# AVALONBAY COMMUNITIES INC (AVB) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AVALONBAY COMMUNITIES INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/915912/000091591224000004/avb-20231231.htm
Accession: 0000915912-24-000004
Filing date: 2024-02-23
Report date: 2023-12-31
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/fy2022/ (FY 2022)
Next year: /company/AVB/mda/fy2024/ (FY 2024)

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

2023 Financial Highlights

Net income attributable to common stockholders for the year ended December 31, 2023 was $928,825,000, a decrease of $207,950,000, or 18.3%, from the prior year. The decrease was primarily attributable to decreases in real estate sales and related gains, partially offset by an increase in NOI from communities over the prior year.

Same Store NOI attributable to our apartment rental operations, including parking and other ancillary residential revenue (“Residential”), for the year ended December 31, 2023 was $1,732,422,000, an increase of $100,738,000, or 6.2%, over the prior year. The increase was due to an increase in Same Store Residential rental revenue of $149,495,000, or 6.3%, partially offset by an increase in Same Store Residential property operating expenses of $48,752,000, or 6.6%, over 2022.

During 2023, we raised approximately $1,363,299,000 of gross capital through the sale of wholly-owned real estate, the issuance of unsecured notes and the settlement of the outstanding forward contracts entered into in April 2022 (the "Equity Forward"). 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 2023, we:

•sold four wholly-owned communities containing an aggregate of 987 apartment homes and 27,000 square feet of commercial space for $446,000,000;

•completed the construction of six wholly-owned communities containing an aggregate of 1,393 apartment homes and 29,000 square feet of commercial space for an aggregate total capitalized cost of $575,000,000;

•started the construction of six wholly-owned communities which in the aggregate are expected to contain 2,040 apartment homes when completed, which are expected to be completed for an estimated total capitalized cost of $800,000,000; and

•acquired three wholly-owned communities containing an aggregate of 1,131 apartment homes for an aggregate purchase price of $277,200,000, which included the assumption of a $63,041,000 fixed rate mortgage loan.

During 2023, we i) issued $400,000,000 principal amount of fixed rate unsecured notes, ii) assumed a $63,041,000 fixed rate mortgage note in conjunction with the acquisition of Avalon West Plano, iii) repaid $600,000,000 principal amount of our fixed rate unsecured notes and iv) repaid the $150,000,000 variable rate unsecured term loan (the “Term Loan”).

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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 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, 2023 we owned or held a direct or indirect ownership interest in 299 apartment communities containing 90,669 apartment homes in 12 states and the District of Columbia, of which 18 communities were under development. We have an indirect interest in nine of the 299 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 30 communities that, if developed as expected, will contain an estimated 10,801 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 current year. Unconsolidated communities are communities in which we have an indirect ownership interest through our investment interest in an unconsolidated joint venture. 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 2022 and comparison to 2021 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 24, 2023. A comparison of our operating results for 2023 and 2022 follows (dollars in thousands).

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[[GREPCENT_TABLE]]
[["","For the year ended December 31,","","December 31, 2023 vs. 2022"],["","2023","","2022","","$ Change","","% Change"],["Revenue:"],["Rental and other income","$","2,760,187","","","$","2,587,113","","","$","173,074","","","6.7","%"],["Management, development and other fees","7,722","","","6,333","","","1,389","","","21.9","%"],["Total revenue","2,767,909","","","2,593,446","","","174,463","","","6.7","%"],["Expenses:"],["Direct property operating expenses, excluding property taxes","551,905","","","509,529","","","42,376","","","8.3","%"],["Property taxes","306,794","","","288,960","","","17,834","","","6.2","%"],["Total community operating expenses","858,699","","","798,489","","","60,210","","","7.5","%"],["Property management and other indirect operating expenses","(129,433)","","","(120,625)","","","(8,808)","","","(7.3)","%"],["Expensed transaction, development and other pursuit costs, net of recoveries","(33,479)","","","(16,565)","","","(16,914)","","","(102.1)","%"],["Interest expense, net","(205,992)","","","(230,074)","","","24,082","","","10.5","%"],["Loss on extinguishment of debt, net","(150)","","","(1,646)","","","1,496","","","90.9","%"],["Depreciation expense","(816,965)","","","(814,978)","","","(1,987)","","","(0.2)","%"],["General and administrative expense","(76,534)","","","(74,064)","","","(2,470)","","","(3.3)","%"],["Casualty loss","(9,118)","","","\u2014","","","(9,118)","","","(100.0)","%"],["Income from unconsolidated investments","13,454","","","53,394","","","(39,940)","","","(74.8)","%"],["Gain on sale of communities","287,424","","","555,558","","","(268,134)","","","(48.3)","%"],["Other real estate activity","174","","","5,127","","","(4,953)","","","(96.6)","%"],["Income before income taxes","938,591","","","1,151,084","","","(212,493)","","","(18.5)","%"],["Income tax expense","(10,153)","","","(14,646)","","","4,493","","","30.7","%"],["Net income","928,438","","","1,136,438","","","(208,000)","","","(18.3)","%"],["Net loss attributable to noncontrolling interests","387","","","337","","","50","","","14.8","%"],["Net income attributable to common stockholders","$","928,825","","","$","1,136,775","","","$","(207,950)","","","(18.3)","%"]]
[[/GREPCENT_TABLE]]

Net income attributable to common stockholders decreased $207,950,000, or 18.3%, to $928,825,000 in 2023 from 2022, primarily due to decreases in real estate sales and related gains in the current year, partially offset by increases in NOI from communities in the current year.

NOI.  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 unconsolidated investments, depreciation expense, income tax expense, casualty loss, gain on sale of communities, other real estate activity and net operating income from real estate assets sold or held for sale. Management considers NOI 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 property management overhead 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.

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 ancillary residential revenue. Reconciliations of NOI and Residential NOI for the years ended December 31, 2023 and 2022 to net income for each year are as follows (dollars in thousands):

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[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["","2023","","2022"],["Net income","$","928,438","","","$","1,136,438"],["Property management and other indirect operating expenses, net of corporate income","121,704","","","114,200"],["Expensed transaction, development and other pursuit costs, net of recoveries","33,479","","","16,565"],["Interest expense, net","205,992","","","230,074"],["Loss on extinguishment of debt, net","150","","","1,646"],["General and administrative expense","76,534","","","74,064"],["Income from unconsolidated investments","(13,454)","","","(53,394)"],["Depreciation expense","816,965","","","814,978"],["Income tax expense","10,153","","","14,646"],["Casualty loss","9,118","","","\u2014"],["Gain on sale of communities","(287,424)","","","(555,558)"],["Other real estate activity","(174)","","","(5,127)"],["Net operating income from real estate assets sold or held for sale","(14,733)","","","(46,678)"],["NOI","1,886,748","","","1,741,854"],["Commercial NOI (1)","(33,911)","","","(35,652)"],["Residential NOI","$","1,852,837","","","$","1,706,202"]]
[[/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 2023 as compared to 2022 consists of changes in the following categories (dollars in thousands):

[[GREPCENT_TABLE]]
[["","For the year ended"],["","December 31, 2023"],["Same Store","$","100,738"],["Other Stabilized","25,235"],["Development / Redevelopment","20,662"],["Total","$","146,635"]]
[[/GREPCENT_TABLE]]

The increase in our Same Store Residential NOI in 2023 is due to an increase in Residential rental revenue of $149,495,000, or 6.3%, partially offset by an increase in Residential property operating expenses of $48,752,000, or 6.6%, over 2022.

Increases in inflation can result in an increase in our operating costs 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 $173,074,000, or 6.7%, in 2023 compared to the prior year primarily due to the increased rental revenue from our Same Store communities, discussed below.

Consolidated Communities —The weighted average number of occupied apartment homes for consolidated communities increased to 77,667 apartment homes for 2023, compared to 77,319 homes for 2022. The weighted average monthly rental revenue per occupied apartment home increased to $2,955 for 2023 compared to $2,784 in 2022.

Same Store Communities — 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, 2023 (dollars in thousands).

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[[GREPCENT_TABLE]]
[["","Residential rental revenue","","Average monthly rental revenue per occupied home","","Economic Occupancy (1)"],["","","","","$ Change","% Change","","","","","% Change","","","","% Change"],["","For the year ended December 31,"],["","2023","","2022","","2023 to 2022","","2023 to 2022","","2023","","2022","","2023 to 2022","","2023","","2022","","2023 to 2022"],["New England","$","366,070","","","$","340,566","","","$","25,504","","","7.5","%","","$","3,303","","","$","3,053","","","8.2","%","","96.4","%","","97.1","%","","(0.7)","%"],["Metro NY/NJ","523,854","","","489,336","","","34,518","","","7.1","%","","3,571","","","3,321","","","7.5","%","","95.8","%","","96.2","%","","(0.4)","%"],["Mid-Atlantic","366,888","","","345,618","","","21,270","","","6.2","%","","2,412","","","2,276","","","6.0","%","","95.3","%","","95.1","%","","0.2","%"],["Southeast Florida","73,733","","","67,269","","","6,464","","","9.6","%","","2,903","","","2,666","","","8.9","%","","96.8","%","","96.1","%","","0.7","%"],["Denver, CO","28,209","","","26,845","","","1,364","","","5.1","%","","2,259","","","2,150","","","5.1","%","","95.8","%","","95.8","%","","\u2014","%"],["Pacific Northwest","167,292","","","160,194","","","7,098","","","4.4","%","","2,676","","","2,558","","","4.6","%","","95.2","%","","95.4","%","","(0.2)","%"],["Northern California","420,879","","","400,685","","","20,194","","","5.0","%","","3,013","","","2,870","","","5.0","%","","95.9","%","","95.9","%","","\u2014","%"],["Southern California","544,414","","","513,136","","","31,278","","","6.1","%","","2,738","","","2,570","","","6.5","%","","95.9","%","","96.3","%","","(0.4)","%"],["Other Expansion Regions","22,933","","","21,127","","","1,806","","","8.5","%","","2,169","","","2,003","","","8.3","%","","95.2","%","","95.0","%","","0.2","%"],["Total Same Store","$","2,514,272","","","$","2,364,776","","","$","149,496","","","6.3","%","","$","2,926","","","$","2,745","","","6.6","%","","95.8","%","","96.1","%","","(0.3)","%"]]
[[/GREPCENT_TABLE]]

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(1) 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 contract rates and vacant homes at market rents. Vacancy loss is determined by valuing vacant units at current market rents. Economic Occupancy considers that apartment homes of different sizes and locations within a community have different economic impacts on a community's gross revenue.

The following table details the increase in Same Store Residential rental revenue by component for the year ended December 31, 2023, compared to the prior year:

[[GREPCENT_TABLE]]
[["","For the year ended"],["","December 31, 2023"],["Residential rental revenue"],["Lease rates","5.4","%"],["Concessions and other discounts","0.4","%"],["Economic Occupancy","(0.3)","%"],["Other rental revenue","0.9","%"],["Uncollectible lease revenue (excluding rent relief)","1.2","%"],["Rent relief","(1.3)","%"],["Total Residential rental revenue","6.3","%"]]
[[/GREPCENT_TABLE]]

The increase for Same Store Residential rental revenue for the year ended December 31, 2023, as compared to the prior year was not significantly impacted by uncollectible lease revenue, inclusive of amounts received from government rent relief programs. Same Store uncollectible lease revenue decreased for the year ended December 31, 2023 by $4,172,000, resulting in a 0.1% decrease in Same Store Residential rental revenue. However, uncollectible lease revenue was impacted by a decrease in government rent relief of $31,766,000 for the year ended December 31, 2023 from the prior year. Adjusting to remove the impact of rent relief, uncollectible lease revenue as a percentage of Same Store Residential rental revenue decreased to 2.4% in the year ended December 31, 2023 from 3.7% in the year ended December 31, 2022.

We use concessions periodically as a means to increase leasing velocity, providing our new and existing residents an upfront incentive to enter into a new lease, or extend an existing lease. During 2023, concessions granted for our Same Store communities increased over the prior year by $5,341,000 to $17,040,000. 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, 2023, amortized concessions decreased by $7,219,000 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, 2023 and 2022 was $8,480,000 and $6,229,000, respectively.

Management, development and other fees increased $1,389,000, or 21.9%, in 2023, compared to the prior year, primarily due to fees for third-party back-office, financial administrative support services in the current year, partially offset by reduced third-party development fees.

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Direct property operating expenses, excluding property taxes, increased $42,376,000, or 8.3%, in 2023 compared to the prior year, primarily due to the addition of newly developed apartment communities as well as increased Residential operating expenses at our Same Store communities as discussed below.

Same Store Residential direct property operating expenses, excluding property taxes, increased $35,681,000, or 7.6%, in 2023 compared to the prior year, primarily due to increased utilities, maintenance costs, bad debt associated with resident expense reimbursements and legal and eviction costs as restrictions on managing delinquent accounts eased or expired, partially offset by a decrease in on-site payroll costs resulting from technology and centralization initiatives.

Property taxes increased $17,834,000, or 6.2%, in 2023 compared to the prior year, primarily due to the addition of newly developed and acquired apartment communities and increases for our Same Store Residential portfolio, partially offset by decreased property taxes from dispositions.

Same Store Residential property taxes increased $13,071,000, or 4.9%, in 2023 compared to the prior year, primarily due to increased assessments across the portfolio, successful appeals in the prior year and the expiration of property tax incentive programs primarily at certain of our properties in New York City. The expiration of property tax incentive programs represents $6,810,000 or 52% of the 4.9% increase in property taxes for the year ended December 31, 2023.

Property management and other indirect operating expenses increased $8,808,000, or 7.3%, for the year ended December 31, 2023 compared to the prior year, primarily due to increased costs related to initiatives to improve future efficiency in services for residents and prospects and investments in technology as well as increased compensation related costs.

Expensed transaction, development and other pursuit costs, net of recoveries primarily reflect costs incurred for write downs and abandonment of Development Rights, development pursuits not yet considered probable for development, as well as costs related to abandoned acquisition and disposition pursuits, offset by any recoveries of costs incurred. In periods of increased acquisition pursuit activity, periods of economic downturn or when there is limited access to capital, these costs can be volatile and 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 $16,914,000 in 2023 compared to the prior year. The amount for 2023 includes write-offs of $27,455,000 related to seven Development Rights that we determined are no longer probable. The amount for 2022 includes write-offs of $10,073,000 related to three development opportunities that we determined are no longer probable.

Interest expense, net decreased $24,082,000, or 10.5%, in 2023 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 and any mark-to-market impact from derivatives not in qualifying hedge relationships. The decrease in 2023 was primarily due to an increase in interest income due to higher cash amounts invested and higher interest rates coupled with increased capitalized interest, partially offset by the increase in rates on variable rate indebtedness.

Depreciation expense increased $1,987,000, or 0.2%, in 2023 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 increased $2,470,000, or 3.3%, in 2023 as compared to the prior year, primarily due to proceeds from legal settlements we received in the prior year, partially offset by a decrease in executive transition compensation in the current year.

Casualty loss for the year ended December 31, 2023 of $9,118,000 was primarily due to damages to certain of our communities in our Northeast and California regions related to severe weather and other casualty events.

Income from unconsolidated investments decreased $39,940,000 in 2023 compared to the prior year, primarily due to prior year gains from the sale of the final three communities in the U.S. Fund and related promoted interest, coupled with unrealized gains on property technology investments.

Gain on sale of communities decreased in 2023 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 $287,424,000 and $555,558,000 in 2023 and 2022, respectively, were primarily due to the sale of four and nine wholly-owned communities in 2023 and 2022, respectively.

Income tax expense of $10,153,000 and $14,646,000 for the years ended December 31, 2023 and 2022, respectively, was primarily related to dispositions at The Park Loggia.

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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 a 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) gains or losses on sales of previously depreciated property or (ii) real estate depreciation may impact comparability 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 life 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 or other investments;

•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 settlements and costs;

•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;

•changes to 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.

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, 2023 and 2022 (dollars in thousands, except per share amounts).

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[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["","2023","","2022"],["Net income attributable to common stockholders","$","928,825","","","$","1,136,775"],["Depreciation - real estate assets, including joint venture adjustments","811,717","","","810,611"],["Distributions to noncontrolling interests","25","","","48"],["Gain on sale of unconsolidated entities holding previously depreciated real estate","\u2014","","","(38,144)"],["Gain on sale of previously depreciated real estate","(287,424)","","","(555,558)"],["Casualty loss on real estate","9,118","","","\u2014"],["FFO attributable to common stockholders","$","1,462,261","","","$","1,353,732"],["Adjusting items:"],["Unconsolidated entity gains, net (1)","(4,161)","","","(8,355)"],["Joint venture promote (2)","(1,519)","","","(4,690)"],["Structured Investment Program loan reserve (3)","1,186","","","1,632"],["Loss on extinguishment of consolidated debt","150","","","1,646"],["Hedge accounting activity","566","","","(229)"],["Advocacy contributions","1,625","","","634"],["Executive transition compensation costs","1,244","","","1,631"],["Severance related costs","2,625","","","1,097"],["Expensed transaction, development and other pursuit costs, net of recoveries (4)","30,583","","","13,288"],["Other real estate activity","(174)","","","(5,127)"],["For-sale condominium imputed carry cost (5)","602","","","2,306"],["Legal settlements and costs (6)","457","","","(2,212)"],["Income tax expense (7)","10,153","","","14,646"],["Core FFO attributable to common stockholders","$","1,505,598","","","$","1,369,999"],["Weighted average common shares outstanding - diluted","141,643,788","","139,975,087"],["Earnings per common share - diluted","$","6.56","","","$","8.12"],["FFO per common share - diluted","$","10.32","","","$","9.67"],["Core FFO per common share - diluted","$","10.63","","","$","9.79"]]
[[/GREPCENT_TABLE]]

_________________________________

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

(2) Amounts are for our recognition of our promoted interest in the U.S. Fund.

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

(4) Amount for 2023 includes write-offs of $27,455 for seven Development Rights that we determined are no longer probable. Amount for 2022 includes write-offs of $10,073 related to three development opportunities that we determined are no longer probable. Amounts for 2023 and 2022 also include $3,128 and $3,215, respectively, for additional expensed pursuit costs.

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

(6) In 2022, we received $6,000 of legal settlement proceeds, of which $3,684 is adjusted for Core FFO.

(7) Amounts are primarily for the recognition of taxes associated with The Park Loggia dispositions.

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.

41

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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;

•regularly scheduled principal and interest payments and principal payments either at maturity or opportunistically before maturity;

•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 restricted cash of $530,960,000 at December 31, 2023, a decrease of $203,285,000 from $734,245,000 at December 31, 2022. The following discussion relates to changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities.

A presentation of GAAP based cash flow metrics is as follows (unaudited, dollars in thousands):

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["","2023","","2022"],["Net cash provided by operating activities","$","1,560,029","","","$","1,421,932"],["Net cash used in investing activities","$","(928,955)","","","$","(560,419)"],["Net cash used in financing activities","$","(834,359)","","","$","(671,056)"]]
[[/GREPCENT_TABLE]]

•Net cash provided by operating activities increased primarily due to increases in NOI.

•Net cash used in investing activities was primarily due to (i) investment of $901,847,000 in the development and redevelopment of communities, (ii) acquisition of three wholly-owned communities for $215,889,000 and (iii) capital expenditures of $197,274,000 for our wholly-owned communities and non-real estate assets. These amounts were partially offset by net proceeds from the disposition of four operating communities and the sale of for-sale residential condominiums of $467,096,000.

•Net cash used in financing activities was primarily due to (i) payment of cash dividends in the amount of $922,657,000, (ii) the repayment of the $600,000,000 fixed rate unsecured notes and (iii) the repayment of the $150,000,000 Term Loan. These amounts were partially offset by (i) the settlement of the Equity Forward for $491,912,000 and (ii) proceeds from the issuance of unsecured notes in the amount of $399,756,000.

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Variable Rate Unsecured Credit Facility

The $2,250,000,000 Credit Facility matures in September 2026. The interest rate that would be applicable to borrowings under the Credit Facility is 6.13% at January 31, 2024 and is composed of (i) the Secured Overnight Financing Rate ("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 0.805% per annum, which consists of a 0.10% SOFR adjustment plus 0.705% per annum, assuming a daily SOFR borrowing rate. The borrowing spread to SOFR can vary from SOFR plus 0.63% to SOFR plus 1.38% based upon the rating of our unsecured senior notes. There is also an annual facility commitment fee of 0.12% of the borrowing capacity under the facility, which can vary from 0.095% to 0.295% based upon the rating of our unsecured senior notes. 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. The first determination under the sustainability-linked pricing component occurred in July 2023, resulting in reductions of approximately 0.02% to the interest rate margin and 0.005% to the commitment fee due to our achievement of sustainability targets.

The availability on the Credit Facility as of January 31, 2024 is as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","January 31, 2024"],["Credit Facility commitment","$2,250,000"],["Credit Facility outstanding","\u2014"],["Commercial paper outstanding","(20,000)"],["Letters of credit outstanding (1)","(1,914)"],["Total Credit Facility available","$","2,228,086"]]
[[/GREPCENT_TABLE]]

_____________________________________

(1)In addition, we had $58,616 outstanding in additional letters of credit unrelated to the Credit Facility as of January 31, 2024.

Commercial Paper Program

We have a Commercial Paper Program with the maximum aggregate face or principal amount outstanding at any one time not to exceed $500,000,000. 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. 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, 2024, we had $20,000,000 outstanding under the Commercial Paper Program at a weighted average contractual interest rate of 5.45%.

Financial Covenants

We are subject to financial covenants contained in the Credit Facility 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, 2023.

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 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.

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Continuous Equity Offering Program

Under our continuous equity program (the “CEP”), 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 the CEP 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 2023 and through January 31, 2024, we did not have any sales under this program. As of January 31, 2024, we had $705,961,000 remaining authorized for issuance under this program.

Forward Equity Offering

In addition to the CEP, during the year ended December 31, 2023, we settled the Equity Forward issuing 2,000,000 shares of common stock, net of offering fees and discounts, for $491,912,000 or $245.96 per share.

Stock Repurchase Program

We have a stock repurchase program under which we may acquire shares of our common stock in open market or negotiated transactions up to an aggregate purchase price of $500,000,000 (the “Stock Repurchase Program”). Purchases of common stock under the 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 Stock Repurchase Program does not have an expiration date and may be suspended or terminated at any time without prior notice. During the year ended December 31, 2023, we repurchased 11,800 shares of common stock at an average price of $161.96 per share. From January 1, 2024 through January 31, 2024, we had no repurchases of shares under this program. As of January 31, 2024, we had $314,237,000 remaining authorized for purchase under this program.

Interest Rate Swap Agreements

The following derivative activity occurred during the year ended December 31, 2023:

•In connection with the issuance of our $400,000,000 unsecured notes in December 2023 maturing in 2033, we terminated $250,000,000 of forward interest rate swap agreements designated as cash flow hedges of the interest rate variability on the issuance of unsecured notes, receiving payments of $8,331,000 which will be recognized over the life of the unsecured notes as a reduction in the effective interest rate. All of the positions settled were forward interest rate swaps that we had entered into during 2023.

•In addition, we entered into $200,000,000 of forward interest rate swap agreements to reduce the impact of variability in interest rates on a portion of our anticipated future debt issuance activity in 2024. We expect to cash settle the swaps and either pay or receive cash for the then current fair value.

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 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, 2023 and 2022 (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 “Unconsolidated Investments” for further discussion of the construction loan).

[[GREPCENT_TABLE]]
[["","","Effective interest rate (1)","","Principal maturity date","","Balance Outstanding (2)","","Scheduled Maturities"],["Debt","","","","12/31/2022","","12/31/2023","","2024","","2025","","2026","","2027","","2028","","Thereafter"],["Tax-exempt bonds"],["Variable rate"],["Avalon Acton","","4.91","%","","Jul-2040","(3)","$","45,000","","","$","45,000","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","45,000"],["Avalon Clinton North","","5.56","%","","Nov-2038","(3)(5)","147,000","","","126,400","","","\u2014","","","\u2014","","","\u2014","","","700","","","2,800","","","122,900"],["Avalon Clinton South","","5.56","%","","Nov-2038","(3)(5)","121,500","","","104,500","","","\u2014","","","\u2014","","","\u2014","","","600","","","2,300","","","101,600"],["Avalon Midtown West","","5.51","%","","May-2029","(3)","82,700","","","76,600","","","6,800","","","7,300","","","8,100","","","8,800","","","9,600","","","36,000"],["Avalon San Bruno I","","5.45","%","","Dec-2037","(3)","60,950","","","57,650","","","2,200","","","2,400","","","2,600","","","2,800","","","3,000","","","44,650"],["","","","","","","457,150","","","410,150","","","9,000","","","9,700","","","10,700","","","12,900","","","17,700","","","350,150"],["Conventional loans"],["Fixed rate"],["$250 million unsecured notes","","\u2014","%","","Mar-2023","(4)","250,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["$350 million unsecured notes","","\u2014","%","","Dec-2023","(4)","350,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["$300 million unsecured notes","","3.66","%","","Nov-2024","","300,000","","","300,000","","","300,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["$525 million unsecured notes","","3.55","%","","Jun-2025","","525,000","","","525,000","","","\u2014","","","525,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["$300 million unsecured notes","","3.62","%","","Nov-2025","","300,000","","","300,000","","","\u2014","","","300,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["$475 million unsecured notes","","3.35","%","","May-2026","","475,000","","","475,000","","","\u2014","","","\u2014","","","475,000","","","\u2014","","","\u2014","","","\u2014"],["$300 million unsecured notes","","3.01","%","","Oct-2026","","300,000","","","300,000","","","\u2014","","","\u2014","","","300,000","","","\u2014","","","\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","","","400,000","","","\u2014","","","\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","","","450,000","","","\u2014"],["$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","","","400,000","","","\u2014"],["$350 million unsecured notes","","4.38","%","","Feb-2033","","350,000","","","350,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","350,000"],["$400 million unsecured notes","","5.19","%","","Dec-2033","","\u2014","","","400,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","400,000"],["Avalon Walnut Creek","","4.00","%","","Jul-2066","","4,327","","","4,501","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","4,501"],["eaves Los Feliz","","3.68","%","","Jun-2027","","41,400","","","41,400","","","\u2014","","","\u2014","","","\u2014","","","41,400","","","\u2014","","","\u2014"],["eaves Woodland Hills","","3.67","%","","Jun-2027","","111,500","","","111,500","","","\u2014","","","\u2014","","","\u2014","","","111,500","","","\u2014","","","\u2014"],["Avalon Russett","","3.77","%","","Jun-2027","","32,200","","","32,200","","","\u2014","","","\u2014","","","\u2014","","","32,200","","","\u2014","","","\u2014"],["Avalon San Bruno III","","2.38","%","","Mar-2027","","51,000","","","51,000","","","\u2014","","","\u2014","","","\u2014","","","51,000","","","\u2014","","","\u2014"],["Avalon Cerritos","","3.35","%","","Aug-2029","","30,250","","","30,250","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","30,250"],["Avalon West Plano","","5.97","%","","May-2029","","\u2014","","","63,041","","","593","","","1,065","","","1,111","","","1,159","","","1,202","","","57,911"],["","","","","","","7,770,677","","","7,633,892","","","300,593","","","826,065","","","776,111","","","637,259","","","851,202","","","4,242,662"],["Variable rate"],["Term Loan - $150 million","","\u2014","%","","Feb-2024","(5)","150,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total indebtedness - excluding Credit Facility and Commercial Paper","","$","8,377,827","","","$","8,044,042","","","$","309,593","","","$","835,765","","","$","786,811","","","$","650,159","","","$","868,902","","","$","4,592,812"]]
[[/GREPCENT_TABLE]]

_________________________________

(1)Rates are as of December 31, 2023 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 $43,848 and $47,695 as of December 31, 2023 and 2022, respectively, deferred financing costs and debt discount associated

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with secured notes of $18,372 and $14,087 as of December 31, 2023 and 2022, respectively, as reflected on our Consolidated Balance Sheets included elsewhere in this report.

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

(4)During 2023, we repaid this borrowing at its scheduled maturity date.

(5)During 2023, we repaid some or all amounts outstanding of this borrowing in advance of 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 $15,333,000 for 2024, $15,633,000 for 2025 and $348,404,000 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 discussed further 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 2024, we expect to continue to meet our liquidity needs from one or more of a variety of internal and external sources, which may include (i) real estate dispositions, (ii) cash balances on hand as well as cash generated from our operating activities, (iii) borrowing capacity under the Credit Facility, (iv) borrowings under the Commercial Paper Program and (v) secured and unsecured debt financings. Additional sources of liquidity in 2024 may include the issuance of common and preferred equity, including the issuance of shares of our common stock under the CEP. 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, 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.

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 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.

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Consolidated Investments

During the year ended December 31, 2023, we acquired the following communities (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 Frisco at Main","","Frisco, TX","","360","","","$","83,100"],["Avalon Mooresville","","Mooresville, NC","","203","","","52,100"],["Avalon West Plano","","Carrollton, TX","","568","","","142,000"],["Total acquisitions","","","","1,131","","","$","277,200"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2023, we sold four wholly-owned communities containing an aggregate of 987 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","","Commercial square feet"],["eaves Daly City","","Daly City, CA","","Q2 2023","","195","","","$","67,000","","","$","54,618","","","\u2014"],["Avalon at Newton Highlands","","Newton, MA","","Q2 2023","","294","","","170,000","","","132,723","","","\u2014"],["Avalon Columbia Pike","","Arlington, VA","","Q3 2023","","269","","","105,000","","","22,345","","","27,000"],["Avalon Mamaroneck","","Mamaroneck, NY","","Q4 2023","","229","","","104,000","","","77,901","","","\u2014"],["Total asset sales","","","","","","987","","","$","446,000","","","$","287,587","","","27,000"]]
[[/GREPCENT_TABLE]]

Unconsolidated Investments

During the year ended December 31, 2023, 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.

•We had an equity interest of 28.6% in the U.S. Fund and because we achieved a threshold return for the fund, during the year ended December 31, 2023, we recognized income of $1,519,000 for the final amount of promoted interest, which is reported as a component of income from unconsolidated investments on the accompanying Consolidated Statements of Comprehensive Income. During 2023, we completed the dissolution of the U.S. Fund.

•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, 2023, excluding costs incurred in excess of equity in the underlying net assets of the venture, we have an equity investment of $32,738,000 in the venture. The remaining development costs are primarily expected to be funded by the venture's variable rate construction loan. The venture has drawn $135,983,000 of $167,147,000 maximum borrowing capacity of the construction loan as of December 31, 2023. While we guarantee the construction loan on behalf of the venture, any amounts payable under the guarantee are obligations of the venture partners in proportion to ownership interest.

•We invested $10,748,000 in various property technology and environmentally focused companies directly and indirectly through investment management funds during the year ended December 31, 2023. As of December 31, 2023, we have $73,892,000 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, 2023, we recognized income and unrealized gains of $4,161,000 related to these investments, included as a component of income from unconsolidated investments on the Consolidated Statements of Comprehensive Income.

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Structured Investment Program

During the year ended December 31, 2023, we entered into four additional commitments under the SIP, agreeing to provide an aggregate investment of up to $99,210,000 in multifamily development projects. As of January 31, 2024, we had seven commitments to fund up to $191,585,000 in the aggregate under the SIP. As of January 31, 2024, our investment commitments had a weighted average rate of return of 11.5% and have initial maturity dates between September 2025 and December 2027. As of January 31, 2024, we had funded $101,982,000 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” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in 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:

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

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

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

•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 regions;

•our declaration or payment of dividends;

•our joint venture 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;

•trends affecting our financial condition or results of operations;

•regulatory changes 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.

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:

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•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;

•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;

•an outbreak of disease or other public health event may affect the multifamily industry and general economy, including from measures taken by businesses and the government and the preferences of consumers and businesses for living and working arrangements both during and after such an event;

•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;

•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.

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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 $50,996,000 and $50,039,000 for 2023 and 2022, 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.

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, 2023, capitalized pursuit costs associated with Development Rights totaled $53,122,000.

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 costs related to development pursuits not yet considered probable for development, as well as costs incurred in pursuing the acquisition or disposition of assets for which such acquisition and disposition activity did not occur, of which we expensed $33,479,000, $16,565,000 and $2,192,000 of these costs during the years ended December 31, 2023, 2022 and 2021, respectively. These costs are included in expensed transaction, development and other pursuit costs, net of recoveries on the accompanying Consolidated Statements of Comprehensive Income. 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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