艾芙隆海灣社區公司 (AVB) 2005 Q1 法說會逐字稿

Welcome to the AvalonBay Communities first quarter 2005 earnings conference call. Later we will conduct a question-and-answer session and instructions will follow at that time. [OPERATOR INSTRUCTIONS] As a reminder this conference call 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, Kimberly. Good afternoon and welcome to the AvalonBay Communities first quarter 2005 earnings conference call. If you did not receive the press release in last night's fax or e-mail distribution please call us at; 703-317-4636 and we will be happy to send you a copy. As always, I'd like to remind you that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday's press release as well as in our Form 10-K filed with the SEC. The release also includes an attachment with definition and reconciliations of non-GAAP financial measures and other terms. The attachment is 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. And with that, I'll turn the call over to Bryce Blair for his remarks. Bryce?

Thank you Alaine. And again, welcome to our first quarter call. With me on the call today are; Tom Sargeant and Tim Naughton, both of whom have participated on these calls for many years. Also with us on today's call as well as future calls is Leo Horey, our Executive Vice President of Operations. Many of you are familiar with Leo as he is a 15 year Company veteran and a participant in many past investor events.

Now before we get started with our comments for this quarter, I wanted to take a minute to just announce a few changes to the format of today's as well as future calls. As we're always examining ways to make the calls as effective as possible. And have regularly reached out to you in the past to get your feedback. And we appreciate that. To that end we've decided to structure our calls a bit differently. Specifically, on our first and third quarter calls we will have shorter prepared remarks with fewer up-front speakers. Typically just two. Allowing more time for Q&A, during which all four of us will be available to answer questions. On the second and fourth quarter calls our prepared comments will be a bit longer with all four of us addressing the key areas of our business. Year-end and mid-year seem logical times to delve a bit deeper into our operations, strategies and business outlook. While for the first and third quarter calls we should be able to be a bit briefer. We think this is a reasonable approach and will be following up with some of you to get your feedback on how it's working. So, for today's call it will just be Tom and I speaking. And I will be addressing two topics. Our operating performance for the quarter and highlights for our investment activity. And then Tom will address some key financial and capital markets activity. Again, all four of us will certainly be available to take questions.

So, let me start with a brief overview of our operating performance. Last evening we reported EPS for the quarter of $0.92 and FFO per share of $0.96. The FFO per share represents a year-over-year increase of 21%, which is largely attributable to four items. And I will go through each one briefly. First, the contributions from our development activity. Over the past 12 months we've added over 2,000 homes to our development activity. And as communities move through their lease-up to stabilize operations they're an important contributor to earnings and NAV growth. Secondly, from growth in same-store sales revenue we reported growth in same store revenues of 2.4% on an accrual basis or 3% on a cash basis. This is the largest increase in same-store sales revenue that we've seen in three-and-a-half years with all six of our regions reporting positive revenue growth.

In terms of regional performance; southern California and the northeast showed the strongest year-over-year growth with southern California being primarily through growth in rental rate, while the northeast was mostly through occupancy gains. The two weakest regions were the Mid-Atlantic, as it absorbed 8000+ apartments delivered last year. And northern California, which is still being held back by the weak fundamentals in San Jose. A third contributor to our FFO growth was lower interest expense. As we've taken advantage of the favorable rate environment and the strong sales market to lower both our rates as well as the amount of debt outstanding. And fourth, from a number of non routine items which Tom will address in his comments.

Let me turn to investment activity. As I mentioned on our last call we planned 2005 would be a year where we would be aggressive in our development activity, selective in our acquisitions and opportunistic in our dispositions. And during the first quarter we acted consistent with that. Regarding development, we started two communities both of which were in California. We closed on four land purchases and completed one community in Boston. And by quarter end we had approximately $650 million underway. And we expect the amount under construction to continue to grow throughout the year exceeding $1 billion underway by year end. We have a long and successful track record developing in some of the most difficult markets in the country.

We're pleased to be recognized as the multifamily builder of the year by both Multifamily Executive late last year then just two weeks ago by the National Association of Home Builders. Our development expertise coupled with the size of our development pipeline and the strength of our balance sheet is an important component of our future growth. This is particularly true in an improving economic environment. Regarding acquisitions we were very selective during the quarter. We had no closings and we have one asset under contract which we expect to close during the second quarter. The acquisition environment is very competitive. And we'll continue to be patient , focusing on those situations which we feel are clearly value added.

Regarding dispositions, we continue to be opportunistic adjusting our sales activity to respond to the incredible demand for condo-quality assets in proven condo markets. And during the quarter, we sold two assets totaling approximately $80 million. Both of these were sold to condo converters. They were sold at an average cap rate of 3.9%, which represented a 19% unlevered IRR. Now clearly, these are very attractive valuations and yet we wouldn't consider these even our best assets. In fact, the average age on these two assets that we just sold was 20 years old. And one of them is in San Jose, which is probably our weakest market today. So the strength of the sales market does have a number of implications. First it provides visible evidence of the value of our existing portfolio and provides the data to reevaluate the cap rates used in many of your NAV calculations.

Second it demonstrates the significant value being created through our $650 million of current development activity and embedded in our $3 billion development pipeline. And finally it will likely result in us increasing our disposition activity during the year if the sales market stays strong as we're currently experiencing. With that I will pass to the Tom who will highlight some of the financial and capital markets activity for the quarter.

Thanks Bryce and good afternoon. There are three areas I'd like to focus on this afternoon, which are capital related activity for the quarter. Several non-routine items and how these items impacted our original and future outlook. And then finally, comments on our dividend and interest rates.

First, on the capital side we completed a number of transactions during the quarter that helped position us for future earnings growth and value creation. Several of these are particularly noteworthy and I'll go through them. First, we closed on the discretionary investment management fund on March 16. And as you recall this is a fund that is a partnership with Private Equity Capital. It will enable us to purchase assets that can be repositioned, redeveloped, or that offer attractive market cycle opportunities. We raised about 330 million of equity that, once levered, will enable to us purchase and redevelop assets totaling about 900 million. In connection with this closing, we transferred assets at a cost of about 113 million that were purchased and warehoused on our balance sheet until the closing could occur.

Second transaction, we'd like to talk about, is the redemption of 150 million of unsecured notes in January with a rate of 6.58% and the issuance of 100 million of notes, eight-year notes, at 4.99%. The new notes were issued at a 72 basis point spread over the eight-year applicable pricing bond. And what's noteworthy about this is that this 72 basis points is the lowest spread we've ever achieved on any debt issuance over any period of time. And it underscores the demand in the market today for value and yield. The eight-year term also provides for an evenly staggered debt maturity schedule that limits future refinancing risks. The third transaction I'd like to talk about on the capital side is the buyout of our partners 75% interest in Avalon on the Sound. We were able to gain 100% control over a proven asset in a market that we know well, which also substantially mitigates investment risks. We also expect to develop a future second phase of this community.

Turning to the earnings for the quarter, which included several nonroutine items. The principal non-routine item we should mention is the - - is something we included in our January outlook and that was our share of the gain from the sale of Rent.com to eBay. The totaled 6.3 million or approximately $0.08 per share. The remaining non-routine items were not included in our outlook and are helpful in mapping to the $0.96 we achieved for FFO in the first quarter, compared to the mid-point of our range of $0.93. These include the accrual for payments to be made to a departing executive officer that totaled $2 million or approximately $0.03 per share. Secondly, income of $1.3 million, or $0.02, that we received from a development of a hotel adjacent to an existing AvalonBay asset to compensate AvalonBay for the impact of construction on our leasing and marketing of the asset.

There were several other items that were also beneficial to earnings and can be described in three different ways. Let me go just through those. First, would be the permanent recurring items. Second would be permanent and nonrecurring items and then finally timing or temporary items that are expected to turn around later in the year. For permanent recurring items, interest savings from lower than planned rates and our reduced debt issuance added about $0.01 to earnings. We expect that the $0.01 per share will continue to benefit us in later quarters compared to our outlook. For permanent nonrecurring items deferred asset sales contributed about $0.01 to our outperformance. It is a permanent positive earnings event for the year but limited just to the first quarter.

Finally, temporary or timing items include; better than expected operating expenses which contribute about $0.02 to earnings. This was a function of cost containment efforts, certainly the benefit of operating and improved pricing environment as well as timing of budgeted expenses. We expect about half of the expense savings that we saw in the first quarter will turn around and mostly will turn around in the second quarter. So, for the second quarter we do expect the non-routine items will be absent. And we expect to return to a more normal or "operating FFO quarter". And provided a range in our press release last night of $0.85 to $0.89 per share.

In this outlook we considered the items that would both benefit as well as challenge us in the second quarter as listed above. And as Bryce mentioned we are evaluating expanding our disposition program to harvest value embedded in the portfolio. Dispositions may also include land sales that we would sell at a profit. Neither expanded sales of operating assets nor land sales are considered in this second quarter outlook.

Just a few comments on the dividend and interest rates and the balance sheet before I turn the Q&A. First, on the dividend, a strong balance sheet and prospects for continued earnings growth as well as strong dividend coverage from recurring cash flow prompted the Board to increase the dividend in April to $0.71 per share. The dividend payout ratio on an FFO basis, or an AFFO, basis is one of the best in the sector. Floating rate debt is just 15% of all debt. And this means that as fundamentals improve resulting growth in earnings is largely protected from rising rates. So, with our dividend safe and growing and our strong financial position, the Company is well positioned to execute on our expanded development pipeline. I guess we'd go straight to Q&A now. And we'd open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] One moment, please, for the first question. Your first question comes from Ed Jordan Sadler with Smith Barney.

Good afternoon. I'm here with John Litt. My first question is just regarding the comments on potentially expanding dispositions. Is this as a result of anything? Were there some unsolicited offers on properties or have cap rates moved down to some level that's attractive to start expanding it?

Jordan this is Tim Naughton. I think as we mentioned last quarter while we gave guidance, for dispositions this year, we said our bias was towards looking opportunistically at the portfolio. And that has been somewhat in reaction to in many cases un solicited offers for our assets. But then also just the continued strength of the condominium market and many of our markets, which has continued to put pressure downward on cap rates. So it really is just in response to what we're seeing on the market.

Tim, it's John Litt. A question on the four land parcels you bought. I'm curious about what the pricing is on a per-unit cost and how that compares to historical levels? Or really trying to get a sense of how much the land pricing is going up in relation to what we've seen has been happening to apartment pricing?

Well, John, they're all different. It really kind of depends on how long they were under contract. In a couple of cases the assets were under contract for more than two years. So the settlement price doesn't really reflect what's going on in the land market. But generally land pricing has been going up dramatically in our markets again driven by what's going on in the for sale market. It's not unusual to - - I've seen land prices double from just two or three years ago, in particular markets, particularly D.C. and southern California.

So in an environment where you're growing your development pipeline to a $1 billion, I guess the thought process is that the acquisition to market is too pricey. Is that mostly deals that you've had in the works for awhile or would it still pencil to go out and, you know, contract for new piece of land today and you'd still get a return that's better than if you were out acquiring?

Yes. That's a good question. The stuff we're starting this year generally has been in the pipeline for three or four years with about a $3 billion pipeline. That supports about 700 million a year. So roughly in general it takes about three or four years to get through the process, the entitlement and design process. And with respect to stuff that we're out - - new stuff that we're putting in the pipeline today; generally it's not permitted stuff, it's not - - it's stuff that's not even close to being entitled. And that's really the only way that typically we've been able to find land opportunities that do pencil such that they are accretive relative to acquisitions.

Today if you wanted to buy an entitled piece of line the excess return you'd get wouldn't justify the risk of doing construction?

For rentals generally not. For for-sale, it obviously does, given what condo guys are willing to pay. But honestly John we generally don't even bid on those deals.

The way you're adding value is by finding the unentitled stuff and working it through the process?

Absolutely. In many cases, just a couple of examples, we have been buying improved properties even. I think we mentioned that last quarter. We bought, actually closed on three in the Washington area that are kind of C, C- office properties that we're looking to re-entitle as residential that has existing cash flow in place. I think it's throwing off about 5%, 5.5% on the acquisitions costs. We're also continually looking at public/private partnership deals that are large and cumbersome that take time to go through where for sale guys just don't have the appetite or the patience to wait it out.

I think Jordan had another question.

One last one for Tom, just on the valuation of Avalon on the Sound maybe you could give a little more color, maybe a cap rate?

Let me let you address that question, Tim. Tim you, want to take that?

Sure. Avalon on the sound, essentially the effective cap rate Jordan was high 5's, 6ish%. Remember that we're buying a partnership interest there. We're not buying a whole asset. So probably it was in the high 5's.

Was that fixed price, or end market?

It was fixed price. It was a negotiated price between us and our partner.

Okay. Thank you.

Your next question comes from Lou Taylor with Deutsche Bank. Please proceed with your question.

Can you comment on your expenses during the quarter and why they were lower, or year-over-year?

Lou this is Leo Horey. Lou, expenses did improve largely for two reasons. One, through the cost containment that Tom mentioned. And then secondly, as a result of timing. Now, the cost containment really was helped by where our occupancy sits today. When our occupancy is so high things like marketing, utilities, REIT equity costs all come down. So there has been a lot of focus on expenses. The quarter was very favorable. As Tom mentioned, some of those are going to come back against us in future periods.

Okay. Great. And then second question. Just pertains to concessions. They still were trending a little bit higher. I mean, did you need to do that to maintain the occupancy or do you see them drifting higher from here?

Concessions were stubborn. And have been stubborn throughout various markets. We had the most challenge with concessions in the Mid-Atlantic. And the truth is if we were to eliminate the Mid-Atlantic from the concession number, our concessions per move in would actually go down by about $100. Occupancy has stabilized at a fairly high level and we are working to move those concessions off the various markets.

Thank you.

Your next question comes from Rob Stevenson.

Tom, just couple of housekeeping items. The money you received in the hotel is there any of that coming in the second quarter or is that all now done?

It's substantially done Rob. And if you think about that transaction it really is to offset the impact of that construction on our asset so it's not really a windfall. And some extent that's a prepaid item, in that the future impact on the asset really hasn't even been seen yet. So there could be some additional funds that come in but they would be largely offset by the impact of the asset in leasing or other costs that we have to incur to manage through the construction adjacent to the community.

Okay. And then the sound asset - - is that wholly owned by you now or is that - - that's not going into the fund is it?

It is wholly owned by AvalonBay and it's not going into the fund because it was a preexisting as asset that we owned. We bought out our partnership interest.

What are you guys seeing these days in terms of upward pressure on real-estate taxes?

Real-estate taxes, I mean, there is pressure - - obviously this is Leo. There is pressure on real estate taxes but it's largely been what we expected. So there has been some growth but not disproportionate.

Okay. Thanks, guys.

Your next question comes from David Harris with Lehman Brothers.

Good afternoon. Tom, maybe I missed this. Did you reconfirm prior guidance for the full year?

We didn't speak to prior guidance, David. What we did is provided outlook for the second quarter. If you don't - - if we don't comment on our outlook you assume that it's still in effect. What we are doing is re-evaluating dispositions and other changes in the business in the second, third, and fourth quarter. And we feel like giving an jut look update in the second, at the end of the second quarter is probably a better time to do a comprehensive outlook update.

OKay. My take on that then, prior guidance is still good subject to accelerated property sells or land sales, which could swing it either way.

Yes. I think the way to look at it is I went through in great detail in my comments kind of a road map of permanent versus temporary variances from our plan. I think if you go back to the transcript of the call afterwards and listen to those you can probably set a new baseline in terms of a midpoint. We don't want to set that at this time, though, for you because we are evaluating dispositions and other changes in the business.

Okay. Well maybe this is a question for Tom, or for Tim or for Leo. Is the same store assumptions pretty much intact from what you - - that which you gave out to us quarter ago?

This is Leo Yes, the same-store assumptions are intact.

Okay. Could I just ask a question on the separation payment to I - - I think it was Sam Fuller who you referenced on the last call. Was the payment there part of his contract or was it some - - related to some other issue?

David this is Tim Naughton. Yes, it's related to his contract.

Okay. Not to belabor it. I know you've fielded a number of questions on the Sound. I looked back on the disclosures and it seemed to me that the cost base here was 92.5 million. In which case the capital appreciation has been about 7% per annum. Would those numbers be correct?

The - - you're talking about on Avalon Sound?

Yes.

Yes. The original cost basis was 92 million, you're correct. And effectively we bought a 75% interest for just over 84 million. So, I haven't runt on an annualized basis from the time it was completed but 7% sounds in the ballpark.

Does that surprise you as being -- first impression that sounds rather low given what's happened to cap rates generically. Even though I heard what you said about taking out the majority partner would obviously impact the cap rate consideration then.

It is lower than our portfolio. It would be.

Is that specific to that location or building?

Yes, it is. Well, generally the New York market is underperformed since New York - - the broader New York metro area has underperformed since the time that this asset would have been completed. So that's part of it. And then this particular location has probably underperformed within our New York portfolio over that same time period.

Well, rents three years ago were about 2.5 thousand a unit. Would they probably have about held?

No. They've gone down. I think we stabilized the initial lease-up in the 270 foot range and effective rents are probably in the 230 range today.

Thank you, gentlemen.

Your next question comes from Rich Anderson with Maxcor Financial. Please proceed with your question.

Hi, thanks. Tom, if I could just clarify the $0.02 of better operating expenses you highlighted. Half of which you said would turn around in the second quarter. Should I assume theb the other half would recur? I guess I didn't understand what you meant by turn around.

Yes, I think the way to look at it is that we benefited about 1.2 million in the first quarter compared to what we thought we'd have in the plan. I think it's fair to assume that half of that will turn around, half of it may be kept for the entire year. And that's the best guidance we can give you for the second quarter at this time. I don't know, Leo if you would like to add anything.

As I mentioned during my comments, the occupancy was a big benefit to us. And the occupancy related costs. If you look in the future periods, we're not going to have that benefit because our occupancy did grow last year throughout the year. In fact, it was about 94% in the first quarter. And then it got up above 95. And then to 96. So I don't believe that we will see those benefits in comparable periods into the future. I think that we got the benefit one time and while we will continue to focus on cost containment, the occupancy doesn't give us a lift going forward.

Yes. If I could just add one thing and that is if you look back to first quarter of '04 we were obviously in a different pricing environment and just building our occupancy platform back. So to some extent this is a better comparative period for expenses, compared to the first quarter '04. So those comparisons are going to get more challenging as that benefit that we saw from occupancy diminish over time.

Okay. The other question is, you saw a decline in your development cap rate - - average development cap rate to 7.6%. And yet an increase in your redevelopment cap rate to 9.8% from 9.5%. Could you sort of give some color as to why those two are going in opposite directions?

Rich, this is Tim Naughton. With respect to the development yields from 7.8% to 7.6% this last quarter, it's really just a function of the basket of communities we added - - we started two communities in California. One in northern, one in southern California. And generally West Coast, and particularly California yields are below the portfolio average too. I think you can probably see, if you looked at the average rents per home, there really isn't material change across the communities that were in development last quarter. So it's really just a function of the basket. In the case of redevelopments it's basically the same basket. A couple of communities did show an increase in rent, particularly the Fairway Hills deal and that helped push up the average yield on the redevelopment.

Okay. And just lastly, would you say northern California this quarter, the same-store performance, was positive surprise? And likewise was the mid-Atlantic a negative surprise relative to your expectations?

Rich this is Leo. with respect to northern California, it was largely on plan as we expected. We do expect stronger performance out of Oakland and San Francisco. And as Bryce mentioned earlier, San Jose is a challenge. And I believe with respect to Mid-Atlantic we've been talking about this for awhile and Mid-Atlantic did not have the downturn that many of our markets did over the past couple of years. And we did expect it to be more modest. We are trying and working our way through the supply that's been delivered. So the market's performed about as we expected.

Okay. Thank you.

Your next question comes from William Atchison with Merrill Lynch. Please proceed with your question.

Yes, thank you. Circling back to the concessions, if you go look at the fourth quarter supplemental, the concessions per granted move in established communities was $861. And then looking at it in the first quarter disclosure is 962 in the fourth quarter as quoted. Is that because of a lot of newer development properties coming on line that it went up by effectively $100 per unit?

It was - - this is Leo, Bill. The basket changed because we'd started a new year, changed the same-store basket. It actually went up about $74 per move in. From year-over-year on the same basket. And as I mentioned if you were to take out the Mid-Atlantic it would have been down by about $100 per move in.

That's helpful. Then on the hotel disruption because of the development there where in the income statement can I find that 1.378?

It's in rental and other income.

It's in rental?

Rental and other income.

Oh, and other. Okay. Then one last thing very quickly. You mentioned that this is first year-to-year increase in rental rates in three years. I tried to go back and find out when was the last time you had both an economic occupancy increase and a rental increase. And I had to go back to a time when your disclosure kind of runs out. Do you guys have any idea when the last time that happened?

The last time, Bill, we had an occupancy rate improvement and a rental rate improvement?

Right.

I don't think we could tell you that off the top of our head. It hasn't been recent.

It's 1999 or earlier. Okay. Thank you.

Your next question comes from Andrew Rosivach with CSFB.

Most of my questions are answered but if I go back and look at your outlook if one thing seems to have changed it looked like you were going to do 150 to 200 million of debt offerings. And your offering was smaller than the amount you retired. Is that a function that you may have higher dispositions than you planned and you don't need the money?

Andrew, this is Tom. Yes.

That's easy. I'm done. Thanks, guys.

Your next question comes from Jay Leupp with RBC Capital Markets. Please proceed with your questions.

Jay Leupp,: Here with David Ronco. Just questions on your recent development activity where you commenced construction. Avalon Wilshire, if I'm doing the math right, 42 million, 123 apartment homes. So we're talking about $341,000 per unit. And then up in San Francisco the Mission Bay North 2 development, 118 million, 313 units, 376,000 per unit. Can you talk a little bit about what you're assuming in terms of rents that you're going to be achieving on these units, your rent growth assumptions and what your stabilized yields are going to be here?

Jay this is Tim Naughton. I can do that. First of all there aren't any rent growth assumptions. I think as you know we don't trend rents. So, the yields that we quote are based on current market conditions or current rents being achieved. So there is no growth embedded in these numbers. With respect to Wilshire there's actually a fairly good sized retail component to that. And that's what's driving some of that cost up. About 15% of the value of that asset is actually in the ground floor retail. It's right along Wilshire Boulevard. Great retail location. So, you kind of need to back that out to get to what the real embedded residential cost of construction is. And in terms of rents we're looking that market today is about 240, 245 a foot. Wilshire and it's probably not too far from that and Mission Bay as well probably in the mid 2's.

Jay Leupp,: Okay. And what's just the average per square foot in each of these developments per unit, just weighted average?

I don't have in that front of me but it's on the order of 900 square feet but we could get the exact number to you.

Jay Leupp,: If that's approximate, that's good enough. And then in terms of just targeted development yields by region; is there a significant difference in terms of your target yields in the different regions where you're undertaking development? And if there is how much of a basis point spread are we talking about?

There is a difference, and it's somewhat of a function of the market itself and the long-term characteristics of that market. Not every market is equal in terms of long-term growth rates. And then there's also a difference in terms of where we think we are in the cycle. Not every market is at the same place in the real estate and the investment cycle as well. So you'll see target yields vary, call it 150 basis points from - - probably from the low to the high.

Jay Leupp,: And could you give me the range in terms of low to the high at this point?

In terms of target yields?

Jay Leupp,: Yes.

Yes, it's probably 7 to 8.5.

Jay Leupp,: Thank you.

Your next question comes from David Rodgers with KeyBanc McDonald. Please proceed with your question.

First question on the investment fund do you have a pipeline that you're working on right now? Obviously that acquisition criteria is totally different than your own portfolio. Are you working on acquisitions there. How much and what would you expect to close this year?

Well, I mean, our guidance was - - the midpoint of our guidance was around 175 million, Dave. And currently as Bryce had mentioned we have one community under contract. And we're out in the market looking to source more right now. The time from contract to closing is pretty short, particularly in this market environment. But that's the target. And as Bryce said it's an awfully competitive market out there. And we are being very selective in terms of really looking for those value added opportunities.

And I guess maybe question for Bryce finally is on the Chicago market it doesn't seem that - - it's a relatively small portion of your portfolio. Longer term does that concentration continue to make sense given the condos in Chicago and the way assets are trading there despite the fundamentals and the concern about condos maybe coming back to the market as rentals at some point? Does it make sense just to leave and come back later? What do you think about that?

We don't think it makes sense to leave and come back later. I think underpinning that comment is you know, our business strategy bee is predicated on really being active - - an active developer, not just an acquirer; who can buy and sell and time the market. Development requires a long-term commitment to that market. We like Chicago over the long term. It provides a nice balance in terms of economic drivers compared to some of our higher beta coastal markets that are heavily driven by technology, financial services; Chicago marches to a bit of a different drummer. So, we don't look at it as necessarily the highest revenue growth market but much more stable. Given that we want to have a concentration in that market you need to remain committed to that market. So we have actually been growing our concentration in Chicago through a couple of acquisitions. And we're looking to grow a development pipeline there as well.

And then maybe last question for Leo is - - or Tim could you talk about single family trends? I didn't hear if you commented on those at all and across the portfolio.

Single family - - this is Tim again. Single family in what sense, David, just the health of the market?

Single family move-out trends, I guess from your portfolio relative to what you've seen historically. Have you seen any changes on a geographic basis? Have they remained very strong.

I'll let Leo handle that in terms of move-outs.

With respect to move-out, this quarter we saw it in the high 24% range. It has come down from the peak. Typically we've operated between 20% and 25% people moving out to home purchase. And it goes from a low in California where home affordability is very low in the mid teens to a high in high 30's in the Midwest. So it has come back a little. The trends have been similar. Bryce.

I just want to add a bit to that. It's been obviously been a lot of press recently about the growing issue of home affordability in the country. Steve [Afak] of Merrill Lynch put out a piece about a week ago. GreenStreet has written about it. A number of you have written about it has well. It's no more acute anywhere than in our markets. It's - - very high home prices are causing the rent per spike equation to be as wide a gap as it ever has been. Having said that, as Leo mentioned, we're starting to see a little bit of relief in terms of the move-outs. And the $64 question obviously is will this continue, how long it will continue? It impacts us in a number of fronts. It impacts in terms of looking at the rapid rise in home prices. Impacts us in terms of how people feel about home price appreciation and therefore how people feel about needing to move from rental to purchase. That's one issue. The other issue and we've talked about in this prior calls is the super heated condo market and single family market puts upward prices on land, which Tim mentioned, and construction cost. So it is something we monitor pretty darn carefully. Overall we feel that it is a - - that operating in markets with high cost of housing is a positive for the AvalonBay story but at a certain point it gets dysfunctional.

And just a follow-up to that. Are condos in your markets, from what you can tell, making housing less expensive or more so relative to maybe where your assets are located in a certain submarket?

Could you rephrase that? I'm not --.

Well, I guess just on follow-up to what you said, the way condo prices are moving now, is that pushing the single family affordability to be less affordable, in your particular markets? Jacksonville we've seen entry level condos come on really low prices, maybe 100,000 or less. I'm wondering how you're seeing the condo market affecting your affordability?

Well I think condos, maybe they - - hopefully this will be responsive. But the increase in condominium development and condominium conversion through the country and certainly in our markets is absolutely reflection of the high single family prices. When you have home markets where the median home value in more than a half a dozen of our markets exceeds $600,000 that's a median. And that won't buy you much in San Francisco, I can assure you, or New York City, as many of you are familiar. So that drive says there's a demand for housing, people seek lower cost alternatives. Which condominiums typically are. Not always, I mean there's condominiums that are being developed for 1 million plus in many of our markets. But I think it's no coincidence that you've had a spike in condominium development as you've seen home prices in our markets have appreciated almost 50% in the last three years. So they are absolutely very much related. I think that's embedded in your question. And, where it's something we're watching carefully.

Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from Steve Swett with Wachovia Securities.

Thanks a lot. My questions have been answered.

Thank you, Steve.

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

Hi guys. Just a couple of quick questions. Maybe Tom, this is a question for you. The - - I presume that you recognize a small bit of the - - I guess your management fee for the fund. Where does that show up and can you quantify that for me?

Yes. It's in management fees, and it's about 200,000 per quarter.

Okay. And that's for the sub period? Is that right? Because it closed on the 16th?

Correct.

What kind of run rate should we expect?

It's 3.5 million a year. That's on the asset management fee. There are also property management fees that depend on revenues.

That's going to ramp up as you acquire more? As we acquire assets.

Right, okay. And then just another big picture question I was kind of late to the call. Tom - - not Tom, Bryce, one of your competitors has started teaming up with a condo converter and kind of you guys seem to be a logical extension of that given your capability of developing. Where are you in that thought process? Have you revisited thinking about doing that? Hello?

[OPERATOR INSTRUCTIONS] Please proceed with your conference.

Rich, are you still there?

I'm still here.

We apologize. The line just - - we got dropped out, so we are back. And I think we only heard the first sentence. I apologize. If you could repeat the question.

Sure. Basically my question was that; one of your competitors has started doing a little condo on the side, some development with converted - - not converters, but condo developers. Just kind of given your expertise in the high-end development, have you kind of thought about this again at all? And what's your thoughts there?

Yes. Well, it's a great question. Certainly there is a tremendous opportunity in terms of condominium development or conversion. And clearly AvalonBay would have the skills to do that in the sense of our developments, construction skills, and some skills that would certainly be applicable to the marketing. Having said that, from our point - - and it is something we have talked a fair amount about and we would certainly not preclude getting into that business in the future. But at this point in time it's really a question of timing and a question of resources. And from a timing point of view, we are a little concerned about whether the valuations will stay as lofty as they are. And so it's been our thought process and our decision to try to move more aggressively through just selling through condo converters. Thereby getting more done with less risk in a shorter time period than we could do that. Versus trying to convert ourselves, which obviously would take longer. And subject ourselves to more interest rate risk, economic risk and ultimately liability risk. And then the second issue is just resources. We've just closed the investment management fund. We are looking to sell a fair amount. And we are growing our development pipeline. So there's only so many major fronts that you can apply resources to without taking on undue risk. So, long way of saying I think it can be a business that AvalonBay could choose to be successful in in the future but for right now we're following a different strategy.

All right. Thank you.

Your next question comes from Chris Pike with UBS.

Good afternoon. Just a couple of quick questions. Tom, in terms of the fund if you can just refresh my memory of the total amount that you're looking to take down. Is there any targeted volume that's going to be earmarked for development only - - sorry, redevelopment?

Chris, the program - - one, just to clarify, there is no development, thank you for catching yourself this is a pure acquisition fund. In terms of redevelopment we think it's going to track history, and over time we think if you look back at our track record over the last ten years of what we acquired; 40% to 50% of those assets were redeveloped, as we define them. I think it's reasonable to assume that the same level of investments would be made in the fund. And that would be up to 50% of the assets that we acquire would have a major redevelopment component to it.

And your asset management fee on those properties will stay intact up until the properties reach stabilization again? In other words, you won't be penalized from an asset management perspective?

No, asset management fees are paid on a committed capital basis.

And then just last question. In terms of, let's say A versus B type of properties that you guys are looking at where do you see cap rates differing between the two as you look to close on some more properties in the fund?

Chris this is Tim Naughton. In terms of difference between A and B cap rates, I don't know that we're seeing a big difference. As we mentioned the two assets we sold this past quarter probably would be qualified as B assets in most people's definition of class of assets. But maybe there's a 25 basis point difference today between an A and a B asset.

Do you see more B's being offered nowadays than, let's say, 90 days ago?

I don't know that I'd say more than 90 days ago but generally over the last year or two would say that there's more B assets trading than in the previous few years.

Thanks a lot, folks.

Sure.

[OPERATOR INSTRUCTIONS] We have no further questions at this time.

All right, thank you. This is Bryce. I just wanted a couple quick closing comments and a brief infomercial for our upcoming investor meeting in June. In terms of the quarter we certainly were pleased with our performance. Particularly given the broad based nature of it. Contributions from same-store sales portfolio, contributions from the stabilization and development communities, and great execution on the sales. We're optimistic about the future given the nature of our markets, the supply constrained market sand how they typically perform in an expansion. Optimistic because of that nature of our development pipeline. And optimistic because of our capabilities particularly given the closing of the IM fund that Tom spoke to. And importantly we have the balance sheet and organization to execute on those opportunities. So we are optimistic about the future.

In terms of our investor conference hopefully you have received save the date card will you be receiving invitation within next week to our investor conference, which will be on June 7. This is the day before NAREIT in New York City. We're scheduling basically a half-day affair. We think it will be an interesting schedule. A tour of Avalon at Christy Place. Our first new development in Manhattan will have just opened up for leasing. We have a number of outside speakers who will be there. Will be able to comment on the New York rental market. And also having an optional tour to visit Avalon at Riverview. So we think we've got a great venue. Hopefully it will fit with your schedule. We think it will be a good use of your time. So with that, thank you for your time today and we look forward to seeing you in June.

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