艾芙隆海灣社區公司 (AVB) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities' fourth 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 then 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. Walsh, you may begin your conference.

Thank you, Vanessa. Good morning, welcome to the AvalonBay Communities' fourth quarter 2002 earnings conference call. On the call today are Bryce Blair, Chief Executive Officer and President; Tim Naughton, Chief Operating Officer; and Tom Sergeant, Chief Financial Officer. We'll begin in just a minute.

But first, if you did not receive the press release in last night's fax or e-mail distribution, or if you had difficulty accessing it on the web, 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 10-K filed with the SEC. And now I'd like to turn the call over to Bryce Blair for his opening remarks. Bryce?

Thank you, Alaine. And good morning and welcome to our fourth quarter conference call. On our call today we'll begin with the review of 2002 with a focus on the fourth quarter. I'll be briefly summarizing our quarterly results, and then Tim will review the fourth quarter operating performance and our investment activity. Tom will then discuss some of the financial highlights, both for the quarter and for the full year 2002.

We're then going to shift to 2003, and I'll comment on some of the major factors impacting our outlook and guidance for this year. Let me begin with a brief summary of our fourth quarter results. Yesterday we reported EPS for the fourth quarter of 91 cents and FFO per share of 85 cents. On a year-over-year basis, we experienced a decline in same store sales NOI of 11.9%, which translated into a year-over-year decline in FFO of 17 1/2%.

If you compare sequential quarters, our same store sales revenue declined 1.4% between the third and fourth quarters of last year. These results reflect the continued weakness in the economy, and in particular how it is disproportionately impacting both our markets and our property class. With that I'd like to pass it to Tim, who will provide further details on the operating and investment activity for the quarter. Tim?

Thanks, Bryce. I'll review, as Bryce mentioned, operating results and investment activity for the quarter, but also for the year as a whole.

Overall, our markets remain soft and this was certainly demonstrated in our Q4 results. With the recently released revisions to employment data, it now appears we experienced modest job losses nationally Q4 on a sequential basis, after seeing modest gains in Q3. Reporting the notion that recovering employment continues to be delayed. In the aggregate, our market continued to experience job losses at a rate higher than that of the U.S.

For the quarter, same store NOI decreased by almost 12% compared to Q4 of 2001. Results of same store revenue declines of 6.3% and expense growth of 9.8%. For the year, same store NOI was down by 9.9%. Same store revenue was driven by declines in average rental rates of 6.8% for the same period last year, while economic occupancy was up by half a percent, resulting in the decline in same store revenues of 6.3%.

For the year, same store revenue was off by 6.1%. Perhaps more importantly in looking at trends, it's what's happening on a sequential basis. Sequentially this quarter from Q3, revenues continue to drift down, driven primarily by increased concessions and declining growth potential. Sequentially from Q3, same store revenues are down by 1.4% as compared to a rate of decline of 2% reported last quarter. About 1/3 of this decline was related to increased concessions, and most of the other 2/3 was attributable to lower growth potential.

Sequential changes average run rates were most pronounced in the Northeast, Northern California and Seattle. Northern New Jersey and Stanford, Connecticut, continue to feel the sting of supply/demand imbalances, while the rest such the Northeast is still absorbing the impact of job losses in the financial services sector. Average run rates continued their sequential decline in Northern California and Seattle, although at a lesser rate than experienced in previous quarters. Economic occupancies remained relatively flat over the last three quarters, declining slightly by ten basis points sequentially from Q3.

Sequentially from Q3, Southern and Northern California gained ground for the quarter and are now both above 95%, while the Mid-Atlantic and Midwest eroded by a couple hundred basis points for the quarter leading the remainder of our regions outside of California in the 92% range.

For the full year, economic occupancy averaged 93 1/2%, or 200 basis points below the average for 2001. As I mentioned earlier, same store expenses increased by 9.8% for the quarter over the same period last year. This increase was expected and was due primarily to an unusual base year comparison, and therefore is not reflective of a materially higher run rate in operating expenses. As you might recall last year in Q4, we posted a year-over-year decline in same store expense of 4.2%.

In addition, sequentially from last quarter, same store expenses declined by about 6%, which is in line with normal seasonal patterns. As a result, the increase in Q4 this year reflected a more normal absolute level of expenses than we would expect in the fourth quarter of the year. For the full year, same store expenses increased by 4 1/2%, and were up by about 2% when you exclude insurance.

This is fairly consistent with our expectations for next year, as we stated in our prior guidance, where we said that we would expect same store expenses to increase in the 3 to 5% range. Overall then in looking back at 2002, it was a year where the fundamentals never really improved, but probably didn't erode as much as they appear to have, based upon results. Occupancies were relatively flat throughout the year, as we have operated in a 93 to 94% range since January.

This was after occupancies had declined by more than 500 basis points from their peak in September of 2000 to the beginning of 2002. Consistently high levels of availability in 2002 certainly put pressure on pricing throughout the year, manifesting itself in a greater level of concessions. 62% for the year was 3 to 4% higher than we typically have experienced, but by year end, it's fallen back to more normal levels.

By year end, gross potential revenue, which fell by almost one half of a percent per month on a sequential basis for much of 2002, was declining by only 10 basis points by December. So while the fundamentals continue to erode somewhat through the year, it's clear that by the end of the year the rate of decline had lessened considerably from where we ended 2002.

I want to shift now to investment activity for the quarter, and I'll start with development. During the quarter, we completed four development communities and started two new developments and one redevelopment of an existing community. The four completions represented 210 million in total investments and were completed for 7 million less than the original collective budget. For the full year we completed ten communities totaling 467 million, with a projected stabilized yield of 9.3%. The two new starts in Q4, including Darian, Connecticut, and North Potomac, Maryland, while the new redevelopment is in the Washington, D.C., market. Overall, our development portfolio declined by 140 million since last quarter to 645 million.

This portfolio will continue to decline in size over the next couple of quarters, as we complete additional communities and a number of new starts [INAUDIBLE]. The projected stabilized yields on our current development portfolio now stands at 9.1%. As we have discussed in the past, these yields are gross of concessions. Which in the past have been a normal part of the initial lease-up process, as we attempt to stimulate absorption over what would normally be required during stabilized operations.

Historically, these concessions have run in the range of 2 to 3% of market rent. In 2002, we have seen an increase in the level of concessions required during lease-up, given the softer market conditions we have experienced. For the current development portfolio, the average concession has been 6 1/2% of market rent since the inception of lease-up. If you factored in the incremental level of concessions experienced for our current portfolio over what we have typically experienced in the past, and you assume that these concessions continue beyond the initial stabilization of the community, the impact would be about 60 basis points of the average projected yield for the portfolio.

On the transaction front, we sold one asset in Boston known as Longwood Towers. This asset was sold for 8 million, which represented an economic profit of 43 million, and a GAAP gain of almost 49 million. This represents the largest profit to date for any asset that we have sold. We originally bought this asset in the late 1993 for about 17 million, and invested another 20 million since then, principly through a major redevelopment in 1997 and 1998. The unleveraged IRR was over 22% over our whole period. This transaction is interesting for a few reasons.

First, it validates the strength of our markets over the full course of the real estate cycle. Second, it clearly demonstrates our ability to create significant value through the development and redevelopment process. And finally, this transaction closed at the lowest cap rate of any asset we have sold over the last nine years. And confirms the notion that while NOIs have declined over the last several quarters, asset values have remained firm or have increased, as declining cap rates have offset declining cash flows.

As Bryce will discuss more fully in his remarks regarding our outlook for 2003, we expect to continue to be a net seller of assets as we move into 2003. In fact, we currently have 135 million in dispositions under contract that are in the due diligence stage, and are expected to close in Q1. Overall on the investment front, we took a number of steps this quarter that significantly enhanced our liquidity and balance sheet position. We completed over 200 million in new development. We closed on 80 million in dispositions. And finally, we placed under contract 135 million in additional dispositions.

Given economic conditions and the protracted apartment market downturn, we anticipate that we will continue to take on a more conservative posture in the first part of 2003 and approach new capital commitments cautiously until there is greater visibility towards improving fundamentals. I'd now like to turn it over to Tom, who will discuss the financial highlights.

Thanks, Tim, and good morning. I'd like to cover three topics that -- this morning, and I will list those for folks that are taking notes. First, I'd like to point out some specific items that are included in our results. Secondly, I'd like to focus on key balance sheet metrics and I will conclude with the financial outlook we provided in December. First, a few items that wed like to point out that are in the numbers.

As Tim mentioned, the $49 million gain on the sale of Longwood Towers is included in our reported results in earnings per share, but was appropriately excluded from FFO. We also reported an impairment charge of $6.8 million for land held we planned to sell. This charge impacted EPS, but not FFO. And I would like to mention that we have about $40 million in land that's on the balance sheet right now other than these two parcels, and we currently have no plans to sell any of that land.

Companies prorata share of technology company operating losses, totaling 1.3 million, was recognized during the quarter. This impacted both FFO and EPS, and brings our carrying value in this company to zero. This item is reflected in the line item called "Joint Venture Income and Minority Interest" on your press release, and explains the change in that category between year end during the quarter.

Finally, we had a true up in health and benefit cost of 670,000 and an increase in our allowance for [INAUDIBLE] suit costs of $400,000; and a total in this line item of $900,000 for the quarter that is included in the category called "Other Operating Costs". This category primarily relates to offsite overhead and these components explain the growth in that category between quarters and year-over-year. Second discussion point is key balance sheet metrics. Our financial position remains strong, but it has been impacted by declining operating fundamentals in the industry and for our company.

One of the stronger aspects of our balance sheet is our low reliance on floating rate debt, which is less than 2% of our capital structure. Another is our high percentage of unencumbered assets, whereby about 80% of our NOI is from assets that don't have specific debt on them. Our debt maturity average is eight years and are evenly spaced, with approximately 155 million coming due each year over the next four years. Our debt is about 46% of our total capitalization.

Finally, our payout ratio, FFO payout ratio for the fourth quarter, was about 82%. After considering Cap Ex, our AFFO payout ratio is one of the lowest in the sector. One area where our financial position has weakened is in the area of fixed charge coverage, which has declined 2.7 times in the fourth quarter from an historically high level of 3.3 times in 2001. Such declines are industry wide, and are driven by revenue declines in most of the markets that we serve.

We are committed to maintain and enhance our financial flexibility in 2003, and reduce development volumes combined with asset sales, are two steps we have taken to maximize our financial flexibility. In 2002, we issued 450 million in unsecured debt, with an average maturity of eight years, an average rate of 5.6%. These issuances, combined with anticipated asset sales in the first half of '03, provide adequate liquidity for us to be selective in the timing and level of capital markets activity during 2003.

Further, we currently have adequate committed liquidity to complete the construction under way, as well as planned starts for 2003, without requiring to us return to capital markets. In our financial condition, our flexibility remains strong and we are positioned to manage through the current difficult market environment. The third and final discussion point is the 2003 financial outlook that we provided in December.

Our December revenue results were roughly as we had forecasted, and January revenue trends are largely in conformance with our expectations. Our current outlook remains unchanged, based on current revenue trends. Bryce will address some of the employment data that has recently emerged and provide some color on how this impacts our view of the industry trends in 2003. We are seeing success with our disposition program, and in fact we expect that the dispositions Tim mentioned will be accelerated and will occur during the first quarter. We had anticipated that these actually occurred second quarter.

This will impact our first quarter results by about 2 cents per share. We expect that we would likely be at the low end of the range for the first quarter that we provided in December, due to these accelerated dispositions. The outlook for our expense growth is driven by such noncontrolable categories as property taxes and insurance.

We expect property taxes to rise 5% in 2003, anticipating that state and local governments will look to real estate taxes to address growing deficits. We will aggressively monitor each and every assessment to mitigate the overall increase, but we do expect taxes to rise more this year than they have in the past. During the last call, we promised we would update you on your pending insurance renewal. Property and casualty insurance costs continue to disproportionately impact our expense growth in our insurance renewal, and completed in November a yield of about a 30% increase in expense for the upcoming year. And this is lower than the increase in 2002, but still a big jump.

We continue to focus on some of the more controllable aspects of the business, aggressively managing costs and intense focus on overhead continues to yield benefits and you'll note our corporate G&A declined 6% between years. Also capitalized overhead declined about 6% from last year. Our outlook includes planned redemptions of debt and equity that net about 100 million. The allocation of capital between these securities depends on market conditions and the liquidity needs of the company. With an expanded disposition program, and reduced development volume, excess liquidity and retained cash will help to fund these redemptions in a balance sheet neutral to positive manner.

In summary, we focused on a number of important financial areas this quarter. We issued long-term debt, and that combined with the large asset sale helped ensure and enable financial and operational flexibility in 2003. We repurchased additional shares of common stock. We completed key insurance renewals.

Finally, we completed our 2003 financial plan and published very detailed financial outlook that I hope you found helpful in preparing your models for 2003. During this year, we expect to take additional steps to enhance our financial flexibility through asset sales and security redemptions, and focus on a number of efficiency initiatives to prepare the company and our associates through the next expansionary cycle in our business. With that, I'd like to turn the presentation back to Bryce.

Well thank you, Tom. I'd like now to shift to a discussion of some of the key aspects of our outlook for 2003. In late December we issued a financial outlook for the year, and in my comments I'll be highlighting and elaborating on some of the key points in that release. I'll be touching on three areas: First, the economy, what are the economic assumptions we relied upon for key budget assumptions.

A second area will be with regard to our portfolio. Commenting on the expected performance of the portfolio, given the current economic environment and future assumptions. Then third, commenting on the area of investment activity, discussing the level and reasoning behind our acquisition disposition and development plan through 2003.

To begin in the area of economy: The single most important assumption in developing our budget for 2003 is our expectation regarding the performance of the economy. On a year-over-year basis, Avalon based markets lost about 350,000 jobs during 2002, which on a percentage basis is a rate higher than the U.S. as a whole. This higher rate of loss is due primarily, due to our market's heavy reliance on the currently weak financial services and technology sectors.

The current economic forecasts for Avalon-based markets in 2003 is for job growth of half of 1%, which translates into about 150,000 net new jobs. This is modest, yet positive, growth. This rate of growth is below that of the nation as a whole as our markets are expected to recover more slowly, again primarily due to our heavy reliance on the financial services and technology sectors which are continuing to struggle.

Over the past 12 to 18 months, consensus forecasts for job growth have proven to be overly optimistic and have continually been revised downward with each successive forecast. While the current job forecast is half of 1%, we assumed in our budget preparation no material job growth. We did that, given that we expected job projections for '03 to be revised downward, following the trend of 2002 and unfortunately as Tom alluded, given the disappointing job data for December, which is released in early January just about a week and a half ago, future job projections will likely be adjusted lower again.

In any event, to the extent there is positive job growth in '03 it will likely come late in the year, and thus will have a negligible impact on 2003 results. As is typical in the early stages of an early economic recovery, this has been a jobless recovery so far. Positive GDP growth has not resulted in material job growth, and it's jobs that is the primary driver for apartments. We expect the demands for fundamentals in '03 will be a modest improvement over '02, given the more stable employment outlook I discussed.

And yet, we don't expect material job growth without significantly increasing demand until 2004. Given the set of economic assumptions, let me shift to the second [INAUDIBLE] about projected same store sales performance. With no material job growth and the continued addition of new apartment supply, the demand/supply balance for this year will remain unfavorable, which will result in projected declines in revenue of between 2 and 5%.

Important to point out, that even if revenue stays flat throughout all of 2003 at levels equal to our fourth quarter '02 results, we would still experience year-over-year revenue declines of 2 to 3%. Just because our revenues are declining throughout all of 2002 and we need to keep that in mind as we are looking at how the maps work in these comparisons, our estimate of revenue declines is based on both our projection demand/supply for '03 and the comparisons to a declining '02.

So we expect revenue declines of between 2 and 5%, and when combined with expense growth of between 3 and 5%, that will result in NOI declines for the year of between 4 and 9%. As we look around our markets, the regions with the largest percentage NOI declines on a year-over-year basis we expect will be the Midwest, Seattle and Northern California, and the only region we are expecting positive year-over-year increases is in Southern California.

Let me now turn to a brief discussion of our investment plans for 2003. First, covering our development activity and then concluding by summarizing our planned acquisitions and dispositions. During 2002, we slowed the pace of our development starts to reflect the weakening market conditions. In 2003, we will slow the pace of our development starts even further. The dollar volume of our investments and new starts is about $400 million in 2002, and we expect it to be about half of that, or about $200 million in '03. The majority of the '03 starts are not planned to begin until the second half of the year, allowing us to better staff both the current and expected demand/supply fundamentals prior to starting many of these communities.

Now despite the weak demand/supply fundamentals, the appetite for quality apartment products remains extremely strong. Investor interest, fueled by low interest rates and declining alternative returns, have pushed cap rates into the 6's and in some cases into the 5's for some of the most desirable products. We clearly saw this in the level of interest and the opening sales price we achieved at Longwood Towers, as Tim has highlighted.

Given the attractive sales environment, we plan to be an aggressive net seller in '03, planning no new acquisitions and $300 million of sales, and expect 2/3 of the sales to occur in the first half of the year, and as Tom mentioned, we have a significant amount of assets under contract we expect to close in the first quarter of the year. Now while the sales will be dilutive in the short term given the low interest rate environment we are operating in, we believe it's an opportune time to divest of assets or markets that do not meet our long-term investment objectives. It also allows us to realize some of the embedded value from our portfolio.

So in summary, our focus during the year with regard to our portfolio will be to maximize performance of our existing assets, but really a keen focus on maintaining occupancy and controlling expenses. Our focus with regard to investment activity would be to be cautious in terms of new development starts, yet aggressive with regard to this position.

Finally, with regard to our balance sheet, maintain the quality of the balance sheets so we are prepared for opportunities. We believe we are approaching the year in a balanced [INAUDIBLE], and we believe we have a realistic assessment of the difficult operating environment which is likely to persist throughout much of the year. And yet, we will be watchful, continue to be watchful, for opportunities, which our experience has shown are available during all phases of the economic cycle. With that, operator, we would be glad to answer any questions any of you may have.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star and one on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, press star then the number two. If you're using a speaker phone, please lift the hand set before asking your question. Again, if you have a question at this time, press star one on your touch tone telephone. One moment, please, for the first question. Your first question comes from Rob Stevenson with Morgan Stanley.

Hi, good morning, guys. Bryce, where are the assets that are under contract for sale right now, is that spread across the portfolio, certain markets?

Rob, we do not specify the asset or the market while it is in due diligence. That's been a consistent practice we have had, and so we are not able to disclose that.

Okay. In terms of the NOI decline for 2003, are you continuing to expect sequential declines? You said year-over-year it's still going to be negative because of the ramping down throughout '02, but sequentially do you still expect declines?

Rob, this is Tom. We do expect sequential declines during the year. We expect a sequential decline in the first quarter from the fourth quarter of about 3%. It will moderate from there and then turn positive towards the end of the year.

Okay, and then Tim, can you talk about the D.C. market in particular, you guys had negative sequential numbers out of that market. Is this a deterioration in the entire market, is this a deterioration of certain submarkets, what's going on in that market specifically?

If I said revenue, I meant NOI when I quoted 3%. If I said revenue, I apologize. Can you repeat your question for Bryce.

Bryce or Tim, Can you go through what's going on now in D.C. market conditions. You guys had negative economic occupancy during the quarter and submarket specific phenomenon, and the market starting to get weak here.

Yeah, Rob. This is Tim. I'll take that. In the second half of the year, we have seen job growth stall in the D.C. market. Whatever increase in federal spending that has occurred has not yet worked its way through the job markets, unemployment markets.

At the same time, we have seen supply continue to increase, and we are actually at a point now where we are starting to see supply we believe peak. So the impact that's had mostly in terms of slippage in economic occupancies, and most of the sequential decline was on the occupancy side. Rental rates were essentially flat. In terms of [INAUDIBLE] markets, certainly the [INAUDIBLE], given both supply and demand issues there. That's where a lot of the telecom fallouts occurred.

In North Arlington, where we have seen a lot of new supply of high rise communities. We have seen some softness there as well. We do expect D.C. probably to have the best job picture of any market, along with Southern California, as we do expect that the additional spending will result in some job growth there. We're seeing numbers vary from anywhere from about 257,000 to as high as 45,000, 50,000. May not be enough to absorb all the new supply, but should be able to absorb a good part of it.

Okay, and then lastly, the Chicago market, I mean, it looked to be one of if not your worst this quarter, what's going on there these days, all still just the supply issue?

In Chicago, not really. Most of the supply issues in Chicago have been downtown where we don't have a presence. But actually, if you get out in the suburbs, there's only, you know, one or two submarkets where there's been a real supply issue. It's really a story of demand, Rob. It's probably -- among all of our markets, it's where the longest downturn has occurred. It's really been protracted in the Chicago market. It's really a story of low supply, but lower demand. Particularly in the suburbs.

Okay. And then Tom, one last question. Did you give the average price for the repurchases in the fourth quarter?

No, I'm sorry, I didn't.

You have that number?

It's in the $38 range.

Okay. Thanks, guys.

Thank you.

Your next question comes from David Ronco with RBC Capital Markets.

Hi guys. Kind of a follow-up, I guess, to a question the last few minutes ago. Although you can't talk about where the assets that are under contract for sale are, can you talk maybe about what markets you might be targeting, looking at dispositions in '03, and maybe as a follow up to that, what kind of cap rates those particular markets, what you're looking at in terms of cap rate there.

David, this is Bryce. I'll take the first part of the question and Tim will address expectations with regard to cap rate. In terms of our disposition, process of deciding on assets, we look at either markets that we no longer choose to be in, and over the past few years have pretty dramatically reduced the number of markets from almost 30 markets a few years ago to approximately 17 today.

As a key part of our strategy has been to more deeply penetrate the markets, our core markets, and increase our concentration in those core markets. We believe through that increased concentration, we will drive enhanced performance. So we have, over the past years, exited markets where we had a [INAUDIBLE] amount of assets, particularly some of the Midwestern markets, where we had a few assets.

A second part of our disposition strategy is to look at assets. And even though they may be in a core market, like Boston or Washington or Northern California, they may be assets that no longer meet our long-term investment objectives because of either their age, their product positioning, or their specific submarkets. So it can fall into one of those categories.

Our disposition throughout 2003 will fall into both. Tim, in terms of cap rates, you might want to discuss that portion of the question?

Sure. David, we are seeing cap rates across our markets generally at 7% or less. And probably a relevant range to use is in the 5 1/2 to 7% range, I'd say Boston would be at the low end of that range. And for planning purposes, we are looking at something around 7%.

Excellent. A follow-up. Could you talk about the Silicon Valley market in particular, maybe talk about cap rates here in our backyard, and then also talk a little bit about your recently completed development, Avalon at Kayhill Park there. Where -- I see an average here in your supplemental of 1790. Where is that versus, you know, what you initially anticipated when you started that development?

Well, I'll start. David, it's Tim again, I'll start with the second part. In terms of the average rent of around 1800, generally assets in San Jose, market rents from the peak, which is frankly when we underwrote this deal, are down probably on the order of 28 to 29%. We did underwrite some initial discounts of that, obviously not nearly enough.

In terms -- Kayhill Park would be consistent with those kind of declines from what initial expectations were. In terms of cap rate in Silicon Valley, there just hasn't been much traded to really make an informed judgment as to where those are. I would suspect it would be on the low end of the range I quoted to you earlier just based upon what's happening in the [INAUDIBLE].

Great, thanks a lot, guys.

Your next question comes from Andrew Rosenbach, with Piper Jaffray.

Good morning. I'd like to ask you guys a couple of big picture questions about your buyback program. Assuming that your experience at Longwood is duplicatible, sounds like it is, where you can do a profitable high cost per door deal, [INAUDIBLE], why not prove it with a larger disposition and buyback program? Right now you have only got with the remaining capacity on your buybacks the ability to buy a little bit more than 1% of your shares?

Andrew, this is Tom -- the -- let me make a couple of comments. First, we will continue to repurchase our common stock and it will depend on market conditions. We were pleased with the results of the Longwood sale and we are pleased with the pricing on the basket of assets we expect to close in the first quarter. We have an existing $100 million program, we would like to get through that program first before we would talk about what we would do after that. That would depend on liquidity needs of the company.

That provides for $100 million of net security redemptions in 2003, which may be comprised of the combination of the debt procured in common stock securities. We will fund these redemptions primarily with asset sales, to achieve a neutral effect on the balance sheet.

To the extent that we, during the year, expand our disposition program, it's not likely that we would take those net proceeds and expand our development program. So that could free up additional securities, additional liquidity, for common stock repurchases. But we would like to get through this first hundred million dollar allocation, then address it with our board at the appropriate time.

Let me put it to you another way. If your current share price weakness persists, you're around $36 today, would that lead you to accelerate or enlarge your buyback program or that 100 million of securities that you did have in your previous guidance of potential buybacks and preferred buybacks that you can do?

Just depends on the level. I can tell you at $36 we are certainly very interested in repurchasing shares. We were interested at 38. I think it stands to reason we would be more interested at 36. But expanding the stock buyback program is something we would consider at the time and recommend it to the board if appropriate, and then the board would have to act on that.

Right. Have you ever thought of going private?

Andrew, we don't comment on any form of MNA or privatization transactions.

Okay. Last, a quick switcher, your nonrevenue enhancing Cap Ex went from 60 a door fourth quarter last year to 89 bucks a door fourth quarter this year. Is anything coming up? Is there a story behind that number?

There's no story. It's just the nature of the improvements that we made to the property. There's really no story behind it. There's no change in policy that drove it.

So it's just probably the timing of a roof or something like that?

Timing of key capital improvements programs, and it's also related to just the mix of assets involved in capital improvement programs between years.

Great, thank you.

I would like to emphasize, Andrew, no change in policy.

You betcha. Thank you.

Your next question comes from John Litt, with Salomon Smith Barney.

Good morning, guys, it's Jordan Sadler here with John. I had a quick question regarding same store performance on a sequential basis, Northern California seems to improve from the third quarter, and I was just wondering if Tim maybe could provide some color as to what went on.

Obviously, occupancies, you were able to gain some there. If the conditions are changing, you could maybe talk about that and talk about your expectations. I noticed that they were on the list of weakest markets expected for '03. Maybe you could just talk about that a bit.

Sure, Jordan. Essentially on a sequential basis, revenues were flat in Northern California, and that was driven by, as you mentioned, increases in occupancies. I think we saw increase in occupancy of 1 1/2%. So we still had a decline in rental rates of about 1 1/2%, which that rate of decline has been moderating.

That's largely due to just easier base year comparisons, we are not seeing -- we are not seeing really a decline in concessions yet in that market. In fact, the concessions have actually stayed relatively high and you saw with respect to market rents, they did come down a bit in Northern California fourth quarter. So I think part of what happened in Northern California is we tried to -- we are very aggressive about trying to maintain occupancy, and we bought a little occupancy in Q4 and that worked its way through results on a sequential basis.

Okay. And just for the overall portfolio, I know you talked about year-over-year expense, the comparisons in the expense decline, maybe you can talk about, there was a 5.6% decline from the third quarter, 14 1/2% in Seattle. What is that attributable to?

Well, that's just largely seasonality. That's pretty typical of what we have seen in the last few years, moving from Q3 to Q4. Moving from a high turnover quarter to a low turnover quarter. So it's really a drop in turnover-related expenses.

Right. And then with regard to the Northeast and your 2003 expectations, I notice they were not on the list of the weaker expected markets. Are you seeing some turn there or expecting greater job growth?

No. In general, we are looking at Northeast in 2003 as markets of low demand and pretty low supply. Again, as I mentioned in my prepared remarks, we expect the imbalances to continue most severely in Northern New Jersey and Stanford, Connecticut markets. We are seeing some additional concessions in Boston and New York, and Northern New Jersey. But in terms of sequential changes there, we don't -- we are not looking at improvement right now based upon everything we are seeing.

Just one last -- I noticed that the Avalon on the Hudson asset, which was a presale commitment, last quarter in your supplemental is about a $59 million asset. Is disappeared off the quarter supplemental, is that still in the works?

Let me speak for all the -- first, Jordan. It was previously listed I believe on the development right supplement, this was a deal that was a presale contract that we entered in early 2002 with the third party, for an asset to be built that would be delivered in the '04, '05 time frame.

That contract had a number of post-contract contingencies, if you will, that frankly, we haven't been able to resolve to our satisfaction or to the seller's satisfaction, and we are technically out of contract right now and as you might be able to imagine during these kind of market conditions, we are a little bit less flexible with respect to resolving issues as they come up. At this point, because it's out of contract, and we are just uncertain as to whether or not it will be resurrected, we chose to drop it from the supplement.

Okay. And actually, one last question, you added Darian, Connecticut, you began development on them during this quarter. Why would you begin development in a market that -- close to a market that you're seeing as weak?

Jordan, this is Bryce. I'll take that maybe a little broadly at first just to talk about development and then I'll come specifically to Darian. We have a long track record of creating value through development, and frankly that's been through all phases of the cycle, and we believe this is a time to be cautious in terms of starts but not to over react and necessarily shut everything down.

You can actually even look at our historical performance, which we have provided for many years on attachment 11, and you can see some of the deals that we completed in the '94 and '95 time frame. Those were deals that began in '92 and '93. A period of very, very weak market fundamentals.

Good business can get done during all phases of the cycle, just real important to be extremely selective in terms of the assets and in terms of the markets, and we think Darian fits both of those criteria. I'm sure many of you, but not all, are familiar with Darian, Connecticut. It's a very affluent town of Fairfield, Connecticut. The average household income approaching $300,000. The average home price around 700,000. We actually put this deal under contract in 1992, before Avalon even went public.

It has taken us ten years to get the entitlements for this deal, which clearly shows a very, very difficult entitlement process, in many of our markets, clearly in some of the most affluent communities in Fairfield County. So this deal we believe has both favorable current economics, but also it's just -- we believe it will be a very strong long-term performer. So our process for looking at Darian is really no different from our process at looking at any others, in difficult market conditions or volatile times you need to be cautious and selective. But there are still opportunities to be done and we think Darian is one of them.

Okay, thanks, guys.

Your next question comes from Steve Swet with Wachovia securities.

Good morning. Just a couple follow-ups on a couple of earlier questions. Just so I understand, Tim, on the sequential versus the year-over-year picture you're presenting for Northern California, the forward expectations you laid out where you said Northern California was expected to be one of your weakest markets, is that more on a year-over-year comparative basis or are you still expecting some sequential drops in Northern California results going into 2003.

We do expect additional sequential drops, Steve, but it's -- I think Bryce had mentioned we were looking at one of the weaker parts in terms of performance next year, which is based upon year over year comparisons.

Okay. And then also just to follow up on an earlier answer to a question about sale locations, you mentioned that your sales in 2003 would reflect both exits from markets where you no longer want to focus, as well as assets in markets where you just, for site-specific reasons, choosing to sell a property. Are there any new markets that you've identified for exit, or are those still just getting out of markets that you have already identified?

Well, Steve when you say identify, we haven't identified publicly any markets that we intend to exit. As part of the disposition plan, if you will, that involves a review of all of our markets, and the identification of any markets that we may choose to exit. So as a part of that process, there was a market that we concluded we didn't want to exit and we'll be doing so in 2003 as part of our disposition plan. I'm just not prepared to disclose what market that is.

Okay, but you guys did identify one new market you chose to exit?

That's correct.

Okay, and then a question on timing. What was the timing of the Q4 sale?

Mid-December, Steve.

Okay. And then just to be clear on the 2003 sales guidance, you have 135 million under contract for Q1, and the remaining 165 million, is that still a Q2?

About 2/3 of total dispositions in the first half with 135 million in Q1.

Okay. And Tim, just one final question. On the concessions, you gave the concessions on average for the development properties or the lease-up properties. What was the concession on average for the overall portfolio?

Well, for the stabilized portfolio it was on a cash basis 2.6% this quarter, Steve, and that was up from 2% that we reported in Q3.

And is there -- did you have any differing policies on individual markets or -- policies isn't the right word, but are you seeing anything different within your markets where you're either focusing more on concessions or less on concessions in individual markets?

It's by their nature, they do tend to be different from market to market, certain markets it becomes more of a pricing convention. In other markets you might see people just cut low -- so it really kind of depends on the market. Seattle is an example of a market that historically has been a big proponent of concessions. So we have had to more or less meet the market from a convention standpoint.

Any markets, Tim, where you're looking at reducing the level of concessions that may have been in place a couple of quarters ago?

They're always going up and down, Steve. So it's -- it's based upon current conditions we are seeing week to week, frankly.

Okay. Thanks a lot.

Your next question comes from David Harris with Lehman Brothers.

Yeah. Good morning, everyone. Kind of just a clarification with regards to your outlook for same store NOI. Bryce, I think you mentioned the only market you're expecting a positive number was Southern California. You're not including D.C. on the positive side of the ledger?

That's correct, we are not.

Okay. Is that flat or are you assuming a negative number there?

We are expecting a negative number, just modestly negative compared to the three I mentioned. We think of our business in six regions, excuse me, as I think most of you know. I mentioned three being the most negative, being the Midwest, Seattle, Northern California. I mentioned the fourth being positive, Southern California. Remaining two regions would be Mid-Atlantic and the Northeast, which we expect negative but more modestly negative.

Okay. Just pressing more on the sales, obviously you're not talking about locations, but could you talk a little bit more about the nature of buyers and how much of that is condo conversion interest?

And along with the transaction, a fair bit of was condo conversion interest, David, and in some regard they helped set the value. Although it was not eventually sold to a condo converter, it was sold to a pension fund. With respect to other assets, generally it's more institutional buyers of apartments that are driving values of apartments at this point.

Okay. Could you comment as to whether you're seeing condo conversion concentrated in any markets or would you not be able to distinguish it across the portfolio?

You're not seeing or hearing a lot of it in any one particular market, at least in our markets. David, so it's -- I couldn't say it's in any one particular market at this point.

I think, David, just to add to Bryce, I think you hear a lot more about it than you see. That it is certainly logical to assume with the strength of the for-sale market and the low-rate environment that there are people who believe there is a significant opportunity there. And as Tim mentioned we saw that in some of the initial interest in Longwood. But in terms of ultimately the amount that's getting done in the markets, it is not a lot, at least in our markets.

Tim, a couple of questions for you, if I can go back to you. And I may have mentioned this before. But did you give the turnover for the fourth quarter?

I did not. It was 54% which was down 4% from the same quarter last year.

Okay. Are you still using the tiering system or have you moved away from that?

We still use the tiering model, David.

I think a few quarters back, I talked about how we have adjusted occupancies and availabilities and we look at -- we more or less -- it's based upon market occupancy so it's -- we are not trying to achieve 97% occupancy in a market that's at 92%, but we are letting where the markets are currently trading -- help direct us as to where we price. Ultimately we want to be at market occupancy or a little bit above.

Would you attribute the fact you have been around though 94, 95% occupancy level for a number of quarters now even though market conditions have been soft to the use of a tiering system?

To some extent I think it's attributable the cause of focus in terms of where the current market is leveling off, but I think in general where we are at is pretty reflective of the markets that we are in.

Okay, and in the past I think you guys have talked about tracking where your tenants go when you leave. Is there any increase in the number of folks that you're seeing in the last quarter departing for single family, you know, or is it fairly flat on previous experience?

Q3 to Q4 it was pretty flat. I think it actually went from 20% to 21%. The biggest change was actually in relocations, which actually dropped 5% from 25 to 20%. That's really what helped drive turnover down on a year-over-year basis, about 4%.

Okay, and one final question from me for Tom, I guess. The [INAUDIBLE]. Is that a run rate on a forward basis from Q4 on through the quarters this year, Tom?

No. David, our investment in reeling up was this last quarter's allocated share of losses has been reduced to zero, so we don't expect any additional losses from reel in.

Okay. All right. Thanks so much.

Your next question comes from Chris Grimm with Lehman Brothers.

Hey, guys. Wondered on a more formal basis, Tom, if you can spell out for us the 2003 sources and uses. By my calculation, I see retained earnings of 40 million for the year, sales between 250 and 350 gross. Can you match up the uses as planned against those numbers right now?

Sure. Let me just grab it. Do you want than any time or do you want to --

The only thing I'd like to understand is if this is the balance sheet impact. Can you gauge for us a fixed charge impact of whatever we have here on the balance sheet, plus the projected decline in earnings in '03.

Let me -- Tom's trying to retrieve that. If the -- okay for you if you can hold that while we are retrieving that. Do you have an additional question or --

No. Just the second part.

We promise to respond to it, but he has to find the sheet here and I'd like to keep Q&A going. We will respond. But let's move to the next question, operator.

Your next question from Craig Leopold with Green Street Advisors.

Good morning. I guess I'm not sure if this is for Bryce or Tim, but could you expand a little bit on the impairment charge, what were the two projects where you experienced that charge and what was the nature of it? Is it that you guys had invested some capital and pursuing an entitlement that never came to fruition or is it a change versus your purchase price and you didn't get an entitlement or decided not to go forward with development, just wanted a little more color on that?

Sure, Craig, this is Tim. I'll take that. There are two pieces of land that we are now anticipating selling, and I'll identify the markets for you.

One is in Seattle and it's market based. We don't anticipate proceeding with development of one community there, based upon the fundamentals of that particular deal and the market fundamentals. And then secondly is a deal in Southern California and it's based upon entitlements where we have been unsuccessful in prevailing on entitlements. At this point, we anticipate selling it based upon its current approved use.

Okay. Does this -- does I guess the Southern California chain -- I mean, historically you guys have not bought land unless you basically -- unless it was entitled and you guys were ready to go, you tended to take land down or control land through purchase options, does this experience change your -- you know, get you to go back to the way you did things historically?

This is Bryce. Our preference was and our preference remains to purchase or close on land only once the entitlements are in place. That unfortunately is not always possible throughout many of our markets.

But particularly, some of the more competitive markets, which currently Southern California has been and remains very competitive. So you try to get as much time with as much contingencies as you can. But there's a certain point you have to make a business decision on whether to proceed forward or not. We are not going to adopt, we haven't and don't intend to adopt, a policy of never closing on land unless it's entitled, but clearly it is our strong preference to have as much time and as much contingencies in that purchase process as possible.

Okay, and then one question I was unclear, I know Tom covered this earlier, that is the pursuit costs that are shown in other operating expenses. Did I hear him correctly say it was $900,000 in the quarter?

Yes. Craig, it was 900 in total, but there was a $400,000 increase from the third to the fourth quarter. We had 500,000 in the third quarter and we had 900,000 in the fourth quarter.

What do you expect going forward?

I think the run rate -- certainly the run rate is not 4 million. It just depends on each individual asset and how we proceed to development or don't. So I can't really give -- I can't really give you a run rate, but certainly historically it's been 2 million to 3 million a year, and this year it may be 2 1/2 to 3 1/2 million a year.

Okay. Thank you.

Let's return to Chris's question. Tom, if you could respond on the sources and uses.

Yes. Chris, essentially this position should provide somewhere in the range of 250 million in proceeds. We expect about $100 million of asset-specific financing, where we had to issue bonds both tax exempt and not taxable.

Taxable bonds and nontaxable bonds of 100 million, and then that basically would fund the development activity of $300 million for the year, and redemptions of securities.

Your next question comes from Van Oppenheim with Bank of America Securities.

It's Lee Shallup with Van. First to follow up on the questions about the pursuit cost, Tom, you specifically mentioned you have 40 million of land on the balance sheet. Are there pursuit costs that are on the balance sheet in addition to that, or is that included in the 40 million?

That is not included in the 40 million. There are pursuit costs in addition to the 40 million. And the 40 million, by the way, is excluding the two land parcels that we have set aside for disposition.

Can you give us a sense what that pursuit cost level is today?

It's in the 30, 35 million range.

Okay. Then you -- looking at the development rights, the potential development rights of relatively large number and the starts for 2003 is going to be relatively small compared to the historic run rate. Does that create risk of additional write-offs down the road on the pursuit cost front?

Lee, this is Bryce. When markets slow down and we take actions to be more cautious, it's going to result in, and you're seeing it result in, a slight build up in the development rights and a slight buildup and the pursuit costs that we a carrying associated with it. We think we have taken the proper measured steps.

You've seen some of that in the fourth quarter results, where we have both taken an impairment charge and increased the pursuit cost reserve. We managed that development pipeline very, very actively in terms of our contractual commitments on the land as well as in term of us third party costs. So we think we have -- we think we have it adequately covered. Our experience has shown that we have been able to manage that historically and we expect we will be able to through this period as well.

Pass it on to Van.

Just quick question for you on concessions. In your 10-Q you have been showing the difference in revenues if you had been expensing condition on a cash basis as opposed amort ammortizing that. It's gone up to 2 1/2 in the third quarter. Do you have the number for the fourth quarter at this point?

Yes. This is Tom. A couple -- let me give you a couple of statistics.

If you were to ignore concessions and just show revenue on a cash basis, the sequential decline in revenue would have gone from 1.4% to 1.5% between the third and fourth quarter of this year. Year-over-year, [INAUDIBLE] concessions would have put our revenue on a cash basis at a decline of 7% compared to 6.3% on a accrual basis.

The number in terms of the difference between -- for this quarter what the revenue would have been, do you have that?

I don't have the absolute number. I have the percentage changes. I can get back to you on the absolute number.

Okay. Then quick second question, wondering about the preferred, you have series D preferred that was available for redemption about a month ago at an 8% rate? In the past you have been pretty active in redeeming those. Wondering if there's a different thought on this.

Well, I think as we stated, we are prepared to redeem about $100 million of securities net in 2003, and the allocation between the three categories debt preferred and common will be done based on market conditions at the time we make the decisions to make the redemptions. I can't get more specific than that. I don't want to say today we are going to redeem the preferred, because we'll make that decision at a later date. In the aggregate, we expect to redeem about $100 million of securities.

Okay, thanks.

Your next question comes from Kevin O'Shea with UBS Warburg.

Good morning. Couple questions. First, Tim, with regard to your developments looking at your schedule from Q4 to Q3 '02, just wanted to know whether a couple things were net of the EBITDA yield or not. Four properties in terms of expected stabilization move back a quarter and then with respect to four other properties market rents declined. I know you say concession, the EBITDA yield is gross of concessions. Is it net of these items because I know the 9.1% yield has not changed?

They are. This year's stabilization really doesn't impact EBITDA, Kevin, because it doesn't really impact -- it doesn't impact the yield. Because the denominator isn't really impacted. In terms of the stabilized NOI, it doesn't really impact the stabilized NOI either. The rents, on the other hand, do impact stabilized NOI and those are worked through into the average stabilized yield of 9.1% for the entire portfolio.

And so you were able to maintain the 9.1 EBITDA yield because it was sort of a wash relative to a couple of your projects coming in under budget?

That's correct.

And additionally Kevin, you have a constantly changing basket of properties. There were two new properties added this quarter as well. So the basket of properties changes.

Okay. Follow up to Craig's earlier question on the two land parcels that are not going to be developed. If they're not in your judgment suitable for multi-family development, what is their current use and how did you calculate the $20 million value for both?

In one case, the one in Southern California, it's actually a current approved use is industrial office. And the one in Seattle's obviously multi-family, could be potentially a condo deal for somebody. It could be available for rentals to somebody who has a, you know, different impression of that particular opportunity than we might at this point.

Is your intention to hold them for sale now or hold on to them and perhaps sell them at a more opportune time?

We have made the decision those assets would be sold. That's the basis of the impairment charge.

On the Longwood Towers sale, was that a reverse inquiry or did you put the property up on the market for sale?

It was heavily marketed.

Couple more questions. With regard to your stock buyback activity, just wanted to get a sense of how you evaluated from an earnings accretion perspective in contrast to a NAB perspective. And kind of to put it in context, your stock's currently trading at about an 8.8% FFO yield to your consensus '03 estimate of 322.

Interestingly, you earned the same amount in '99, and on this day your stock closed at 33.75, a few dollars below where it is today in a 9.5% FFO yield. Yet there was no buyback activity. Clearly '99 was a different environment, with REITs being more out of favor. But on the other hand you're looking at rising NOIs, just wanting to understand your thoughts on why it made sense to do it now and not then?

Well, that's a good observation and you've got a good memory of '99 versus today. Clearly '99 was a different year. '99 was a year everyone was concerned about liquidity. That was kind of the number one topic.

You know, you're following '98 where you have the Russian default and long-term capital management issues that really created a liquidity crunch where one could not go the unsecured debt markets and issue bonds. So in '99, even though the stock price was attractive, we were concerned about liquidity constraints and chose not to buy back the stock at that time.

The way we look at it today is we try to convert -- the way we rationalize capital between competing alternatives and buying back our stock two ways, one is quantitatively and the other is qualitatively. Looking at the numbers, what we try to do is convert our stock price to a yield equivalent to an unlevered development yield, and if that unleverd development yield on the stock is higher than development, we take a serious look at stock buyback.

For example you quote an 8.8% FFO yield, that's a levered yield just by the nature of FFO. We convert that to something closer to an 8% of today's stock price in terms of an unlevered yield, and that becomes very competitive with development yield that we are seeing today. The qualitative side of it points back to liquidity. And you know, we have to be concerned about liquidity.

We do think liquidity is better today than it was in 1999, and that's why we are more interested in purchasing shares today than we would have been in '99, given those market conditions. It all does center around stock price, liquidity needs, competing uses of the capital and I guess would say that in 2003, we are certainly -- if we were buying at 38, we still feel good about liquidity, certainly we would be interested in buying at 36.

Okay.

Bryce, do you want to add something?

Just one final comment, Kevin, in '99 -- and part of it, as Tom mentioned, is what are the alternative uses of capital? In '99 we were very actively developing and we were enjoying, you know, very strong yields at that point in time. We have seen yield compression today versus '99, which rations again how much we channel into development versus into potentially stock repurchase.

Okay. Last question, wanted to get a sense of how you look at the demographic data in terms of its potential impact on class A apartments over the coming decade. And your own target demographic profile for your assets.

If you look at the age 20 to 29 cohort, they are obviously increasing over this decade at a pretty good clip of about 400,000 per year. At the same time, however, the more fluent renter base of 30 to 34 is shrinking in total by about 1.5 million or about 300,000 a year over the next four or five years. How does that change your view on kind of the amenity package you'll put in place for some of your apartments, and just generally speaking what kind of demand implications it has for your properties?

Kevin, this is Tim. I'll take that. Demographic data is something we look at pretty closely because it's something you can count on in term of us materializing, especially if immigration loss stay relatively constant.

So in general what demographics will show you not just on age, but in other variables as well in terms of household type, ethnicity, and incomes, that the renter population, and generally households, are becoming much important fragmented and much more segmented.

In terms of how that might impact their thinking with respect to product, I think you can expect our product will continue to evolve to really try to target specific segments. I know that the 30 to 45 segment is declining, the 45 to 65 segment is increasing pretty dramatically, and even as a percentage of our residents, I think it now accounts for about 21, 22%s of all residents. That number will clearly go up over time.

So I think you can expect that will continue to develop, communities that will target certain amenities and certain features that will target that segment as well as the 20 to 29 segment.

Kevin, if I could add to that. I think a key point of your comments and Tim's response is that the resident profile will become increasingly diverse and some of you have probably heard me say on numerous occasions that part of what our strategic vision is about is to more deeply penetrate our markets, I commented on that earlier with a broader range of products and services and an increased focus on our customer.

It's really the latter two, the broader range of products and services and increased focus on our customer, that are largely driven by the changing demographics you mentioned. You've seen over the last 18 to 24 months a considerable breadth of product with which we have delivered, from town home communities in New Jersey to high rises in -- and Avalon River View in Queens. We don't believe there's a cookie cutter approach, or one size fits all.

We are -- we will continue to look to increase our presence in our markets, but we'll look to do that with a variety of products so that we can capture a different age cohort as opposed to being too fair lowly focused on one age cohort in the past.

Your next question comes from Rich Moore with McDonald Investments.

Yeah, good afternoon. This is actually Dave Rogers. I had a couple quick questions for you. Was wondering if you could discuss more traffic patterns potentially in the fourth quarter versus the fourth quarter of a year ago, and in the turnover number you gave us, any particular market movements you're seeing that you would note?

In terms of traffic patterns, it's pretty flat year-over-year, Dave. And on -- in terms of turnover, down 4%, it was actually down across the board but down most significantly down in Northern California, by about 10% in Northern California. Southern California was down about 5%, and the other markets were all down somewhere between flat to 5%.

Quickly on the occupancy levels. I think you gave the average occupancy levels there. What about the year end numbers. If you mentioned that we missed it, I'm sorry. Could you go through anything that might vary significantly between the average and year-end numbers?

Pretty flat through the quarter and through the course of the year for the portfolio overall. Obviously some movement between certain regions, Southern California, Northern California generally increased through the course of the year. In terms of just looking at Q4, nothing major there in terms of where certain regions may have ended the quarter versus where they went into the quarter.

Then the final question we had is, obviously we are looking at job growth and the age cohorts income et cetera, any other macro level indicators that you're looking at internally that give you any signs that we may be seeing a pick up in any particular markets or anywhere in the country and what those indicators might be and how positive or negative they might be.

Well, we look at a number of things obviously in our portfolio first of all that might demonstrate things like traffic that might demonstrate demand at the margins, increasing declining from a seasonable standpoint, it's been pretty flat year-over-year, so we're not really seeing anything there. We look at things like turnover, turnover has come back into more historical ranges, which demonstrates there's probably less people moving related to job losses or job relocation.

From a job standpoint, it's been pretty flat line, up Q3 down on Q4. It now appears across our markets. You know, right now we are seeing nothing that indicates it's moving dramatically in one direction or the other.

Okay. Thank you.

Your next question comes from Evelyn Inferna with Cornerstone Real Estate. Please proceed with your question, ma'am.

Hi, guys. A couple of quick questions. And Longwood Towers, can you give a little color on how the cap rate got to be where it was. Was it an issue of not being allocated in that region of the country and just paying top dollar, and then my follow up questions are with regard to your pro forma rents on your developments.

The first being, how do these rents compare with where the markets are now for projects that haven't even been completed yet? What kind of growth projections you're assuming, and also the absorption center of these things, some of these projects, the pace seems to be very low compared to, I guess, the normal operating environment. I know these are not normal times, but you would think if you're delivering a project in 2005 you would expect the absorption rate to be higher than 12 units per month. If you can give a little -- are you being your typical very conservative selves or just what's the thinking behind all this?

This is Tim. I'll try to address the question. We may need to ask you to repeat one or two of them. First on Longwood, I think you asked about the cap rate, just a little bit more color on that.

We represent 5 1/2% cap rate, which was based upon trailing 12 months NOI with [INAUDIBLE] fee and reserves related to that. Our own expectations for Boston and the Northeast is in general we expect NOI to actually go down over the next 12 months. You might argue the 54 is even a little high.

Yeah. No problem saying that.

People looking to buy were probably looking at it differently to pay what they paid. And in terms of trying to sell that asset, it was part of the disposition process which I think Bryce did a good job of outlining earlier.

It was not necessarily intended to be an opportunistic play, it was based on somebody coming to us that had an idea they wanted to buy this thing for a big number. In terms of new developments, I think you asked about absorption rates, they are down particularly in the fourth quarter, we are seeing absorptions relative to goals that are underperforming on the order of 15 to 20% in terms of absorption rates, and that's probably as big as we have seen in the last several quarters.

In terms of what we are looking at on the press release schedules, when they stabilize, it's based upon more or less expectations. The average community's been kind of in the 18 to 22 per month range when you look at the portfolio overall.

Well, are those rents in line with where rents are today, or what kind of -- are you assuming some sort of growth there versus today?

No. Rents are based upon actual leased rents in place. Growth of concession and any vacants would be shown -- would be captured at market.

Right. But the projects that are under construction lower down on the list aren't -- you don't even have units to lease yet. And that's what I'm asking. Are those rents derived and where do those compare versus where rents are today in the markets. I know some markets don't have comps.

In almost every case those were pro forma rents that we base upon at the time we started construction.

Evelyn, they are specifically not based upon any trending assumptions. Our underwriting has been based upon our estimate of current market conditions. As you mentioned, sometimes there's very good comps and sometimes there less good comps.

Okay. And I do have one last question and it's with regard to your positive outlook on Southern California. If we should go to war with Iraq, what kind of implications -- would you be as positive on the positive NOI growth that you are forecasting for Southern California or would your forecast then change?

Evelyn, if obviously a war scenario changes a lot of assumptions throughout the budget, it certainly wouldn't be impacting just Southern California, but to the point of your question, Southern California is an area that has a high dependence on military and to the extent, I assume part of your question is, though the extent you have troop movement and deployments and others that would have --

That, coupled with the fact that every person that was at the national multi-family council has a project in Southern California or wants one. Similar dynamic that you're experiencing in D.C., which is typically very recession resistant and a strong market, a dynamic we might be seeing in Southern California. I just have -- it feels like there's a lot of supply coming out of the ground.

Just to be clear, again, we didn't give a specific percentage, but our expectations for positive growth are modest, reflecting the reality that no region in the country is immune from either economic pressures or from supply challenges.

Evelyn, if I could just add to that, in terms of new supply in Southern California. We are likely to get more supply or San Diego in Orange County.

We are actually expecting about 2% of inventory in terms of starts next year -- I should say in terms of completions and L.A. is actually much more modest. A lot of people want to get business done there. I think it's probably, you know, more talk than there is activity relative to the size of that market.

It's actually one of our more supply constrained markets, and actually the focus of our new activity in the development area.

Thank you.

At this time there are no further questions. Do you have any closing remarks.

I do, operator, thank you. You know, one thing that I hope you took away from both reading of our release and comments this morning, is that, you know, while your markets remain weak, our execution, we believe, has remained very strong, and that we are pleased with.

The continued job losses and the strong single-family market have resulted in weak demand supply fundamentals and we can't control those markets, but we can control the quality of our response and what we have tried to do is highlight for you how we responded in certain areas throughout the year, such as in the area of cost controls, where we completed in the fourth quarter alone a couple hundred million dollars of new development activity, and we did so bringing them $7 million under budget.

We also, as Tom mentioned, are able to control our G&A through the year bringing that in 6% below 2001 levels. We also, with regard to the portfolio, were able to maintain stable occupancies despite deteriorating market conditions and we talked a little bit about that on the call and had a question of was that related to our belief in the tiering model. I think it is.

It's something we have said for many years that we believe that you maximize NOI from a high occupancy platform, and we have worked hard at that for the year through, in some cases, pricing adjustments and certainly in all cases great on-site execution. We have been able to hold our occupancy stable throughout a difficult year.

Finally, in terms of capital investment activity, clearly I think the Longwood execution speaks for itself in terms of both the profit generated, but also how it spoke to the value we were able to create through the redevelopment efforts. Great execution on a lot of debt capital rates in the year, $450 million at 5.6%. This was not a year -- this past year was not a year where we wanted to play and take advantage of the floating rate gain. It was a time when we wanted to do what we believed was the right thing for the balance sheet from a long-term perspective.

It was a year where we opportunistically repurchased stock for the first time in our company's history. As we look to '03, we look ahead to '03, we do expect, as we have stated, to continue to see challenging market conditions, but we also plan to respond with continued sharp focus in those areas of cost control, portfolio performance, and capital investment activity. So we look forward throughout the year of updating you on that and responding to your questions. Thank you for your time today.

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