艾芙隆海灣社區公司 (AVB) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the AvalonBay Communities third quarter 2005 earnings conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press the star zero on your touch-tone telephone. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Alaine Walsh, Director of Investor Relations. Ms. Walsh, you may begin your conference.

Thank you, Lu Ann. Good afternoon. And welcome to the AvalonBay Communities third quarter 2005 earnings conference call.

Please note 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 and Form 10-Qs filed with the SEC.

As usual, the release includes an attachment with definitions and reconciliations of non-GAAP financial measures and other terms. The attachment is available on our Web site 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 welcome and thank you for joining our third quarter conference call.

We know it's a busy day for all of you and we're going to try to keep our prepared comments brief and we'll have all of us available for questions. With me on the call today are Tom Sargeant, our CFO, Tim Naughton, our President, and Leo Horey, Executive Vice President of Operations.

Tim and I will be providing some initial remarks and then all four of us will be available to address any questions.

In our comments we're going to be addressing three topics today, a review of our quarterly results, an update on our investment activity and finally comments on our updated financial outlook with some initial comments on 2006. Let me begin first with a brief review of our quarterly results.

Last evening we reported EPS for the quarter of $1.30 and FFO per share of $0.91. EPS results reflected a year-over-year increase of about 116%, which is driven principally by large gains from our asset sales.

Our FFO of $0.91 reflects a year-over-year increase of about 6%. However, last year's results included a $0.02 per share gain on a land sale, so when comparing just operating FFO which excludes land gains, the year-over-year increase is about 8%. Again, that land sale gain was last year, not this year.

The year-over-year increase in FFO is largely attributable to NOI growth in our existing portfolio combined with growth in NOI from our new development activity. These positives were partially offset by the mildly dilutive effects of our dispositions activity and higher G&A costs.

Our same store sales revenue of 4.3 was the largest we've seen in over four years. The revenue increase importantly came principally from increases in rental rate as opposed to increases in occupancy.

Adjusting for concessions on a cash basis, year-over-year growth in revenue was 4.6%, which is a number that is more comparable to how our peer group reports. As we enter the fourth quarter the portfolio is well-positioned to sustain this positive revenue growth with high occupancy and low availability.

Turning to investments, I'm going to make a few broad comments and then Tim will be providing some additional details on our development and disposition activity.

As you know, we have a long track record of navigating through a very difficult approval process in terms of the zoning process for new developments in our markets. A long track record of successfully developing and leasing apartment communities, and then ultimately selling these assets for attractive return.

All phases of this value creation cycle are at play this quarter. The new developments starts accelerating with strong leasing activity at our development communities, and with attractive asset sales yielding double-digit unlevered returns.

This level of value creation will expand in the coming quarters as we continue to grow our development pipeline and development activity underway.

Selling assets at a sub-four cap rate and re-developing those proceeds in a 7% plus initial yields will help support accelerated FFO per share growth in the coming years.

Our development pipeline now stands at $3.6 billion of communities either under construction or in the planning stages. This is the largest in the multi-family sector and is reflective of our core competency in that area and a significant growth engine for the Company.

During the third quarter, we were very active in terms of new construction starts beginning over 300 million in new communities, as well as continuing to execute on our expanded disposition program, closing on about 130 million of sales during the quarter.

And with that, Tim will now provide a little additional color on our development and disposition activity. Tim?

Thanks, Bryce.

As Bryce mentioned in the third quarter, we were active on the development front. Starting four communities, totaling 320 million, and completing one other at 48 million, resulting an increase of development underway to around 950 million.

The starts were located in the Northeast and mid-Atlantic. Two of the new developments Decoverly in Rockville, Maryland and Riverview North in Queens, New York, are second phases of existing stabilized communities.

Our Riverview North deal is the largest single phase we've undertaken to date, containing over 600 apartments in a 39-story building and totaling 175 million in capitalization. Together with phase one, this community will have almost 1,000 apartments in two towers standing on the East River directly across from the U.N.

As you probably recall, this development was part of a public/private partnership dating back to the late '90s with the state of New York. During the time we have controlled the option on this property, the Queens waterfront location has continued to transition and mature into a compelling housing alternative relative to midtown Manhattan, which is only one subway stop away.

Rents are currently just over $3 per foot at our first phase of Riverview versus upwards of $5 per foot and higher for midtown.

One other new development I'd like to call to your attention is our Lyndhurst, New Jersey community which is located in Northern New Jersey adjacent to the Meadowlands. This is the first community we have started in Northern New Jersey in over five years, a market where we've increased our assets over the last few quarters.

This market is beginning to show real momentum, as evidenced by effective same store year-over-year rental rate growth of around 8% this past quarter. Northern New Jersey is benefiting from improving fundamentals, limited new supply, the conversion of rental housing stock to condominiums, and growing job growth in the broader New York metro area.

You should also note that we added three new development rights in New Jersey in Q3.

Looking forward in Q4, we expect to start four additional communities totaling around 300 million while we should complete approximately 250 million. As a result we expect our development underway to increase around 1 billion by year-end.

This level of development is consistent with our expectations but is well above recent years when we've averaged 600 to 700 million. We do expect that development underway will continue in the 1 billion range, given future development rights of almost 3 billion.

Current yields for our development underway have generally stabilized in the mid to high seven, as effective rents have stabilized or increased in most markets. The yields on our most recent starts are generally in line with these economics despite construction costs inflation of 10% plus over the last year.

The impact of construction costs inflation we've seen so far has been mitigated somewhat by improving fundamentals combined with attractive land positions.

I'll shift now to discuss dispositions.

We continue to be active in the area of asset sales, completing three dispositions in Q3 totaling 128 million. These three communities were each sold to condo converters at an economic gain of almost 100%, an average cap rate in the mid threes, and an unlevered IR of about 16.5%.

These communities were sold in three separate markets, Washington, D.C., Seattle, and Northern California, which is indicative of the breadth of condo activity across our market.

For the year, excluding land sales, we have completed about 245 million in dispositions. These sales have been completed at an average cap rate of 3.7%, an economic gain of 127 million resulting in an 18% unlevered IRR, which is particularly impressive, given that the average hold period was about eight years.

In terms of our expectations for the balance of the year, we disclosed last quarter that we were increasing our level of disposition activity for 2005 from around 125 million to approximately 500 million, with the additional volume focused on condo converters, where we believe we can generate a healthy premium over what income buyers will pay.

Given the current marketing and contract status of these projected sales, we are still targeting about 500 million in sales, although about 100 million will likely slide into early Q1 of '06.

And with that, I'll turn the presentation back to Bryce.

Thanks, Tim.

I'd like to shift the discussion to our updated financial outlook and then share with you some initial thoughts regarding '06.

Based upon our outperformance for this quarter and our updated expectations for next quarter, we raised our full year outlook by $0.07 for a revised FFO range of 3.74 to $3.78 per share. This range compares to the $3.65 midpoint that we provided in our July outlook.

As we enter the fourth quarter, our focus is increasingly shifting to 2006 and to some of the risks and opportunities that we see on the horizon. And one area and that I'd like to touch on is the risk related to development and construction cost increases.

Tim touched on this and I'd like to expand a bit more.

Over the last year our construction costs have increased at double-digit rates, and land prices have risen even more dramatically. There are many reasons for this upward pressure, but some of the key culprits are first, rising energy costs, which impacts virtually all construction material.

Secondly would be the robust for sale market which results in increased competition, certainly the land but for consultants and subcontractors as well ultimately driving up both land prices and labor rate.

And finally, just the general inflationary pressure that's in the economy we're all experiencing as the economy strengthens.

As we look to next year, we see very little relief on these issues, and these will be compounded by the impact of the hurricane recovery effort. And while we're concerned about development and construction cost pressures, there are a number of steps that we've taken over the years that we think allow us to be better positioned to manage these overall cost risks.

And the first is that we do have a 20-plus year history of developing in most of our markets. This long track record affords us better access to the best consultants and subcontractors, particularly when they're very busy like they are now.

Secondly, as we've mentioned, we have a $3.6 billion pipeline where our land costs have been locked in. And since the majority of this land has been under contract for two or three years, our average cost on the land that is owned or under option contract is about $30,000 per apartment home. This is certainly well below prevailing market value.

Also given the volume of our development activity, we have significant economies of scale, and we've invested in the organizational infrastructure to leverage those scale efficiencies. Example of this would be our centralized design, estimating and purchasing group, who leveraging our best practices in design and the efficiencies in purchasing across our national development activities helping us to control costs.

And finally, we have over 100 development and construction professionals throughout our 10 regional offices that oversee the actual development construction process. And while we're certainly not immune to development cost pressures, we are better prepared than most to deal with them.

Now, regarding overall apartment fundamentals for next year, we're optimistic. And I want to touch briefly on the demand and the supply side of that.

First, regarding demand, rental housing demand should be relatively strong.

Initial '06 job forecasts suggests growth of approximately 2% in our market and [inaudible] to about 1.2% job growth in 2005. And as you know, job growth is a critical driver of overall rental housing demand.

Secondly, rental demand should be benefited by a slow down in the for sale market, or could be benefited by a slow down in the for sale market, particularly a slow down in the condo market. And we think if we see interest rates rise and price appreciation stalls, that will shift demand back to apartments.

Two things on the supply side, the supply of new apartment construction on AvalonBay markets is expected to be flat to moderately down next year as so many of the planned starts have been replanned as condos.

And secondly, the overall supply of existing apartments has been reduced by the volume of conversion, they're expected to total approximately 115,000 units nationally in 2005, and a disproportionate share of these are in AvalonBay's market. So together, the expected improvements in rental demand combined with the supply dynamics should result in improved apartment fundamentals in '06.

We plan to provide our formal '06 financial outlook in January in conjunction with our fourth quarter call. And please note this is a change from the last few years when we've released our outlook in late December.

So overall we are pleased with our third quarter results and we're optimistic regarding the implications of these third quarter results on next quarter's activities and our overall 2006 performance.

With that, Operator, we'd be glad to address any questions that anyone has.

Thank you. [OPERATOR INSTRUCTIONS] One moment please for the first question. Your first question comes from Ross Nussbaum of Banc of America Securities.

Hi, everyone. I'm here with Karin Ford. Two questions. First is, can you give us some more color on the same store NOI growth in the quarter in the Northeast, particularly can you break it out between say the Boston area, Connecticut, and sort of the New York/New Jersey area?

Leo, you can take that?

Between Boston, Connecticut, and New York/New Jersey, I would tell you that driven by the performance in the New Jersey area certainly, the same store NOI growth was very strong. Boston has lagged that.

The NOI growth typically tracks what's going on from a revenue perspective. And you can see how the revenue results are. So, you know, Boston would be the laggard there. Certainly the Northern New Jersey area would be very strong, New York would be okay, and the Fairfield area is doing fairly well, also.

And the other question I think, Bryce, this may be for you is, if I look at the development rights page in your supplemental, it looks like you currently own just under half of the properties that are listed there. Of the owned parcels, are those already zoned and permitted? Or even on the owned land, are you still going through the process on the zoning?

Hey, Ross, it's Tim Naughton. I think I'll take that.

I think Bryce mentioned earlier, we've got about 360 million in land either that we own or is under option. And about 150 of that is owned and the other 210 would be under option.

And just to clear up, of the 150 that's owned about 50 million of that's actually an income producing asset which are class C-type office buildings that are throwing off cash flow of around 6%. Generally, those income producing assets are generally unentitled. Everything else would be entitled, where there's not zoning risks. In the case where we bought some office buildings, we're obviously buying based upon its existing use.

Okay. I think Karen has a question as well.

Yes. Can you tell me what your concessions for move-out were this quarter?

Concessions per move-out, you mean concessions for move-in?

I'm sorry, move-in, yes.

Concessions per move-in for the third quarter ran about a half a month on the same store pool, that's down approximately 15% or so from the previous quarter.

And what is that in dollar terms?

That's around about $750, our average rent's about 1500.

Right. Okay. And you mentioned, Bryce, in your '06 outlook that a cooling condo market could be beneficial for you guys. Are you starting to see evidence of that in any of your markets? And is that why some of your asset sales are slipping from the fourth quarter into '06?

Well, it's not why our asset sales are slipping in '06 it's more just the process, the sales process particularly when you have things towards year-end, we think that's just being realistic about how things usually happen at year-end.

But in terms of are we seeing any signs? I'd say yes, Karin and some is anecdotal and some is data driven and looking at I'm sure the same data that that you all look at I'll just throw out a few things.

Starting first with the overall for sale marketplace and new home construction, new home sales, and the latest data, September, showed price appreciation basically flat on a year-over-year basis, it was up 1%, I think, and inventories that were at their highest in five years of almost five months of inventory of new homes. When you look at existing, sales of existing homes which includes condominiums, the data is a little bit more positive, you're still seeing price appreciation, I think it's about 13% or so nationally, condo price appreciation was single-digit, though, at about 9%.

I think one of the more alarming numbers is the inventory of condominiums. The national data shows, you know, they did set a five-month inventory level, which is the amount of condos on the market is actually up 37%, from a year ago at this time.

So overall, when you look at sort of flattening prices at the high-end, and increasing inventories pretty much across the board, I think those are certainly early indicators that the market is cooling. So there is still, you know, price appreciation, but it is slowing.

Makes sense. Thank you.

Your next question comes from John Litt of Citigroup.

Hi, it's John Stewart here with John Litt and Craig Meltrom. Can you give us a sense for what the expected cap rate will be on the remaining $250 million of dispositions?

Sure, John. It's Tim Naughton. Consistent with what we've been seeing so far year-to-date, you know, mid to mid to high threes.

Okay. Can you kind of expound then on the comment that the sales program is mildly dilutive even if you're paying off the line at four and change?

Yes, John, this is Tom Sargeant. I think mildly dilutive, it's pretty much a wash, I don't know that you could really say that it helps or hurts us. If you think of those cap rates are market stated at the market cap rate and they adjust for property management fees, you know, we're about at what the line is, so it's really a wash. It really isn't that dilutive. I don't know, Tim, if you wanted to add anything.

Just the other thing to note there, John, is that when we quote cap rates we are adjusting taxes from the buyer's perspective so it is a buyer's cap rate. They look a little different to the seller.

And you can tell by some of these gains that we've got, we're looking at some pretty big reassessments ultimately upon sale so often times that will account for 60 or 70 basis points difference between a seller's and buyer's cap rate but we are always quoting cap rates on a buyer's basis whether we're seller or buyer.

Thank you for that. You mentioned that the yields on your development projects underway have held in the mid sevens but given your comments about rising input costs, can you comment about your expected yields on development rights?

John, this is Tim. It's hard to say until you're actually buying out the deals. You know, as Bryce mentioned, we've got, we do feel like we're insulated somewhat by just the land positions that we've got at, you know, roughly 30,000, 30,000 per unit, but typically when we project development rights we're not doing it every month, it's not a practical way to do that and to get data that's, you know, worth what you're looking at.

But I would say, you know, the last four or five deals that we've just started, that we're in the process or have just bought out, you know, those mid sevens-type development yields are holding out still.

Okay. Thank you.

Your next question comes from Craig Leupold of Green Street Advisors.

Bryce, did you say your land basis on the stuff you have owned or under contract is at a 30,000 unit average?

Yes.

And you indicated that you thought it would, that was below market. Where would you estimate market on that today? You know, it's -- which market, what product type?

I mean it would range from probably that number to as high as 100,000, you know, we're seeing land trade over $100,000 per unit. I mean Tim can probably give some more anecdotal comments on it. Tim?

Craig, this is Tim. Generally you're not, even for rentals overage, you're not seeing land prices less than say 50,000 a unit in our markets today. Obviously when you're get into 100,000 units you're generally looking at for sale or condo builders, but I think that's kind of the range, you know, 50 on the low-end to maybe 100 on the high-end.

Okay. Also on construction costs, I know you guys mentioned that you're working with some of the best contractors and subs in your markets. Is there any risk given the cost increases that they're absorbing that they put pressure on you?

Pressure in what way?

Well, pressure in that they walk from a job?

You know, there's always that risk, and clearly, you know, if you're in the development construction business, everyone has had contractors default on you. Sometimes it's for pricing reason, sometimes it's for performance reasons, so yes, that is a risk.

We bond -- if we're in a situation where we have a really key subcontractor, we will look to bond that subcontractor. The majority of time we do not because it's an additional cost to incur that bond and sometimes we don't think it's worth that trade-off.

But yes, I think it is a risk. It's one we've dealt with in the past but it's certainly one that exists today. I don't know Tim, if you --

Yes, Craig, I do think it's a risk mainly in probably in markets where we haven't been operating as long and you probably noticed that in Southern California, we did have increases in our deals there. And that somewhat is a function of project delays that are related to the failure of subcontractors, but as well as just, you know, it's hard to get inspections in time, it's hard for utility companies to do the work they need to do in a timely way, and I think when you don't have as long of a relationship in those markets in particular, you know, you will have subcontractors and vendors who are providing materials, you know, try to take advantage of the opportunity, certainly.

And then last question related to property operating expenses. You guys have done a pretty good job this year in controlling expenses but obviously sequentially we saw an increase. Can you give us any kind of rough range as to kind of what your expectations are on a look-forward basis?

I think that the run rate, Craig, this is Leo, I think that the run rate that you've seen year-to-date is kind of where we feel it's going to be. I think that in '06, we're going to see more pressure.

I believe that pressure's going to come in the utilities category which is manifesting, just beginning to manifest itself, I think you're going to see continued pressure on property taxes and on payroll. So that would be kind of my expectations.

You know, for this year, for '05, we'd be about in the range that we've been running year-to-date, in '06 there's going to be more pressure. Tom?

You know what? Maybe it'd be helpful, Craig, this is Tom, to just give you a quick overview of what we think revenue and NOI growth is going to be for the year. We currently think revenue for the year is going to be about 3.5%. We think NOI growth will be in the 4 to 5.

You know, NOI, expenses are very seasonal, so from the third to the fourth quarter, we do expect expenses to fall off. So those are basically some rough guidelines.

For the quarter, fourth quarter, revenue is probably 4.5 to 5%, and NOI growth probably 5 to 6%. The only thing I'd add then is expenses are pretty volatile especially in the fourth quarter because we have true-ups at the end of the year, so obviously these numbers are projections at this time.

Right. Thanks, Tom.

Once again, if you have you a question at this time, please press star one on your touch-tone telephone. Your next question comes from Christine Kim of Deutsche Bank.

Hi, good afternoon, guys. Most of my questions have already been answered but you mentioned that there is some volatility with your expenses and I saw that Southern California you had some savings there this quarter. Could you expand upon where the savings came from?

With respect to Southern California or --

Right.

Or where the offsets were.

Southern California.

In Southern California, what we saw was that, you know, we were favorable about a percent and a half this quarter. Just to make it clear, year-to-date, we're, you know, the expense has grown about 2.5%.

What we've seen is that payroll and property taxes, categories that we've talked about before, are rising. Those have been offset somewhat by the maintenance-related categories, better experience in bad debt and some better experience in marketing, quite frankly.

Okay. Great. And you gave a little bit of indications of where expenses were trending in '06. Any comments on revenue trends for '06?

Not at this time.

Okay. Thank you.

Your next question comes from Rich Anderson of [inaudible].

Thank you. A question first is, let me just make sure I got this right, half months of concessions on average, half months rent concessions on average, is that what you said?

Yes on same store sales flow, Rich, this is Leo.

Okay. On the fund business, the acquisition fund, I think if I'm doing my math right you have about $168 million of total acquisitions there. First of all, is that right?

That's about right, yes.

How would you say it's progressing? Is it moving as fast as you thought it would be or is it slower than, is it taking off slower than you thought it would? What's your prognosis so far?

You means in terms of investment activity?

Yes.

I'm going to turn that to Tim.

Hey, Rich, it's Tim here. I think you're probably right, it's probably in the neighborhood of 168 we've done to date. We do have three acquisitions in the pipeline currently in different phases of due diligence which amount to a little bit more than an additional 100 million.

I would say that we're basically at what our expectations were at the beginning of the year, but as we, you know, as we said at the beginning of the year, you know, in January and February, we didn't necessarily see cap rates moving up a whole lot, and in fact, you know, on the margin, we're probably still seeing cap rate declining, sitting here today for income buyers, you know, condo buyers, a little bit all over the map depending upon the market, but for income buyers we're still seeing cap rates fly a little bit the margin at a time when interest rates are moving up a little bit at the margin.

So you got, right now, we're in a period where I think really for the first time over the last 10 years or so, you're seeing negative leverage or at least close to negative leverage on acquisitions. So that's, you know, we're being very selective with respect to acquisitions as a result of that.

Okay.

And just one thing to add, Rich, just something I said on last call, maybe the last two calls, you know, one of our key jobs here is to be an allocator of capital and to treat that preciously whether it's from our common shareholders or from outside investors, and I said in the last couple of calls that our activities this year, our strategy and certainly our activities were to be aggressive in our development activity. You've seen that in a sense of us ramping up our development activity and we're still able to generate very attractive yields on that.

And secondly, to be opportunistic in terms of our sales activity, and you've seen us do that in the sense of dramatically increasing our sales volume to capitalize on a very attractive sales market.

But the third part that we said, you know, really two quarters ago and again last year was to be very selective in our buying. And so as we've, as the market has gotten very aggressive on the sales side, it certainly has, or the reverse side of that as Tim mentioned.

So we're going to treat that capital preciously and allocate it scarcely when we're seeing yields where they are today. We are finding opportunities but, you know, they're certainly hard to identify.

I imagine most of them are re-development opportunities. Is that correct?

The vast majority.

When you have it fully, first of all, where do the fees show up on your P&L?

They're in the revenue line under management fees.

Okay. Not in GV.

And you can see the growth in that category year-over-year.

Yes, so how big, when the fund is fully funded at, I guess 940 million, how big, how much, you know, in absolute value fees would you expect for, you know, on an annualized basis from the fund?

There are three different fees in the fund format. The first is the investment management fee, or the asset management fee, and that's 1.25%. That's on a committed basis. So that's fully in our quarterly number for the third quarter. The second fee --

Of equity.

Yes, I'm sorry, it's 1.25% on the equity.

On committed equity.

On committed equity so it is fully in there at this point.

Okay. So it's all, it's fully in there.

It's full in the third quarter number. The second fee would be property management fee at 3.75% and that will ramp up as we add assets, and if you want to say there's probably a 12 multiplier on the revenue number, divide your 940 by 12 I think you'll get close to that. But that number ramps up over time so it's not fully embedded in the third quarter.

And then the last piece is re-development fees. You'll probably see more of that at the beginning of the fund and less at the end, and it's not recurring, it's more transactional.

Okay. I mean so are we talking about like an annual, I'm doing this, I have no idea. 20million bucks or something like that?

Well, I think have you to take some assumptions and do the math but 375 is on revenues and that ramps up over time, and then the re-development, you know, it's really hard to predict what set that's going to be.

Okay. And last question is, when you look at your same store growth in light of your, you know, significantly more conservative accounting treatment for various expenses, if you were to sort of apply a more market capitalization policy, say $600 a door or something, would you be able to hazard a guess what that impact would be on your same store growth rate?

Well, theoretically it wouldn't change your growth rate because you'd do it for both periods.

Both periods, okay. But I mean in terms of absolute NOI, I mean bringing to the bottom line, what do you think the impact would be?

I'm reluctant to do the calculations on this call because I may misquote the number. Do you want to, you know, I think you know how many units we have, you know what our average capitalization per unit is compared to others. I think the math is pretty --

Pretty straightforward?

Yes.

Okay. But no impact on the growth rate?

Yes.

Okay. Thank you very much.

You're welcome.

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

Hi, good morning. A question on the Northern California markets. It looks, just based on the results here, that you've turned the corner. Would you guys say that?

David, this is Leo. I would say that Northern California is certainly improving, and even last quarter, I indicated that Northern California long-term probably has the greatest upside. I would say we have not turned the corner necessarily in San Jose, although we are making progress, there's still supply coming into that market and the job growth is modest at best.

With respect to San Francisco, we feel pretty good there, largely because there's no supply, so any job growth is going to move us along, and as you see in the numbers for this quarter, it's pretty favorable, and then the East Bay is kind of more in between.

So I'd put San Francisco strongest, the East Bay at the next most favorable, and then San Jose as we've been saying all along is likely to lag the rest of our markets coming out, but long-term, we feel really good about all of the Northern California markets.

Okay. Thank you.

Your next question comes from Craig Kucera of FBR.

Hi, thank you. I just wanted to follow-up on Northern California, too. We've been hearing that the housing market weakened pretty sustainably here in the second to third quarter. And I wanted to get your thoughts on if you've seen any pickup in traffic or in the, you know, the quality of the people coming through the doors, are they able to, looking a little bit better than they were maybe three to six months ago?

This is Leo again, Craig. Traffic, you know, has been kind of in line with the rest of our portfolio, so it's not disproportionate, so we haven't seen a big shift at this point. Although, you know, it may be early to see that coming through. And this is a time of year when the traffic tends to turn down, as you know.

Absolutely. I guess I meant on a year-over-year basis, then, has there been any market change?

Actually, Craig, Tim Naughton here. I think both Northern California and Seattle probably have showed the biggest improvement on a year-over-year basis. Traffic was up in both those markets and kind of flat though modestly down in most of the other markets. So relative to the other markets probably a bit better.

Okay. Great. And one other question, I just wanted to ask, you know, if we're entering a phase of the cycle where in some of the markets that you operate, condominiums get a little bit overbuilt, I know here in Washington, they're somewhere on the order of 45 to maybe even 50,000 condos that could be coming on or plan to come on in the next two or three years. How do you anticipate you would, how would your Company fair in that environment and how do you think it would play out as competition for rents?

Craig, this is Tim. First of all, I don't think those 45,000 are going to get built.

I don't, either.

I mean you've read the same articles we have. There's about 18,000 that are currently in the marketing stages right now which that represents probably about a year and a half's supply relative to the kind of absorption rates we've seen over the last couple of years. But the reality is, if the market softens, a lot of those deals are underwritten with some pretty aggressive underwriting assumptions, and they're just not going to happen in my view.

Okay. Thanks.

Your next question comes from Thayne Needles of Baird.

Good afternoon. Most of my questions have been asked and answered. Tom, just one question for you. If the sales that were to slip, or at least 100 million in sales were to slip into '06, would that negate the need for the possibility of using an 858 distribution? And if not, is that a signal, the fact that you considered the 858 a signal, this is more of a broader question, of an anticipation of a much slower sales activity in '06 back more to a normalized level?

Thayne, your question was really hard for us to hear, but I think I got most of it. Let me just answer the question.

Whether the sales closed as they scheduled this year or some of them slip into next year, we were comfortable with our overall level of distributions to cover those gains using that 858 election, as you mentioned.

So we aren't, the slippage into next year, if that should occur, really doesn't impact our distribution policy with respect to those assets for sale. I think you asked another question, but it was so faint, it was really hard to hear.

Sorry. I'll try again. Turn my volume up. The question was, the decision of the positive, of electing to use an 858 election as a way of passing the gains out, is that an indication of an expectation that the 2006 sale level will be more back to a normalized level and considerably less than this year's activity?

No, I think, one, we use 858 freely, and we basically time sales based on market conditions, or our expectation of when we want to harvest value and we don't necessarily drive it off of distribution policy.

Great. Thanks, Tom.

Your next question comes from Chris Pike of UBS.

Good afternoon, everybody. I guess for either Tim or Leo, with respect to concessions, I know early in the year, you experienced a state in which were you actually burning concessions off and looking at differences between the GAAP concession and the cash concession.

Just wondering, you know, what was driving the market dynamic then, and especially given some of your rental rate, monthly sequential rental rate increases that you talked about in the release, you know, when do you think that type of state may once again show up in the numbers? If at all?

Chris, help me to understand your question. Are you asking are we seeing concessions coming down?

Well, in the beginning of the year, it seemed based, in looking at the difference between what you were showing on your GAAP number and your cash number that were you actually burning them off, and since I guess it was Q1, they've crept back up, unless I'm reading something incorrectly here.

I'm just wondering, what was the market dynamic in the beginning of the year that helped you burn the concessions off, but now, given that you've had some pretty significant positive rental rate moves sequentially in Q3, and even year-to-date, you're still driving concessions higher?

Chris, I believe this comes back to the fact that we're really focusing on effective rates.

So it's a pricing decision then?

It is a pricing decision. And that's what's been going on. Although from this high occupancy platform, I believe that you can expect to see concessions continue to decline. But it was a pricing decision.

Okay. Great.

Your next question comes from Ralph Block of Focus Financial.

Hi, guys. Is there any way you've been able to monitor or try to quantify the amount of condo sales in your markets that are being made to speculators? What I'm trying to get at is if the condo market really cools, is there apt to be a much more of a supply problem than we think right now?

Ralph, I don't, this is Bryce. I don't think there's any way that we could offer any empirical data that you could have any confidence in. You hear much anecdotal data. Some of it has some basis in underlying fact, you know, the numbers ranging from less than half to more than half depending upon what markets you're in and what kind of asset you're talking about, you know, clearly there is a significant component of investor buying, but to put a figure on it. Tim, do you have any --

I think most of the market research consultants don't have any better data than we do, generally assume about 30 to 40%, Ralph. As Bryce says, it's going to vary by market, higher in South Florida and Las Vegas than say in New York or Boston for instance, which generally not viewed as having many investors.

The 30 to 40% is typically what you hear from people as a baseline assumption.

But it's not something you're terribly concerned about right now?

Well, I think there's two was, Ralph, to look at it. If you're, and I address both the, if you look at the effect on supply, in terms of new supply, developments that were previously planned as apartments are being replanned as condo, so that's, you know, even if some of those come back as rental it's still a net reduction in supply of new rental. Even if 40% come back, you still have 60 that didn't, that otherwise would have been rental.

The same corollary is true on conversions. 115,000 conversions this year nationally of existing rental stock to condominiums. Even 30 or 40% that come back, you still have 60 or 70 that did not, so yes, it's something we watch for.

And also when they do come back to the market, our experience has been that they're not necessarily playing in the same market that we're playing in, you know, someone who is shopping for a Class A apartment community with a professional management as opposed to someone who is renting a condominium unit from an individual owner. They tend to be slightly different markets so it is something that you need to be watchful for but it isn't something that I think is as big of an issue as some may consider it to be.

Thank you. Your next question comes from Carey Callaghan of Goldman Sachs.

Hi, good afternoon. This is Dennis Maloney for Carey. I'm looking at your development pipeline, and for those products that carried over from the second quarter, I see that you've either kept flat or lowered your anticipated average rents on all but one project. I'm wondering what is behind this and does this adjust in fact that you're scaling back your outlook for market rent growth?

Carey, Tim Naughton here. Really the only deal that changed materially was, I think was the Bedford Center deal which just really opened for leasing and opened at about, from an effective recent basis about 8 or 9% below original pro forma.

The others are pretty much at the margin and don't have much of an impact on the overall development yield and as the basket changes quarter, in fact the development yield stayed flat from 7.7 to 7.7 again this quarter. You know, I mentioned in my prepared remarks generally we're seeing a stabilizing of rents and an increase in certain cases.

And then I would actually expect, as we move forward on a lease-up on some of these deals with the market conditions haven't improved you'll actually see some of these rents start to move up as we get a little bit further into the lease-up.

Thank you very much.

Once again, if have you a question at this time, please press star one on your touch-tone telephone. There are no further questions at this time. Mr. Blair, do you have any closing remarks?

Thank you, Operator. And thank you all for participating on the call in what I know has been a busy week and I'm sure many of you will be attending NAREIT next week in Chicago. So thank you again for your time.

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