艾芙隆海灣社區公司 (AVB) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the AvalonBay Communities fourth quarter 2003 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 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, Miss Alaine Walsh, Director of Investor Relations. Miss Walsh, you may begin your conference.

Thank you, Paul. Good afternoon. And welcome to the AvalonBay Communities fourth quarter, 2003 earnings conference call. On the call today are Bryce Blair, Chief Executive Officer and President, Tim Naughton, Chief Operating Officer and Tom Sargeant, Chief Financial Officer. If you did not receive the press release in last night's fax or e-mail distribution, please call us at 703-317-4636 and we will 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 A filed with the SEC. As usual, we have included definitions and reconciliations of several non-GAAP financial measures and other terms that are included in yesterday's earnings release and which may also be included in today's discussions. This summary is also available on our web site at www.avalonbay.com/earnings and we encourage you refer to this information during your review of our operating results and financial performance.

With that, I'd like to turn the call over to Bryce Blair for his opening remarks. Bryce?

Thank you, Alaine. On our call today we'll be addressing both our 2003 results and our outlook for this year, 2004. Regarding 2003 first, I will briefly recap our quarterly results and provide some commentary regarding our performance for the year and then Tim and Tom will be reviewing our operating, investment and financial highlights. We're then going to shift to a discussion of 2004 where Tom will highlight some of the key components of our financial outlook and then I will wrap up with general comments regarding our expectations for 2004.

Let me begin with a brief recap of fourth quarter and full-year results for this past year. Last evening reported EPS for the quarter of $1.36 and FFO per share of 81 cents, this resulted in FFO per share for the full year of $3.27. The 81 cents was at the high end of the guidance range we gave last quarter and the $3.27 for the year was slightly above the mid-point of the earnings guidance that we gave over one year ago in December of 2002.

As you know, the apartment fundamentals remained weak throughout 2003. Demand for apartments continue to come under pressure from continued job losses, from the competition from home sales, while at the same time the supply of new apartment homes continued at high levels and as a result, we experienced the third year of negative demand supply fundamentals both for AvalonBay's markets but for the nation as a whole, as well.

Despite these weak fundamentals, we executed in a way that allowed to us meet our originally budgeted expectations while taking actions that position us well for an improving economy in '04 and '05. We acted quickly throughout the year to take advantage of opportunities that presented themselves and I want to highlight just a couple of examples. During the year, we capitalized on the volatility in the equity markets by repurchasing shares earlier in the year when our stock price was under pressure. Then we sold shares later in the year when the equity prices strengthened. During the year, we capitalized on the strength of the sales environment by increasing our original sales program by approximately 50%, ultimately selling over $450 million of apartments. This was an all-time high for AvalonBay in terms of sales and we sold these at an average cap rate of 6.3 and realized an unleveraged IRR of 15%.

As a result of our strong execution, combined with the strong capital flows to the sector overall, we delivered total shareholder return of 30%, which exceeded the multi-family sector average by about 300 basis points. With that, I'm now going to turn it over to Tim and Tom who will provide additional color on our 2003 performance before we shift back to a discussion of '04. Tim?

Thanks, Bryce. As Bryce mentioned, I will discuss property operations and investment activity where I'll touch on both new development and dispositions.

Starting with property operations, overall in Q4 we continue to see many of the mixed results that we discussed last quarter. Markets are still declining at the margin as demand and supply remain out of balance, but we are still seeing some signs of stabilization. Since last quarter, economic occupancy and market wrench remains essentially flat across the same-store portfolio. However, there continues to be pressure on revenues in the form of concessions as concessions per move-in continue to increase.

Performance was uneven across regions, on a year-over-year and on a sequential basis. Since last quarter, about 1/3 of our markets experienced increases in same store revenues while the other 2/3 posted declines. Overall, the rate of declines continues to diminish, but as we move into 2004, a year in which new demand and supply figure to be roughly in balance, we expect that portfolio performance will stabilize and flatten and then begin to improve in 2005 as stronger employment growth takes hold.

Year-over-year, same store revenues were down 3.1% from Q4 of last year and by 4.3% for the full year. Declines were most pronounced in Northern California and parts of Northeast, particularly in the Boston and Fairfield markets. Southern California, the Mid-Atlantic, central New Jersey and Long Island all posted modest year-over-year growth.

Same store expenses increased 1.7% from Q4 of last year. Year-over-year increases in expenses has moderated from past quarters, primarily as a result of a favorable renewal in insurance that became effective this past quarter. We expect this pattern to continue into 2004, as same store expenses are projected to increase on the order of 1 to 3% next year. Sequentially from Q3, same store revenues were down .9%.

Average rental rates were off by about a percent, driven by lower transactional income and higher concessions. Base rental revenues, which excludes seasonal transactional income, declined by .6% since Q3, which is slightly less than the rate of decline experienced in the last two quarters. Economic occupancy was up slightly by 10 basis points this quarter from Q3, averaging 94.1% for the quarter. Performance was mixed across markets. Central New Jersey and San Francisco posted significant increases while Long Island and Fairfield each declined by over 2%. Three of our six regions, Northern California, Southern California and the Mid-Atlantic, now have economic occupancies of 95% or greater, while the other three regions, the Northeast, the Midwest and Northwest, hover in the 91 to 93% range.

Seasonal traffic and move-outs were both down modestly for the quarter on the order of 2 to 3%. Concessions continue to be needed to support occupancy. For the quarter, concessions per move-in averaged $950 or about a 9% increase from Q3. Across regions, cash concessions per move-in ranged from negligible levels in San Diego and Long Island to almost a month and a half in Northern New Jersey. Other markets where concessions remain prevalent include Seattle, Boston, Oakland and the D.C. area.

Shifting now to investment activity, I will start with new development. This past quarter we continue to be active with our development program, completing two communities and starting three more. Economic recovery is certainly taking hold, which will ultimately translate into stronger and sustainable employment growth in later 2004 and 2005. As a result, we expect that we will see much healthier apartment markets when new starts stabilize in '05 and '06. Many of our starts were planned to occur in the second half of the year when we expected have more visibility of economic recovery. Moving into 2004, we expect that we will continue to expand development in a measured way with 100 to 125 million starts per quarter, gradually returning to volume levels of a couple of years ago, which was around 800 to 850 million.

In Q3 we completed communities in the Boston and L.A. markets. Avalon at Newton Highlands represents our first podium product that we built in Boston, expanding our product mix in that market. While Avalon Glendale represents our first ground-up completed in Southern California. These two communities were complete at a combined cost of about $98 million, which was about $1 million under the combined original budget.

In addition, we started three new communities this quarter and expanded our redevelopment program at Prudential Center in Boston. Each of the new starts represents the first phase of what will be multiphase communities. These three communities taken together reflect the growing diversity of our portfolio, in terms of product, location and targeted customer segment. Avalon at Chrystie Place is a $150 million first-phase development in Manhattan, containing 361 apartments and 90,000 square feet of retail space. Chrystie Place is located at 2nd and Halston in a dynamic neighborhood in the lower east side.

Our second start this quarter was Avalon Pines in Long Island, which was a 296-apartment wood frame community. This represents the first phase of what will ultimately be a 450-apartment community. And finally, the third community that we started this quarter was Avalon Pine Hills, located in the South Shore of Boston. This is a small first phase containing 98 apartments targeting the growing and affluent empty nester segment.

With these completions and new starts, total development volume is about 100 million higher than reported last quarter. With the proposed joint venture financing of Chrystie Place in Manhattan, however, the level of development being funded from our balance sheet remains about the same.

The average projected yield for the development portfolio is now about 8.4%, net of concessions. The projected yield declined by about 20 basis points from last quarter as a result of higher concessions and a changing basket of communities. The average concession given to date on the development portfolio stands at just over one month or about 9%. Absorption is running at 86% of goal, which is about the same as we reported last quarter.

Finally, I'd like to turn to dispositions. In the fourth quarter, we continue to be an active seller of assets at historically low cap rates and very attractive returns. Our disposition volume for the year reached peak levels for the company as we sold more than 450 million, which was about 260 million more than the average over the preceding five years. Over the full year, we sold a record level of assets at an unleveraged IRR of 15%, which is greater than the average IRR of the previous five years, despite eroding property fundamentals that have occurred in the last two to three years. In Q4 we sold three communities for a total of $159 million at a weighted average cap rate of 5.8% and economic gain of $62 million.

Through the assets for communities developed by AvalonBay over the last five years, Avalon at Fair Lakes, located in Fairfax, Virginia was completed in 1998 and sold to a condo converter for twice our investment. The property was originally developed for 99,000 per apartment and sold for $207,000 per apartment. Avalon Crest, located in Fort Lee, New Jersey, was completed in 1999 and sold for a 50% economic profit. Both of these transactions validate the value created through the development program during the last expansion and serve as a reminder of what makes AvalonBay unique.

For the full year, we completed $454 million of dispositions at an average cap rate of 6.3% and it represented an economic gain of over $130 million. Asset sales this past year fell in one of two categories: First, strategic as we exited Minneapolis and lessened our exposure to the New Jersey/Hudson River waterfront. And secondly, opportunistic as we sold several assets in the stronger-performing markets of Southern California and Washington, D.C.

As we begin 2004, we expect that we will continue to sell assets. Our current outlook calls for net sales of 150 to $200 million. Given our current liquidity and financial flexibility, however, we may choose to increase or decrease the level of activity, depending upon conditions in the real estate and capital markets.

So, overall in Q4 we saw a continuation of many of the trends we've seen develop over the last few quarters. There are some signs of stabilization in our performance that we expect to further materialize in 2004 as demand and supply begin to come in to balance. This should translate into a leveling of performance in 2004 before projected improvement in 2005 and beyond.

With that, I'd like to turn it over to Tom, he will discuss financial highlights for the quarter.

Thanks, Tim. I have a few topics to cover this afternoon. The first is a review of our 2003 results and then I will turn to the outlook for 2004 we provided for you in December.

As it relates to 2003, the results for the year came in largely as expected with revenue, NOI and FFO within the ranges that we provided to you in our original outlook about a year ago. The internal tools and disciplines we've established to help prepare these forecasts have enabled us to get a much deeper look into our business than ever before. We have the accurate forecasting and greater control over variances are (sic) two of the by-products of these tools.

Looking back on 2003, the cumulative effect of a number of well-executed transactions did help overall earnings. Net preferred stock redemptions, net common stock purchases and sales, as Bryce mentioned, and disposition activities have improved key balance sheet metrics. Just to give you a few, debt to total market cap now is just below 40%. Most of our NOI, 80% in total, comes from unencumbered assets and only 3% of our capital structure is comprised of floating rate debt. Our fixed charge coverage now stands at 2.7 times and you can see that these are stats that indicate a very strong financial position, important as we approach the next expansionary cycle.

Just a couple of additional comments on dispositions. The GAAP gains on assets sold for the quarter totaled about $79 million and for the year, $161 million. These gains are included in EPS but excluded from FFO. Also, the $454 million of dispositions for the year did dilute fourth quarter and full year results and this dilution will carry over into 2004. Dilution FFO, though, is temporary until proceeds are reinvested but the gains do capture the value created over the past business cycle and improved key metrics and our financial flexibility.

Before moving to 2004, let me just make a couple of comments on attachment 2 that has our fourth quarter and full-year earnings. There is a line item called other operating expenses that shows an increase of about 6% between years. This is attributable primarily to a legal cost and compensation expense. G&A levels declined by about 10% from the fourth quarter of '02 due primarily to lower professional and consulting fees. The line item for impairment loss taken in 2002 relates to two land parcels that we held for sale at that time. We didn't have any impairment losses in 2003. You probably are aware that NAREIT clarified the FFO definition for impairment losses, which means that our prior year FFO now reflects a reduction for these previously-accrued losses.

Let me now turn to the 2004 outlook that we provided to you on December 18 of 2003. And at that time we noted that we expected same store sales revenue to decline about 0 to 2% for the year. The biggest driver for revenues job growth, we use third party employment forecasts and our own assessment of local market conditions to prepare our outlook. So far, January early rental rate and occupancy trends support the guidance we provided in December and the markets are currently performing as we expected. Downward revisions to third party job estimates have been common over the last several years and with a lower than expected December job growth statistics, we will be watchful for slippage in these forecasts that could impact our own financial outlook. Expense growth ranges of 1 to 3% are primarily driven by expected growth in property taxes and salary increases offset by moderating property insurance costs that Tim mentioned earlier.

Our financial outlook gave detail on expected sources and uses of capital. Our liquidity remains strong with adequate capital to complete development activity under way without the need for unidentified capital sources. I won't get into a lot of detail and I would just refer you to the outlook release for additional detail on capital activity, but there are a couple of areas I'd like to highlight. Sources of capital in 2004 include asset sales of between 150 and $200 million. Tim mentioned that the level of asset sales is subject to change, based on capital and real estate market conditions and, in fact, last year we adjusted our asset sales early in the year from original plans and will be prepared to adjust plans quickly in 2004 to respond to changing capital and real estate market conditions.

We also plan to use several joint venture financing structures in 2004 for some of our development activity. We used JVs to help manage allocations to certain markets where we have a concentration of capital and, thus, overweight that market. We also used JVs for large multiphased assets in specific locations and Tim mentioned our Chrystie Place development in New York City as an excellent example of how we use joint venture financing to mitigate multiphase development risk.

Joint venture equity and related third party debt is expected provide between 100 and $125 million of capital in 2003 for development activity. Uses of capital include debt redemptions and, in fact, we have $125 million coming due next month that has a rate on it at 6.6%. Again, we have ample liquidity to redeem these notes under our current credit facility.

We noted in our outlook release that this G&A category shown on attachment 1 and attachment 2 will increase. These increases relate primarily to increased compensation costs, including expensing of options and new corporate governance costs including increased internal audit costs and section 404 certifications under Sarbanes Oxley. Development overhead is also expected rise due to higher staff and related compensation expenses we prepare for more development activity in 2004 and 2005.

Just to conclude on the financial outlook before I turn it back to Bryce, the processes and the discipline that we've put in place to prepare this financial outlook that we provided to you in December helps ensure that we avoid surprises and helps us avoid the distractions that come from those surprises. This allows us to focus on the core business and act on opportunities that emerge in 2004 as the operating environment gradually improves. Bryce, those are my comments, I turn it back to you.

Well, thanks, Tom. And I'm going wrap up the prepared comments with some discussion about the 2004 expectations just more broadly, as Tom dealt with some of the details in our financial outlook.

I'd say overall we see 2004 as a year of transition. Transition in the employment markets, transition in the apartment fundamentals and transition in certain aspects of AvalonBay's business plan. I'm going to touch on each one of these three points briefly.

I will start first with the employment markets. As you know, employment peaked in the first quarter of 2001, both for the nation as well as AvalonBay's markets. And since that time, the nation's lost about 2.5 million jobs or about 2% of total jobs. The rate of job loss in our markets during that same time period has been even higher with our markets losing about 3.5% of our total jobs. And this higher rate of job loss has been due to the high concentration of technology and financial services jobs in our markets. As we look at 2004, current consensus economic forecasts project modest job growth at just under 1%, both for the nation and for AvalonBay's markets. So, they're both projected to perform on-par with regard to job growth. While less than 1% job growth is certainly not robust, it is a welcome change from the job losses that we've seen over the last three years.

Now, the positive job growth should translate into a transition year for apartment fundamentals. As I mentioned earlier, the last three years we've seen demand/supply fundamentals that have been unfavorable as a result of the job losses, the strong home sales and the steady amounts of new apartment supply. Assuming the modest job growth that I mentioned earlier during 2004, apartment demand/supply fundamentals should turn to roughly in balance for the year. And while a year when demand and supply roughly in balance will not result in any significant revenue improvement, it should curtail the significant revenue declines that we've been experiencing over the past two years. Stronger projected job growth in '05, 2 to 2.5%, should result in strong demand/supply fundamentals for '05 and '06.

With the expected transition in apartment fundamentals, we're acting on or preparing for a transition in certain aspects of our business activity. Let me highlight a couple of those areas. First, with regard to our level of acquisitions and dispositions, we expect to shift from last year, where we were exclusively a net seller, as Tim mentioned, to this year where we expect to be active both on the sales and acquisition front.

Secondly, with regard to development, as Tim mentioned, we'll continue to expand our development volume, but do so in a measured way, recognize that the communities that we begin in '04 will be stabilized in late '05 and '06, a period of projected stronger market fundamentals.

And finally, we'll be opportunistic with regard to our capital markets and our financing activity and Tom touched on this. You know, the current capital markets environment is extraordinarily attractive with regard to debt rates as well as the availability and pricing of private equity. As we ramp up our acquisition and development activity, we expect to finance these activities with a mix of capital sources. We can take advantage of the attractive capital markets environment while also allowing us to mitigate the capital market risk.

To wrap up -- in summary, '03 was a unique year for the apartment sector and AvalonBay. It was a year where the weak economy and the poor apartment fundamentals coexsisted with very strong capital flows to our sector and an extraordinarily strong sales environment. We largely anticipated the weakness and we were quick to act on the opportunities.

In 2004, we're anticipating an improving economy and more stable apartment fundamentals. Yet, we're not a year where the fundamentals are strong enough to generate positive year-over-year revenue growth. We do, however, think it will be a year where there will be opportunities to create value through our investment and capital markets activity and we believe we have the people, the systems and the balance sheet to capitalize on those opportunities as they emerge. With that we would be glad to respond to any questions you may have.

Ladies and gentlemen, if you do have questions or comments for today's Q&A session, press star then the number 1 on your telephone keypads. If you are using a speaker phone, please lift the handset before asking your question. Your first response is from Chris Pike with UBS.

Good morning. Just a quick question in terms of expense growth, I guess for Tom or Tim. In terms of 1 to 3% going forward in '04, should we assume that's a flat growth rate for the year? Or assume a little higher in the beginning of the year and trending down toward the latter part of the year?

Chris, this is Tim Naughton. I will take that. I think you should assume that the expense growth of 1 to 3% is a pretty representative run rate through the year.

Okay. Okay. And can you also talk about some fundamental trends you saw emerge in the Mid-Atlantic region through the quarter and maybe through the first couple of weeks of 2004, specifically in Baltimore and D.C. in terms of traffic, concessions, conversions and so forth?

Sure, Chris. This is Tim again. In term of the D.C. market in general, I'd say that it was firmer than we expected. I guess the one exception would be downtown where I think recovery is likely to be a bit more elusive. In terms of this past quarter, actually the traffic and turnover fundamentals were pretty good. Traffic was actually up and turnover was down, the number of move-outs was actually down in the Mid-Atlantic, particularly in D.C., as you probably know, job growth is probably most positive in D.C. than any other market in the country. I think we're projecting about 30,000 job growth in '04 but the one thing I'd caution you is that's probably still about only half of what it needs to be to absorb the new supply that's likely to come of around 10,000 apartments. As I mentioned on past calls, I think we can get a bit of relief from some condo conversions that we are seeing, including one asset that we sold this past quarter, but I think just given the level of institutional capital that's out there and the level of supply that's coming, it's likely to be a more muted recovery.

How about in terms of Long Island, it seems you pushed rents there, occupancy suffered a little bit sequentially from Q3. Can you add color on that market?

Yes, Long Island is a market that we've been pushing rents on and really through this whole downturn. It's been a market that seems to have been a bit immune from the recession we've seen in the apartment markets. I think you're probably right. I think we continue to push rents there. We saw a little softness this past quarter, job growth did flatten there this last quarter. Generally it has held up through the recession. You know, having said that it's, we're not looking at supply, much in the way of supply next year, it's well under 1%, which is a healthy level and we do expect that job growth will return in '04.

Okay. Shifting to developments, based upon my calculations, you guys signed about 15 leases a month per property and it's a little off from last quarter. Is that falling in line? Or were you expecting to do a little better on the lease-upside?

It's pretty close in line. We've been running, I think I said 86% of absorptions, about the same last quarter , so we've been running in the 10 to 15% below our original projections, really almost from the beginning of the year. You know, my calculations are about the same as yours. I think we've got about 16 per community, per month, is what we actually absorbed in the fourth quarter and that is pretty representative of seasonal patterns. You obviously get less leasing activity in the fourth quarter.

And lastly, in terms of your JV, you indicated you're going to look to JV-specific assets in specific markets, you know, based upon risk and concentration. Are there any markets at this point, whether they be in the development pipeline or the entitlements pipeline, that you're most concerned with? To put in the JV structure, that is.

Chris, this is Tom. There are certain markets that we're currently overweight in terms of our allocation of capital and those markets we would look to do more joint ventures than other markets and Seattle would be a good example of that. Another example would be Stanford, Connecticut where we've done two joint ventures in the past. The other example we gave of using joint ventures is where we have multiphased, very large developments in the New York metro area and at Avalon Sound, which is a multiphase development, and now at Chrystie Place, you can see our use of joint ventures to help mitigate specific local market risk and concentration of capital in any one location.

Would Northern California and the multiphase there fall into that bucket, as well?

Possibly.

Okay. Great, thanks a lot.

Our next question is from Jay Leupp with RBC Capital Markets.

Hi, this is actually David Ronco here with Jay Leupp. I wondered if you could talk about the large decline in expenses sequentially from the fourth quarter to the third quarter?

David, this is Tim Naughton. I can do that. That was largely seasonal. I think we had mentioned last quarter that we did anticipate expenses coming down. A lot of it is turnover-related. I think turnover was in the mid-70s in the third quarter it was 53% this last quarter. So, you just get a natural reduction there and the other comment I had in my prepared remarks was that we did get a break this quarter of the renewed insurance which was actually a decline on a year-over-year basis but also on a sequential basis.

Okay, great. Thanks, Tom. A couple of questions about Northern California. Number 1, wondered if you could talk about the drop in expenses there, whether that, too, was related to turnover? Secondly, wondered about the nature and amount of concessions in each of these submarkets here? And then third, what is the job outlook is for the coming year, particularly in San Jose?

Sure, David, this is Tim. I'll try and hit on all of those items. In terms of expenses, some of it was certainly related to turnover. Turnover is down slightly. Year-over-year, it was down a bit more in the Bay area than it was across the rest of our portfolio, so some of it was that. Some of it, frankly, that market has just been under pressure for a longer period of time and I think just, there's a, you know, we're just, you know, very focused on expenses in that market. With respect to concessions, I think that was the second question you asked?

Right.

And then lastly just the outlook for the markets?

Job market, yeah.

Job markets. Why don't I take the first item, the job markets first. Overall we expect that it's going to be uneven in Northern California, kind of going from best to worst. Say San Francisco, we're actually seeing employment markets stabilizing there now. We expect modest employment growth in '04 and combined with relatively low levels of supply, by the end of next year, we actually expect demand/supply fundamentals actually accelerating in San Francisco. Oakland has a lot of the same characteristics. The one thing Oakland has going against it is a little bit more exposed and vulnerable to home buying. And lastly, San Jose, we're still seeing rental rates deteriorate. It's a function of demand and supply. We saw '03 job losses of 30,000. We expect '04 to be relatively flat. I think San Jose and Boston are the only two markets we expect flat job growth year-over-year. And, you know, probably most troubling as we continue to see supply in San Jose, which, obviously is continuing to contribute to a deterioration of that market.

In terms of concessions, interestingly, it's mainly focused on Oakland right now. I think it's just somewhat of a function of we have seen some growing availability in that market over the last couple of months. So, more of the concessions are focused there whereas San Jose has been more of just, you know, just market rent deterioration.

The nature of concessions, has that changed much or are you still doing basically a month free in those markets?

It's different on every floor plan, different in every community; we’re constantly testing lifting concessions and adding concessions. In Oakland it's around a month. In San Jose, in San Francisco, it's actually it's less than a month.

Okay, great. And then just a follow-up to those questions, I wondered if you could talk about how those factors culminate into any NOI projection you have for the Bay area in '04?

Sure. Overall, as you saw in our outlook, we're looking at, you know, modest decline in NOI, flat to modest decline in revenue. As you go around the different regions, the patterns regionally are basically the same, although we expect the differences to narrow. Southern California, Mid-Atlantic should be the most positive year-over-year. The Northeast and Midwest should be relatively flat year-over-year and the and we expect declines again in Northern California and Seattle in the 3 to 5% range on a revenue basis and a little bit more on the NOI basis.

Great. Hey, thanks, Tim, appreciate it.

Our next question is from Brian Legg with Merrill Lynch.

Can you talk about your the concessions per move-in increasing from the third quarter by a pretty healthy amount, the 9%, when it looks like market rents are holding flat and your occupancy is fairly stable?

Yes, Brian, this is Tim again. Yeah, they're up on the order of 870 to 950 per move-in, so, I would say it's 9% it maybe represents, you know, about 1% effective decline in rent quarter-to-quarter. And I would say part of it probably is there is probably a little seasonal element in there as well. And then market rents, as you said, were relatively flat. So, when you look at net effect of market rents, were down, you know, including recessions, on the order of a percent.

And looking at the quarter, usually the fourth quarter is a seasonally softer period, but you look at your overall revenues as being flat on a cash basis and you had a pretty dramatic drop in expenses. If we look back to more stable environments in the apartment markets, would this type, you know, call it a 3.5% cash NOI growth from a third to fourth quarter, wouldn't you expect, you know, a negative NOI growth from the third to fourth quarter? And is this potentially a bullish sign? Because it certainly doesn't coincide with your guidance of continued decreasing sequential NOI until the fourth quarter of '04.

Brian, this is Bryce. A couple of general comments. You know, expenses are, you know, seasonal changes in expenses are just, can be very confusing and I would just caution people not to put too much read into that, even adjustment and insurance, you know, between quarters causes that. You know, revenues are still declining. You can clearly see that in our financials and as you look across, you know, until you can stop, you know, you can look at concessions, occupancy, market rents, you can look at lots of things, but at the end of the day, if revenues are still declining, that's not a good thing and we were declining throughout 2003.

So, as we look into 2004, our business judgment combined with the economic forecast, combined with just, frankly, with the way the math works, it will be a year of flat to modest revenue declines. Barring any significant changes in the economy, as Tom mentioned, we've seen lots of adjustments over the last couple of years, always on the downward side on jobs where hopefully there will be a surprise on the upside. But without a significant change in the job outlook, we're very confident with the earnings outlook we've given.

Yeah, but looking at your cash revenue it was essentially flat from the third quarter and I would think on a seasonal basis that you normally have a larger drop than that. That's a positive sign.

Well, I don't know that I guess, this is Tom, Brian. I think the interesting thing to note, yes, we did have on a cash basis, basically a flat third to fourth quarter. You know, one could wonder, well, if concessions per move-in are going up, what's going on with cash revenues improving, and maybe that's when you're heading. If it is, let me say the following. We did have per move-in increases in concessions, but the absolute level of concessions between the quarters actually declined about $700,000. So, we did have to use move-ins pretty aggressively in certain markets in the Northeast. The rest of the markets around the country, concessions stayed either down or they were flat. So, you are seeing the benefit of lower move-ins during the fourth quarter and therefore a reduced need to use concessions overall, but we had to use more concessions per move-in to convert the traffic we were looking to convert.

I would be cautious, though, about calling a turn based on the fact we have a flat revenue trend third to fourth quarter because concessions, as confusing as they are, can cause one to reach false conclusions about a turn and we're not ready to say that revenues are flattening, in fact, we're continuing to reiterate that we think overall revenues next year on an accrual basis will decline 0 to 2%.

And last question. When you talk about JV structures, will your JV structures be both used for both net dispositions and potential acquisitions going forward?

Did you say dispositions?

Are you going to sell some of your on-balance sheet portfolio into a JV structure as a way to reallocate your portfolio or do you really expect to use the JV structure to expand your portfolio?

Brian, this is Bryce. It could be and it is being used in certain development activities and Tom and Tim have spoken of that. So, that's one category. It could and may very well be used in the sense of acquisitions in certain markets. And also it could be used to sell certain assets. We do not have any current plans to do the latter, to sell a pool of assets into a pool and take an interest. We know some others have done that. That's not something we're currently contemplating but it absolutely is, you know, an option and it is a way to manage geographic concentration.

Okay. And last question, I assume the appetite among condo developers is still fairly strong. Do you foresee that that 150 to $200 million going up if you just see more opportunistic sales to condo developers like you saw in the D.C. region?

Tim, I'm sorry, Brian, this is Tim! You know, one of the benefits that we have right now is a lot of financial flexibility so it does give us the opportunity to expand or contract the disposition program, depending upon, you know, real estate conditions and, of course, part of that includes opportunistic place on the condominium converters so we will continue to be watchful for those opportunities.

Okay, thank you.

Our next question is from Andrew Rosivach with Piper Jaffray.

Hi, guys. Tim, I'd like to start with you. It's been so long since I have heard the word insurance and positive next to each other. Could you give some detail on that policy?

Andrew, this is actually Tom. I'd be happy to give some detail. We renewed our, we did something called a cancel early re-write which, in observing the conditions in the market for insurance, we determined there was an opportunity to reset our rates early. And we did that. And we did it earlier in the year, around beginning August 1, we actually achieved about a 20% decline in the run rate on our property insurance, which is, you know, benefited '03 and will continue to benefit all of '04 because when we canceled and re-wrote the policy, we did it for an 18-month period. So, we're covered throughout '04 under that existing policy.

Good news is we're going to see, you know, a slight decline in insurance this year, offsetting some of the other increases we noted, but, you shouldn't expect the run rate to change materially for the property portion of insurance during 2004. We're not going to see the same last half of 2004 benefit that we saw in 2003.

The other big component of insurance is casualty. That piece, which is about 1/3 of the cost of property, actually went up 15%. So, that offset some of the benefit we saw on the property side.

Finally, a category that you don't see as much is our deductible piece and that's really the most volatile piece right now in insurance, is how much are we going to have to absorb in terms of slip and falls at the property? You know, some years we have a fire or two or three fires and we have $2 million of losses there. The end of this year it's been more like 800,000. So, that's a very volatile element of insurance, as well. But that is what happened with insurance. The markets are improving for property. They're continuing to deteriorate for casualty and they will continue to deteriorate for D&O.

Did you say your deductible is the same over last year, I'm sorry, I didn't catch that part.

The deductible is the same in terms of what we would take to the insurance company but what we have to absorb is based on actual activity and that's what is volatile.

Gotcha. Okay. Then a generic question for probably both Bryce and Tom. You mentioned that your capital markets assumptions could change given what's happening in the financial markets and, you know, my 2 cents is that all of us are amazed at how low rates are, how tight spreads are and how low cap rates are all at the same time and other rates are actually doing a lot to term out their debt as much as possible and it actually looks like you're increasing your floating rate exposure.

Is there anything given on what you're seeing today that would make you change a little bit of what you think you will do in terms of capital markets activity?

First, Andrew, we're not increasing our floating rate exposure. Our line balance year-to-year hasn't really anticipated the change much. I'd point that out. Yes we are doing some tax exempt bonds that are floating, but only 20% of that is to us. But our floating rate debt really isn't going to increase dramatically. I want to set the record straight. Although we believe there is room for growth with only 3% of our capital structure floating.

I just mean from December 31, Tom I understand that in the '03 you were at a very low level.

Right. In terms of terming out the debt early, we don't have a lot to term out so if we were to do a debt deal, it would be cash on the balance sheet, which is not the end of the world.

And the other thing I would point out is that the opportunities for to us term out debt are pretty modest given that we've got a fairly stable maturity schedule. We've got $125 million coming due in February at a 6.58% rate. We have a couple of secured debt deals coming due that add another $25 million, but our opportunities to take, you know, $300 million of debt out and replace it with 200 basis points less really isn't there for us. However, having said all of that, we will be opportunistic. If there is an opportunity and a use of proceeds that match up, you can expect that we'd be in the debt markets and we think we have the financial flexibility to do it.

Great. And just since the refi starts are so enormous, I know you show what rollovers you have this year are there any swaps burning off in about 04?

Yes, there are some swaps burning off. It's around $80 million. We do expect to refinance those in February. That will create some interest savings that are included in our financial outlook of about $2 million annually.

Gotcha. And one other. What were the pursuit cost writeoffs in the fourth quarter?

They were nominal, it was $70,000.

Fantastic. Thanks a lot.

Yep.

Our next question is from Jordan Sadler with Smith Barney.

Good afternoon. I guess first I just had a question on the sources and uses going into the year. You guys had $450 million or so in dispositions and rates of equity. What you do you see as sort of the dry powder before there is an equity raise, a preferred raise in the works?

I am sorry, I didn't get who...

It's Jordan.

Oh, Jordan, I'm sorry, I apologize. Jordan, our liquidity remains, it's probably the best it's ever been, which is both good and bad. We wish there were more use of proceeds right now. Just to give you a rough flavor of sources and uses, though, dispositions we've talked about net being $150 million after the debt is repaid. Joint venture debt and equity is another 100 to $125 million. You know, net new debt, if you look at specific property debt and possible additional debt issuances, could be 250, so you have about $525 million of sources. The uses of that capital would be to redeem the debt of $125 million coming due next month. Some asset-specific debt of about $25 million coming due. And then about $375 million of development activity, that's gross dollars out the door, JV and other. And that's basically the sources and uses and I didn't talk about issuing any preferred and common when I went through that.

Okay. That makes sense. Can you also just talk a little bit about the disposition pipeline. Obviously you're sort of, it seems like you closed the spigot off a little bit. Is there anything sort of lined up or being marketed for sale at this point? In terms of decisions as to what to sell. Would it be correct to assume that it's going to be more in sort of the opportunistic camp than the strategic sort of nature?

Jordan, this is Bryce. You know, Tim used the analogy of two buckets, either strategic or opportunistic and staying with that, you know, strategic, you know, there are no markets that we are currently planning to exit in '04 that would be in that category than '03, when we exited Minneapolis. So, that's not a likely scenario this year. What is likely is more in the opportunistic, meaning outsized valuations from strength of the, just the sales market or the condo-buying alternative, still a very strong sales market. Not every asset is hotly bid for by condo guys, but many are. We are currently marketing some assets and expect them to close in the next few months, Tim. There are a couple being marketed and then there's a number there...

They're under contracts there?

Close. There is at least one asset under contract currently, Jordan. And another in the marketing. And then there's a number of assets we have tentatively, and I think you can get from our remarks that the disposition program is a very fluid program, to the extent that cap rates move and interest rates don't or vice versa. Shifting back as a source of capital, between capital and dispositions is something you'd expect us to do.

Also, as we look within our individual markets, we have portfolio allocation in terms of how much capital we want in that market but we also have objectives in terms of the type of assets we want in a certain market. In certain markets we may want to have more "A" assets and in certain markets we may want to have more "B" assets. So, disposition becomes a lever to achieve those submarket portfolio goals. So, don't be surprised to see us sell some newer assets and don't be surprised sometimes to see us sell older assets. There isn't one set criteria across the overall portfolio. It is trying to achieve individual portfolio objectives.

Okay. And then two other quick ones or another quick one. Your IRRs were 15% or so on the sales done this year, somewhat consistent with what you've done over the last five years. Can you talk about maybe your hurdle when you're analyzing an asset a for sale in terms of an IRR hurdle? And then maybe talk about the actual recent changes in cap rates, if you're seeing any, given the low interest rate environment, any re-establishment type of condo converters and things of the like.

Jordan, this is Tim. I will take that. In terms of a hurdle, it's not like a new development deal or a new investment where we necessarily have a hurdle. It's really, again, much more a function of, you know, strategic objectives and opportunity, you know, opportunities are when we think it's outsized value relative to the under, relative to what we would pay for that asset in the market and, you know, sometimes it's going to be in a market like Southern California or D.C. that has had a pretty decent NOI performance, even, you know, given the economic situation. Other times it may in be markets that have actually, you know, have actually felt some strain, but where, for whatever reason, the market is buying the asset more than we think they ought to be, but it's still an opportunity to sell and may result in a lower unleveraged IRR. And the second part of your question was?

Regarding cap rates.

Turns and cap rates.

Right.

You know, we haven't yet seen any significant upward movement in cap rates and I mean cap rates do vary by market and by asset type so it's tough, you know, to really benchmark them, you know, across time within an individual portfolio. But, you know, we have not yet, we still have a very active pool of buyers for the assets we've put on the market and as best as we can benchmark, you know, across a similar asset, a similar market two quarters ago, we're really not seeing any significant movement.

Thanks, guy, that's it.

Our next question is from David Harris with Lehman Brothers.

Hi, good afternoon. Tom, I wonder if you could tell us just whether you've got any specific buyback arrangements assumed within your '04 guidance? This is for common share buyback.

We have no common share buybacks in our forecast or outlook and we have no common stock issuances in our outlook.

Okay. Thanks for the clarification. And then on Chrystie Place, if I look back at the guidance, the detailed guidance that you threw out in December, you made specific reference to a joint venture which would be resulting in a 20% interest and involve the issuance of $117 million of tax exempt bonds. Is that all associated with the Chrystie Place JV?

Correct.

Okay. That sounds as if you've got that transaction pretty far advanced. What's the timing in terms of a formal announcement with your JV partner?

We expect to close both the bonds and the JV partnership in the first quarter.

Okay. All right. And what would you recognize any profit at that time? Or would that just be rolled into the total project and you'd recognize that later in the development?

There is no cost at the conversion into the partnership. This is a cost-based joint venture. We're not looking to make money entering by bringing a partner in at the beginning. That's not what the plan is for that community.

Okay. This question is for Tim or for you, Tom, could you remind us of your definition of cap rates when you are throwing out the 5.8 on the sale of the assets in the fourth quarter?

David, this is Tim. I will take that. In terms of the numerator it would be our expectation in the next 12 months of cash flow less a reserve, which I think we highlight in attachment 15 of around 225 to 250 per apartment. So, that would be the numerator. And the denominator would be, you know, obviously the asset price.

Yeah. No management?

Oh, I'm sorry, yes, typically there's a management fee of around 3%. Again, I think that's pretty well detailed in the attachment 15.

Okay. Okay. Tim, you still there?

Yes, I am.

One final question. You threw me here, my English doesn't go this far. What's a podium project? [ Laughter ] I was waiting for that question!

Yeah! A podium is typically a three or four-story wood frame building on top of structured parking. Underneath the building it looks more like a high rise but above looks more like a garden.

Okay. Okay. And then...

David, this is Bryce, just maybe to add to that, I think, you know, one of the points that we are trying to make is to help, because so often when we do property tours people see only a select group of the properties that we have but we have quite a broad range of products in terms of what we own and quite a broad range of products in terms of what we develop from literally, you know, two-story town homes to 40-story high-rises. And so the point is within any individual market, we have quite a broad breadth of skills and believe that's extraordinarily important. You know, the days of having one product, you know, a three-story walk-up apartments are over. But it's also not, you know, we're not trying to be just do high-end high-rise communities. So, the mix of product types is hopefully what you take away from Tim's comment about our first podium in Massachusetts.

Okay. And then actually just going to that point, the retail in the Chrystie Place, size and any concerns about risks about representing the property development?

Did you say, was why one of the questions?

No, no, I mean you just talked about the mix.

Yes, yes. Okay, yes. As we do more urban communities as a percentage of what we do, quite often those come with either a requirement by the zoning municipality or a desire on our part to incorporate some retail into it, you know, typically that's been, you know, 10, 20,000 smaller level retail. This is a relatively large level of retail. It is one of reasons why when we looked at the overall mix of the size of a multiphase development in Manhattan and a significant retail component along with some other complexities of the deal that we chose to pursue it in a joint venture format.

We're excited and we think the retail will certainly add, you know, to the overall success of the community but different product types, particularly a product type that we're not as experienced in does carry some level of risk and we try to identify that.

Okay. How big is the retail component of that project?

90,000 square feet.

Okay. And you're going to be the developer on that?

That's correct.

Okay.

It's

integral to the building. If you think of it, it's the first two levels are retail. The apartments sit above the retail. Okay. Great. Great. Thanks for the clarification. Thank you.

Our next question is from Steve Swett with Wachovia Securities.

Thanks, good afternoon. Tim, just a couple of questions for you. You mentioned that traffic and move-outs were down in Q4, I think. Were there any markets where the patterns were different than you would typically see for the fourth quarter and just seasonal terms?

Yeah, Steve, this is Tim again. It was a little uneven. I think I said they're both down about 2 or 3%. So, they're down proportionate to one another, but, you know, different across regions. In terms of traffic, we actually saw traffic decline in the Northeast, Northern California and Seattle and increase on a seasonal basis in the Mid-Atlantic, Southern Cal and Midwest. They generally held those patterns for turnover with the exception of the Mid-Atlantic, actually turnover is down there and in the Northeast, turnover was up. There is a little bit of a disconnect between traffic and turnover in those two regions.

Great. I know it's a small market, but could you just comment on Los Angeles? The pattern over the last several quarters has been toward lower revenue performance. Is it a single property? Is it something in that market or is it something else?

Yeah, and you're speaking more toward L.A., specifically, not Southern California.

Yes, just the L.A. area.

Yes, certainly it's been a tougher employment market than Orange County and San Diego. I think we're going to see about 35,000 jobs lost in '03. Expect roughly to regain those in '04, but I think it's just really been a demand-side issue. I think the higher end has been more impacted than the middle market. It is a softer market overall from a demand standpoint than the rest of Southern California.

One last question, on the development pipeline, you're behind, I think you said relative to pro forma on the lease-up. Is it one or two properties or is it across-the-board?

It's pretty consistent across-the-board. I think you can see in the net effect of rental rate, many of those came down this past quarter. A couple in D.C. actually went up, so generally D.C. has been the, specifically the suburban Maryland assets, have probably been performing better on the margin and, you know, most of the other assets are kind of, are underperforming pretty proportionately.

And just to be clear, the stabilization dates reflect your current estimates on the lease-up.

They do.

Okay, thanks.

Our next question is from Rich Anderson with Maxcor Financial.

Thank you. Are you looking for anymore land in Manhattan? Other development sites?

We are, Rich.

Okay, and I guess in light of the fact that you sold a property in Fort Lee, right across the river, do you see some sort of disconnect or do you see a better opportunity to now be in the city versus right across the river? Is there anything that you're seeing specifically that drove you to sell in Fort Lee and develop in Manhattan?

Not so much market-driven as concentration-driven. We have developed and own a number of assets in Northern New Jersey, you know, from Jersey City, the number of communities in Jersey City, Edgewater and Fort Lee as well as in Florham Park, which is certainly not in the water but in Northern New Jersey and we have nothing in Manhattan. So really, hopefully, you're probably sick of hearing us say, we take very seriously our portfolio allocation by region and by submarket and by asset type. So, it's really more looking at asset concentration as opposed to market opportunities.

Okay. Switching to the left coast. During the fourth quarter did you see anything in the San Francisco Bay area that took you by surprise negatively? A peer of yours was taken off guard by some weakness in that market early on in the fourth quarter. Did you see anything like that?

Rich, this is Tim. For us it was more in the East Bay rather than in San Francisco and Peninsula. I think I mentioned earlier that, you know, concessions are highest right now in the East Bay. I think it's been a bit more vulnerable to home buying than either San Francisco or San Jose, but San Francisco and San Jose more or less performed in line with expectations, all be them weak.

Okay, and my last question is Tom, you mentioned interest coverage about an hour ago, I guess, at 2.7 times. I just looked back at the release last quarter and it was 3.2. Is it a different definition? Is one fixed and another just interest coverage? What's the disconnect there and did it really drop by 50 basis points?

It didn't actually drop. Regrettably, with the new requirements that come with financial reporting, you have to calculate certain numbers in a certain way. We had to include in our fixed charge calculation last quarter the gain on the sale of a partnership interest for the [falcrum] sale, that's included in the 3.2 that you quote. If you were to carve out that income, which was 22, $24 million, we actually showed an increase in our fixed charge coverage of about 10 basis points.

Okay. Thanks very much.

2.6 to 2.7.

Thank you.

Our next question is from Richard Paoli with ABP Investments.

Hi, guys, I know it's been a long call. Most of my questions have been addressed. I'm going to be quick. Tom, I think it was you that mentioned developed capitalized overhead and in your supplemental I did notice that in the close for the year it has increased and logically your, obviously, increasing your development so that should go up. Can you give me a little flavor of the past increase? It's been like, I think it was a million dollars since last year. And then, you know, what you're expecting in terms of that capitalized overhead number, trend-wise?

Yeah, Rich, I think you can expect that, one, we gave guidance on the overhead increases for capitalized overhead in our outlook, so I'd refer you back to that for the year. The reason for the increase is twofold. One is last year in the fourth quarter we had an accrual adjustment downward that lowered the capitalized overhead because of lower bonuses. We had to true up our overhead in the fourth quarter related to the bonus accrual. That drove the number down. We're now driving the number back up as we prepare for the next expansionary cycle. We actually have added some staff and the related compensation expense for that and that's what you're seeing in terms of the gradual increase. If you go back to '02, the fourth quarter, you see the effect of an anomaly there. That's the bonus adjustment. And then the steady ramp up really does relate to our positioning for the upturn.

Just more activity. And you mentioned that you could see your development getting up to the, was it 800 to $850 million range? And is that like an '06 time frame in terms of starts or '05, where do you...

Rich, this is Tim. Probably near the end of '04, early '05. As I mentioned, we anticipate starting in the order of 100 to $125 million a quarter and, you know, typically they stay on the schedule for about two years. So, you know, that's how you get to the 800, $850 million.

Okay. And then I was wondering, I think I caught the sense that you guys are somewhat bearish on the D.C. area. You mentioned supply coming. Could you just shed some light on where it is, is it in the district, is it out in Dulles Corridor? Is it everywhere, you know, you guys have been pretty spread out but have a good size there.

It's everywhere, but to different degrees. If there are 10,000 apartments being delivered next year, probably 6,000 in Northern Virginia, 2,000 downtown and 2,000 to 3,000 in suburban Maryland and in terms of being bearish, I guess, I think we expect the recovery in that market as apartment markets start to recover to be more muted. It didn't go down as much as other markets and just the absolute level supply with the number of new entrants that have come in over the last three or four years will just keep it from being robust at all. We certainly don't expect a positive surprise.

I'm not an expert on the region, but I think I'm asking this right. In terms of Northern Virginia, inside the beltway, outside the beltway? I mean some companies do make that distinction. How much of that would you say of that 60% that's, you know, the supply that's coming in, you know, in the outer reaches of the, you know, the beltway area?

Yeah, it's both. I'd be guessing in term of how much is inside and outside the beltway, Rich. It's certainly more out the Dulles Corridor than it is either the 95 Corridor or the 66 Corridor.

Okay. And then I'm just going to ask one, you know, bigger picture question, it's been a pretty long call, but, you guys are not the only ones that are, you know, looking at developing into the recovery. And, you know, there's been a lot of supply already. I mean what makes you guys feel that, you know, the recovery is actually going to come? Because, you know, you're going to be ramping up your development pipeline and sounds like everybody else might be. I mean why should we believe that the supply just isn't going to overwhelm whatever demand is created by jobs?

Rich, this is Bryce. I will start in and Tim may want to add some comments. Development will continue as long as value is being created. And just our wish or your wish or anyone else's wish that supply should come down because, you know, jobs are not there, is, you know, just, you know, we've seen, hasn't happened. Interest rates are low, capital is available, capitalist chasing deals on both a pre-sale and completed basis, and developers, including us, will continue to develop either for their own account or for sales or for ultimately condo conversion.

And I've been, as I'm sure many of you have been at many conferences over the past few months and there are a number of conferences coming up, and people continue to say, you know, they believe, you know, they're surprised that supply hasn't come down. You know, just look at the economics. Even with high levels of concessions and even with the depressed rental rates, there is (sic) very few troubled deals out there. There's very few development deals that have not created value in excess of, you know, the cap rates that they either have been sold at or could be sold at. Our portfolio, even under these negative fundamentals, as Tim mentioned, fully taking concessions is at 8.4 and we sold a group of assets at about $450 million at 6.3 and this past quarter at 5.8.

So, we're creating value today. We believe we will create more value into a recovery period and it's a core competency that AvalonBay has and it's a core competency that we are going to leverage off of. Tim, you might want to add?

Yeah, Rich, I think the other thing is, I think it's going to be expanding less than it might seem. You're probably hearing it from some of the public eyes who probably did hold back a little bit and are talking about expanding. I tell you, the private guys never stopped. The capital has been out there in terms of the private equity and certainly in our markets when they've gotten entitlements, they’ve generally gone forward. So, I think, you know, what limits some of the things we've talked about in some of the markets, that's just some of the natural constraints, there are less of them in Northern Virginia than there are in most of our other markets, but, you know, we expect supply, you know, maybe to jump, you know, 5,000 units or less a year, so, we're not seeing a rampant increase, that's not in our numbers.

You said that was in your markets, Tim, like an aggregated.

Yes, our markets we are looking at selling 30,000 to 35,000 apartments.

O.K., thank you

Sure.

Our next question is from Ralph Block with Bay Isle Financial.

I was reading that November over November last year housing prices in California were up about 18%. Is there some point at which the ratio of median, of housing expenses to median income becomes such that single family housing just becomes less affordable and maybe exerts less pressure on rental rates?

Hi, Ralph, this is Bryce. Actually I believe someone just forwarded me today there, was an article, I think in the San Francisco Chronicle on that very point that rental rates have come down and home prices continue to go up and it is now creating, you know, pressure, back to the good guys in the sense of making rental a better value. As a broader comment, taking away from specifically San Francisco, you know, there's been a number of pieces, a number of people that looked at this issue, you know Axi-Metrics (ph) looked at it a quarter ago. Green Street did a piece a few months back and Steve [INAUDIBLE] had a piece that just came out yesterday that I thought that was pretty interesting. And in that piece, what he looks at is the cost of ownership, total cost of ownership, you know, after looking at different mortgage instruments and factoring in insurance and other issues and contrasting that to the effect of rent payments.

You know, it is maybe to the point of your question, it isn't just about interest rates, it's about ultimate payments and where home prices are so unaffordable, the interest rates have far lesser impact on that rent by decision, you know, just one example, again, looking at this piece, you know in San Francisco, you know, the average, the median home value is $570,000 and I think some would even dispute that number, but $570,000 versus, you know, to pick on Atlanta for a second, it's $155,000. So, it's three and a half times as expensive in San Francisco. Again, using just this piece that came out yesterday, the average rent in San Francisco, $1400, again by lease, $720 in Atlanta by lease. The rents in San Francisco are double. The housing prices are three and a half times. It's that element of lack of affordability which causes the propensity of rent in our markets to be higher because people simply, even at a very attractive interest rate, simply can't afford these very high home prices.

So, yes, I do think and we've seen that in the sense of just the reasons for move-out within our markets. They are less to home ownership in the most expensive markets, like San Francisco, for us, that's one of the markets where we see the lowest level of move-outs to home ownership and highest in the markets where home ownership is more affordable.

I guess the bottom line is that while that trend hasn't really helped you too much in California so far, if it continues, it may likely do so?

I think that's the point is that, you know, as they say, trees don't grow to the moon and there is a simple point. Again, this article is in the paper today, I think as a sign that at a certain point, enough is enough. Home prices can only rise so much and rental rates can only drop so low before the consumer makes that trade-off in the opposite direction.

Okay, thanks.

Tim, you might want to add?

Yeah, the thing I wanted to add Bryce, certainly the price to average income has been going up nationally for home pricing, but the increase has been certainly more significant in our market. I think nationally it's around 3, maybe a little over 3. In our markets, it's on the order of 4.5. That's increased at a greater rate here in the last three months, three years here, I am sorry.

Okay, thank you.

Sure.

Our next question is from Dennis Maloney with Deutsche Banc.

Real quick question. In the fourth quarter, where was bad debt as a percent of revenue? And then secondly, with the reopening of the path connecting Jersey City to downtown, have you seen any meaningful pickup in traffic in Jersey City?

Dennis, this is Tim Naughton. Bad debt ran about .9%, which is pretty much what it's been running the last couple of quarters. It may have run 1.0% last quarter.

And then if terms of the path train re-opening, we actually have seen a pickup in occupancies and traffic at our Avalon Cove property in Jersey City, so that does seem to be helping us on the traffic front.

Thanks a lot.

Sure.

Our next question is from Mark [Hiaua] with Spectrum Advisor Service.

Mark?

Sorry! Sorry. Am I still on the line?

You are!

Okay! I just have a philosophical question. Given where interest rates are today and the prospect of a recovery and the traditional amount of leverage that is used in apartment ownership, why wouldn't you step up your level of leverage? Is it a matter of, you know, just the demands of Wall Street or do you think that's smart business?

Hi, this is Tom. I think, Mark, it's both. Wall Street does put a governor on what they expect a publicly owned REIT to use in terms of leverage. I would say the amount of leverage that one could use or a company could use really depends on their business model. We are an active developer and we need more equity in our capital structure to address the business risk presented by development. If you are a primarily an acquirer of assets, I think you probably could have more leverage in your capital structure than someone who develops and that's just good risk management.

Having said all of that, I think that the multi-family REITs, apartment REITs, could step up their leverage. There's been a lot of debate about that recently. I think many people believe they could take home more leverage and I think you might see that happen in the industry over time, but we really do focus on AvalonBay's overall need for equity to support our development activity and especially when you're looking to accelerate your development activity into the expansion.

Interesting answer. Thank you.

Our next question is from Scott O'Shea with Deutsche Banc.

Thank you. Tom, could I get accumulated depreciation at the end of the quarter?

I will have to call you back on that.

Okay.

Sorry! [ Laughter ]

That's okay.

We don't give a complete detail in terms of the balance sheet each quarter and I will confess I've never been asked for that, but I will get it to you.

It's just helpful to calculate the covenants, if you could give a call that would be great.

I sure will.

There are no further questions at this time. Do you have any further comments or any closing remarks?

Well, just closing comments. I just thank everyone for their time and participation today and we look forward to seeing many of you at the numerous conferences over the next several months. So, thank you for your time today.

Thank you, ladies and gentlemen, for participating. That does conclude today's call. You may now disconnect.