs, net of recoveries primarily reflect costs incurred for development pursuits not yet considered probable for development, as well as write downs and abandonment of Development Rights and costs related to abandoned acquisition and disposition pursuits and any recoveries of costs incurred. These costs can be volatile, particularly in periods of increased acquisition pursuit activity, periods of economic downturn or when there is limited access to capital, and therefore may vary significantly from year to year. In addition, the timing for potential recoveries will not always align with the timing for expensing an abandoned pursuit. Expensed transaction, development and other pursuit costs, net of recoveries, increased $13,334,000 in 2022 as compared to the prior year. The amount for 2022 includes charges of $10,073,000 primarily related to development opportunities in the Pacific Northwest and Southern California that we determined are no longer probable.

Interest expense, net increased $9,659,000, or 4.4%, in 2022 as compared to the prior year. This category includes interest costs offset by capitalized interest pertaining to development and redevelopment activity, amortization of premium/discount on debt, interest income, any mark to market impact from derivatives not in qualifying hedge relationships and the recognition of the GAAP required estimate of future credit losses for the SIP. The increase in 2022 is primarily due to an increase in variable rates on unsecured and secured indebtedness, partially offset by an increase in capitalized interest.

Loss on extinguishment of debt, net reflects prepayment penalties, the write-off of unamortized deferred financing costs and premiums/discounts from our debt repurchase and retirement activity, or payments to acquire our outstanding debt at amounts above or below the carrying basis of the debt acquired. The loss of $1,646,000 in 2022 was primarily due to the repayment of secured debt. The loss of $17,787,000 in 2021 was due to the repayments of unsecured debt.

Depreciation expense increased $56,382,000, or 7.4%, in 2022 as compared to the prior year, primarily due to the addition of newly developed and acquired apartment communities, partially offset by dispositions.

General and administrative expense (“G&A”) increased $4,453,000, or 6.4%, in 2022 as compared to the prior year, primarily due to an increase in compensation related expenses in the current year, partially offset by legal settlement recoveries recognized in the current year.

Casualty loss for the year ended December 31, 2021 of $3,119,000 related to damage across several communities in our East Coast markets from severe storms and a fire at an operating community.

Income from investments in unconsolidated entities increased $14,809,000 in 2022 as compared to the prior year, primarily due to the gain from the sale of the final three communities in the U.S. Fund and includes the recognition of $4,690,000 for the promoted interest associated with the final U.S. Fund dispositions. The increase for the year ended December 31, 2022 was partially offset by the gain from the sale of the final two communities in the Archstone Multifamily Partners AC JV LP in the prior year.

Gain on sale of communities decreased in 2022 as compared to the prior year. The amount of gain realized in a given period depends on many factors, including the number of communities sold, the size and carrying value of the communities sold and the market conditions in the local area. The gains of $555,558,000 and $602,235,000 in 2022 and 2021, respectively, were primarily due to the sale of nine wholly-owned communities in both 2022 and 2021.

Gain on other real estate transactions, net represents the impact from the sale of land parcels and other tangible and intangible real estate assets, and increased $2,942,000, or 140.3%, in 2022 over the prior year.

Net for-sale condominium activity is a net gain of $88,000 for the year ended December 31, 2022 and a net expense of $977,000 for the year ended December 31, 2021, and is comprised of the net gain before taxes on the sale of condominiums at The Park Loggia and associated marketing, operating and administrative costs. During the year ended December 31, 2022, we sold 40 residential condominiums at The Park Loggia, for gross proceeds of $126,848,000, resulting in a gain in accordance with GAAP of $2,217,000. During the year ended December 31, 2021, we sold 53 residential condominiums at The Park Loggia for gross proceeds of $135,458,000, resulting in a gain in accordance with GAAP of $3,110,000. In addition, we incurred $2,129,000 and $4,087,000 for the years ended December 31, 2022 and 2021, respectively, in marketing, operating and administrative costs.

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Income tax expense of $14,646,000 and $5,733,000 for the years ended December 31, 2022 and 2021, respectively, is primarily related to the activity at The Park Loggia and other taxable REIT subsidiary (“TRS”) activity.

Non-GAAP Financial Measures — Reconciliation of FFO and Core FFO

FFO and FFO adjusted for non-core items, or “Core FFO,” as defined below, are generally considered by management to be appropriate supplemental measures of our operating and financial performance.

Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts® (“Nareit”), we calculate Funds from Operations Attributable to Common Stockholders ("FFO") as net income or loss attributable to common stockholders computed in accordance with GAAP, adjusted for:

•gains or losses on sales of previously depreciated operating communities;

•cumulative effect of change in accounting principle;

•impairment write-downs of depreciable real estate assets;

•write-downs of investments in affiliates due to a decrease in the value of depreciable real estate assets held by those affiliates;

•depreciation of real estate assets; and

•similar adjustments for unconsolidated partnerships and joint ventures, including those from a change in control.

FFO can help with the comparison of the operating and financial performance of a real estate company between periods or as compared to different companies because the adjustments such as (i) excluding gains or losses on sales of previously depreciated property or (ii) real estate depreciation may impact comparability between companies as the amount and timing of these or similar items can vary among owners of identical assets in similar condition based on historical cost accounting and useful like estimates. By further adjusting for items that we do not consider part of our core business operations, Core FFO can help with the comparison of our core operating performance year over year. We believe that, in order to understand our operating results, FFO and Core FFO should be considered in conjunction with net income as presented in the Consolidated Statements of Comprehensive Income included elsewhere in this report.

We calculate Core FFO as FFO, adjusted for:

•joint venture gains (if not adjusted through FFO), non-core costs and promoted interests from partnerships;

•casualty and impairment losses or gains, net on non-depreciable real estate;

•gains or losses from early extinguishment of consolidated borrowings;

•expensed transaction, development and other pursuit costs, net of recoveries;

•third-party business interruption insurance proceeds and the related lost NOI that is covered by the expected third party business interruption insurance proceeds;

•property and casualty insurance proceeds and legal settlement activity;

•gains or losses on sales of assets not subject to depreciation and other investment gains or losses;

•advocacy contributions, representing payments to promote our business interests;

•hedge ineffectiveness or gains or losses from derivatives not designated as hedges for accounting purposes;

•expected credit losses associated with the lending commitments under the SIP;

•severance related costs;

•executive transition compensation costs;

•net for-sale condominium activity, including gains, marketing, operating and administrative costs and imputed carry cost; and

•income taxes.

FFO and Core FFO do not represent net income in accordance with GAAP, and therefore should not be considered an alternative to net income, which remains the primary measure, as an indication of our performance. In addition, FFO and Core FFO as calculated by other REITs may not be comparable to our calculations of FFO and Core FFO.

FFO and Core FFO also do not represent cash generated from operating activities in accordance with GAAP, and therefore should 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 presentation of GAAP-based cash flow metrics is included in our Consolidated Financial Statements included elsewhere in this report.

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The following is a reconciliation of net income attributable to common stockholders to FFO attributable to common stockholders and to Core FFO attributable to common stockholders for the years ended December 31, 2022 and 2021 (dollars in thousands, except per share amounts).

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["","2022","","2021"],["Net income attributable to common stockholders","$","1,136,775","","","$","1,004,299"],["Depreciation - real estate assets, including joint venture adjustments","810,611","","","753,755"],["Distributions to noncontrolling interests","48","","","48"],["Gain on sale of unconsolidated entities holding previously depreciated real estate","(38,144)","","","(23,305)"],["Gain on sale of previously depreciated real estate","(555,558)","","","(602,235)"],["Casualty loss on real estate","\u2014","","","3,119"],["FFO attributable to common stockholders","$","1,353,732","","","$","1,135,681"],["Adjusting items:"],["Unconsolidated entity gains, net (1)","(8,355)","","","(14,870)"],["Joint venture promote (2)","(4,690)","","","\u2014"],["Structured Investment Program loan reserve (3)","1,632","","","\u2014"],["Loss on extinguishment of consolidated debt","1,646","","","17,787"],["Gain on interest rate contract","(229)","","","(2,654)"],["Advocacy contributions","634","","","59"],["Executive transition compensation costs","1,631","","","3,010"],["Severance related costs","1,097","","","313"],["Expensed transaction, development and other pursuit costs, net of recoveries (4)","13,288","","","1,363"],["Gain on for-sale condominiums (5)","(2,217)","","","(3,110)"],["For-sale condominium marketing, operating and administrative costs (5)","2,129","","","4,087"],["For-sale condominium imputed carry cost (6)","2,306","","","7,031"],["Gain on other real estate transactions, net","(5,039)","","","(2,097)"],["Legal settlements","(2,212)","","","1,139"],["Income tax expense (7)","14,646","","","5,733"],["Core FFO attributable to common stockholders","$","1,369,999","","","$","1,153,472"],["Weighted average common shares outstanding - diluted","139,975,087","","139,717,399"],["EPS per common share - diluted","$","8.12","","","$","7.19"],["FFO per common share - diluted","$","9.67","","","$","8.13"],["Core FFO per common share - diluted","$","9.79","","","$","8.26"]]
[[/GREPCENT_TABLE]]

_________________________________

(1)    Amounts consist primarily of net unrealized gains on technology investments.

(2) Amount for 2022 is for our recognition of our promoted interest in the U.S. Fund.

(3) Amount for 2022 is the expected credit losses associated with the lending commitments under our SIP. The timing and amount of actual losses that will be incurred, if any, is to be determined.

(4) Amount for 2022 includes charges of $10,073 primarily related to development opportunities in the Pacific Northwest and Southern California that we determined are no longer probable.

(5) The aggregate impact of (i) gain on for-sale condominiums and (ii) for-sale condominium marketing, operating and administrative costs is a net gain of $88 for 2022, and a net expense of $977 for 2021.

(6) Represents the imputed carry cost of for-sale residential condominiums at The Park Loggia. We computed this adjustment by multiplying the total capitalized cost of completed and unsold for-sale residential condominiums by our weighted average unsecured debt rate.

(7) Amounts are primarily for the recognition of taxes associated with The Park Loggia and other TRS activity.

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Liquidity and Capital Resources

We employ a disciplined approach to our liquidity and capital management. When we source capital, we take into account both our view of the most cost effective alternative available and our desire to maintain a balance sheet that provides us with flexibility. Our principal focus on near-term and intermediate-term liquidity is to ensure we have adequate capital to fund:

•development and redevelopment activity in which we are currently engaged or in which we plan to engage;

•the minimum dividend payments on our common stock required to maintain our REIT qualification under the Code;

•debt service and principal payments either at maturity or opportunistically before maturity;

•lending commitments under our SIP;

•normal recurring operating and corporate overhead expenses; and

•investment in our operating platform, including strategic investments.

Factors affecting our liquidity and capital resources are our cash flows from operations, financing activities and investing activities (including dispositions) as well as general economic and market conditions. Cash flows from operations are determined by: operating activities and factors including but not limited to (i) the number of apartment homes currently owned, (ii) rental rates, (iii) occupancy levels, (iv) uncollectible lease revenue levels or interruptions in collections caused by market conditions and (v) operating expenses with respect to apartment homes. The timing and type of capital markets activity in which we engage is affected by changes in the capital markets environment, such as changes in interest rates or the availability of cost-effective capital. Our plans for development, redevelopment, non-routine capital expenditure, acquisition and disposition activity are affected by market conditions and capital availability. We frequently review our liquidity needs, especially in periods with volatile market conditions, as well as the adequacy of cash flows from operations and other expected liquidity sources to meet these needs.

We had cash, cash equivalents and cash in escrow of $734,245,000 at December 31, 2022, an increase of $190,457,000 from $543,788,000 at December 31, 2021. The following discussion relates to changes in cash, cash equivalents and cash in escrow due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows included elsewhere in this report.

Operating Activities—Net cash provided by operating activities increased to $1,421,932,000 in 2022 from $1,203,170,000 in 2021, primarily due to increases in rental income.

Investing Activities—Net cash used in investing activities totaled $560,419,000 in 2022. The net cash used was primarily due to:

•investment of $921,203,000 in the development and redevelopment of communities;

•acquisition of four wholly-owned communities for $536,838,000; and

•capital expenditures of $174,705,000 for our wholly-owned communities and non-real estate assets.

These amounts were partially offset by:

•net proceeds from the disposition of nine wholly-owned communities and ancillary real estate of $934,117,000; and

•net proceeds from the sale of for-sale residential condominiums of $117,266,000.

Financing Activities—Net cash used in financing activities totaled $671,056,000 in 2022. The net cash used was primarily due to:

•payment of cash dividends in the amount of $889,607,000;

•the repayment of the $100,000,000 variable rate unsecured term loan; and

•the mortgage note repayment and principal amortization payments in the amount of $43,332,000.

These amounts were partially offset by proceeds from the issuance of unsecured notes in the amount of $348,565,000.

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Commercial Paper Program

In March 2022, we established the Commercial Paper Program. Under the terms of the Commercial Paper Program, we may issue, from time to time, unsecured commercial paper notes with varying maturities of less than one year. Amounts available under the Commercial Paper Program may be issued, repaid and re-issued from time to time, with the maximum aggregate face or principal amount outstanding at any one time not to exceed $500,000,000. The Commercial Paper Program is backstopped by our commitment to maintain available borrowing capacity under the Credit Facility in an amount equal to actual borrowings under the Commercial Paper Program. As of January 31, 2023, we did not have any amounts outstanding under the Commercial Paper Program.

Variable Rate Unsecured Credit Facility

In September 2022, we entered into the Sixth Amended and Restated Revolving Loan Agreement (the “Credit Facility”) with a syndicate of banks, which replaces our prior credit facility dated as of February 28, 2019. The amended and restated Credit Facility (i) increased the borrowing capacity from $1,750,000,000 to $2,250,000,000, (ii) extended the term of the Credit Facility from February 28, 2024 to September 27, 2026, with two six-month extension options available to us, provided we are not in default and upon payment of a $1,406,000 extension fee, (iii) amended certain provisions, notably to reduce the capitalization rate used to derive certain financial covenants from 6.0% to 5.75% and (iv) transitioned the benchmark rate from the London Interbank Offered Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR"). We may elect to expand the Credit Facility to $3,000,000,000, provided that one or more banks (from the syndicate or otherwise) voluntarily agree to provide the additional commitment. No member of the syndicate of banks can prohibit the increase, which will only be effective to the extent banks (from the syndicate or otherwise) choose to commit to lend additional funds.

The interest rate applicable to borrowings under the Credit Facility is 5.14% at January 31, 2023 and is composed of (i) SOFR, applicable to the period of borrowing for a particular draw of funds from the facility (e.g., one month to maturity, three months to maturity, etc.), plus (ii) the current borrowing spread to SOFR of 0.825% per annum, which consists of a 0.10% SOFR adjustment plus 0.725% per annum, assuming a one month term SOFR borrowing rate. The borrowing spread to SOFR can vary from SOFR plus 0.65% to SOFR plus 1.40% based upon the rating of our unsecured and unsubordinated long-term indebtedness. There is also an annual facility commitment fee of 0.125% of the borrowing capacity under the facility, which can vary from 0.10% to 0.30% based upon the rating of our unsecured and unsubordinated long-term indebtedness. The Credit Facility contains a sustainability-linked pricing component which provides for interest rate margin and commitment fee reductions or increases by meeting or missing targets related to environmental sustainability, specifically greenhouse gas emission reductions, with the adjustment determined annually beginning in July 2023. The Credit Facility also contains a competitive bid option that is available for borrowings of up to 65% of the Credit Facility amount. 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 Credit Facility. The competitive bid option may result in lower pricing than the stated rate if market conditions allow.

Prior to the amended and restated Credit Facility, our cost of borrowing was comprised of LIBOR plus 0.775% and an annual facility fee at 0.125%, both as determined by our credit ratings.

We did not have any borrowings outstanding under the Credit Facility and after taking into account the Commercial Paper Program and $1,914,000 outstanding in letters of credit, we had $2,248,086,000 available under the Credit Facility as of January 31, 2023. We had $48,297,000 outstanding in additional letters of credit unrelated to the Credit Facility as of January 31, 2023.

Financial Covenants

We are subject to financial covenants contained in the Credit Facility and the Commercial Paper Program, Term Loan and the indentures under which our unsecured notes were issued. The principal financial covenants include the following:

•limitations on the amount of total and secured debt in relation to our overall capital structure;

•limitations on the amount of our unsecured debt relative to the undepreciated basis of real estate assets that are not encumbered by property-specific financing; and

•minimum levels of debt service coverage.

We were in compliance with these covenants at December 31, 2022.

In addition, some of our secured borrowings include yield maintenance, defeasance, or prepayment penalty provisions, which would result in us incurring an additional charge in the event of a full or partial prepayment of outstanding principal before the

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scheduled maturity. These provisions in our secured borrowings are generally consistent with other similar types of debt instruments issued during the same time period in which our borrowings were secured.

Continuous Equity Offering Program

In May 2019, we commenced CEP V under which we may sell (and/or enter into forward sale agreements for the sale of) up to $1,000,000,000 of our common stock from time to time. Actual sales will depend on a variety of factors to be determined, including market conditions, the trading price of our common stock and our determinations of the appropriate funding sources. We engaged sales agents for CEP V who receive compensation of up to 1.5% of the gross sales price for shares sold. We expect that, if entered into, we will physically settle each forward sale agreement on one or more dates prior to the maturity date of that particular forward sale agreement, and to receive aggregate net cash proceeds at settlement equal to the number of shares underlying the particular forward agreement multiplied by the forward sale price. However, we may also elect to cash settle or net share settle a forward sale agreement. In connection with each forward sale agreement, we will pay the forward seller, in the form of a reduced initial forward sale price, a commission of up to 1.5% of the sales prices of all borrowed shares of common stock sold. During 2022 and through January 31, 2023, we had no sales under this program. In October 2022, we settled the outstanding forward contracts entered into in December 2021 under CEP V, selling 68,577 shares of common stock for $229.34 per share and net proceeds of $15,727,000. As of January 31, 2023, we had $705,961,000 remaining authorized for issuance under this program.

Forward Equity Offering

In addition to CEP V, during the year ended December 31, 2022, we completed an underwritten public offering of 2,000,000 shares of common stock for an initial net forward sales price of $247.30 per share, after offering fees and discounts, offered in connection with forward contracts entered into with certain financial institutions acting as forward purchasers. Assuming full physical settlement of the forward contracts, which we expect to occur no later than December 31, 2023, we will receive approximate proceeds of $494,200,000 net of offering fees and discounts and based on the initial forward price. The final proceeds will be determined on the date(s) of settlement and are subject to certain customary adjustments for our dividends and a daily interest factor during the term of the forward contracts.

Interest Rate Swap Agreements

During the year ended December 31, 2022, related to the issuance of our $350,000,000 unsecured notes due 2033 in November 2022, we terminated $150,000,000 of forward interest swap agreements designated as cash flow hedges of the interest rate variability on the issuance of unsecured notes, receiving a net payment of $26,869,000. We have deferred these amounts in accumulated other comprehensive income (loss) on the accompanying Consolidated Balance Sheets, and are recognizing the impact as a component of interest expense, net, over the term of the respective hedged debt.

Stock Repurchase Program

In July 2020, our Board of Directors approved the 2020 Stock Repurchase Program. Purchases of common stock under the 2020 Stock Repurchase Program may be exercised at our discretion with the timing and number of shares repurchased depending on a variety of factors including price, corporate and regulatory requirements and other corporate liquidity requirements and priorities. The 2020 Stock Repurchase Program does not have an expiration date and may be suspended or terminated at any time without prior notice. During 2022 and through January 31, 2023, we had no repurchases of shares under this program. As of January 31, 2023, we had $316,148,000 remaining authorized for purchase under this program.

Future Financing and Capital Needs—Debt Maturities and Material Obligations

One of our principal long-term liquidity needs is the repayment of long-term debt at maturity. For both our unsecured and secured notes, a portion of the principal of these notes may be repaid prior to maturity. Early retirement of our unsecured or secured notes could result in gains or losses on extinguishment. If we do not have funds on hand sufficient to repay our indebtedness as it becomes due, it will be necessary for us to refinance or otherwise provide liquidity to satisfy the debt at maturity. This refinancing may be accomplished by uncollateralized private or public debt offerings, equity issuances, additional debt financing that is secured by mortgages on individual communities or groups of communities or borrowings under our Credit Facility or Commercial Paper Program. In addition, to the extent we have amounts outstanding under the Commercial Paper Program, we are obligated to repay the short-term indebtedness at maturity through either current cash on hand or by incurring other indebtedness, including by way of borrowing under our Credit Facility. Although we believe we will have the capacity to meet our currently anticipated liquidity needs, we cannot assure you that capital from additional debt financing or debt or equity offerings will be available or, if available, that they will be on terms we consider satisfactory.

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The following debt activity occurred during 2022:

•In February 2022, we repaid our $100,000,000 variable rate unsecured term loan at par upon maturity.

•In September 2022, we repaid $35,276,000 principal amount of secured fixed rate debt with an effective rate of 6.16% in advance of the October 2047 scheduled maturity, recognizing a loss on debt extinguishment of $1,399,000, composed of prepayment penalties and the non-cash write off of unamortized deferred financing costs.

•In December 2022, we issued $350,000,000 principal amount of unsecured notes in a public offering under our existing shelf registration statement for proceeds net of underwriting fees of approximately $346,290,000, before considering the impact of other offering costs. The notes mature in February 2033 and were issued at a 5.00% interest rate, resulting in a 4.37% effective rate including the impact of issuance costs and hedging activity.

The following table details our consolidated debt obligations, including the effective interest rate and contractual maturity dates, and principal payments for periodic amortization and maturities for the next five years, excluding our Credit Facility and Commercial Paper Program and amounts outstanding related to communities classified as held for sale, for debt outstanding at December 31, 2022 and 2021 (dollars in thousands). We are not directly or indirectly (as borrower or guarantor) obligated in any material respect to pay principal or interest on the indebtedness of any unconsolidated entities in which we have an equity or other interest, other than as disclosed related to the AVA Arts District construction loan (see "Investments" for further discussion of the construction loan).

[[GREPCENT_TABLE]]
[["","","All-In interest rate (1)","","Principal maturity date","","Balance Outstanding (2)","","Scheduled Maturities"],["Community","","","","12/31/2021","","12/31/2022","","2023","","2024","","2025","","2026","","2027","","Thereafter"],["Tax-exempt bonds"],["Fixed rate"],["Avalon at Chestnut Hill","","\u2014","%","","Oct-2047","(3)","$","35,770","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["","","","","","","35,770","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Variable rate"],["Avalon Acton","","4.70","%","","Jul-2040","(4)","45,000","","","45,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","45,000"],["Avalon Clinton North","","5.35","%","","Nov-2038","(4)","147,000","","","147,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","700","","","146,300"],["Avalon Clinton South","","5.35","%","","Nov-2038","(4)","121,500","","","121,500","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","600","","","120,900"],["Avalon Midtown West","","5.29","%","","May-2029","(4)","88,300","","","82,700","","","6,100","","","6,800","","","7,300","","","8,100","","","8,800","","","45,600"],["Avalon San Bruno I","","5.24","%","","Dec-2037","(4)","62,350","","","60,950","","","2,200","","","2,300","","","2,400","","","2,500","","","2,800","","","48,750"],["","","","","","","464,150","","","457,150","","","8,300","","","9,100","","","9,700","","","10,600","","","12,900","","","406,550"],["Conventional loans"],["Fixed rate"],["$250 million unsecured notes","","3.00","%","","Mar-2023","","250,000","","","250,000","","","250,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["$350 million unsecured notes","","4.30","%","","Dec-2023","","350,000","","","350,000","","","350,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["$300 million unsecured notes","","3.66","%","","Nov-2024","","300,000","","","300,000","","","\u2014","","","300,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["$525 million unsecured notes","","3.55","%","","Jun-2025","","525,000","","","525,000","","","\u2014","","","\u2014","","","525,000","","","\u2014","","","\u2014","","","\u2014"],["$300 million unsecured notes","","3.62","%","","Nov-2025","","300,000","","","300,000","","","\u2014","","","\u2014","","","300,000","","","\u2014","","","\u2014","","","\u2014"],["$475 million unsecured notes","","3.35","%","","May-2026","","475,000","","","475,000","","","\u2014","","","\u2014","","","\u2014","","","475,000","","","\u2014","","","\u2014"],["$300 million unsecured notes","","3.01","%","","Oct-2026","","300,000","","","300,000","","","\u2014","","","\u2014","","","\u2014","","","300,000","","","\u2014","","","\u2014"],["$350 million unsecured notes","","3.95","%","","Oct-2046","","350,000","","","350,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","350,000"],["$400 million unsecured notes","","3.50","%","","May-2027","","400,000","","","400,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","400,000","","","\u2014"],["$300 million unsecured notes","","4.09","%","","Jul-2047","","300,000","","","300,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","300,000"],["$450 million unsecured notes","","3.32","%","","Jan-2028","","450,000","","","450,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","450,000"],["$300 million unsecured notes","","3.97","%","","Apr-2048","","300,000","","","300,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","300,000"],["$450 million unsecured notes","","3.66","%","","Jun-2029","","450,000","","","450,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","450,000"],["$700 million unsecured notes","","2.69","%","","Mar-2030","","700,000","","","700,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","700,000"],["$600 million unsecured notes","","2.65","%","","Jan-2031","","600,000","","","600,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","600,000"],["$700 million unsecured notes","","2.16","%","","Jan-2032","","700,000","","","700,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","700,000"],["$400 million unsecured notes","","2.03","%","","Dec-2028","","400,000","","","400,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","400,000"],["$350 million unsecured notes","","4.37","%","","Feb-2033","","\u2014","","","350,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","350,000"],["Avalon Walnut Creek","","4.00","%","","Jul-2066","","4,161","","","4,327","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","4,327"],["eaves Los Feliz","","3.68","%","","Jun-2027","","41,400","","","41,400","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","41,400","","","\u2014"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","","All-In interest rate (1)","","Principal maturity date","","Balance Outstanding (2)","","Scheduled Maturities"],["Community","","","","12/31/2021","","12/31/2022","","2023","","2024","","2025","","2026","","2027","","Thereafter"],["eaves Woodland Hills","","3.67","%","","Jun-2027","","111,500","","","111,500","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","111,500","","","\u2014"],["Avalon Russett","","3.77","%","","Jun-2027","","32,200","","","32,200","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","32,200","","","\u2014"],["Avalon San Bruno III","","2.38","%","","Mar-2027","","51,000","","","51,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","51,000","","","\u2014"],["Avalon Cerritos","","3.35","%","","Aug-2029","","30,250","","","30,250","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","30,250"],["","","","","","","7,420,511","","","7,770,677","","","600,000","","","300,000","","","825,000","","","775,000","","","636,100","","","4,634,577"],["Variable rate"],["Term Loan - $100 million","","\u2014","%","","Feb-2022","(5)","100,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Term Loan - $150 million","","5.42","%","","Feb-2024","","150,000","","","150,000","","","\u2014","","","150,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["","","","","","","250,000","","","150,000","","","\u2014","","","150,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total indebtedness - excluding Credit Facility and Commercial Paper","","$","8,170,431","","","$","8,377,827","","","$","608,300","","","$","459,100","","","$","834,700","","","$","785,600","","","$","649,000","","","$","5,041,127"]]
[[/GREPCENT_TABLE]]

_________________________________

(1)Rates are as of December 31, 2022 and include credit enhancement fees, facility fees, trustees’ fees, the impact of interest rate hedges, offering costs, mark to market amortization and other fees.

(2)Balances outstanding represent total amounts due at maturity, and exclude deferred financing costs and debt discount for the unsecured notes of $47,695 and $50,606 as of December 31, 2022 and 2021, respectively, deferred financing costs and debt discount associated with secured notes of $14,087 and $16,278 as of December 31, 2022 and 2021, respectively, as reflected on our Consolidated Balance Sheets included elsewhere in this report.

(3)During 2022, we repaid this borrowing in advance of its scheduled maturity date.

(4)Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement.

(5)During 2022, we repaid this borrowing at its scheduled maturity date.

In addition to consolidated debt, we have scheduled contractual obligations associated with (i) ground leases for land underlying current operating or development communities and commercial and parking facilities and (ii) office leases for our corporate headquarters and regional offices of $15,905,000 for 2023, $15,631,000 for 2024 and $361,248,000 thereafter.

Future Financing and Capital Needs—Portfolio and Capital Markets Activity

We invest in various real estate and real estate related investments, which include (i) the acquisition, development and redevelopment of communities both wholly-owned and through the formation of joint ventures, (ii) other indirect investments in real estate through the SIP, all as further discussed below and (iii) investments in other real estate-related ventures through direct and indirect investments in property technology and environmentally focused companies and investment management funds.

In 2023, we expect to meet our liquidity needs from one or more of a variety of internal and external sources, which may include (i) the settlement of the outstanding forward equity contracts to sell 2,000,000 shares of our common stock, (ii) real estate dispositions, (iii) cash balances on hand as well as cash generated from our operating activities, (iv) borrowing capacity under the Credit Facility, (v) borrowings under the Commercial Paper Program and (vi) secured and unsecured debt financings. Additional sources of liquidity in 2023 may include the issuance of common and preferred equity, including the issuance of shares of our common stock under CEP V. Our ability to obtain additional financing will depend on a variety of factors, such as market conditions, the general availability of credit, the overall availability of credit to the real estate industry, our credit ratings and credit capacity, as well as the perception of lenders regarding our long or short-term financial prospects.

Before beginning new construction or reconstruction activity in 2023, including activity related to communities owned by unconsolidated joint ventures, we plan to source sufficient capital 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 abandon Development Rights, write off associated pre-development 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 Development Rights or reconstruction activity and significant losses could be incurred.

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From time to time we use joint ventures to hold or develop individual real estate assets. We generally employ joint ventures to mitigate asset concentration or market risk and secondarily as a source of liquidity. We may also use joint ventures related to mixed-use land development opportunities and new markets where our partners bring development and operational expertise and/or experience to the venture. Each joint venture or partnership agreement has been individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture or partnership agreement. We cannot assure you that we will achieve our objectives through joint ventures.

In addition, we may invest, through mezzanine loans or other preferred equity investments, in multifamily development projects being undertaken by third parties. In these cases, we do not expect to acquire the underlying real estate but rather to earn a return on our investment (through interest or fixed rate preferred equity returns) and a return of the invested capital generally following completion of construction either on or before a set due date.

In evaluating our allocation of capital within our markets, we sell assets that do not meet our long-term investment criteria or when capital and real estate markets allow us to realize a portion of the value created over our ownership periods and redeploy the proceeds from those sales to develop and redevelop communities. Because the proceeds from the sale of communities may not be immediately redeployed into revenue-generating assets that we develop, redevelop or acquire, the immediate effect of a sale of a community for a gain is to increase net income, but reduce future total revenues, total expenses and NOI until such time as the proceeds have been redeployed into revenue generating assets. We believe that the temporary absence of future cash flows from communities sold will not have a material impact on our ability to fund future liquidity and capital resource needs.

Investments

We invest in consolidated real estate entities, unconsolidated investments in real estate ventures and direct and indirect investments in property technology and environmentally focused companies through investment management funds.

Consolidated Investments

During the year ended December 31, 2022, we acquired the following communities containing 16,000 square feet of commercial space (dollars in thousands). See Note 5, "Investments," of the Consolidated Financial Statements included elsewhere in this report for further discussion.

[[GREPCENT_TABLE]]
[["Community Name","","Location","","Apartment homes","","Purchase price"],["Avalon Flatirons","","Lafayette, CO","","207","","","$","95,000"],["Waterford Court","","Addison, TX","","196","","","69,500"],["Avalon Miramar Park Place","","Miramar, FL","","650","","","295,000"],["Avalon Highland Creek","","Charlotte, NC","","260","","","76,700"],["Total acquisitions","","","","1,313","","","$","536,200"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2022, we sold nine wholly-owned communities containing 2,062 apartment homes (dollars in thousands). See Note 6, "Real Estate Disposition Activities," of the Consolidated Financial Statements included elsewhere in this report for further discussion.

[[GREPCENT_TABLE]]
[["Community Name","","Location","","Period of sale","","Apartment homes","","Gross sales price","","Gain on disposition"],["Avalon West Long Branch","","West Long Branch, NJ","","Q122","","180","","","$","75,000","","","$","56,434"],["Avalon Ossining","","Ossining, NY","","Q122","","168","","","70,000","","","40,512"],["Avalon East Norwalk","","Norwalk, CT","","Q122","","240","","","90,000","","","51,762"],["Avalon Green I/Avalon Green II/Avalon Green III","","Elmsford, NY","","Q322","","617","","","306,000","","","196,466"],["Avalon Del Mar Station","","Pasadena, CA","","Q322","","347","","","172,300","","","77,141"],["Avalon Sharon","","Sharon, MA","","Q322","","156","","","65,650","","","44,355"],["Avalon Park Crest","","Tysons Corner, VA","","Q422","","354","","","145,500","","","88,156"],["Total asset sales","","","","","","2,062","","","$","924,450","","","$","554,826"]]
[[/GREPCENT_TABLE]]

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Unconsolidated Investments

During the year ended December 31, 2022, we had the following investment activity related to our unconsolidated real estate and property technology and environmentally focused investments. See Note 5, "Investments," of the Consolidated Financial Statements included elsewhere in this report for further discussion.

•The U.S. Fund sold its final three communities for $313,500,000. Our proportionate share of the gain in accordance with GAAP was $38,144,000. The U.S. Fund repaid the $115,213,000 of outstanding secured indebtedness at par in advance of the scheduled maturity dates. In conjunction with the final dispositions, we achieved a threshold return resulting in an incentive distribution for the promoted interest based on the returns earned by the U.S. Fund. During the year ended December 31, 2022, we recognized income of $4,690,000 for the promoted interest, which is reported as a component of income from investments in unconsolidated entities on the accompanying Consolidated Statements of Comprehensive Income.

•Arts District Joint Venture was formed to develop, own, and operate AVA Arts District, an apartment community located in Los Angeles, CA, which is currently under construction and expected to contain 475 apartment homes and 56,000 square feet of commercial space when completed. We have a 25% ownership interest in the venture. As of December 31, 2022, excluding costs incurred in excess of equity in the underlying net assets of the venture, we have an equity investment of $28,660,000 in the venture. The remaining development costs, representing 60.0% of the total project cost, are expected to be funded by the venture's variable rate construction loan. The venture has drawn $86,664,000 of $167,147,000 maximum borrowing capacity of the construction loan as of December 31, 2022. While we guarantee the construction loan on behalf of the venture, any amounts due under the guarantee are obligations of the venture partners in proportion to ownership interest.

•Avalon Alderwood MF Member, LLC (“Avalon Alderwood Place”) was formed to develop, own, and operate Avalon Alderwood Place, an apartment community located in Lynnwood, WA, which completed development in 2022 and contains 328 apartment homes. We have a 50% ownership interest in the venture. As of December 31, 2022, we have an equity investment of $54,938,000 in the venture.

•We invested $18,714,000 in various property technology and environmentally focused companies directly and indirectly through investment management funds during the year ended December 31, 2022. As of December 31, 2022, we have $34,299,000 of remaining equity commitments to contribute to these investment management funds, with the timing and amount for these commitments to be fulfilled dependent on if, and when, investment opportunities are identified by the respective funds. During the year ended December 31, 2022, we recognized income and unrealized gains of $8,315,000 related to these investments, included as a component of income from investments in unconsolidated entities on the Consolidated Statements of Comprehensive Income.

Structured Investment Program

During the year ended December 31, 2022, we entered into commitments under the SIP in our existing markets for three mezzanine loans of up to $92,375,000 in the aggregate. The mezzanine loans have a weighted average rate of return of 9.8%, and mature at various dates on or before June 2026. As of January 31, 2023, we have funded $34,046,000 of these commitments. See Note 5, "Investments," of the Consolidated Financial Statements included elsewhere in this report.

You should carefully review Part I, Item 1A. "Risk Factors" of this Form 10-K for a discussion of the risks associated with our investment activity.

Forward-Looking Statements

This Form 10-K 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,” “may,” “shall,” “will,” "pursue" and other similar expressions in this Form 10-K, that predict or indicate future events and trends and that do not report historical matters. These statements include, among other things, statements regarding our intent, belief or expectations with respect to:

•the impact of the Pandemic on our business, results of operations and financial condition;

•our potential development, redevelopment, acquisition or disposition of communities;

•the timing and cost of completion of apartment communities under construction, reconstruction, development or redevelopment;

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•the timing of lease-up, occupancy and stabilization of apartment communities;

•the timing and net sales proceeds of condominium sales;

•the pursuit of land on which we are considering future development;

•the anticipated operating performance of our communities;

•cost, yield, revenue, NOI and earnings estimates;

•the impact of landlord-tenant laws and rent regulations;

•our expansion into new markets;

•our declaration or payment of dividends;

•our joint venture and discretionary fund activities;

•our policies regarding investments, indebtedness, acquisitions, dispositions, financings and other matters;

•our qualification as a REIT under the Code;

•the real estate markets in Metro New York/New Jersey, Northern and Southern California, Denver, Colorado, Southeast Florida, Dallas and Austin, Texas and Charlotte and Raleigh-Durham, North Carolina, and markets in selected states in the Mid-Atlantic, New England and Pacific Northwest regions of the United States and in general;

•the availability of debt and equity financing;

•interest rates;

•general economic conditions, including the potential impacts from current economic conditions, including rising interest rates and general price inflation, and the Pandemic;

•trends affecting our financial condition or results of operations;

•adverse regulatory developments that may affect us; and

•the impact of legal proceedings.

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. We do not undertake a duty to update these forward-looking statements, and therefore they may not represent our estimates and assumptions after the date of this report. 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. You should carefully review the discussion under Item 1A. “Risk Factors” in this report for further discussion of risks associated with forward-looking statements.

Risks and uncertainties that might cause such differences include those related to the Pandemic, including, among other factors, (i) the Pandemic's effect on the multifamily industry and the general economy, including from measures taken by businesses and the government, such as governmental limitations on the ability of multifamily owners to evict residents who are delinquent in the payment of their rent and (ii) the preferences of consumers and businesses for living and working arrangements both during and after the Pandemic. In addition, the effects of the Pandemic are likely to heighten the following risks, which we routinely face in our business.

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 to obtain land at attractive prices 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, increases in the cost of capital or lack of capital availability, resulting in losses;

•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 costs and construction costs and a decrease in our expected rental revenues;

•the timing and net proceeds of condominium sales at The Park Loggia may not equal our current expectations;

•occupancy rates and market rents may be adversely affected by competition and local economic and market conditions which are beyond our control;

•financing may not be available on favorable terms or at all, and our cash flows from operations and access to cost effective capital may be insufficient for the development of our pipeline, which could limit our pursuit of opportunities;

•the impact of new landlord-tenant laws and rent regulations may be greater than we expect;

•our cash flows 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;

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•we may be unsuccessful in our management of joint ventures and the REIT vehicles that are used with certain joint ventures;

•laws and regulations implementing rent control or rent stabilization, or otherwise limiting our ability to increase rents, charge fees or evict tenants, may impact our revenue or increase our costs;

•our expectations, estimates and assumptions as of the date of this filing regarding legal proceedings are subject to change;

•the possibility that we may choose to pay dividends in our stock instead of cash, which may result in stockholders having to pay taxes with respect to such dividends in excess of the cash received, if any; and

•investments made under the SIP in either mezzanine debt or preferred equity of third-party multifamily development may not be repaid as expected or the development may not be completed on schedule, which could require us to engage in litigation, foreclosure actions, and/or first party project completion to recover our investment, which may not be recovered in full or at all in such event.

Critical Accounting Policies and Estimates

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. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” of our Consolidated Financial Statements.

Cost Capitalization

We capitalize costs during the development of assets. Capitalization begins when we determine that development of a future asset is probable and continues until the asset, or a portion of the asset, is delivered and is ready for its intended use. For redevelopment efforts, we capitalize costs either (i) in advance of taking apartment homes out of service when significant renovation of the common area has begun and continue until the redevelopment is completed, or (ii) when an apartment home is taken out of service for redevelopment and continue until the redevelopment is completed and the apartment home is available for a new resident. Rental income and operating expenses incurred during the initial lease-up or post-redevelopment lease-up period are fully recognized in earnings as they accrue.

During the development and redevelopment efforts we capitalize all direct costs and indirect costs which have been incurred as a result of the development and redevelopment activities. These costs include interest and related loan fees, property taxes as well as other direct and indirect costs. Interest is capitalized for any project-specific financing, as well as for general corporate financing to the extent of our aggregate investment in the projects. Indirect project costs, which include personnel and office and administrative costs that are clearly associated with our development and redevelopment efforts, are also capitalized. Capitalized indirect costs associated with our development and redevelopment activities are comprised primarily of compensation related costs for associates dedicated to our development and redevelopment efforts and total $50,039,000 and $46,263,000 for 2022 and 2021, respectively. The estimation of the direct and indirect costs to capitalize as part of our development and redevelopment activities requires judgment and, as such, we believe cost capitalization to be a critical accounting estimate.

There may be a change in our operating expenses in the event that there are changes in accounting guidance governing capitalization or changes to our levels of development or redevelopment activity. If changes in the accounting guidance limit our ability to capitalize costs or if we reduce our development and redevelopment activities without a corresponding decrease in indirect project costs, there may be an increase in our operating expenses.

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We capitalize pre-development costs incurred in pursuit of Development Rights. These costs include legal fees, design fees and related overhead costs. Future development of these pursuits is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and availability of capital. Pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development no longer probable, any capitalized pre-development costs are written off with a charge to expense.

Due to the subjectivity in determining whether a pursuit will result in the development of an apartment community, and therefore should be capitalized, the accounting for pursuit costs is a critical accounting estimate. As of December 31, 2022, capitalized pursuit costs associated with Development Rights totaled $58,489,000.

Abandoned Pursuit Costs & Asset Impairment

We evaluate our direct and indirect investments in real estate and other long-lived assets for impairment when potential indicators of impairment exist. If events or circumstances indicate that the carrying amount of a property may not be recoverable, we assess its recoverability by comparing the carrying amount of the property to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property. We assess land held for development for impairment if our intent changes with respect to the development of the land. We evaluate our unconsolidated investments for impairment, considering both the carrying value of the investment, estimated expected proceeds that it would receive if the entity were dissolved and the net assets were liquidated, as well as our proportionate share of any impairment of assets held by unconsolidated investments.

The assessment of impairment can involve subjectivity in determining if indicators are present and in estimating the future undiscounted cash flows or the fair value of an asset. Estimates of the undiscounted cash flows are sensitive to significant assumptions including future rental revenues, operating expenses, and our intent and ability to hold the related asset, which could be impacted by our expectations about the future.

We expense costs related to abandoned pursuits, which include the abandonment of Development Rights and disposition pursuits. These costs can vary greatly, and the costs incurred in any given period may be significantly different in future years.

Our focus on value creation through real estate development presents an impairment risk in the event of a future deterioration of the real estate and/or capital markets or a decision by us to reduce or cease development. We cannot predict the occurrence of future events that may cause an impairment assessment to be performed, or the likelihood of any future impairment charges, if any. You should also review Item 1A. “Risk Factors” in this Form 10-K.

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