艾芙隆海灣社區公司 (AVB) 2002 Q3 法說會逐字稿

Good morning, Ladies and gentlemen, and welcome to the AvalonBay Communities third quarter 2002 earnings conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press the Star Zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Alaine Walsh, Manager of Investor Relations. Ms. Alaine Walsh, you may begin your conference.

Thank you, Terry. Good morning, and welcome to the AvalonBay Communities third quarter 2002 conference call. On the call today are Bryce Blair, Chief Executive Officer and President, Timothy Naughton, Chief Operating officer, and Tom Sargeant, Chief Financial Officer. We'll begin in just a minute, but first if you did not receive the press release in last night's e-mail or fax distribution, please call us at 703-317-4636 and we'll be happy to send you a copy. As always, I'd like to remind you that forward-looking statements may be made during this discussion, there are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially.

There is a discussion of these risks and uncertainties in yesterday's press release, as well as in our form 10K filed with the FCC. And now, I'd like to turn the call over to Bryce Blair, for his opening remarks. Bryce.

Thank you Elaine, and good morning. On our call today, Tim will update you on our operating performance and investment activities, and Tom will discuss some of the financial highlights for the quarter. In my comments, I'd like to briefly summarize our quarterly results, then discuss the impact of jobs on our market. And then comment on our continued commitment to our long-term strategy. Yesterday we reported EPS for the third quarter of 35 points, and that's a FFO share of 87 cents. In the year-over-year basis, we experienced a decline in year-over-year sales and a same-store of 12 1/2 percent, which translated into a decline in FFO of 15 1/2 percent.

These results reflect a continued weakness in the economy, and secondarily the continued strength of the for-sale home market. And turning to jobs, as the key driver for rental household demand is job growth, and while the nation has experienced slow but positive job growth over the past six months, AvalonBay's markets have continued to see job losses during this same period. If we put some numbers to this, if you look at the job numbers for the six-month period from February through August of this year, the nation as a whole has experienced job gains of about 190,000 jobs during that period. AvalonBay's markets, which are heavily dependent as on technology, Telecom, and financial services, industries that have been hit particularly hard during this recession, have experienced a net job loss of 170,000 jobs. The net job gain for the nation as a whole, yet net job losses for AvalonBay's markets.

These job losses when combined with the continued strength of the for-sale markets have resulted in the sequential decline in our revenues of 2 percent between the second and third quarters. We expect we'll continue to experience weak fundamentals and sequential revenue declines for as long as we continue to experience sequential job losses in our markets. As we head into 2003 we expect job growth in our markets to be positive for the year overall, however we will expect any material job growth will not happen until the second half of next year.

Turning to our strategy, and on occasion some of you have asked and, and it is fair to ask, as to whether we have materially altered our strategy in our observations and experiences over the past year. I think the simple answer is that while we have certainly altered some of our short-term operating practice, our commitment to our long-term strategy remains fundamentally unchanged. You heard me summarize our strategic vision as one of more deeply penetrating our chosen markets, for a broader range of products and services, with an increased focus on our customer. And appropriate in this statement is a focus in four key areas. A focus on our high-barrier markets, a focus on premium apartment products, a focus on our strong development capabilities, and our commitment to maintaining a conservative balance sheet.

I want to touch on each briefly. In terms of our market, while our markets are currently challenged, this is a function of weak demand, not one of substantial increased supply. Our markets are heavily dependant upon technology and financial services sectors that while currently consolidating, are sectors that over the long-term, are expected to be significant job generators for our economy. As the economy strengthens, we do expect our markets to return to turn out performance, as the long-term fundamentals for our market continue to be benefited of by the strong, long-term economic drivers within our market, the low home affordability which our markets are known for, and the constrained supply, which is characteristic of the high barrier market for the operator. We remain committed to our market strategy of focusing on these high barrier of entry markets, and yet we will continue to actively manage our geographic concentrations in order to achieve our portfolio objectives, and looking to achieve the highest risk-adjusted returns.

Secondly, in terms of our focus on premium products, as our portfolio is quite young at approximately seven years average age, and has average rents of over $1500 per apartment. This is contrasted to an average of about $900 per apartment for the multifamily reach as a group. But I think it's fair to say that AvalonBay's portfolio overall would clearly be considered a premium product. In any recessionary environment it's logical and expected that the premium or upper end is disproportionately impacted as consumers look for ways to tighten their belt. And I think there's ample evidence that this is happening in our economy today. When the economy begins to expand, the reverse generally occurs, as consumers trade up in their housing choices, thus benefiting the upper end communities. And we remain committed to focusing on the premium end communities, believing that over the full range of the business cycle, that this market segment will outperform. We think history supports that.

Third, in terms of our development capabilities, AvalonBay has a long track record of creating value to development, which we're quite proud of. For the last nine years as a public company, we've completed $2 billion in new communities with an average initial yield of almost 11 percent. Creating about $800 million of value in the process. And even in today's environment, with current market conditions that compress their average yields to below nine, our development efforts are still creating both current earnings growth, and NAV growth. We have, and will continue to exercise discipline in our development starts, beginning development only where current economics and expected market conditions justify doing so.

Finally I want to talk about our continued commitment to a conservative balance sheet. Our balance sheet has always been grounded in the belief that, that it's important to match long-term assets with long-terms capital, and that the capital structure of your balance sheet should match the risk profile of your business. Given these beliefs, we have always maintained one of the strongest balance sheets for the industry with modest debt levels and minimal exposure to floating rate debt. Along with terribly increasing our leverage ratios, or substantial increasing our floating rate debt would have benefited current earnings, it would be inconsistent with our long-term goals.

Our performance over the last ten years, and our future outlook reinforce our belief that our long-term strategy is sound. Essentially, we do remain committed to the markets we've chosen to operate in. We remain committed to the market segment that we were focused on, and to creating value to our development capabilities, and also to maintaining a conservative balance sheet, believing that while some of these may not be currently benefiting our performance, each of these is extremely critical for our long-term performance. I would characterize our approach as one of being flexible in our operating tactics, yet focused in our strategic vision. With that, I'd like to introduce Tim Naughton, who'll provide further details in our operating performance, and our investment activity.

Thanks, Bryce. I'll address results of property operations for the third quarter and a review of investment activity. As Bryce mentioned in his remarks, operating results remain under pressure due to challenging market conditions. On a sequential basis, first potential revenue continues to decline at a rate of about one-third of one percent per month. And while economic occupancy and market rents have remained relatively stable over the last quarter, recessions have increased significantly across the portfolio. Whatever signs of stabilization we may have been sensing when we started the last quarter may have been premature, as job losses continued in many of our markets through August of this year.

For the quarter, same-store increased by 12 1/2 percent, compared to the same quarter 2001. The results of same-store revenue declined to 7.8 percent, expense growth of 4.4 percent. Same-store revenue was driven by declines in both economic occupancy and average rental rate from the same period last year. Economic occupancy declined by 1 1/2 percent, while average rental rates were off by 6.3 percent. Sequentially from Q2, same-store revenues were down two percent, as compared to a rate of one percent reported last quarter. With the difference being driven by lower lease rate income, and higher concessions. Back concessions as a percentage of market rent increased to 2 percent in Q3, from 1 to 2 percent in Q2. For sheet four we expect further erosion of sequential revenue to approximately one to two percent, or somewhat less than that experienced in Q3, due to lower seasonal turnover.

Sequential changes to average rental rates were most pronounced in Northern New Jersey and Fairfield, Connecticut, both of which have experienced deteriorating supply-demand fundamentals over the last couple of quarters. We've talked about the issues confronting the northern New Jersey market over the last couple of quarters, particularly in Jersey City. But both Jersey City and Stanford, Connecticut continue to be hampered by job losses in the financial services sector on the demand side, and new lease [inaudible] on the supply side. Economic occupancy increased by .3 percent sequentially from Q2. The most significant increases in economic occupancy occurred in Southern California and in the New Jersey, New York area. Increases in Southern California were reflective of firmer market conditions there.

While occupancy gains in New York and New Jersey were a result of aggressive pricing and use of concessions. Declines in economic occupancy were registered in the San Francisco, Boston, and Fairfield markets, each of which have experienced material job losses at the beginning of 2/2002. With the exception of Southern California and mid Atlantic, economic occupancy are hovering in the 92 to 94 percent range. Portfolio wide, economic occupancy remain relatively stable now for the last four months, albeit with higher concessions. During the quarter, annual turnover was up modestly, and traffic was essentially unchanged from Q3 of 2001. Turnover increased most significantly in the Boston, Minneapolis and San Francisco markets.

Same-store expenses increased by 4.4 percent for the quarter over the same period last year. Our largest increases were in marketing and bad debt. Year to date, excluding insurance fraud, same-store expenses are up about one percent from the same period of last year. We remain focused on managing operating expenses aggressively throughout the portfolio.

Moving on to development activity for the quarter, during the second quarter we completed one development community, and started two new communities. Arlington Square, phase two, was completed this quarter ahead of schedule, at a cost of 42.6 million, which was 1.3 million under our original budget. Year-to-date, we have now completed six communities, totaling over 250 million capital investment, at a projected stabilized yield of 9 1/2 percent. Budget and schedule performance remain strong. The [inaudible] reoccurred at the Boston and Long Island markets. Including these two starts, our current development portfolio now stands at just under 800 million, with a projected stabilized yield of 9.1 percent.

For those communities currently in lease-up, cumulative absorption is running at 88 percent of goal, while average rental rates are at 95 percent of original performance. For the year, we expect to complete 10 communities, with a total capitalization of approximately 40 to 70 million, at a projected stabilized yield of nine to 9 1/2 percent, which is in line with our expectations that we discussed last quarter. Although like our stabilized portfolio, the level of concessions has increased during the course of year. We will continue to subsidy new potential starts on a case-by-case basis. [Inaudible] to start four of those communities where current financial [Inaudible], and projected economic conditions justify doing so.

On the transaction front, there's no acquisition or disposition activity at [P3]. We do however, have one disposition community under contract in the Boston market. The fact that it's currently [inaudible] is expected to close in the fourth quarter, the interest for this access was [keying] is that you're more than 20 qualified offers from virtually every type of buyer active in the market today, including institutions, [inaudible] and private equity players. While the transaction market is strong in general, we do believe our experience on this particular deal is evidence of the uniqueness of our access, or the attractiveness of our markets to real estate investors.

For the balance of 2002, we do not anticipate completing any further acquisitions or distributions. [inaudible] 2003, we do expect to accelerate this position and focus virtually all of our transaction activity in this area. While cash flows have been flat and negative in most markets, [back rates] have declined substantially in the last few quarters. We intend to take advantage of the transaction environment by being a net seller of assets in the near term. In addition, dispositions will provide additional capital and liquidity to fund redevelopment and any additional repurchase of common stock.

So in summary, our markets continue to demonstrate weakness, economic occupancy has leveled off after having increased in the earlier part of the year, use of concessions has increasingly been necessary to maintain the existing levels of occupancy across many of our markets. And we don't expect any material sign of stabilization until job growth resumes in our markets. In the meantime, we continue to stay focused on maintaining occupancy and controlling operating expenses across our stabilized portfolio. With that, I'd now like to turn over to Tom, who will discuss our financial highlights.

Thanks, Tim. There are four topics I'd like to cover this morning, which I'll list for those that are taking notes. The first is the impact of interest rates on our business. The second key balance sheet metrics. The third is expenses in CapEx. And finally, stock repurchases.

I'd like to start by commenting on some of the ways that this slow interest rate environment's impacting our business. Some are obvious, and some are not. Low mortgage rates have diverted demand from our product to single-family homes. And we think that likely accelerated during the third quarter as interest rates registered further sharp declines. And while diverted demand is somewhat offset by lower short-term rates, we really don't benefit from that because our capital structure is comprised largely of long-term permanent debt. Conversely, low rates have caused home values to rise faster than incomes, in long-term this will benefit the rental product that we offer in the markets.

There are other long-term benefits, including lower cost of building our product, and lower long-term rates on our unsecured debts, and in that regard, we did lock in on some of the longer-term, benefits of low interest rates during the third quarter, by issuing $150 million of five year unsecured debt at 5 percent, and we are considering expanding our offerings during the rest of the year. In summary, the short-term impact from low rates has been mixed on our business, but certainly the long-term benefits in our business are all positive.

The second discussion point I'd like to have is the key balance sheet metrics, and we continue to enjoy a strong balance sheet and great financial flexibility. Our debt in preferred market capitalization's about 44 percent, our debt maturities average eight years and are evenly spaced with about 155 million coming due each year over the next four years. Permanent floating rate debt remains at about 2 percent of our capitalization, and approximately 80 percent of all of our NOIs unencumbered, offering great financial and operational flexibility. And if I could just note, when we do sell an asset as Tim mentioned, we do get tremendous interest, and there's more interest when that asset's not encumbered by secured debt. So we are able to more effectively market assets if they're not encumbered with secured debt. Receiving premium pricing, even in this low cap rate environment. Our coverage ratios remain very strong. Our fixed charge coverage based on interest expense is about 2.8 times, and our FFO covers our dividends 1.24 times.

Lower interest rates and preferred stock redemptions have kept coverage metrics high, in a difficult market environment. And this is yet another long-term benefit of the current low-rate environment. Another preferred issue does become redeemable in, in December, and we are evaluating the relative contribution that that redemption would have on our fixed-charge coverages. Our financial condition and flexibility positions us well to manage through this difficult market environment.

Third discussion point relates to expenses and CapEx. We continue to focus on the more controlled aspects of our business as Tim mentioned, and aggressively managing controllable costs. This focus on overhead has benefited the company in year to date. G&A has declined about 6.8 percent from last year and the trend for capitalized overhead is also down. Insurance costs have disproportionately impacted expense growth, and our insurance and rules are underway today. And the complexity of procuring insurance continues to grow with the costs. We expect our renewal this year will not cover terrorism, and will not cover mold. Some elements of the coverage will show modest increases, such as property insurance, while D&O and earthquake coverage are expected to rise considerably. I will provide you an update when all of our renewals are final, but we expect the rate of growth for all of our insurance costs will moderate from prior year increases. Operating expenses and capitalization policies are inextricably linked. And higher turnover than expected during the quarter negatively impacted operating results, as we expensed all the turnover costs, including carpet. These policies are strictly applied, and resulted in a relatively stable level of nonrevenue generating CapEx per home that is consistently lower than the industry averages.

Year-to-date, our CapEx per home for stabilized communities is about 213 dollars per apartment, compared to about 191 for the same period last year. And you may remember in the prior quarter, we provided a schedule that gave an example of the detailed release that we will provide annually, that reconciles our capital expenditures to require FCC filings. We do disclose our CapEx per home each quarter, and the trend but we expect to provide annual detail on a separate schedule once our FCC filings are complete or substantially complete.

The fourth and final discussion point this morning related to finance is our stock buyback program. This repurchase program was introduced in the third quarter and we've been active buyers, acquiring approximately 157,000 shares to date. I'd like to emphasize that the stock repurchase program is intended to be balance sheet neutral and will permanently fund the repurchases with retained cash and asset sales to ensure that we continue to match our capital structure with the business risks and the environment. So in summary, we focused on a number of financial areas this quarter. The short-term effect of low rates on our business will pass and the long-term benefits will provide sustained earnings growth during the next expansion. Our balance sheet strength and our financial flexibility remain a priority for the company, and our key financial ratios remain strong.

Our focus on cost containment and, and strict adherence to conservative capitalization policies continued. But insurance markets remained difficult. Our stock repurchase program's active and will be executed in a balance sheet neutral manner. Let me conclude by noting that we plan to provide an update on the 2002 year in December at which time we will also include our initial financial outlook for 2003. With that, I'd like to turn the presentation back [inaudible].

Thank you, Tom. And operator, we'd be pleased to open up the line for a question.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your touch-tone telephone. If your question has been answered, or if you wish to remove yourself from the queue, please press star, then the number two. If you're using a speaker phone, please lift the handset before asking your question. Again, if you have a question at this time, please press the star, then the number one on your touch-tone telephone. One moment please, for the first question. First question comes Steven Swift of Wachovia Securities. Please proceed with your question.

Good morning. A couple questions this morning. First, in the table that reviews the economic occupancy, sequential changes in the press release, Washington, DC was, was left out. I just wanted to know what the number was for the DC area.

Steve, this is Tom. I think if you were to go back into schedule four, you can see the economic occupancy by sub market and it includes Washington, DC. We, we didn't highlight Washington, DC, because it wasn't one of the larger changes. But you can see it on schedule four and the economic occupancy change, year over year was, 1.7 percent decline.

Okay, okay, yeah, that's right. On the asset sales for Q4 and then your expectations at this point for early 2003, do you have a sale volume expectation?

For 2000, for 2002, the Q4 to single assets 70-80 million dollar range, Steve. And then for early 2003, we don't yet have a projected volume expectation.

Okay. And then, last question is, regarding your development yields. The yields you quote, if I'm not mistaken are based on the rental rates highlighted in the table not that of concessions, is that correct?

That is correct.

So that the stabilized yields that you're indicating with regard to this year and your expectations going forward again would not be with concession impact.

That's correct, Steve.

And, Tim, when you underwrite the development starts, is it based on that stabilized yield, or is it based on the actual concessions in the market, I mean, how, how do you, how do you factor that the decision making process?

We look at rent on an affective basis, so they would be netting concessions at the time that we actually make the, the decision to move forward. If I could just provide a little more color on concessions in general, Steve. I'd pretty much end my remarks that they have been going up through the course of the year. They currently, in Q3, they ran at about 8% of market rent, so those leases that were actually, for those units that were actually occupied in Q3, for lease up communities to date, that number's posted up 4%, 4 1/2 percent, and nas a point of reference on lease up communities, even in 2000, we saw that number more in the 2, 2 1/2 percent range in the, in the strongest of markets. I'll tell you that 3 to 4 percent is not unusual through the course of a lease up, where you're trying to essentially occupy all your apartments in a year period. Where normally on a stabilized basis, you'd be looking to occupy say, 60%, just given the, given the turnover rate.

And if I look at the, the several properties you've delivered in the second quarter, and then also the Arlington Square Two in third quarter, do you have a figure for the contribution from those properties in the third quarter, in terms of NOI?

Steve, this is Tom, not really. I guess the only thing I could add is that when you, when you have a community that is completed and it's 60 to 70 percent leased, at that point in time, we, we've got all of the costs related to that community flowing through the P&L but we don't have all the revenue. So as that community stabilizes, there's no additional baggage that comes with that incremental revenue. It all drops to the bottom line, so I don't have the numbers in front of me in terms of contribution during the third quarter, but certainly a bright spot is that some of these communities are continuing to lease when they don't have any capitalized interest associated with them.

Okay, thank you.

The next question comes from Rob Stevenson of Morgan Stanley.

Good morning, guys. Tom, once you start allocating your capital and your free cash flow towards the, the development funding, how much capital do you have right now that you could allocate towards the share buyback, until you get the 70 to 80 million dollars of disposition proceeds here?

Well let me answer it this one, Rob. We have a stock buyback program of a hundred million, and we've bought 800 thousand some-odd thousand shares, so we will aggressively continue with that. Stock buyback program until the hundred million dollars is met. We have adequate sources of liquidity to complete that stock buyback through the end of this year if we're able to purchase stock opportunistically.

Okay, so you guys aren't gonna be shut out because of lack of capital given the development obligations?

Absolutely not.

Okay, another question, interest, another income line item, this quarter was down on a sequential basis, about 2.2 million dollars. What wound up happening there?

I saw your kind of advance question. We were puzzled by that. We couldn't get back to your 2.2 million. I guess I'm confused about how you calculated that. But let me say that interest expenses increased, because we've issued debt. Interest income is down, because we have less cash and we're earning incredibly low rates on the cash we have on hand. But if you want to call me offline with the components of that decline, I'd be happy to go through it with you.

Okay. And then, question for you, Tim. You said that you were talking about turnover before. What was the turnover rate in the portfolio this quarter and what was it last quarter and the year ago period?

This quarter, Rob, it ran at 77%, last year, for the same quarter, it was actually at 75%, so it was modestly up. Those were higher than in some previous years. The year to date, we're currently 64%, and year to date last year, we would have been at 60%. So we're running at a rate of about 4% through the first three quarters. And we would expect the year to date number to come down after Q4, given they're just lower seasonal turnover.

Okay. So the 77% should be your, your, your, your high for the year?

Yeah, and it has in the last few years.

Okay.

In the third quarter.

And then just a question about the dispositions for next year. Is the sort of timing that you're starting to market these things now and you just won't close until next year, or are you sort of waiting until the beginning of the year to sort of identify the properties that you're gonna wind up selling?

No, we're actually identifying the properties today, Rob, and it's just the nature of timing that they won't actually close until next year.

Okay. Thanks, guys.

Operator, we're not hearing any question here.

Your next question is from David Harris of Lehman Brothers.

Oh, boy, I hope it was worth the wait. The question for Tim, if I may. The occupancy numbers are average for the quarter, I think. Are they?

That is correct.

Well, what was the quarter end for the portfolio, Tim?

It, right around the quarter average, David.

Okay, and that would be your best estimate as to where we're gonna end up for the year?

Well, for the year?

Mm-hmm.

You mean, at year-end, you mean.

Yeah, for the fourth quarter. [inaudible]

I think, I think in that ballpark, in terms of physical occupancy right now, to the end of, middle to the end of October, we're probably running about 20 basis points lower than, lower than where we're, were quarter, quarter ending, which is right around the 93.9 mark.

Okay, I've got two bigger-picture questions, if I may. I mean, if we think back to what you guys were saying back in June, when you were talking about, your sense that we might be seeing stabilization around this time, what went wrong with the, the antennae?

David, this is Bryce. I'll try to take that. I think there are two key things that were happening externally. One is jobs, which I've already commented on. We continued to see job losses, in fact, when the expectation at that time as I think you'll remember, was for flat job growth in the second half of the year. The second thing was rate. We had jobs declining and rates declining, both which were negative to apartment fundamentals in general and certainly to our market. But those two factors had a negative adverse effect on the fundamentals, and ultimately, our performance. We had expected flat jobs that ultimately translated into our expectation that we'd see flat revenue between the second and third quarter, if you remember our forecast. And in fact, we saw job losses, and we saw rates drop, and that translated into revenue decline.

Well, now if I go back on what I think you said earlier, are you really -- that stabilization rebound out nine to 12 months?

Well, you're referring to my comment about jobs in 2003?

Well, I think you made a reference to some kind of a recovery in the second half of next year.

Yeah, well what I stated was that we expect, certainly based upon all the economic forecasts, that we as I'm sure you do, subscribe to, that there will be positive job growth nationally, as well as in our market. It's expected to be more modest in our markets than nationally because of the characteristics of our market. But in both cases, for the nation and for our market, job growth is very heavily back-ended in 2003, meaning materially all the job growth would happen in the second half. That's the current projection. That's our current expectation.

And you'd expected to see through to your results by Q3?

No. No, we have said previously that there is a lag between the effects of job, there's a lag, obviously, between GDP growth and job growth. We're seeing that right now, right? Where we're seeing positive GDP growth, we're not yet seeing job growth.

Right.

There also is a lag between the effects of job growth and it translating into material, in fact, on our revenues. So, no, with job growth in the third quarter does not directly translate into material improvement in the third quarter in our revenues. There is a lag, we stated previously of about a couple quarters.

But we are talking about a 12 month time elapse between what you were saying in June and what you're now saying, in terms of the benefit to the bottom line of AvalonBay, in terms of your perception now of the, the macro-economic environment.

No. No, let me, if that's what you're hearing, that's a, mis-statement on my part. We expected flat job growth in the second half of the year. That is now not happening. But we are not, that flat job growth means no more job losses. It does not mean job growth. We are now saying that we are expecting job growth to happen in the second half of 2003. We previously expected that to happen in the first half of 2003. So David, if I can parse it into three segments, we're, we got job losses, which we're in right now, we've got stabilization, which is where we'll end up in a flat job growth environment, and then job growth. We are right now in the first section, we expect to be in the flat segment in the first half of 2003, and to see job growth in the second half of 2003. About six months' different from our expectation previously.

Okay, well thank you for that clarification. My second bigger-picture question was is the concept of renters by choice somewhat redundant in the changed economic environment we now live in, compared to when we were first really talking about this a couple of years ago?

When you say redundant, could you amplify on that?

Well, have you, have you changed your definition of what sort of group of people we're talking about complying with your concepts of renter by choice? I mean the idea of high-paid young people working in technology and financial services seems a rather sort of out of fashion concept.

I don't think it would be fair to, to say that we defined it, or the industry defined it necessarily that narrowly, David. renters by choice is, broadly defined as people who have the income to purchase a home, but choose not to based upon the desire to be in a rental product that meets their needs. The average age of our residents is 38 years old. It isn't necessarily a young, 20-something young professional. And what's happening today is clearly, we've got, pressure in the economy which is causing everybody to tighten their belt. And so people are being more judicious in their expenditures, and therefore, being more careful about how they choose to spend their dollars. And sometimes that results in people doubling up or moving into B properties as opposed to A properties. I don't think that fundamentally changes the fact that there are people previously, people today, people in the future, who will still choose to rent over purchasing.

I guess my question is, is your perception now of that group of people you'd still define as rent, a renter by choice somewhat smaller than, than the number we might have been thinking about a couple of years ago?

Tim, would you like to?

Yeah, David, this is Tim. In terms of the size of that market, I would say I don't think we think it's changed dramatically, but it certainly has changed on the margin, which is I think, in pricing, we're still looking at, we have a portfolio of over 40,000 apartments where the average household income of that portfolio's in excess of 80 thousand. We're almost twice the rate of the US average household income. But certainly at the margin, given what's going on in the technology [inaudible] effective, which is a big, big part of our customer segment. And then also in terms of interest rate for sale housing, I think we have gotten squeezed on two different sides here over the last several quarters.

Okay, Thank you.

Our next question comes from Rich Anderson of Salomon, Smith, Barney.

Thank you. I just wanted to clarify one thing about job growth and the lag that you've talked about in the past. If your expectation now is job, positive job growth in the second half of the year should we not then anticipate positive revenue growth, same-store revenue growth, until sometime mid-2004? Is that a fair statement?

Rich, we are not in a position to give revenue projections. But conceptually you are knitting together the pieces which we've given you, I would say, accurately. But we're not in a position to project revenue projections for 2003 at this point in time.

Okay. With regard to your comment earlier about being net sellers for 2003, that's obviously in contrast to some of the comments that you made previously, maybe six months ago, about being net buyers this year. Can you just sort of give some color on what has happened with cap rates to sort of switch gears the way you have over that, over the past six months?

Well, let me make one comment, then I'll ask Tim to talk, particularly about cap rates. In my prepared comments I actually used the term that I would like to think our approach is flexible in our operating tactics, good focus on our strategic vision, and I think this is an example of that, yes, we certainly do have annual plans and quarterly plans but we will continue to react to, in an opportunistic way, to what the market offers us. And today, we are given the reaction that we've seen to the asset that we have currently being marketed. But clearly just the general appetite for quality product in quality markets has caused us to shift our focus some. I think that's a positive thing in the sense of us responding to the opportunity. In terms of Tim, in terms of cap rates, Tim may have some specific color.

Yeah, sure. I think across our markets we're saying that over the last couple quarters we think cap rates are down at least 50 to 75 basis points, Rich, and I think there are certain markets where, that number's probably is north of, north of 100 basis points. And, in fact that is our experience [inaudible].

Okay. Tom, with regard to the fixed charge coverage ratio of 2.8 times, can you, given some of the items that you talked about in terms of investments and, and dispositions and buy back, where might that fixed charge coverage ratio go? What would be you comfort level in terms of how low it could go?

Well, it could go up or down over the next six to nine months by 20 basis points which we're comfortable operating within that range. Our very strong commitment, and I'd underline it and italicize it if I were writing it, is that we're gonna manage the company according to the business risks that we face, and one of the ways we gauge that is looking at these metrics. So we're very committed to maintaining these metrics and maintaining our current rating levels, and the active disposition program that we have and we plan to accelerate, will address those, those metrics and keep those metrics in a range that we're comfortable with.

Okay. Turning to the, the development pipeline, you guys adjust pro forma rents when you see evidence that adjustment needs to be made through your lease up activity. And I'm looking at four or five projects in Stanford, San Jose, San Francisco, and even in Boston. Would you say the likelihood is that there will be some adjustment to pro forma rents that may have implications to the average cap rate on a go forward basis?

Uh.

In those particularly weak markets, I should point out.

Yeah, in terms of what we actually disclose on the, on the press release schedules which is, hopefully it's a, it's a combination of what's been leased to date as well as market rents in our remaining unleased apartments. And if there's a change in the margin, a lot of times it doesn't get updated. To the extent that by margin I mean $10 or so. But there, there really hasn't been a material change. It's really been felt more, mostly through concessions, which is our, you know I mentioned in my prior remarks, we have seen an increase over the course of a year from about 4 percent to about 8 percent in the end of the third quarter. So that's really where the pricing pressure's been felt and well, that's really where it's occurred. It's really been on a concession item, line item.

Last question is on CapEx. I'm disappointed not to have the disclosure this quarter. But I would like, if you could, talk about an element that you reported on last quarter of, revenue enhancing CapEx that was a number of 5.3 million dollars, which you called other stabilized communities' redevelopment costs. Could you talk about the types of items that are, involved in that 5.3 million dollars and why you think it's revenue enhancing?

Rich, I think we did that on that schedule and that's, that, by the way that number is an annualized number that you're quoting, because it came out of the sheet for the last quarter's press release. so I think I would just refer you back to the footnotes where we detailed, in the second quarter, the components of that category.

Yeah, okay. Maybe we can talk offline because I don't see specific cost items related to that specific number. But, maybe we could talk offline on that.

Okay, that'd be fine. But it is an annualized number, so if you think about it on a quarterly basis, it's a very nominal amount.

Okay. Thank you very much.

Um-hmm.

The next question comes from Craig Leupold of Green Street Advisers.

Good morning. Tim, could you repeat the number where in terms of rents of development properties versus pro forma? I missed what percentage of goal you were at.

Ninety-five percent.

Ninety-five. Okay.

That's cumulative to date.

Okay. And then, Tom, on the share repurchases of the 858,000 shares you've repurchased through some date in October, how much that actually occurred in the, in the third quarter?

Craig, I don't have the exact number. I'd say, what we will do when the stock repurchase is, at the conclusion of the program, we will give you all of the details about when it occurred and at what the average price was. But we're trying to keep that program, such that we can opportunistically purchase shares at various prices. and if we were to give a lot of disclosure about what our actions are, it could hurt our ability to execute on the program at the lowest possible price.

With, with that said, would it be fair to assume that the majority of it, though, occurred after the quarter?

I think it's fair to say that we've been getting some really good buys on our stock lately.

Okay. Tim, on, on the cap rate issue, can you give us your range of, of cap rates? I mean, you noted that they've dropped 50, 75 basis points and maybe 100 basis points in some markets. But could you provide a little more color in terms of expectations from say, the fourth quarter sale, and what you what maybe would be appropriate to model as you look into 2003, assuming cap rates stay where they are?

That's assuming they stay where they are. Sure. In the hottest markets, and again, it depends on how you're defining cap rates. If you're strictly looking at the next 12 months of projected NOI, then the hottest markets, you're seeing cap rates approach 6 percent, the low sixes. That's probably the most extreme, and probably at the high end across our markets today, you're, you're probably in the mid-sevens, mid to high sevens.

Okay. What would you put, what, what would be some of the markets you'd put in the hottest markets?

Southern California, I think Boston would, would fall in that category. DC's probably somewhere in the middle, for those numbers that I talked about.

Okay. Have you seen, have you seen any change, kind of more recently, obviously there's been public disclosure coming from the public reach that, that things are, are worse than people thought even two or three months ago. Are you starting to see buyers' expectations change at all their underwriting change such that you might expect cap rates to increase? Anything in that line?

I think it's less an issue of that, Craig, than just demand and supply right now. I think, when I look at cap rates that it's just more product, it's the market. And I think it's, I think it's a reasonable expectation that more products might come to market in the next couple of quarters.

Okay. Then my last question is sort of more a big picture question, probably more appropriate for Bryce. And that is, you talk about adhering to your long-term strategy, which obviously relies heavily on development activity, but, given the market we're in today, it's, it's, I guess it's sort of surprising to see your development activity, your current development activity, at, $790 million, which is sort of the historical high for you guys. Do you, do you expect to, to bring that number down, or will we continue to see development rights flow into, current projects under development?

Craig, I, you will definitely continue to see development rights flowing into development. But I think you will find that the communities that we choose to begin development on are, are those, as we said, that are justified by the current economics of the community and the market fundamentals as we project them. And if you look at even our most recent starts where we've started communities, a couple have been in the Boston area, which while weaker than, 12 months ago is still a market that is pretty solid. And Long Island which is a market that has been extremely strong for us. And you saw us take actions earlier in the year in terms of us actually stopping development in a market such as Seattle and postponing development in markets such as San Francisco. But where historically our development had been much more even, it has recently been, and I think you would expect it to be, more spotty, not in the sense of the magnitude, but in terms of the markets that we choose to begin construction in, for the reasons I mentioned.

Okay. And, and just related to that, under attachment 11 where you have, the remaining to invest, you got, $290 million, I'm sorry, at the end of this quarter, you've got 400 and some-odd million. How much of that is related to projects on the development rights schedule that would start in the next 90 days?

Tim?

Yeah. Craig, I, I can't give you the exact amount. I can tell you that there's, there's three communities that are in there that are projected to, projected to start. But I can't say how much of those actually, how much of those dollars actually are being funded through about 2003.

Okay. Thank you.

The next question comes from [Andrew Rosavitch] of Piper Jaffrey.

Good morning. A couple of questions for Tim. After you looked at your results recently, with your mix of rents, occupancies, and concessions, your higher turnover, your higher bad debt expense, is there anything you can do on the operating side to better maximize cash flows, or are your results simply a product of market conditions?

Andrew, I can tell you we're, we're always trying to do something. And in certain markets, we'll experiment with concessions versus lower market rents and in other markets, frankly we'll focus on, trying to generate more traffic, and in other markets we'll be even more focused on, on turnover and trying to, negotiate harder on the, on the renewals, or being more flexible on renewals. But I can't tell you it's one fit to any one particular market or any one asset. I can't tell you that. We try all of those things across many of our markets.

A second question. Do you track where your tenants go when they move out? for example, are you losing any tenants that can now move into more centrally located areas because they're cheaper? Are you losing folks in New Rochelle who can now go into Manhattan?

We don't track it analytically, just anecdotally. We certainly are aware of that. I mean, generally we have seen, in certain markets like Northern California, we do believe that there has been a little bit of, movement in. As rents have to come down from their peak, 20 to 25 percent across many of the sub markets. But we don't track that analytically.

Okay. Tom, one quick question. How big a nut, on a quarterly basis, is lease termination fees?

On a quarterly basis, well, it's about a million quarterly. It has been as high as a million six. It fell to about a million, excuse me, about a million one in the third quarter which is the lowest level since March of 2001. So it has been consistently in the million 4 to million 6 range from March of 2001 through June of 2002. A total of 1.1 million in the third quarter, and that's both good and bad. It's bad in that we had frankly anticipated that revenue, because it had been in our stream for so long. so that's the bad part. The good part is that one could view it as a leading indicator of better times to come. I won't tell you how I interpret it, other than it certainly hurt in the third quarter when that revenue wasn't there.

Right. And last up, I think the guidance that you gave in your preannouncement, does that have any additional unsecured's baked into it?

It had, from what points? From the second quarter?

No. What you, what you put out October 7 for your 365 to 370, you mentioned in your comments that you're thinking of putting out some more, midterm to long-term unsecured debt, and I'm wondering if those numbers contemplate any additional debt issuance?

Those numbers contemplated some additional debt issuance over the second quarter reforecast that we provided. We will likely do more than even the third quarter reforecast that we used in that guidance provided.

Okay. Thanks, guys.

Our next question comes from Charles Berman of McFarland Partners.

Hey. Good morning. Near and dear to my heart, and maybe others, is the safety of the stock and also the safety of the dividends, especially given how many of your competitors are at risk that they're, not necessarily trading at discounts to mid-asset value, or may even have to cut the dividends. cap rates, as you said, Tim, are falling all over the place. Are you guys willing to comment at all on if cap rates were at 7, where you think your NAB is?

Well, Chuck, hi. This is Tom, though.

Hi, Tom.

Hi. Chuck, there's a couple questions there. One about the dividend, and I did quote the coverage that we have. And I would, I, I am certain that our coverage ratios are, are some of the best in the, multifamily sector. The low cap rate environment, does have an impact on dividend levels and as we accelerate sales, that will put pressure on us to maintain dividend levels, because we are committed to paying out a hundred percent of taxable income. So that's one point I would make. In terms of NAB, we think that if you were to look at the asset values that are on the market today, one would think that the asset values would have declined, given the declining, operating environment. But they've remained at very high levels. what we like to do with investors is to provide them with information they need to calculate NAB on their own, in their own way. But I think you can look at our active stock buyback program for an indication that management and the board believes that the stock's trading at a pretty steep discount to asset values.

Okay, second question goes back to the dividend issue. As you mentioned, last year you guys, when you are looking forward to earnings expected things to get better, they didn't get better. Now Bryce is talking about an environment where we're still seeing some job loss. You're hoping it to stabilize and by the end of next year actually improve. Tim, I think, mentioned that occupancy over the last quarter seems to have stabilized. My question to you, and again, you may not be willing to answer it is, if occupancy remains exactly where it is right now and we don't see any more job losses, simply with looking at what I guess would be your gain-to-lease, as opposed to a loss to lease on turnovers, would you expect to see quarterly FFO about the same or would it continue to decline or increase?

Uh.

Because if you're looking at 87 cents and paying out 70 cents, I'm just wondering where you might end up seeing things go if things don't get worse. Would you simply roll over the existing tenants?

Yeah, Chuck, this is Tom again. I'm the keeper of the forecast to some extent, so what I would say is that, where we are today in the portfolio and the aggregate is pretty much flat, no gain or loss to lease. There have been some individual leases though that have turned that, that were, that have a gain to lease component in it and that's brought our gross potential down and has continued to show a decline in gross potential. Even if revenues were flat, expenses due march on and we do expect to see an increase in expenses, insurance alone, that market continues to be a very challenging market. So I think even if you had flat revenue and we saw a sequentially flat revenue picture for the next four quarters, that you would see some decline in FFO from the same store portfolio. Now, I would then add on top of that, you've got the development communities that are contributing even in the difficult environment. And some of these communities are completed and we're not capitalizing interest and we don't have any additional cost, but they are producing, they will continue to produce higher revenue as they lease off. So I think this things will tend to offset if the scenario that you painted were to occur.

So am I correct in assuming then that if this scenario I painted occurred, you expect a continuation of, as I might view it, as a dividend coverage of 87 cents a quarter over a 70 cent a dividend?

Chuck, this is Bryce. We have given FFO guidance for full year 2002, and therefore implicitly fourth-quarter. And in his call we're just not prepared to hypothesize beyond that into 2003.

Okay, thanks guys.

Our next question comes from [ Lee Schalop] of Bank of America.

Most of our questions have been answered, but just two follow-ups. One is, given the current environment and the continued march on of single family home sales, have you thought about any kind of lease to own program like EQR has where you would make a deal with a homebuilder and people would contribute part of their rent towards that as a way for you to take advantage of this environment?

Lee, we are exploring that. We do not have one in place, but we are exploring that.

and then Dan Oppenheim has a question.

Just wondering how you're thinking about the Seattle market right now with Avalon Madison after stopping construction there last fall, if you think that at some point in 2003 you might want to look at that I can to have it ready for opening in 2004 and overall Boston Seattle market.

This is Tim. In terms of Madison, if we might be able to look at it again in 2003, but sitting here in terms of how we view that market today, it is probably unlikely that we'd start it the next year, restart it.

Does that mean then that you think sale will be difficult probably through 2004?

I think it means that we want to see some visual signs that Seattle's starting to recover before we would come back in the marketplace. And those aren't there today, and we don't expect them to be over the next three or four quarters.

Okay, so the cost on that right now, you're just continuing to expense that?

That's correct.

At this time there are no further questions. Mr. Blair, do you have any closing remarks?

I do Operator, thank you. Just a couple quick concluding comments. clearly the weak economy is impacting all of [inaudible] not just Avalon Bay. And you know that and you see that and, and that's a factual statement. Yet, what we tried to do is, is discuss and highlight what things are particularly hard-hitting in terms of AvalonBay's performance. And that clearly is the markets. And I tried to discuss that, that our markets have been harder hit on the job side because of our dependence on certain, certain sectors. And I suspect that that is not a surprise to any of you. Similarly, I talked about the premium product, for which AvalonBay is known for and which has served us very well for very many years, is currently being squeezed, as I mentioned and as Tim mentioned, both by people trading down as well as by people not trading down from single-family given the low rates and the strong single-family market.

These factors, the geographic markets that we've chosen to play in and the market segments that we've chosen to focus on are currently detracting from our performance. I think that's, that's an accurate summary. Yet, these two issues, the geographic markets and the market segments are very important components of our long-term strategy. As I mentioned in my comments, they are not something that we are straying from. we firmly believe that they will position as for, well for our performance as the economy strengthens. And again, we think that our track record and, including much of the analysis you and others have put out, supports that. So we thank you for your time today, your questions, and we look forward to seeing many of you at [inaudible] early next month.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.