艾芙隆海灣社區公司 (AVB) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the AvalonBay Communities second quarter 2004 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 0 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.[Elaine Walsh], Director of Investor Relations.

Miss Walsh, you may begin your conference.

Thank you, Amanda. Good morning, and welcome to the AvalonBay Communities second quarter 2004 earnings conference call.

With me 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 703-317-4751, and we'll be happy to send you a copy.

As always, I'd like to remind that you 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 last night's press release as well as in our form 10-K filed with the SEC.

As usual, we have included definitions and reconciliations of several nonGAAP 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 to refer to this information during your review of operating results and financial performance. And with that, I'd like to turn the call over to Bryce Blair for his opening remarks.

Bryce?

Thank you, Elaine. In my comments this morning, I'll be addressing two topics. First, how the year's shaping up in terms of apartment fundamentals, and how it's impacting our earnings. And secondly, to highlight our key areas of focus for the balance of the year. And how is the year shaping up?

Well, we expected 2004 to be a year of transition, one where sustained job growth would lead to a transition to more stable apartment fundamentals. And this transition began earlier this year, but gained strength this past quarter.

Not only is this transition taking place, but it's happening earlier than our original expectations. As earlier than expected improvement allowed us to exceed the high ends of our second quarter FFO guidance, and to raise our full-year guidance by six cents per share.

Last evening, we reported EPS for the quarter of 46 cents and FFO per share of 83 cents. This was the first quarter in two years where we did not experience a year-over-year decline in FFO per share.

Our FFO per share exceeded the high end of the previous guidance due to three primary factors which I'll walk through briefly.

Our first higher than expected occupancy, our economic occupancy for the quarter averaged 95.2, which is up 140 basis points from this period last year, and 120 basis points from the first quarter of this year.

We've reiterated on each of the last two calls that one of our primary operating goals was to achieve portfolio economic occupancy of 95% or greater.

This is a point at which pricing power begins to shift back to out - in our favor, and during the second quarter we achieved this goal. A second component of the - our performance was operating expense savings.

Some of this is recurring and some one-time and Tim will elaborate on that. And third was continued interest savings.

So the combination of these three factors - it did result in our quarterly results exceeding our earlier expectations, as well as impacting our decision to raise our full-year guidance.

I'd now like to shift to our key areas of focus for the balance of the year including an update on our expected disposition volume. While we're certainly pleased to see our portfolio firm up more quickly than originally expected, we remain very focused on our core operations and on our development activity.

Our core operations are the key driver to near-term performance and our development activity drives future growth. In terms of core operations, our shift is from getting full to staying full.

From a platform of stable occupancies of 95% plus, we'll look to grow revenues through rental rate increases and or through reduced concessions. In terms of development activities, we're focused on ensuring great execution on an increasing level of development activity.

With 2004 as a transition year to a period of healthier fundamentals in '05 and '06, we've been systematically increasing our level of development volumes back to historical levels. As you may remember, our development under way was running at about 800 million in 2001.

In response to the weak market conditions in '02 and '03, we reduced our development volume to between 500 and 600 million, and we've now increased it back to the $800 million range.

Development is a challenging and at times risky business, yet is a core competency of AvalonBay and a key driver of earnings, and NAV growth.

As our development volume increases, we are keenly aware of the significant construction cost pressures, particularly on material prices such as steel, concrete, lumber and drywall.

An improving economy worldwide coupled with a very strong per sale market has resulted in double digit annual increases for many material components.

Overall, we're seeing construction hard cost increases in the range of 10% to 15%, which translates into - about 7 to 10% increase in total development costs.

The majority of our development communities under way were bought out prior to the more recent cost escalations. Or their recent starts as budgets reflected the current costs environment.

So we don't anticipate that this recent escalation in costs will have a material impact on the budget performance of the communities under construction today. It will, however, impact the budgets of the communities still in the planning stages.

Now, one positive aspect of these recent cost increases is it will inevitably make it more difficult to underwrite new apartment deals. This, combined with rising interest rates, may result in the slowing in the level of new apartment supply, ultimately helping demand/supply fundamentals.

As I mentioned, I also wanted to update you on our anticipated disposition volume for the year. During the quarter, we sold two assets and acquired one.

And Tim will elaborate on those transactions. For the year, we originally expected to sell between 150 and 200 million, and we'll likely be close to the low end of that range in terms of volume for the year.

Most of the sales this year will be opportunistic as opposed to strategic. And when I say strategic, I mean by way of example selling out of noncore markets such as the sale of our Minneapolis portfolio last year.

When I characterize something as opportunistic, I mean taking advantage of a unique situation in the market, such as selling in a particularly strong sales environment, or sale to a condo converter. So in summary, I would emphasize two points.

First, the market fundamentals are stabilizing a little earlier than expected, which has led to better than expected cooperating results.

And secondly, our key areas of focus remain on our core operations, staying full and increasing revenues through rent increases and/or reduced concessions; and focusing on great execution of our development volume.

Tim and Tom will now provide additional color on our operating investment financial highlights starting with Tim.

Thanks, Bryce. As Bryce mentioned, I'll discuss property operations and investment activity where I'll - touch on new development as well as dispositions and acquisitions.

Starting with property operations, as you recall last quarter, we noted that in Q1, apartment fundamentals and leading indicators were improving while same-store revenues were beginning to stabilize.

To us, this signaled apartment markets and early stages of recovery. In Q2, we began to see improving fundamentals translate into better property performance.

Improvement came mostly in the form of increases and economic occupancy. For the month of June, economic occupancy reached 95.5%.

Continuing an upward trend that started in February. By June, same-store revenues had increased sequentially for five consecutive months.

Modest and uneven, but increases nonetheless. From Q1, same-store revenues were up overall by 1.2%. The first sequential quarterly increase in 12 quarters. These increases were driven by increases in economic occupancy as well as seasonally high transactional revenue.

Improvement was most pronounced in the Northeast and the Mid-Atlantic, which both saw same-store revenue increases by over 2% from Q1.

The midwest and Pacific Northwest were both up by almost 1%, while both Northern and Southern California were flat from Q1. Market rents and concessions were relatively flat during the quarter.

Average concessions per move-in increased 8% from Q1, but actually declined in May and June after having peaked in April. In our view, this is additional evidence that market conditions are improving, and are translating into improved property performance.

First in occupancy as we've seen, then in concessions as we are currently seeing, and finally in market rents, which we would expect to follow.

On a year-over-year basis, same-store revenues declined .8% from Q2 of last year, versus a decline of more than 2% recorded last quarter.

Year-over-year comparisons continue to improve during the quarter, and in June, we actually had our first monthly year-over-year increase and same-store revenues in nearly three years.

For the quarter, four out of six regions experienced increases in same-store revenues led by the Mid-Atlantic with a 3.5% increase.

Northern California continues to experience year-over-year declines although same-store revenues are stabilizing on a sequential basis there.

In Seattle and in the Midwest, same-store revenues were up in the 1.5 to 2% range, last quarter we mentioned that we believed the worst was behind us in both of these markets after significant downturns.

This continues to be our view on these two regions, and we expect demand/supply ratios in these regions to be among the highest in the country for the balance of '04 and '05.

The northeast shows significant signs of improvement in Q2, continuing a trend we saw beginning to unfold in Q1, as job growth has gained some momentum in Boston and New York over the last few months.

Given limited levels of new supply in most Northeastern markets, modest increases in demand should translate into continued improvement and property performance in the Northeast.

Same-store expenses were up .2% on a year-over-year basis, helped in large part by successful resolution of a pending real estate tax appeal in the Northeast. But for this tax refund, same-store expenses would have increased around 2%, which is in line with our expectations.

We continue to benefit from savings and insurance, bad debt and marketing.

On a year-over-year basis, we expect changes now in same-store - same store NOI to be in the -2 to 0% range driven by same-store revenue changes of -1 to 0%, and expense growth of 0 to 2%.

Each of these ranges all represent improvement from our original guidance. Turning to the lease-up portfolio. Absorption remains strong at 29 leases per community per month during Q2, which is about double the same quarter last year.

Absorption is coming at a cost as concessions remain prevalent averaging about one month in the quarter, cross lease-ups. I want to shift now to investment activity and I'll start with development.

Our development pipeline increased this past quarter as Bryce mentioned. here were no completions, and three communities started in the West Coast. The three starts are located in the L.A. and Seattle markets.

Avalon Del Rey is a 309 apartment community located near Marina Del Rey and directly across from [PliaVista].

Our other start in the L.A. area was Avalon Camarillo-- a three story garden community located in Ventura County in the town of Camarillo.

The third start was Avalon at Juanita Village, located in Kirkland, Washington, on the east side of Seattle.

We recently decided to move forward on this community given the improvement we are seeing in the Seattle economy. Together these three starts total almost 160 million and total development volume now stands at 790 million up over 200 million from the trough.

We expect volume to stay fairly stable for the balance of the year. Budget and schedule performance remain solid on the development portfolio.

As Bryce mentioned in his remarks, existing development communities are generally protected from some of the commodity cost increases we've been seeing.

The average projected yield for development portfolio is 8.2%, down 20 basis points from Q1--resulting from a combination of a changing basket of communities and lower average effective rents particularly at our [CraneBrook] and [Glen Cove South] communities.

And turning finally to disposition and acquisition activity, we were more active on the transaction front this past quarter. During the second quarter, we sold two assets and acquired one other.

The assets were located in the Orange County and Seattle markets, and were sold at a combined price of just over 61 million and an initial year cap rate of 5.9%.

On the acquisition side in Q2, we bought one community in L.A.. This is a 105-apartment community located in the ocean side town of Redondo Beach.

In addition, in early July, we closed on a community in the Chicago marketplace. Both of these communities provide repositioning and redevelopment opportunities and two markets targeted for additional capital.

Together, these assets were purchased for a total cost of 39 million at a projected stabilized yield before redevelopment of 6.6% and a projected stabilized yield post redevelopment of 6.9%.

So, overall in Q2, improving operating results reflect better market fundamentals that we started to see in Q1. Sequential same-store revenues increased throughout the quarter, materializing faster than we had expected.

In June and in the first half of July, which is peak leasing and turnover season for us, occupancy is stabilized in the 95.5% range.

For the balance of the year, we will be focused on maintaining occupancy in the 95 to 96% range while reducing concessions or increasing market rents to drive portfolio revenues.

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

Thanks, Tim. As we continued to respond to opportunities on the operating side of the business, we also continued to execute on the capital side.

My comments this morning focus on capital market transactions as well as a review of expanded lease up disclosures. And I'll conclude with comments on our financial outlook for the next quarter and the remainder of the year.

With respect to capital markets, we previously announced that we completed a $150 million bond offering in April, and that helps to manage our overall floating rate exposure. Floating rate debt now represents just 14% of our debt and about 5% of our total capitalization.

And as the economy expands, most people expect rates to rise, and we see a number of benefits to a rising rate environment given that we have a fairly modest exposure to floating rate debt.

Single family home sales should slow, and the high costs of housing in our markets will make rental housing more competitive.

And with that, pricing power should emerge. Those [inaudible] exposure to floating rate debt, earnings growth from operations and new development will not be materially diluted by the rising rates.

We also renewed our credit facility this quarter on attractive terms. We lowered our stated rate to just 55 basis points over LIBOR while preserving the competitive bid option.

And if you remember, the competitive bid option allows us to price the facility even lower than the stated rate if the bank credit markets have demand for that product. For example, our bid under the line today is at LIBOR plus 28 basis points for an all-end rate of about 1.56%.

Finally, we completed documentation of several joint ventures including JVs for developments in Seattle and L.A. We [inaudible] sparingly for development primarily to efficiently allocate capital and to manage market and asset concentration risk.

And these ventures completed this quarter are consistent with that strategy. All of this capital activity helps fine tune our financial flexibility and will allow us to consider attractive growth opportunities without stressing our balance sheet.

Our key balance sheet metrics remain strong with leverage at 37%. Charge coverage at 2.7 times and an unencumbered asset base of about 81%. Another important balance sheet metric is dividend coverage.

Our dividend has been safely covered by recurring cash flow during this challenging period where operating fundamentals have been under stress.

Coverage will continue to expand as a recovery progresses, and just to give you the metrics for FFO coverage, we were at about - or FFO payout ratio was about 84 or 85% this past quarter. Let me move to a discussion of our expanded disclosure of communities and lease up particularly assets completed but not stabilized.

We get a lot of questions about development assets, especially in conjunction with the NAB calculations that many of you perform. You'll note that on attachment 7 and 8, we've added supplemental data on communities in lease-up that should help you with your NAV calculations.

Valuing development is important for a company such as AvalonBay that has a large development pipeline.

This information should help you in your valuation of development under way as well as better understand the embedded revenue growth potential from these assets that have been completed that aren't yet stabilized.

Turning to our revised financial outlook, Bryce noted that stronger than expected operating results allows us to increase our full-year FFO outlook by about 6 cents per share, increasing the midpoint of the range for the year to $3.28.

Next quarter we expect peak leasing activity to put some pressure on occupancy and concessions, but expect that the current level of FFO can be maintained.

Accordingly, we see FFO in the 80 to 84 cents range in the third quarter with the midpoint of 82. With that, I'd like to turn the presentation back to Bryce.

Thanks, Tom. A couple summary comments. We expect the department of fundamentals to improve this year.

And in fact, they're improving a bit earlier than expected. However, not all markets nationally will perform equally. And even companies in the same markets will be impacted differently depending on the quality of their portfolio and on their growth strategy.

AvalonBay has several unique factors that position us well for our performance in this expansionary phase--and I'd like to highlight four factors. First, our markets. Our focus is on supply constrained markets. Markets that have typically outperformed during the expansionary phase.

In fact, third party forecasts by [inaudible] show AvalonBay's markets is experiencing the greatest expected revenue gains in 2005 out of any of the 17 apartment REITs. Market selections matters. Second factor is our portfolio.

While we have a varied mix of properties by product type and price point, our portfolio's mostly A's, and A's typically outperform in the early stage of an economic recovery. Product quality matters. Third is our development pipeline.

No company has as large a volume or strong a track record in developing new apartment communities. Development has and will continue to be a meaningful growth engine for the company.

And fourth is capacity. When I speak to capacity, I mean both financial and organizational. With one of the strongest balance sheets in the deepest management teams, we have the capacity to execute meaningful levels of growth.

While an improving economy will help overall fundamentals, AvalonBay's markets, our product, our development pipeline, and our financial and organizational capacity position us well for our performance.

And with that, we'd be glad to take any questions any of you may have.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the number 1 on your Touch-Tone telephone.

If your question has been answered, or you wish to remove yourself from the queue, please press star then the number two. If you are using a speaker phone, please lift the hand set before asking your question.

Again, if you have a question at this time, please press star then the number one on your Touch-Tone telephone. One moment, please, for your first question.

Your first question comes from [Jordan Sandler] with Smith Barney.

Hey, good morning, guys. I'm here with John Litt. Firstly, I just wanted to clarify.

Tim, I think you said you saw a year-over-year revenue growth in June, right? Was that on a cash basis or GAAP basis?

That'd be on a GAAP basis, Jordan.

Would it be on a cash basis as well or you're not sure?

Well, it's really on this, Jordan, this is Tom, it's really right on the margin.

We argue this is the peak leasing season and therefore the peak period in using concessions. So, while on a GAAP basis we may be slightly positive, we're slightly negative on a cash basis because of expanded concessions.

Okay.

You had said you were using concessions aggressively in the development pipeline, but you are also continuing to use them aggressively in the stabilized assets as well, is that right?

John, yeah, this is Tim Naughton. We are. And as I mentioned in my remarks, it really peaked in April.

That's kind of when it hit the all-time high on the stabilized portfolio. We've actually seen declines on the order of 5-10%.

That's - in the stabilized, right?

That's in the stabilized, yeah.

But you continue to use aggressive concessions to get the developments?

Yeah, we're about - on the stabilized portfolio, we're - I think - a little less than three-quarters of a month, on the stabilized portfolio, and on the development portfolio this past quarter was actually right around the month, which was actually a little bit down from the first quarter on the development portfolio.

Right. Yeah, because all we had in here was the quarter over quarter breakout, which sort of an increase that was impacted by April.

Correct.

A question on your asset sales. You sold Greenbriar in Seattle and [Laguna Nigel]. Were those -- I guess those were opportunistic not strategic, to use Bryce's words?

Well let me - John this is Bryce - let me start off a bit, then Tim might give you a little detail. In terms of Greenbriar, it definitely wasn't opportunistic in the sense of that was an asset in its quality and submarket location were not keepers for AvalonBay, so we had determined sometime ago that that was an asset we identified for sale.

We wanted to wait until the market conditions improved a bit. You know, we had reported previously there was actually a small economic loss on the sale of that asset.

It did have tax exempt bonds so actually our levered IRR on that was - attractive, but on a unlevered basis, the return was quite low. In terms of Southern California assets, that was more opportunistic in the sense of that market is extremely hot as I think everyone on this call knows.

And so we took advantage of an attractive sales environment to get a good execution.

The reason why I wasn't sure, because you started in the quarter Juanita village in Seattle, so I guess what you are saying the submarkets are - for this new asset is better than the submarket you sold out of?

Oh, absolutely. Fundamentally different assets. One Greenbriar is 20 years old versus obviously the new community we're building, and very different submarkets.

One on the east side versus Greenbriar was on the south - southern submarket. So very much so.

I mean, within, you know, we have assets - allocation goals by market for sure, but as we all know, the real real estate decisions are made on a submarket by submarket basis.

Okay. So what is the reasoning now -- why are you lowering this position guidance or do you expect to sell less? Is it - are the markets softening a little bit in terms of pricing?

No. And to be clear, we didn't lower our guidance. We said our original guidance was 150 to 200 million. And I said I'd - we'd be likely at the low end of that guidance.

Okay.

Strictly given the sales would be opportunistic. I mean, we might end up at the high end of the guidance, we might end up a little bit below it.

It's different than in a year where we say, like last year, "we are going to exit Minneapolis strategically." And that was just a goal to get it done. That's different this time.

And so we are looking at a number of potential sales, including a number to condo converters and, you know, they may or may not happen. You know, we don't need a sale from a capital raising point of view.

We've got a number of assets that we'd be quite happy to keep. But if the right price is there, we're going to execute a trade.

Okay. And then, just on the development, you guys are developing on balance sheet - it looks like on these two JV deals, and then contributing at cost upon completion. Can you - could you just explain the rationale behind that?

This is -- Jordan this is Tom again. In my comments, I mentioned the reasons why we use JVs for development. Again, we use them sparingly.

Certainly, one reason is efficient allocation of capital and the other two reasons are market or concentration risks.

With respect to the Southern California asset just to clarify, we're actually not contributing that at cost. That asset will be contributed at a predetermined market value. So we're actually going to realize a profit in connection with that asset.

And I think you might want to look at it more as a presale with a retained interest than a joint venture. That might be the better way to look at it.

The asset in Seattle is an asset that we had been working on for some time. I would say that that's both a market concentration risk and that we've got a lot of capital allocated in Seattle.

Also, it's efficient in terms of capital allocation because clearly we want to allocate capital to achieve the best overall yields.

And the yields for new development in Seattle are still somewhat compressed and therefore it makes sense to allocate less capital in that market when the initial yields are lower.

We still think long term the asset will be a great value creator for us and our partner, but the initial yields required us to allocate less capital to that asset and that market.

Okay. Lastly, maybe Tom, could you just give us an update on the fund and progress?

You bought two assets since the end of the first quarter. Doesn't seem like they are ripe for the fund being [inaudible] opportunities.

Is that going to be launched sometime soon or what's the progress?

Well, the progress is good. We have to be careful about what we say because we don't want to look like we are offering shares in it over this call.

So I have to limit my comments, but it's going as we expected. We're on track. We're on the original schedule that we expected.

As you may know, these funds take quite a long time to get launched. It's private equity with a lot of pension funds and there are multiple meetings that occur.

But we're pleased with progress to date and those assets are designated to go into the fund.

Okay. Thank you.

Your next question comes from Andrew Rosivach with Credit Suisse First Boston.

Good morning. I apologize if this is kind of asking Jordan's question twice in a different way.

I'm curious, your FFO guidance went up, but your actual GAAP and net income guidance went down. Is that a function of selling less, or do you think you're going to get smaller gains when you sell the assets?

Selling less.

Right. So there is kind of implicitly, there is kind of a slower disposition pace in planning your guidance now and that has a little bit to do with the higher numbers?

Well, we gave a range, and normally, we and you should use the midpoint of any range we give you because we don't give asymmetrical guidance. So if as Bryce mentioned, we're going to be at the low end of that disposition range, that means the gains on asset sales will be lower than we anticipated in our original guidance.

Right. But also the dilution from asset sales will be slightly smaller than you anticipated because you are selling less.

Correct.

Okay. And then just another question on L.A. Is this the first job that you are building in the L.A. market?

Andrew this is Tim Naughton. No, it's not.

Actually, we completed a community in Glendale last year, and we currently - we have two deals that we started, the Del Rey deal that I mentioned in Marina Del Rey, and the Camarilla deal in Ventura County.

It would be the second and third that would be ground up development. But obviously, we've done a number of redevelopments in that market.

So there isn't - you're - so it's going to be similar to how you developed in other markets? You'll be your own GC?

Yes. In fact, I probably should back up a little bit. It's - we've really been working on this pipeline for the last three or four years in the Southern California market. And we're really just starting to pull communities through.

If you look on the development right schedule towards the back of the releases, you'll see a number of those communities are Southern California communities. We've really been - building that team in Southern California over the last three or four years and building that pipeline.

As you know in our markets, it just takes, you know, two, three years to get things through the pipeline. So, you should expect over the next couple of years we'll be doing more business in Southern California in terms of ground up development.

Got it. Okay. And then, finally, Tom, one more question on the fund. If it - were to get revved up this year, would there be a scenario where you might be warehousing some assets or temporarily have additional acquisitions above and beyond what's implied in guidance right now?

I don't think that we would have additional assets above what we provided in the guidance, so the answer to that is no, I don't think we're going to see much of a bump in this year's numbers because of warehousing of assets. We are warehousing assets now. We've already bought two.

Andrew, I'd like to come back to one of your original questions about dispositions. If you remember, we said that a lot of the disposition activity was back ended.

So if you're attributing some of the accretion to our new guidance to lower dispositions, remember that a lot of the dispositions we planned were towards the back end of the year, so they really didn't matter whether we did the disposition or not in terms of 2004 numbers. I just wanted to point that out as you are working through your model.

Great. That's helpful. Thank you very much.

You're welcome.

Your next question comes from Jay Leupp with RBC Capital Markets.

Hi, good morning. Here with [David Roncoe]. You talked some about the increased construction costs working down your development yields.

Could you talk and elaborate a little bit about how the increase in construction costs has - affected your decisions on redevelopment and how or what effect that's had on working down those potential yields?

Jay, this is Bryce. You know, it's a lot less of a factor in redevelopments just by definition. We're talking about, you know, much smaller dollars being invested in an absolute terms as well as a percent of the assets.

So the real - sensitivity is on the new development.

There have been no - planned redevelopments that we've delayed in any way because of construction cost increases, if that's your question. You know, redevelopments we - used to do a lot of redevelopments when we were buying a lot.

And until we were back in the acquisition game again, you shouldn't expect that the volume of redevelopments will be dramatically higher. Tim, do --

Yes. If I could just add to that, Bryce. On redevelopment - yeah, most of your costs are in the form of labor as opposed to material prices, and really where the pressure right now is commodity material prices. And, that's just really not that big of a factor in redevelopment.

Okay. And just one follow-up on the questions you had on concessions.

We saw this on a per move-in basis, they rose 39% over the same quarter last year. Assuming that we've seen a peak in these concession costs, can you give us a feel for how fast you think they could potentially fall?

Jay it's Tim again. You know it's market by market. We've had, you know, just looking across various markets, we've had - just to provide a few examples.

We've had markets that have increased or decreased over just even the last quarter by 5-6- $700 on an average concession per move-in. So, it's ultimately going to be determined on a market by market basis.

We're seeing the need, less of a need to provide concessions on renewals than new leases. And so I think - that's a good leading indicator that we're starting to see some easing off, if you will, on the concession front.

Hey, Tim this is [David Roncoe] with a follow-up here. I just wondered if you guys had disclosed the Cap rates on the acquisitions both in Los Angeles and Chicago?

We did. And my remarks I mentioned two different Cap rates. Really stabilized yields.

One on a predevelopment basis which is at 6.6% and the other on a post-redevelopment basis at 6.9%. That's just a blended Cap rate between the two - acquisitions.

Thank you.

You're welcome.

Your next question comes from [Richard Paoli] with [ABP Investments].

Hi guys, a couple different questions. One just popped into my head as, Tim, you were talking about, you know, the concessions. What is your availability rate? In other words, you know, people that give you notice that they are going to be moving out and where is that trended?

Rich, availability with occupancy - or I should say with vacancy is trended down. You know, currently sitting here in the middle of July, 30-day availability is in the low 5% range. And lease percentage or actual physical occupancy is 95.7 as the middle of the month.

And where was the -- I mean, has the availability trended down since April? I mean, has that been consistent with what your trend in the other metrics were?

It's trended down, but I will tell you, it's been fairly stable the last six or seven weeks as we really entered the higher, you know, the peak leasing and turnover season. And that's been more or less our objective as Bryce mentioned. We're trying to get - the portfolio occupancy in the 95% range, and we're trying to keep it there and now start pushing on concessions and market rents as much as we can while maintaining occupancy.

Okay. Touching on this - the question of constructing costs and the like, what is your - or the company view in terms of these commodity? Are you going from the basis that these are just a new plateau here, and this, you know, what it is, or do you think they're going to come back in eventually? And I have a follow-up to that.

Commodity prices sort of by definition, Rich, are pretty volatile. Steel is probably the one that people are most familiar with just from hearing [inaudible]stories or reading about it. You know, steel prices went up dramatically earlier in the year.

Basically, on both, I think, some speculation and just increased worldwide demand and recently they've come back in. Same with lumber prices that have been up dramatically in the last few weeks, they've come back in.

So, no, we don't necessarily think we're at a new plateau, but certainly as you, when you are at a period in the economy where things are picking up generally, you've got to be concerned about rising prices.

When you are dealing with multifamily construction--which has - remained at robust levels--both in terms of apartment supply but for sale supply as well, you have a high demand on product, so we certainly are anticipating higher prices are here to stay, but it doesn't mean that individual components will stay at those levels or that the cost increases as I mentioned, the 10% to 15% will stay at that level, either.

Now, have you guys essentially, and I'm going to make a gigantic leap here from, you know, hard costs to what it costs you to build a new product to replacement costs when you are looking at acquisitions.

I mean, in the past two years, we have been talking about, you know, the new paradigm in Cap rates and it kind of just strikes me that if, you know, China keeps sucking up all of the concrete that we can produce, whether we've got an environment where this can actually counteract with many -- what many would deem to believe a rising Cap rate in environment if interest rates go up.

I mean, how does what you know about your hard costs to develop impact what you're doing on the acquisition side?

Well, let me take the easy part first and Tim can jump in here. First off, concrete is probably the only thing we're not sending to China. That's a local product. It's the steel they've been taking, not the concrete.

You caught me.

I had to take a shot at you, Rich. Underlying your question, maybe just to rephrase it and then I'll pass it to Tim is, you know, to the extent construction costs are up, replacement costs are up.

You know, the extent replacement costs are up, that has a number of implications. You know, one is, as I mentioned, potentially decreases in supply which is a good thing for fundamentals.

Secondly, is how one might look at acquisitions and replacement costs is clearly a part of that process. Tim?

I was going to more or less say the same thing, Bryce. I mean, I think it acts as an economic barrier from the printing supplies.

So I think from that standpoint, it's positive from an investment standpoint - of existing assets but obviously detrimental to new development.

Okay. I'll yield the floor. Thanks.

Thank you.

Your next question comes from [Rob Stevenson] with Morgan Stanley.

Good morning, guys. On the acquisitions, what do you guys anticipate on spending on redevelopment?

Rob this is Tim. When we first acquire an asset, we can only have a conceptual budget, if you will, for redevelopment, and then we generally refine that over a, call it a 6 to 12-month period. But both these deals are different in their nature.

The deal in Chicago is more extensive, they'll include kitchens and baths for instance, common area. Amenity improvements.

And you're probably looking at, you know, a redevelopment budget in the 15 to 20 thousand a unit range, apartment range. The one in Southern California - just requires less, and redevelopment is more in the area of common areas as well as, as frankly as well as management repositioning.

So, that one, I think, is probably, you know, going to be in the sub10,000 unit range. Those are just conceptual budgets at this point.

All right. And - basically, what do you guys anticipate owning in terms of the JV, once it gets set out? I mean, is it sort of 25, 30% range? Is it less than that?

Rob this is Tom. Every JV's different.

In the case of Seattle, we essentially have no capital in that investment and will have a carried interest after completion that could be as high as 20, 25%.

The other asset we expect to retain a 30% interest in the development and at that point, it would be contributed at our - at a predetermined value, which is higher than our costs. Let me restate that the Seattle deal's 15% carried interest, not 25.

Okay. And is that the same JV partner between those two assets?

It's different. I should add that we also get a promoted interest depending on performance. It could drive the overall carried interest higher in both assets.

Alright. And what do you guys anticipate development starts to be in the back half of this year?

Rob this is Tim. Probably not likely to have anything in the third quarter. There are two or three deals that could start towards the end of the year but probably not much before, call it, November and December and will probably be two or three communities.

Okay. And at this point, are any of these anticipated to be JV assets, or are you going to wholly own those?

I'm just trying to think through the asset - - -.

Rob, right now, I don't think any of those are slated for JV's. Obviously, that could change as we, you know, firm up capital strategy, but I don't think any of those are slated for JV's at this point.

Okay.

And then, Tim, what are you seeing in property taxes? You've got the refund this quarter but as, you know, people are stretching on the municipal and local level for tax dollars and the press gets wind of, you know, record sales prices from multifamily assets and recovery, are you guys anticipating significant upward pressure on the property tax side?

Well, we did anticipate it in terms of the budgeting process this year, and it's more or less been coming in line with the exception of this one tax refund which was a multi-year tax refund that's giving the 600,000 plus rebate.

But I think prior to that having received that, we are looking, you know, at tax increases, real estate tax increases in the 4%, 4.5% range. We had been running in the 2.5% range in the last couple of years, Rob, just to give you, just to bracket it for you.

Alright. And then lastly, Tim, you gave the same-store NOI projection, the revised same-store NOI projection for the year. What was that, I missed it?

It was 0 to negative 2%.

Okay, and that's off of negative 1 to 0% revenue?

That is correct.

Thanks, guys.

Your next question comes from [Chris Pike] with UBS.

Good morning. First question is to Tim. Tim, you indicated in your comments that while monthly revenue trends were improving, they were a little uneven.

I was wondering were you speaking to unevenness among markets, or just different rates of change going over the last several months?

Different rates of change across the entire same-store basket, Chris.

Okay. So it wasn't specific market. You know, one market wasn't up one month and down another month but everything trended up just at different rates?

Most things - were trending up. As I mentioned in my remarks, basically, Mid-Atlantic and Northeast has led on a sequential basis followed by - which were both up over 2% for the quarter, you know, followed by Midwest and Seattle, which are in the 1% to 2% range, and then the two California markets were actually relatively flat, so.

Okay. I don't know if you guys look at class cuts but did you see any material difference between your A product and your B product as we enter this recovery and the changes in which we saw from a fundamental perspective in the quarter?

Chris this is Bryce. You know, it's just too difficult to parse that on a quarterly basis across different submarkets. You really have to have kind of a more apples to apples baskets to look at that in the way you are asking the question.

Yeah, I will say that it is our experience looking at it over a longer period of time, and as I comment in my opening comments, that A's tend to outperform in the early phases of the cycle and underperform in the contracting phase of the cycle.

We saw that happen in the early '90s in terms of the outperformance, and we saw the underperformance happen in the last few years as the A's, you know, come under greater pressure.

It's just I think quite logical that as people are feeling better about their - stake in life in terms of their job security and their job growth that they feel a little bit robust, a little bit more willing to spend more for goods whether it's cars or whether it's housing.

Interestingly, there was, as you may have noticed, an article in the journal today talking about how the economy is impacting different segments of the consumer differently. And I think that's sort of on point to what you typically see as the economy improves.

Okay. I guess now on a related question in terms of As and Bs. On the acquisition side, do you see any material difference in the direction and perhaps magnitude of Cap rates in terms of where they're moving between the A's and the Bs?

Chris, this is Tim again. Over the last, you know, couple of years, I think - with Bs having outperformed As, there has been a compression in Cap rates between A and B product. You know, so - but still Bs do trade at a premium, or a higher Cap rate than As.

Okay, great. And Keith has a couple questions.

Good morning. Two questions for you. The first relates to the properties that you're planning to start development beginning in the, call it, the fourth quarter.

Has your development yields proforma changed on those at all? I know you commented on three properties that you already started construction on. The yields are now 20 basis points lower than what you were assuming in the first quarter. Can you comment on the property that will start at the end of the year, and what your expectations are there?

Keith, Tim Naughton again. We're actually in the process of, you know, frankly relooking at the entire development right portfolio and looking at the impact of, you know, some of these most recent commodity cost increases on projected economics.

So, they're not at the point where they are ready to start, which means they're not at the point at which we have, you know frankly, final plans and specs, which is sort of, the next major milestone for pricing these communities, but we would expect that there would be some - impact to the economics of those deals. And it may - impact, you know, the viability or at least when we choose to start those communities.

From a modeling perspective, Tim, would it be safe to assume that those yields would be around 8.2% as well?

Yeah. I think somewhere in the 8s is, you know, 8 to 8.5 is probably a fair number for the time being.

Okay, my second question a I believe our final question is related to your reserve for Cap Ex, your normalized Cap Ex as related to your properties. Has the hard cost increases that you've seen recently, have they impacted your reserves over the long term for maintenance Cap Ex for the properties?

Yeah this is Tom. You know it's really early - to call that. A lot of the Cap Ex that we're doing now was budgeted last fall and contracted earlier in the year. So we're not seeing a lot of inflationary pressure on Cap Ex.

Obviously, the big driver in causing our Cap Ex to rise over time is more just a natural aging of the product. Having said that, we're seeing a lot of different elements of our cost structure that are probably showing some inflationary pressure.

We're seeing a higher redebt costs in the stabilized portfolio, higher nonroutine costs, which are those quote Cap Ex reserve items. I do think there is some inflation that we're seeing, but most of that's being expensed as opposed to being capitalized.

Okay. So normalized longterm maintenance Cap Ex, you haven't started to reserve more at this point?

We haven't. I don't know, Bryce, if you wanted to add something?

No. I did want to go back, though, Keith, if Tom has answered that question for you satisfactorily.

Yeah, no, I'm just trying to get a sense of what you're reserving today for, you know, maintenance Cap Ex that you'll do a year or two or three years from today.

Well, you know, we don't really reserve for it. We put together a budget and then we capitalize pursuant to our existing capitalization policy which does not change, and then we expense what doesn't meet that capitalization policy, but you don't reserve ahead of time.

And you generally plan about 18 months ahead, but you don't plan three, four, five years out.

Okay, got it. Thanks, guys.

I just wanted to clarify, Keith or make sure it was clear on terms of the prior question about development volume and starts where you are asking about the potential three additional starts.

In Tim's comments, you did mention that we expected the development volume to stay stable for the balance of the year.

So while there may be two or three starts, there are two completions, you know, showing on the attachments 8 that will be completing the third and fourth quarter.

So, by year end, we expect to have the development volume to be about the same, or about 800 million. We don't see a pickup in that in the second half of the year. I just wanted to clarify that.

Okay, I appreciate that, Bryce.

Okay.

Your next question comes from [David Harris] with Lehman Brothers.

Good afternoon, everyone. Tim, what happened to rents at Crane Brook?

David, on Crane Brook, the rents are down there on the average about $185. And really, what that represents is net effect of rents off the original proforma.

When we start a community, we generally don't change the rents until we actually start - actually leasing up.

And it was really just this past quarter, I think, where we felt like we had, you know, enough - data, if you will, on existing leases and occupancies that we really brought the rents down to existing market. And I think we opened up there around 13% below original proforma.

Just to compare that to what was going on in market rents across Boston, market rents were probably down in the 7-8% range in the same period. Honestly, it was a bit of a miss off the original proforma. A partly, you know, a function of the market in the interim.

Okay. Can you just make some general comments as to the quality of credit that you are seeing in your tenant applications in the current market?

David, we're actually seeing bad debt. It's actually come down over the last couple of quarters. On a sequential basis, I think we're running in the . 7, .8% range of total market rent that had peaked around 1%.

We're actually seeing that be less of an issue. And that actually flows through in operating expenses for us, so it's one of the things that's providing some relief in operating expense increases this year.

Okay. My final question really relates to energy and contracts that you have for gas and electricity, oil.

Can you - address -- do you look at these things every 12 months? And is now the season when you are renewing them for the next year, or is this sort of just something that happens on a rolling basis over the year?

It happens more on a rolling basis, and you know, obviously can only do it in a deregulated market environments, which across our portfolio only gives us an opportunity to fix maybe call it a third, 30%-35% of our energy costs. And, to me it's just like interest rates. Depending upon where the market is, and, you know, our appetite to take some - of that risk or volatility off the table, we may or may not lock in.

And the lock-ins can be 12 months, they can be 24 months, they can be 18 months. So, it's really kind of dependent upon the - local utility situation, and having said that, we're actually not seeing that much pressure on utility costs yet. So it hasn't - quite yet translated. So --

Okay. Thank you very much.

Sure.

Your next question comes from Jim Sullivan with Prudential equity group.

Good morning. Thank you. Just a couple of questions. Most of this material I think has been covered before, but I just want to be a little more precise on this.

In the discussion of the same-store guidance, the revised same-store guidance, I know there was commentary on the expense outlook for the year.

That had previously been for expenses to be up 1 to 3%. You had the nonrecurring item I guess in the second quarter.

But for the second half of the year, are you still sticking with that 1 to 3% positive expense number?

Jim, no, it's actually - lower than that for the second half of the year, I believe, on a year-over-year basis.

But for the total year, we're looking at we gave, you know, a range of 0 to 2% so down, you know, down 1% in terms of the top end of the range. I guess it's be, you know, half a percent from the midpoint of the range.

Alright, I'm just talking about expenses alone. Are expenses themselves going to be, you know, a positive 2% in the second half, or? I know the same store was changed from 0 to negative 4, from that to 0 to negative 2.

But on the expense side, is that still going to be up 2% in the second half?

Are you talking about a year-over-year basis?

Year-over-year, yeah.

Yeah, I don't have it in front of me, but I think it's closer to 1% or sub1.

Okay, so therefore, it's not necessarily the case that your guidance assumes positive top line comparison in the second half?

It's correct.

Okay. And secondly, regarding the dispositions, I want to make sure I understand the commentary that I think you made, Tom, about this.

In the second quarter, your EPS result was of course, lower than what you had guided to and talked about the timing being different than I guess contemplated when the guidance was first provided.

But, presumably, that helped the FFO numbers well in the second quarter somewhat. Isn't that the case?

Jim, this is Tim. It actually did, but not as much as you might think. In terms of core operating results , about three-quarters of that improvement over expectations came through the stabilized portfolio. Either same-store, or other stabilized.

Only about 5% of it came through delayed dispositions from what we had in the original plan.

Okay, and then finally for me, just to go back to the question of concessions, Tim, you had commented over the course of the last three to four months that concessions had been coming down on a monthly basis.

And I - in the prepared comments, I think, Tom, in talking about the third quarter outlook talked about peak leasing season and concessions being a variable here. That - I mean, just to make sure I understood it correctly, I think Tom, you were kind of hedging a little bit and thinking that concessions could, in fact, go back up again.

Is that right? Is that the reason for the widespread in the third quarter guidance?

Well, the spread actually is a little bit narrower than we have normally been giving, so we tightened the range a little bit.

But Jim, obviously the third quarter's our peak turnover period. And we are expecting and seeing concessions seasonally rise.

We're seeing occupancy, transitional vacancy increase which is seasonal, and so operating at a 95.5% occupancy level is a fairly high occupancy level, given where we've been over the last couple of years.

So I think we should expect, during that peak leasing season, to see some pressure on occupancy--which might need to be responded to through additional concessions, to maintain the platform where we're at today.

So, I think it's fair to say that we're expecting that concessions--although they moderated some during the second quarter each month, we expect concessions to remain high to allow us to maintain that occupancy. Tim, I don't - did you want to add anything?

I just wanted to clarify something. When I was talking about concessions coming down in May and June, I was talking about concessions per move-in, Jim, and with the peak leasing season, total concessions actually are going up, just because you have more move-ins. But the concessions per move-in have actually - we've seen, you know, we've seen those fall a little bit.

So Tom, you're talking about total concessions, not concession per move-in?

Correct. Total concessions.

Okay. And then I guess, just final question for me, the midpoint of the same-store guidance is going up, I guess, it's only 1%. So that -- so even though conditions are improving, that's why the top end of of your guidance range isn't going up more. It's only really a 1% revision to the midpoint on the same-store guidance?

That's right.

Okay great. Thank you.

Your next question comes from [Craig Leopold] with Green Street Advisors.

I know last year at this time you experienced some increase in top line revenues resulted to, you know,[inaudible] income and kind of transactional stuff related to peak leasing season.

Was that not the case this year from the first quarter to second quarter, because it appears that market rates were flat. Your occupancy was up 1.2% which is in line with where your top line was.

Craig, Tim Naughton. You are correct. I mean, part of this is seasonal. Of the 1.2% increase in the total same-store revenues, if you look at just base rental revenues, netting out any transaction, it was up .8% so, you know, 40 bases points below.

Okay. And then on the asset sales, I'm surprised that the IRR's, you know, relatively low 7.6%. Is that reflect the fact of cost allocations from the Bay merger?

Craig, no, it's really a function of Greenbriar. Greenbriar - we actually took an economic loss on that deal of a couple million dollars. As Bryce mentioned, that deal as well as other deal for that matter, had tax exempt status so that the 7.6% unlevered IRR was really 12% plus on a tax exempt basis, but was brought down by Greenbriar just because we had an economic loss on that deal.

Okay. And last question, you guys -- have you guys tracked at all in your market, you know, how much supply - apartment supply has been lost as a result of condo conversions? Do you have any sense of what that number might be?

Craig, I -we're - let me restate - is the question, what is the decrease in supply from condo conversions?

Yeah. Exactly.

In other words, you know, how many, you know, apartment units in terms of total supply on a percentage basis in terms of total supply have been taken out of the market and are now, you know, for sale condos? I'm just kind of wondering what impact that may be having on occupancy rates?

Craig, I think it's probably - it's principally occurred in the D.C. market and San Diego. Probably in the D.C. market we've seen on the order of, you know, maybe 3,000, 4,000 apartments be converted.

Obviously, some of those are coming back in the form of rentals back on the market. That's over a year and a half period.

In the case of San Diego, I think that the number of conversions is probably been more in the net 25, 30 range in the number of communities, so I think it's probably had a bigger impact in San Diego.

And I just - I don't have as much of a sense of how much of that's come back on in the market in the form of rental, though.

Okay. Great.

Craig this is Tom. I wanted to come back to the Greenbriar question and you astutely point out that, as Tim mentioned, the economic loss we incurred there, part of that was the fact that we had to allocate basis when we did the accounting for the merger.

So that cost wasn't, you know, necessarily actual cost. It was more of the comparison of the allocated basis at the merger date. So there is a little noise in those numbers.

Okay, great. Thanks, Tom.

Your next question comes from Rich Anderson with Maxcor Financial.

Thanks. Considering that Tim, you mentioned 95.7% occupancy in July versus the 95.5 in June, are you making good progress relative to the typical challenges - turnover challenges you've seen in the third quarter?

Rich, just be clear that the 95.7 is physical occupancy in the middle of the month. The 95.5 for the month of June was the average economic occupancy for the month of June. We're actually, it's pretty flat mid-month to mid-month from June to July. It's maybe within ten basis points to the positive.

Okay. That answers that. And my last question, is Northeast now 41% of your business? Is that getting a little high and are you - you know, would you like to see that number come down?

This is Bryce. Not necessarily come down, no. I mean, the northeast, I m, you can look at it as 41%, but as a percent of the total jobs generated in the U.S. as a percent of the total apartment supply it's not out of line. We have - I'm sorry - you know, we've previously stated our goal was to increase our concentration in the Midwest and in Southern California and to lighten our load a little bit in Southern California, particularly San Jose.

So no, we're not unduly concerned with the amounts allocated to the Northeast overall. There may be a submarket or two such as Stanford where we feel, you know, a little top heavy with regard to our concentration but not overall.

Just one last quick question. Is Mission Bay Phase II a part of the potential development starts in the fourth quarter?

Rich, that would likely be an early '05 start rather than '04 start to the extend we move forward on it.

Okay, thank you.

Your next question comes from Carey Callaghan with Goldman Sachs.

Hi. It's a conceptual question for Bruce or for Tim.

You cited construction costs and also interest rates as potentially curving supply and developer's returns to start to come down respectively. At the same time, your developer yields 20 basis points between the first and second quarter.

At what point do you lose your own appetite for development?

When the risk doesn't justify the return or vice versa.

You know, every deal is looked at individually as you heard us speak to before. And every development deal has a different components of risk.

Submarket risk, construction risk, lease up risk, you know, we're going to look at those individually, certainly, as tempered by our opinion of a future demand/supply fundamentals in that market. The - basket of deals that are now coming in at 8.2 are clearly not underwritten originally at that number.

We've seen yields compression as the concessions have neglectively impacted them. We're certainly hopeful that as fundamentals improve, we're going to start to see some top line growth, but that is not how we underwrite deals.

We underwrite deals based upon current rents and current costs. If we saw the development yields on a - to-be-built basis falling into the sevens, that would be a concern. Tim?

Yeah, Bryce, If I could just add to it.

Carey, there are certain markets we have lost our development appetite in the past. We doesn't start anything in the Bay area and Seattle for a few years just based upon, not just underlying yields, but our view of the projected economics as we look forward, you know, as we're looking for visibility with respect to economic recovery.

I guess I also add, there are other - deals and other markets that we've delayed as well. Where we're doing some deals in New York but we're not doing everything that we could do.

So it's, I think it has impacted our decision making in the past and it's going to in the future as well, undoubtedly.

As you know, as you think about it's value creation, have you gone through the development pipeline and thought about kind of a blended market Cap rate versus your projected yield? What's that difference? Is it a couple hundred basis points?

I think today is probably at least a couple hundred basis points.

We're selling assets at 5.9% and, you know, 20-year-old assets at 5.9% in Seattle and Southern California. I think we're pretty confident that Cap rates on these new developments would be somewhere - something south of that.

South of the 5.9. Okay. Thank you.

Welcome.

Your next question comes from [Afhad Khazeem] with [Reefe].

Hey, guys. Just wondering, as far as construction costs going up, et cetera, how does that impact per unit costs when you think about acquisitions and then also obviously dispositions going forward?

Afhad, you know, we talked about it earlier. I think one of the benefits of obviously increasing construction costs is it - you know, it increases replacement costs as you do your analysis.

In a sense, it does create an economic barrier for new supply and, you know, I think that's good from an investment standpoint. It's obviously a challenge when we look at investing new development deals off of our balance sheet.

Sure. And does - your view on apartment values then holding or maybe even going higher in the future. How do you think about that?

Yeah, but it's -- I think positively, but again it's a function of what we think the impact ultimately will be to supply. I mean, it all comes back to demand, supply fundamentals. You know, [inaudible] it's going to impact supply in the margin, if you've got significant material price increases.

Thank you.

Your welcome.

Your next question comes from Dave Rodgers with Key McDonald.

Yeah. Good morning. Bryce in your comments, I think you made the inference that - I guess the next strength of the recovery for your portfolio should come in higher market rents.

But as you look at concessions, if concessions do continue to increase in the third quarter becoming the seasonal peak period, when is that, that the market rents begin to firm a little bit more? If it doesn't happen in the winter,it still a year, or three, four quarters away.

Let me make one comment then I'll pass it to Tim. And I've made this comment on prior calls as well. I do think that sometimes we get too focused on concessions.

Ultimately what our goal is, and certainly what I view our goal is, is to grow revenues. And that revenue growth can come through increased occupancy, it can come through decreased concessions, it can come through increased market rent. Where you choose to put the emphasis is based is based upon in some ways, certainly, the company philosophy, but more often the submarket convention.

And we have - very strong markets that are offering high concessions. And we've got some weak markets that are offering no concessions.

So to get too focused on the level of concessions, I think, can be misleading to what's going on, on overall fundamentals. In terms of individual practice by region, Tim, if you have any color on that, or, you know, just any additional commentary on concessions.

But I think Dave is, as I hear you, Dave, you are getting to the net effect of rent.

You know, when can we - hope to really start driving that effect of rents given that we've got the peak leasing season? I think it's going to be harder to do in July and August than it going to be in October and November.

We just have - structurally less availability coming because you're just getting less notices. Less people are moving out.

So you do think it's possible even as the leasing period slows a bit that you could begin to push rents a little bit in the second half potentially?

Sure, but this all comes back to - supply and demand and job growth, ultimately, and what's the fundamentals that are driving demand, you know, inherent in that, is we believe that we think job growth is going to continue.

Thanks. And the last question, just did you say what turnover was in the quarter?

I did not but I can give it to you. Turnover in Q2 was 62%, which was down 1% on the year-over-year basis and Q1 was 44%.

Thank you very much.

Sure.

Your next question comes from [Richard Paoli] with APB Investment.

Hey, guys. I have a follow-up to Afhad's comments, and then I guess what your response was. As I kind of think through this, you know, we keep speaking about supply, potentially pulling back because of the increasing costs.

My impression is that it would probably occur in the commodity markets faster just because of the price of dirt is a much smaller component of the overall construction cost so i.e., instead of only being, like you mentioned, a 7% increase, maybe it is a larger.

Is that a fair thought? Could you give me the breakdown of what the proportion of dirt on your development projects represent?

Let me just address a couple things and then Tim can elaborate on the components of cost. I don't want people to be mishearing our comments. I did not mean to say and I don't think I said we see dramatic decreases in supply as a result of this.

It is one factor, and one factor only, that impacts a developer's decision to start. You know, a big factor is their expectation about the future in terms of growing revenues and a big factor is capital availability.

As you all may know, you know, the actual multifamily starts, five plus units for the last two months have been below 300,000 for the first time in sometime.

So whether that's, you know, a reflection of construction costs or other factors, I mean, none of us can press it to that level. But people are creating value today to development even at higher construction costs.

Where Cap rates are today and where yields are, if there's capital available, people will still find a way to begin new development.

I think that's what we have seen in the past couple of years. And I don't think people should expect supply will materially change even with a 10% increase in construction costs.

It does make it more difficult, and I think to your question about where it'll be felt more, in commodity markets versus supply constrained markets, I'll let Tim comment on that.

Well, I was really just going to comment on the breakdown between costs. Rich, I think that was your question, was it not?

Right.

Between land and construction. Typically, land on average about 20%, a total capital cost of a typical development deal.

Construction costs, which would include not just materials but labor, general conditions, would probably be about 60%, and other soft costs, architect speed, [inaudible] would probably be the remaining 20%.

Okay. I just have one other. I think this is a question for Tom.

During the prepared remarks, you guys spoke to other expense savings exclusive of the real estate tax adjustment.

Could you please kind of elaborate on what you were seeing there? I don't know if I heard it, if I missed it during the comments.

I didn't get specific, but I'll give you just one example.

The flavor, yeah.

We just recently reset our insurance. We have the ability to, each quarter basically put the policy back to our carrier. We did that and effective June 1st, and saw about an 18% decline on our property coverage.

You will see that start to flow through in the third and fourth quarter. So, you know, as revenues start to pick up, we are seeing benefit on the cost side as well.

And insurance is one example. Tim, do you have something to add?

Yeah, Rich, just a little more color on that. I think I mentioned in my remarks, really bad debt was down. That's comparable on the expense side. Marketing costs are down. Largely as a result of greater use of the Internet, less use of print.

And then on the cost pressure side where we're seeing some pressures on, is in the area of turnover related costs, you know, part of that's good, in the sense that we're having to get apartments quicker, given occupancy's increased [inaudible] and so we're making greater use of contract labor often times to get apartments ready for occupancy.

Okay. Then my final question. Tom, maybe you can help me out with this.

I was just trying to get a sense of what the cash sequential NOI when I say cash, on a cash concession basis.

The sequential change was if you take out that savings on the tax rebate? Because my sense is that that all came in during the second quarter and the first quarter didn't have that adjustment.

Yeah. That's correct. I don't have the NOI on a cash basis but I think Tim quoted out that, we would have seen a 2% increase in expenses.

Yeah, it's about $600,000.

Yeah, okay.

If you want to use 600,000 and recalculate it, I think you could do that.

Okay. Out of the other cash number you presented for the revenues, right?

Yes.

Okay. Thanks.

You're welcome.

At this time, there are no further questions. Bryce, are there any closing remarks?

Well, operator, just wanted to thank everyone for their time today, and hope you all enjoy the balance of your summer.

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