艾芙隆海灣社區公司 (AVB) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities fourth-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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Alaine Walsh, Director of Investor Relations. Ms. Walsh, you may begin your conference.

Thank you, Judy. Good afternoon and welcome to the AvalonBay Communities fourth-quarter 2004 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 yesterday'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 would like to remind you that forward-looking statements may be made during this discussion. There a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday's press release as well as in our Form 10-K filed with the SEC.

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 website at www.AvalonBay.com/earnings, and we encourage you to refer to this information during your review of our operating results and financial performance. With that, I will turn call over to Bryce Blair for his opening remarks. Bryce.

Thank you, Alaine. On our call today we're going to be addressing both our '04 results as well as our outlook and areas of focus for '05. Regarding '04, first I will provide some summary comments regarding our performance for the year, and then Tim and Tom will review our operating, investment, and financial highlights for the fourth quarter. We will then shift to a discussion of 2005, where we will be reviewing our expectations for the year with regard to economic and apartment market expectations, our financial outlook, and key areas of focus for AvalonBay.

So let me begin with a brief review of this past year. 2004 was a year where the improving economy led to a year of relatively stable apartment fundamentals, which when combined with strong capital flows to real estate resulted in exceptional returns to shareholders. AvalonBay delivered a total shareholder return of just over 63 percent, which is the highest in our Company's history and twice that of the apartment sector.

On our call a year ago, when I was outlining our expectations for 2004, I stated that I believed it would shape up as a year transition. We expected and indeed saw a transition in the job markets. After having lost over a million jobs in our markets in the prior 3 years, we transitioned to a modest yet positive job growth of approximately 350,000 jobs or about 1 percent growth in AvalonBay's markets.

We expected and saw a transition to more stable apartment demand supply fundamentals. For the first time in 3 years the ratio between demand and supply for apartments were roughly in equilibrium, which not coincidentally led to roughly stable revenues for AvalonBay.

We correctly assessed what the economic market conditions would likely be during the year, and this allowed us to focus on those items that were within our control and to respond to opportunities that presented themselves. I want to highlight 4 key areas regarding our 2004 performance.

First, our portfolio performance. Our focus in the first half of the year was clearly in occupancy as we improved our portfolio occupancy by over 200 basis points during the first 3 quarters of the year. Having moved occupancies up to a sustainable level, our focus shifted appropriately to reducing concessions and pushing for modest rental rate growth. As a result of the improving fundamentals and a sharp focus on our portfolio, we saw positive year-over-year revenue growth in the second half of the year.

Secondly, on the investment side, we were more flexible in our disposition plan. We increased our sales activity throughout the year to respond to the stronger than expected appetite for apartment product, particularly for high-quality, well-located communities that were attractive to condo converters.

Third, we were aggressive with regard to our development plans, growing both our development pipeline and our development group.

Fourth, we were proactive in accessing a variety of cost-effective capital sources to fund our growth in a financially prudent manner. We were active in the debt capital market; we executed a number of joint ventures; and we made excellent progress and in fact expect to close this quarter on our first investment management fund, which is targeted at acquisition rehab opportunities.

With that, Tim and Tom will now provide some comments regarding these 4 areas and specifically with regard to our fourth-quarter activity. Tim?

Thanks, Bryce. As Bryce mentioned, I will discuss Q4 and overall 2004 results, and a bit later I will come back and touch on expectations for 2005. Over the past year our markets have transitioned from downturn to early-phase recovery. For the full year 2004, same-store rental revenue was relatively flat compared to 2003, as Bryce mentioned.

However during the course of the year, the year-over-year growth rate in same-store rental revenue increased by almost 400 basis points from a run rate of more than negative 2 percent in Q1, to a run rate of more than 1.5 percent this past quarter. Much of the improvement has come in the form of higher occupancy. But more recently over the last couple of quarters we have seen lower concessions and higher market rents as well.

In Q4 on a year-over-year basis, GAAP same-store revenue increased by 1.6 percent, while on a cash basis same-store revenue was up by 2.8 percent or about 120 basis points higher run rate. All regions posted increases on the order of 2 to 3 percent, except Northern California which was slightly negative on a year-over-year basis.

On a sequential basis, same-store rental revenue increased for the third consecutive quarter despite seasonal challenges normally experienced in the fourth quarter. Importantly in Q4, we saw the first rental rate increase in the same-store portfolio on a sequential basis in 3 years. In fact, rental rates were up by half a percent from Q3.

As we have discussed over the past few quarters, as occupancies have recovered to the 95 percent plus range, we have shifted our focus to reducing concessions and increasing market rents. This is just now translating into higher effective rental rates. On a sequential basis the California markets led the way, with Southern California showing the most improvement, followed by Northern California.

I will shift now to investment activity, and I will start with acquisitions and dispositions. During the fourth quarter we purchased 2 additional assets for the investment management fund, 1 in Baltimore and 1 in Seattle. Both of these are '80s vintage assets planned for redevelopment. These communities are located in established submarkets for AvalonBay, in Columbia, Maryland, in the case of Baltimore, and Redmond, Washington, in the case of Seattle. Both of these transactions are good examples of the kind of deals we intend to pursue for the investment management fund.

For the year we bought 5 communities totaling 134 million.

On the dispositions side, we continue to focus our efforts on unique opportunities to harvest value. During the quarter, we sold 3 assets totaling 141 million. 2 of these assets were sold to a condo converter for 120 million. These assets are located in the Roslyn (ph) Boston corridor of the DC metro area. They were sold at a cap rate of just over 4 percent and generated a 20 percent unlevered IRR over an 8-year hold. The economic gain in this transaction was 71 million.

For the full year we completed 241 million of assets sales at an average cap rate of 4.8 percent and an average unlevered IRR of 16.5 percent.

Finally, in the area of development, during the quarter we completed 4 communities totaling 189 million. In addition, we started 1 new community in the Boston area and 2 redevelopments in Chicago and Baltimore, respectively. With these completions and new starts, our current level of new development is 550 million; and we currently have 4 communities in various stages of redevelopment.

For the year we completed 7 communities totaling 364 million and started 6 new communities totaling 241 million.

In summary, 2004 was a year of transition, a year when operations began to stabilize in most markets and we increased our level of investment activity in terms of acquisitions and building our development pipeline. I will expand on this a bit more when we address our outlook for 2005. But for now I will turn it over to Tom, who will discuss financial highlights for the quarter.

Thanks, Tim. I will briefly comment on the quarter and then turn to the full year. For the quarter we performed largely as we expected. Operations were slightly better than expected, and this was partially offset by several non-operating items including higher G&A costs related to performance bonus accruals as well as Sarbanes-Oxley related costs.

For the year, FFO of 336 was substantially better than the 322 we provided in our original outlook way back in December of 2003. I just want to briefly recap some of the key components of that positive performance for the year.

Most of the outperformance was related to same-store revenue growth; this contributed about 8 cents per share. Our markets recovered more quickly than we anticipated, and we actually saw substantial occupancy gains and then revenue growth towards the end of the year.

Lower interest costs due to lower rates and less debt outstanding contributing to our overall outperformance. Several nonroutine items contributed, including a land sale and a note prepayment which combined total about 3 cents per share.

These positives were again offset somewhat by higher G&A related to Sarbanes-Oxley and performance bonus accruals.

It is also important to note that we did see dilution from asset sales during the year that were at a level that were twice what we planned at the beginning of the year. We were able to execute these higher sales levels, use the proceeds to pay down our floating-rate line, and still outperform for the year. We think that is a noteworthy accomplishment.

Turning to the balance sheet, our strong financial position improved, as the key metrics we use to measure our financial position strengthened. At the end of the year, debt to total market cap totaled 31 percent; and this compares to 40 percent at the end of 2003.

Our fixed charge coverage improved to 2.8 times. NOI from unencumbered assets moved up to 82 percent; and just one note about these unencumbered assets. Assets that are free of debt and free of tax protection are highly marketable when they go to sale. We think that the outperformance in terms of overall IRRs and the cap rates we achieved during the year were benefited by the fact that these assets that we sell are largely unencumbered with tax protection and debt.

That is pretty much a recap of 2004. I would like to turn the presentation back to Bryce for a discussion of the year ahead.

Thanks, Tom. We want to shift to discussing our outlook and expectations for 2005. If 2004 was a year of transition, then I think 2005 will be a year of continued growth. We expect the market fundamentals to continue to strengthen, ultimately resulting in positive revenue and accelerating earnings growth for AvalonBay.

I would like to touch in some of our key assumptions underlying our outlook for '05. First, with regard to job growth, we expect to see job growth in our markets accelerating from the approximate 1 percent level in '04 to just under 2 percent in '05.

With regard to interest rates, if the economy strengthens we are budgeting for interest rates to rise by approximately 100 basis points throughout the year.

With regard to demand supply, we expect to see fundamentals in our markets improve from a point of roughly balanced in '04 to our ratio of almost 2 to 1 during '05. Now, while a level of almost 2 to 1 is a welcome change from the flat to negative fundamentals we have seen over the past 4 years, it is still quite modest when compared to past recoveries. The fundamentals are improving, but they are improving at a modest rate and a bit uneven geographically.

The overall improving job growth, modestly rising interest rates, and improving apartment fundamentals are expected to result in positive revenue and NOI growth for AvalonBay for the first time in 3 years and FFO growth of approximately 7 percent.

Against that backdrop, what are our main areas of focus for the year? I would like to highlight 4. First, we will remain extraordinarily focused on our core portfolio. While fundamentals are improving, they are still relatively weak in many markets. We need to remain focus on occupancy as we push for revenue growth.

Second, we are going to be very aggressive in terms of our development activity. Again a (technical difficulty) communities that will be delivering into the '06 and '07 time period.

Third, we expect to be a selective buyer as we look for attractive opportunities, particularly redevelopment opportunities.

Fourth, we plan to be an opportunistic seller, adjusting our sales activity to reflect market conditions.

Tim will speak to our outlook by market as well as expanding on my comments regarding these 4 areas. Tim?

Thanks, Bryce. I would like to just take a couple of minutes providing an overview of our outlook for 2005 on both the operating and the investment side.

First, in the area of operations, same-store revenue is projected to grow in the 2 to 4 percent range. All markets are projected to experience improving fundamentals, and we would expect the rate of growth to increase during the year.

The healthiest markets in an absolute sense will continue to be in the Southern California region. Markets that should experience the most momentum -- that is markets where fundamentals should improve the most in a relative sense -- include the New York metro area, the Bay Area, Seattle, and Chicago.

As discussed last quarter, Northern California appears to have bottomed. We are now seeing some sequential growth in that region which should continue into 2005. The improvement in the DC metro area is projected to be modest, as new deliveries in this market are currently at peak levels. Operating performance in Boston and San Jose is likely to trail the balance of the portfolio due to sluggish job growth in those markets.

Same-store expense growth should be in line with revenues as we are expecting expense growth in the 1.5 to 3.5 percent range. Pressure in real estate taxes and payroll should be offset by moderation in bad debt, marketing, and insurance.

Given the volatility we continue to see in the energy markets, utilities represent the biggest risk on the expense side over the next year, which is mitigated somewhat by the fact that most utilities are separately metered and paid by the resident.

On the investment side, we are expecting acquisitions in the 125 to 225 million range. Our focus will be on value-added opportunities across our existing markets. These may take the form of full-scale redevelopments, management repositionings, or market cycle plays.

Our guidance on dispositions is 100 to 150 million for 2005. But as Bryce mentioned, given our opportunistic focus on asset sales, the ultimate level of sales will be somewhat dependent on upon our view of the transaction market as well as the broader capital markets.

In addition, we will start 5 to 7 redevelopments, some of which will be from new acquisitions for the investment management fund, while the balance will come from our stabilized portfolio.

Finally, in the area of development we are expecting development starts in the 700 to $850 million range. This represents a substantial increase over 2004 levels, as we begin to ramp up development activity and draw down on a $3 billion development right pipeline, a pipeline that has increased by 1 billion over the last year alone.

Starts will occur across many of our markets with a focus on Southern and Northern California and the Northeast regions in particular. Deals on new development will generally range from 7 to 9 percent depending upon the market and its current stage of recovery.

Overall in 2005, we expect that improving apartment fundamentals will result in accelerating growth in same-store revenues. Performance should be a little more even across regions than we have experienced over the last couple of years.

Our focus on the transaction front will be in the areas of value-added acquisitions and opportunistic dispositions. We will be increasing our levels of development and redevelopment significantly which will result in higher levels of deliveries in 2006 and '07 when apartment markets should be solidly in the expansionary phase of the cycle.

Now, Tom will provide a little more further color on 2005.

Thanks, Tim. My final comments center around our 2005 financial outlook that we provided in mid-December and also an update on our discretionary investment management fund. Our performance in January is largely consistent with our December outlook. There has been severe weather on the East and West coast, which will put some pressure on operations in January, but the extent of any increased cost should be covered within the outlook ranges we provided.

Financial outlook also provides meaningful data on investment activity, which translates to capital activity. 2005 will be a big year for AvalonBay with 450 million of new development activity, 175 million of acquisitions, as well as a number of security redemptions and reissuances. We would like to emphasize that we have adequate liquidity to meet these development commitments from internal sources as well as previously arranged joint venture financings.

I would like to expand on the outlook as it relates to abandoned pursuit costs. These trends costs have been trending lower lately, but they can be volatile, and are the most volatile and unpredictable expense category we have. Historically this expense category has been approximately $2 million annually, and this is what we are estimating for 2005. I will also point out that in the fourth quarter abandoned pursuit costs were around 400,000.

Just one cautionary note on revenue growth estimates for the year. Our outlook is heavily reliant upon third-party job forecasts. While fundamentals are improving, they're improving in the context of a relatively weak economic recovery. If job growth falls short of forecast, this will likely impact our revenue growth, but primarily toward the end of 2005.

That pretty much wraps up the outlook. I would now like to turn to the investment management fund which is on track to close this quarter. The fund is oversubscribed and it looks like we will not require 2 closings that is traditional for a fund like this. Rather we expect one closing for all the capital to occur this quarter.

Just a rough outline of the terms. The size of the equity raise is about somewhere between 275 and 325 million. We expect AvalonBay will contribute 50 to 60 million. We will leverage this equity up to 65 percent. The fees from the fund to AvalonBay are such traditional fees as asset management fees, which will be 1.25 percent of the equity on a committed capital basis; in addition there will be redevelopment fees, as well as property management fees.

The preferred or hurdle return rate is 10 percent, and AvalonBay will receive a promoted interest above a 10 percent hurdle that could be as much as 20 percent of all net profits of the fund, again depending on overall fund performance.

We are pleased with the execution of this important new source of capital for AvalonBay and the recurring fee income that it will provide.

So to conclude, 2004 was a year where we transitioned to growth, growth in FFO, and toward the end of the year growth in revenue. We expect growth will continue into 2005 for earnings, investments, and our general capital outlays. We enjoy great liquidity and a balance sheet that is well positioned for our expanding development pipeline. We have a new source of capital for acquisitions from our new investment management fund.

So we are encouraged with the growth that emerged in 2004 and we are looking forward to a sustained expansion into 2005. However, we do need to see continued job growth for operating fundamentals to continue to improve. Bryce, I will turn the call back to you.

Thanks, Tom. Overall, we're very pleased with our performance in '04. The fundamentals improved as expected. Our execution was very strong, and our total return was exceptional. However that was last year and now we are into a new year and a new set of challenges and opportunities. A new year that I think we're very well positioned for, since many aspects of our strategic focus contribute to expected outperformance in the early stages of a recovery.

First, our commitment to supply-constrained markets creates value over the long term, but particularly so in the early phases of the recovery. As jobs accelerate, supply remains constrained, leading to stronger revenue growth.

Secondly, we have multiple avenues of value creation. From our core portfolio of mostly A communities, which with the A communities, while they typically underperform in a contracting economy, they typically outperform in an expanding economy. Value creation from our $3 billion development pipeline and strong development track record, a key source of future earnings and NAV growth. And value creation through acquisition rehab opportunities, leveraged through our investment management fund.

Third, we have the balance sheet and the financial flexibility to support that growth in a financially prudent manner. With that, operator, we would be glad to answer any questions that may be out there.

(OPERATOR INSTRUCTIONS) Jordan Sadler Smith Barney.

I just wanted to touch on market, Tim, for a second if possible. It sounded like Boston was one of the slower growth expectations for next year. But in the fourth quarter, which I know is a little bit seasonally slower, it seemed like you guys had a pretty good sequential quarter.

Are you starting to see -- did you see the bottom in Boston? Is it picking up there yet? Maybe you could talk a little bit about the Northeast as well, including concessions in there as well.

Sure, Jordan. This is Tim Naughton. Boston, I would tell you, we did see a little but of improvement in the fourth quarter and some signs that it hopefully will start to emerge here from the stalled state that it's been in. Occupancy has been relatively flat. We did see a decline actually in concessions in Q4 from Q3. Rents have started to flatten in that market. So we are starting to see the early signs anyway that we may be moving into what I would call early stage recovery.

It is a market that we're expecting less growth out of in terms of same-store revenue in 2005. But I'll tell you, it is also a market that by the end of 2005 could be a positive surprise for us.

With respect to the rest of the Northeast, which I think you asked about, generally the New York region, we are seeing for the most part job growth come back across the region. I guess with probably the exception of the Fairfield submarket. Then when you combine that with low supply, we do think the New York metro area in general will see some acceleration in 2005. You have seen it primarily in the form of higher occupancy this year.

But as we look at demand supply ratios next year, I think Bryce has mentioned it is roughly about 2 for the portfolio of markets. It is about 3 for the Northeastern portfolio of markets. So we would expect generally the New York metro area to really start to have more momentum than the portfolio overall as we move through 2005.

Is supply starting to hurt a bit in D.C. Baltimore?

A little bit. We saw a little bit of -- we did see a reduction certainly in economic occupancy in D.C. over the last quarter. I think part of that is supply; but I think part of that is job growth. We're actually seeing job growth start to decelerate. Obviously D.C. has been the biggest job generator across the country over the last year. But we're actually seeing job growth start to decelerate in D.C. while it's accelerating in a lot of other markets.

We are currently right at the peak of deliveries. We do expect deliveries to actually decline a fair bit as we move through 2005. Condo activity continues to be robust in D.C., so we are still benefiting from some of the conversion of both existing units as well as new developments to condominium.

But overall, in '05 we see it roughly in balance between demand supply in D.C.; and that is just a lower demand supply relationship than we are seeing across the rest of the portfolio.

Lastly, on the markets, what was the expense growth in Northern California about year-over-year?

It was a confluence of factors, but I would tell you lot of it was a tough comparable. The same quarter last year expenses had actually declined 6 percent; so they were up I think just under 10 percent this past quarter.

There was some additional pressure that came from turnover related expenses. While turnover was flat or down in most other markets it was actually up a bit in Northern California. So turnover related expenses were up, as was payroll related, mostly as a result of some outperformance, actually, relative to budget.

Okay. Bonus accruals?

Bonus accruals, exactly. But I think most of it honestly was a tough comparable, Jordan. I should say overall for the year, we ended up at 1.8 percent on same-store expense growth, which we feel pretty good about in terms of that performance.

Sure. Lastly, I have a couple on the fund. I think the guidance for acquisition is 125 to 225 within the fund. You did 130 or so I think year-to-date, that (technical difficulty) contributed to the fund, I think, most of that. So are you already ahead of expectations? Or is the 125 to 225 on top of what you have already warehoused?

This is Bryce. It will be on top of what is already warehoused.

Okay. Tom, maybe just the contribution to FFO expected from the fund in your numbers for '05, aggregating at all up? I know you broke it down into your share of the equity and the fees. But do you have a number for that?

I really haven't quoted a number in the past. It is probably somewhere around a penny to a penny and a half as we ramp up. But it is not a meaningful contributor just because it is kind of a start-up business.

Okay, thank you.

Lou Taylor, with Deutsche Bank.

Let's see, first question just pertains to cap rates, as you look at things you may consider selling in '05. Are you sensing any upward pressure on cap rates yet?

This is Tim. Not really. Again our focus has been on selling the stuff where we think we think we get outsized returns, which is generally, more recently has been the condominium converters, where we think we can earn maybe a 7500 basis point premium to what we think prevailing cap rates are in the market.

I mentioned the 2 assets in Northern Virginia that we sold at just over 4 percent cap. Our estimate, if that had gone to underlining apartment fundamentals or an apartment buyer would have paid maybe a 5, maybe slightly over for that asset. But in general, we're out there in the marketplace buying today, and if anything I guess we would probably see cap rates stabilizing right now.

Second question is for Tom. Tom, as you look at '05 in terms of dilution from those asset sales this year, what is your forecast with regards to -- is it going to be better or worse than last year?

It will be about the same. We are obviously expecting -- 1, for $150 million of dispositions it is not going to be a significant dilutive effect. But with the low cap rates and with the rising floating rates there is probably going to be some crossover during the year where it really doesn't matter.

Right now LIBOR is at 240, 3 percent all-in for us. If you are selling assets at a 4.5 to 5 percent cap rate and the floating rate is moving up on you during the year, there really may not be a bunch of dilution from those sales.

So the dilution could be a little less than it was in '04?

Only because floating rates are moving up, right.

Last question is for either Tim or Bryce. In terms of your development starts for this year, is the ramp in starts due to your view that you're going have just better market conditions in '06 and '07? Or did you get some entitlements more recently that just came through all at once, and you have decided, okay, let's start these projects?

It's a little bit of both. Clearly our expectations are that, as I said in my earlier comments, that we see '05 as the year of modest improvement in our markets. Not robust. Many of our markets are still relatively weak. We see that continuing to firm into '06 and '07. Obviously the farther you go out, the less clear things get.

But that is our expectation. So part of it is, yes, how we feel about the strengthening of our markets. Part of it is the line up just certain deals, deal size, and the timing of entitlements, and how individual markets are maturing.

Last question, with regards to the pipeline, what is your estimate of how many projects you have that are maybe fully entitled and ready to go? That if you see market conditions say 6 months from now, say, much much better and you want to just accelerate starts even further, how much do you have in your pipeline that you can just pull the trigger on very quickly?

This is Tim. Not much, in reality. Generally when we stop through the design phase we don't stop right at the -- when construction documents are completely done. We typically stop well before that. So it would take generally 6 or 9 months. If a deal was just stopped it would take 6 or 9 months to mobilize, and get final documents done, and be in a position where we'd bid the project and feel comfortable pulling the trigger to go.

So I would tell you I would not expect the number, even if market conditions improved dramatically, I would say we could not ramp it up a lot higher than what we have put in our guidance of 700 to 850 million.

Lou, just to add one thing. It's a function of what is ready to start. It also very much is a function of what organizationally we are ready to start. Development, as you know and you have heard us speak to before, is not a business for amateurs. It is a risky business.

We have taken many, many years to build our group up to a point of pretty good competencies. That is not something you would double overnight without taking undue organizational risk. So we are very cognizant of that aspect as well.

Great, thank you.

Richard Bailey, (ph) ABP Investments.

I have a bunch of questions. First, on your revenue outlook for '05, is that I guess expressed in the similar way you report it on a GAAP basis? Could you possibly convert it to what the cash type of revenue growth for '05 looks like? Because it seems like you're running ahead now of what the GAAP number is.

This is Tom. I will have to get back with you on the conversion to cash, because we generally don't do that in our outlook. But on a GAAP basis, 1, we are stating our outlook on a GAAP basis. There is some drag from concessions that are going to burn off in 2005 that were given in 2004.

Okay. My next question is the pace of the decline in the concession has accelerated. I am not sure if that is a seasonal thing, comparing Q3 '04 to Q4 '04. You went from like down 6 and change to down 14 and change. Do you expect the trend to moderate any as you pick up in terms of just leasing activity in the next couple quarters?

Rich, this is Tim. Let me just clarify. I think concessions for moving were down about 14 percent on a year-over-year basis; so Q4 to Q4. Sequentially they were only down about 6 percent. I think those were the 2 numbers you may --.

What I was saying is that it was year-over-year down 6 in Q3; and then year-over-year it was down 14 in Q4.

Okay. All right. Well, coincidentally it was down 6 percent sequentially from Q3 to Q4 as well. But I don't know that I remember the Q3 to Q3 number.

We have actually seen concessions for moving actually decelerate a little bit as we move sequentially. But I tell you, a lot of that I think is seasonal. We do have occupancy pressures as we move into the fourth quarter and early part of the first quarter. It is the low part, low traffic, and low demand part of the season for us, obviously.

Right. Can you elaborate any, if you have seen any diverging trends in terms of markets on concessions? Obviously, Southern California is probably not giving any; but anywhere else?

In terms of declines, actually, the biggest declines have been in Northern New Jersey and New York, and then Oakland and Seattle. Those are the 4 markets we have seen the biggest declines. Then there are a few markets that have increased a bit; I think DC is in there on a year-over-year basis.

Okay. Just bear with me, guys; it's just a couple more questions. Tom, I think this one sort of comes into your court. With respect to your sources of funds, I'm just trying to dial numbers in here. What you are saying is it looks like your acquisitions and your dispositions, exclusive of the items that are going into the fund, are almost a wash in your projections of the midpoint. Yet you're looking to start, if I pull up your sheet here, about 265 to 365 on what you say is cash disbursed.

Where does that financing come? Some of it must be from money that you're getting from the fund for the assets you contribute. What are the other pieces that I'm missing?

We are going to get about 85 million from the fund at closing. We have free cash flow of about 40 million. We will issue unsecured debt this year, and that would probably be 150 to 200 million, remembering that we redeemed 150 million in January. JV debt and equity will approach about $100 million during 2005.

Okay. All right. My final question is more of a technical thing. I see the line item on your income statement, the JV income minority interest and I forget what the rest of the title is. It seems to be bouncing around. It was I guess 733,000 this quarter. Last quarter I think it was in the negative. What is your outlook for that line item, if you could help me on that?

It is not really helpful to give you an outlook on that line item, because it is so transaction related. Let me give you a little color on what is causing that to bump around.

Okay. That would help.

In 2003 we actually sold a JV interest, an asset we had a JV interest in; and that was Falkquin (ph). So the full year of '03 you see a very large number there. That obviously is a tough comparison to make, because you really have a gain on sale of asset going through that in 2003.

In 2004, we began to consolidate Arbor under FIN 46. That deal, then, we received prepayment of that note in the fourth quarter of 2004, and that is a large part of what is flowing through that category in the fourth quarter.

I think you can expect that that number will start to stabilize going forward, but obviously we do have the investment management fund to consider. But that will be an unconsolidated event. It will still go through that category but it will not be minority interest.

Right. Okay. That helps; thank you.

Steve Swett, Wachovia Securities.

Bryce or Tim, if I could ask just a little bit more on your pipeline of land and land rights. Obviously the increase that you have had in the past year -- have you changed anything in terms of your risk profile of the deals you are willing to pursue? Or the expected yields or anything? Or is it just hiring more people to pursue more opportunities?

This is Tim. I would not say the risk profile has changed, really, in any material way. We are probably doing a couple things differently than we were doing a year ago. One is a number of those -- 3 of the development rights that are actually improved office buildings that are actually the D.C. area, that is something we weren't doing a year ago that we intend to re-entitle and basically scrape and redevelop those as apartments.

I would say the other thing that is probably different is we are active in every market, where we had not been in the last 3 or 4 years. We certainly had not been active in Northern California and Seattle, and we have ramped up in Southern California over the course of the last 2 or 3 years. So I think it is really kind of a combination of those two things, along with the fact that we have added more resources to that group.

Have you added maybe a portion at any of these projects devoted to condos or for sale housing; or is it still pure for rent?

In terms of what we intend to develop, it is just market rate rental. But there are some of these development rights that could have a portion of them be for sale condominium that we would more than likely spin off the development rights for that.

In the California pursuits, are you looking to put condo maps on them or would you leave them as for rent?

We're generally looking to put condo maps on anything that we're developing.

Tom, you answered a question earlier on warehousing the properties and placing them into the fund. Would those be then treated essentially as net dispositions? And those are not included in your disposition guidance for the year?

They are not included in the disposition guidelines for the year. If you wanted to add that in, dispositions would total over 200 million for the year.

Okay. In the development starts, the 700 to 800 million, are any of those the larger type deals that you would look to spin off into joint ventures and find an equity partner?

We have slated at least one of those assets to be a joint venture, and that would be Mission Bay Phase II. Actually 2 assets.

Okay, great. Thanks.

Ross Nussbaum with Banc of America Securities.

Two questions. First, you have got 167 of land on the balance sheet where you have not begun construction. Where would you peg the current market value of that land to be?

This is Tim Naughton. Honestly, we have not done an estimate of the market value of the land. I would tell you it is worth more than the 167 million, probably, by a fair bit.

How long has it been on your books? Let me ask it that way.

It depends on the asset. We have increased land inventory recently, and that is a function of a couple of things. It is a function of there were a couple of markets that we were not ready to pull the trigger on and move forward.

It is a function of the land markets, frankly, being a little bit more competitive on terms we have (ph) had it closed once we have gotten the major entitlement, but may not have had the building permits yet.

And it is a function of we have been ramping up the development right pipeline. The development right pipeline has gone from 2 billion to 3 billion; the land inventory level is going to follow on.

Do you think it is somewhere between 1 and 2 years?

That we have gone from what to what?

In terms of the average hold period, if I had to average out.

Of the stuff that we own, it is probably a year, maybe a little less.

Second question is, on the developments that you completed in the fourth quarter. If I look at the average rents and where the occupancy numbers are, how does that come out versus where you had budgeted before you put a shovel in the ground?

The average yield on the development pipeline overall is about 8 percent. The stuff that is completed has about the same projected yield of about 8 percent. Most of that stuff probably was pro formaed at the time that we started construction in the high 8s to 9 percent.

And Karin has got some questions.

Just a question on the G&A. You said it was higher than you expected in the fourth quarter. I know you had given guidance of it being up 6 to 8 percent for 2005. Does that 6 to 8 percent number still hold given what happened in the fourth quarter?

Yes, when we gave our guidance at the end of the fourth quarter we anticipated largely what was going to happen in the fourth quarter; so that 6 to 8 percent would still hold.

You mentioned the weather impact in California and the Northeast impacting January. Can you talk, give us a little bit more color about what you have seen in January? Has it affected both the revenue and the expense side?

What we have seen is snow. Lots of it in the Northeast, particularly in Boston, and that hits both on the revenue and the expense side, Karin, obviously. It slows down traffic, people stay hibernated, and it hits expenses in terms of snow removal costs. California is a little different situation, but it does impact on both sides of the revenue and expense.

Okay. Finally, last quarter I believe you said you thought Northern New Jersey would probably lag the other submarkets in the New York City area. But it looked like Northern New Jersey actually did reasonably well this quarter. Have you changed your mind? Do you think Northern New Jersey is going to pick up the pace and hit that 3 to ration you described for New York?

No, in fact, we think that Northern New Jersey we're projecting more in the 1 to 1.5 percent range in terms of demand supply next year. So it would be lagging the rest of the New York metro area.

Okay, thanks.

David Harris with Lehman Brothers.

A quick couple of questions for you, Tom, a bit more on the fund if I may. Is the 10 percent hurdle rate that you mentioned unlevered?

No, it is levered.

It is levered? The 20 percent promote that you referenced, what hurdle rate -- at what level does that cut in, in terms of the hurdle rate you have to achieve before you would participate at that level?

You are cutting out a little, but if I understand your question above a 10 percent levered return AvalonBay as sponsor would receive 20 percent of all profits. Once we reach a 14 percent levered return to investors, that 20 percent would go to 40 percent; until on all capital we receive 20 percent over the entire fund.

There are a couple of intermediate slices, are there, in between?

There's 2 points, there is the 10 percent and there's the 14 percent.

I may have missed this; you will forgive me. The debt premium payment, what line is that included in for the fourth quarter?

It is in that category that includes minority interest, joint venture income etc.

Okay, okay. One final question for Bryce, if I may. Bryce, 3 year since the Company raised its dividend. Would you care to comment?

Our Board visits dividend policy February of each year; and we will be discussing it in the month of February.

Any view as to -- would you care to express a view as to what management might be suggesting to the Board at that time?

Not at this time, no.

Okay, thank you.

Craig Leupold with Greenstreet Advisors.

Good morning; Craig Leupold. Tom, in terms of the total assets that are now sitting on your balance sheet that will be contributed to the fund, what is the gross amount of those?

About 111 million.

Okay. You mentioned that you had about 400,000 of pursuit costs in the quarter, so that would imply that your investment management costs are about 800,000 in the quarter. I am curious, is that sort of a fully-loaded number for the anticipated size and activity of the fund? In other words, as you guys start to acquire assets and reap property management fees and such, will there be incremental costs that hit the income statement, or is that fully loaded in that fourth-quarter number?

Let me clarify. That category is called investment and investment management, so you have acquisition people in that category as well. So 800,000 includes an acquisition team that did grow in 2004 as we are ramping up for the fund. But we have always had an acquisition team, so it is a little bit of everything, and it includes abandoned pursuit costs. In terms of incremental cost, as we accelerate with the fund there will be some, but I would expect that most of the costs are in place. We will have some incremental property management cost as we get larger. We will have some incremental cost on the construction side as we redevelop assets, but most of the expenses are there. There is another hire coming on the investment management fund.

Okay. Tim, just 2 more follow-ups on the land question. One, what is land as a percentage of your total budgeted cost at this point, generally speaking?

Craig, it generally runs in the 20 percent range on a typical development deal.

You mentioned as you were going through some of the reasons why the land bank has increased as much as it has. One of the reasons you gave was the fact that you're being forced because of competitive situations to maybe close on the land sooner than you might have previously. You did mention that that is only after you have gotten entitlements. Is that still the case? Are you only closing on land once you know that you have got kind of a rough idea as to what you can build? Or are you taking on additional risk through the Development Rights pipeline versus where you have been historically?

Generally, when we're closing, we've got entitlements in place, Craig. Probably the biggest exception is the 3 office buildings I mentioned we bought in DC. They're zoned for their existing use right now, which is office, but in many cases they have got some kind of underlying master plan that contemplates a conversion to residential. But they would still need to ultimately be re-entitled to allow for the residential use.

Are those office buildings throwing off cash flow to you today?

They are, they are. We've got about -- I think there's 167. A little over 30 million of that is income-producing, and it is probably -- I haven't looked at this recently, but it's probably in the 5 to 6 percent range on average.

Great, thank you.

Andrew Rosivach with Credit Suisse.

Hi, guys. Just to clarify on Rich's question, in '05 on a cash basis your revenues are actually better than what is going to be running through GAAP net income and FFO?

Correct. The growth rate in revenue on a cash basis will likely be higher than on an accrual basis.

I just bring it up because that's how other folks report just on a relative basis. The second question for Bryce, someone -- another apartment recently sold a number of assets, declared a special dividend. It would seem to be that there are assets in your portfolio that are probably worth more money in a condo converter’s hands rather than a renter's hands. Have you ever thought of pursuing that kind of strategy?

Well, we have been pursuing that strategy in the assets we sold in the fourth quarter. The Boston Quincy assets, as Tim mentioned, were sold to a condo converter, and those were assets that we didn't intend to sell at the beginning of 2004.

We have been -- I think underlying your question, Andrew, is just what is the appropriate sales pace? Suffice it to say that's something we are always visiting and constantly revisiting. In each of the past 2 years, we have ended up selling basically twice as much as we originally anticipated selling, as we responded in some cases to unsolicited offers, in other cases to situation where we just saw, frankly, an arbitrage opportunity between condo values and apartment values.

So we are continually looking at those things and over the last couple of years we have sold 700 million, half of that was unanticipated sales.

I guess what I am also getting at is, would you ever contemplate doing heavy asset sales, which then would fund a special dividend?

If that was the result, yes. Meaning we would not sell because it would result in a special dividend.

Right, right.

But we haven't been in that situation, because we have been able to cover the gains without having to be in that position. So it is just an issue of magnitude and it's an issue of the gain that you have got embedded in the sales.

Okay, thanks. Finally, Tom, a lot of folks have been asking about sources and uses. Is it correct that you're going to hit a low leverage point when you do these JV contributions and some asset sales early in the year, and then increase leverage from there?

The second part of that, in the sources and uses, is how much you anticipate you will get from a DRIP this year?

Could you ask that second question again?

How much you think you will get from a DRIP?

Oh, the DRIP. You know, the DRIP is not that material. It has been higher in the past, but we may get 10 or 15 million from the DRIP in any given year in terms of reinvested capital.

The first question again was, are we going to reach a low leverage point from which we lever up? We're 31 percent levered now. We're at the beginning of an expansionary cycle. We did position this balance sheet to be where we are today, as we pull the development pipeline through. So I think over time you should expect to see our leverage increase as we pull the development pipeline through.

Okay, thanks, guys.

William Atcheson, Merrill Lynch.

I just wanted to be clear on Northern California. It is a large market for you, 23 percent. There was some very good progress in the quarter, flat occupancy, economic occupancy, rents only down 0.4 percent, and they were down 2.2 percent in the third quarter, a relatively rough seasonal quarter historically. Do you have any visibility on when you could see the rent rates turning positive in Northern California?

This is Tim Naughton. We actually did see rental rate growth on a sequential basis. I mentioned that in my prepared remarks. We saw I think total revenues up by 0.7 percent from the third quarter, and as you mentioned during the seasonally low fourth quarter. So we actually think it bottomed sometime in the third quarter.

From there, we're expecting growth. It is just a matter of trajectory. We are seeing modest job growth in both Oakland and San Francisco, and virtually no supply in San Francisco. So we do expect to see some growth in those markets next year. And with San Jose it is going to lag and be flat to maybe a modest positive growth.

(indiscernible) you see it turning positive on a year-over-year basis as well?

Oh, yes, absolutely, as we move through. Yes. For 2005 we absolutely are projecting year-over-year positive growth in Northern California.

Bill, this is Bryce. I just want to extend your question a little bit further. That is, how we feel about the issue of housing affordability and the impact that will have on rental rates. It is something that has been increasingly written about. But I think just a couple data points are pretty interesting.

Over the last 3 years we have seen incredible escalation in home prices nationally, but particular so in AvalonBay's markets, and particular so in the California markets. Over the last 3 years, the average home price today nationally is about 180,000. In our markets, it is 390,000; so it is twice the national average.

Over the last 3 years home prices have gone up 25 percent, while incomes have gone up 9 percent. So that is pretty stark change. In our markets it is even more significant. Home prices are up 45 percent over the last 3 years; incomes up about 8 percent.

That is obviously not a trend line that can continue. It is has been buffeted by the low rate environment. But any meaningful change in the interest rate environment we believe is going to have a marked change either on home prices or on the volume of home sales, and the cannibalization that we've seen from our residents, from renters to homeownership.

Just lastly within that 3-year period, where in our markets home prices have gone up 45 percent, our rents have gone down 10 percent. So again trends that just simply mathematically cannot continue in those directions. So that gives us optimism in our markets overall and particularly in the very high-cost markets in Southern California and Northern California. So that factors into our outlook for those markets.

I recently did an internal study, housing affordability in markets. Just looking at some of your California markets, housing affordability there is roughly a third of the national average or even lower in some cases. So, absolutely correct.

It is just so significant in some of the markets that it doesn't -- now having said that, we would have thought we would have seen some relief in our move-outs to homeownership. And we have not yet seen that in many material sense. So this is something that we expect to see but have not seen yet, to be clear.

Just a couple more questions. In the Northeast, operating expenses were down. Was that due to very easy comparisons in the year ago, or something else going on there?

Part of it was a comparable from the year prior. But certainly part of it is just a larger, a bigger focus on expenses in general across the portfolio in 2005. And some relief that we have gotten over, particularly in the areas of insurance and bad debt. I think bad debt had been higher, quite a bit higher in '03 relative to '04.

Just in general, across the portfolio, is the trend in expense growth going to be a little bit more predictable this year? Last year was all over the ballpark, up well ahead of inflation, down well below inflation, etc. Are we going to see a little bit more of a steady-state this year?

It just moves around quarter-to-quarter quite a bit. So much of it can be timing. For us it ended up being pretty predictable as it related to full year. But from one month to the next, it can be pretty variable. Tom, you have something to add there?

The only thing I would add is that because we expense carpets, our quarterly costs are going to be more volatile. If you capitalize carpets you're dampening the overall effect of operating expense changes. So I think because of our accounting we end up having more volatility on a quarter-to-quarter basis, and I just thought it was important to note that.

Okay. Talking about carpets or at least the table that has the carpet expense in them, on attachment 7, this might be a little bit too particular for the call, but there is a category -- categorization of 2004 additional capitalized value. There is one item under acquisition construction redevelopment disposition, a $1.263 million item. I was wondering what was in there because it makes a difference in the number we use for nonrevenue CapEx per unit?

Why don't I call you back after the call? Oh, I see. 1.263 acquisitions, construction, redevelopment, and dispositions. Primarily that would be capitalization of costs related to new assets that we have acquired in the last year.

Okay. So that is not something to be considered in nonrevenue CapEx on an ongoing basis? Okay. How about a ballpark cap rates for the acquisitions? The 73 million in acquisitions you did in the fourth quarter.

The pre-renovation cap rate was in the high 5s, Bill. Those are both slated for redevelopment. We're looking at sort of a post renovation yield of around 6.5 percent.

You bought them at about what?

The high 5s.

Okay. Finally, if you could remind that us what your policy is on options expensing; do you do it or not do it? What the effect of that number would be in '05 if you did start doing it and you are not doing it now?

We do expense options and we do use the fair value method, so changes recently in FAS 123 don't impact us.

What is the absolutely value of the number?

Absolute value of --

What is the cost of expensing options?

Well, we give 125,000 options out a year; and that number ranges from $2 a share to $5.50 depending on how it calculates in the Black-Scholes model. So then you amortize that over a 3-year period. So you're talking about 4 to $500,000 a year in expense. Yes, a couple hundred thousand a year.

400 to 500?

I'm sorry?

Did you say 400 to 500 a year?

Let me get back to you on that one.

Okay. Thanks very much, gentlemen.

Rich Anderson with Maxcor Financial.

Maybe you can get a little bit bigger picture here. Your comments today seem maybe slightly more cautionary than your comments 3 months ago during our third-quarter conference call. Am I reading that right? Relative to the fundamental outlook?

No, I hope we're not coming across that way. No, we are seeing the fundamentals improve as we expected in the third quarter. You're hearing some specifics -- this is Bryce speaking -- you're hearing some specifics about the fourth quarter and what we are seeing in January, which are seasonally slow times. So we are trying to accurately project what we are physically seeing today.

But in terms of our expectations, in my opening comments and in Tim's as well, we're continuing to see growth as expected; and for 2005, if we just start from job growth in '04, we saw job growth uneven and a couple of our markets not seeing job growth; in '05 we see it across the board.

We see revenue growth across the board in '05, although still at a relatively modest level, given some historical recoveries. But no, we are not trying to paint any more pessimistic view or any different view than we did a quarter ago.

Just a follow-up to that, Tom, you mentioned reliance upon third-party job forecasts for your same-store estimates. Would you say that you have taken those forecasts and sort of haircut them in arriving at your outlook? Or did you sort of take those forecasts 100 percent at their word?

We generally -- in the past we actually last year did haircut them some. We would lag the growth in jobs by 1 or 2 quarters. This year we are basically doing an at par, so we are not lagging the job growth forecasts.

Just because you just feel better about things now, I guess?

It's a little more predictable. Frankly, you get burned on relying on forecasts, so you build in coverage. Then once they get more accurate, you start dialing it back. I don't think though this year if you lagged it or not if really had a material impact.

Thanks very much.

David Ronco, RBC Capital Markets.

I know you guys are obviously going to buy and well where you can get the right price. But with regard to the upcoming acquisitions and dispositions in 2005, as you look out at your markets, are there any that you're particularly bullish on and would like to build your exposure to? Or any that you would like to lighten up on a bit?

I think there are sort of two questions there. I will try to take the first; just what is our appetite by market over the longer term? Tim may want to talk about where we might see some near-term opportunities. If you understand, I'm trying to separate the questions.

In terms of from a long-term point of view, we're looking to increase our concentration in the Southern California market. We're looking to increase our concentration in the Chicago market. We're looking to lighten our concentration in the San Jose market.

The other markets we're looking to generally grow, on a more of a pro rata basis. So that is sort of long-term perspective. What we then is overlay on that, and say, yes, but what are the near-term opportunities, whether we want to be a buyer or a seller in those markets. Tim will address that.

David, over the last couple years, obviously, we have been selling a fair bit in Southern California and DC; those would be both markets we would actually want to increase our presence in over time.

When we talk about being opportunistic with respect to dispositions, it is really about being keyed into the market and really responding to what we think are the best opportunities out there, base upon what we're hearing in the market.

Just by way of example, last year when we put together our disposition plan, I think we ended up selling 1 asset off the original plan that we came up beginning of the year. We kept switching out with other assets where we saw more compelling opportunities.

That is very different than what we saw really before 2003, where we generally sold the assets that we identified at the beginning of the year. Much more stable market conditions. For the most part those were, quote unquote, strategic sales, either lightening up in a market or exiting a market entirely.

That really hasn't been the focus for the last couple of years, where we have seen really some what we think are outsized opportunities, just based upon what really the market is telling us.

Great, thank you.

Scott O'Shea with Deutsche Bank.

A question for Tom, what are you budgeting this year for maintenance CapEx? Either per unit or on a gross basis.

We are still developing our CapEx plan for the year. I guess I would say it is likely to increase, because as we have evaluated the investment management fund we have also looked at our own assets, to look at value-added opportunities, and we think there are some.

So I think we will increase our CapEx per unit this year. But the final budget has not been determined.

That's fine. A couple of your peers have gone to cap rate based covenants in their last deals. Is that something you would look at this year?

You know, we really haven't studied it, so I can't really respond to your question.

Okay. That's all for me. Thanks.

At this time there are no further questions. Please proceed with your presentation or any closing remarks.

Thank you, operator. We appreciate everybody's attention today. We look forward to saying many of you at the industry events over the next few months. Thanks.

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