艾芙隆海灣社區公司 (AVB) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities fourth 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 star 0 on your touch tone phone. 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. Miss Walsh, you may begin your conference.

Thank you, Louann. Good afternoon and welcome to the AvalonBay Communities fourth 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-Q filed with the SEC. As usual, the release does include an attachment with definitions 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 will turn the call over to Bryce Blair for his remarks. Bryce?

Thank you, Alaine, and welcome and thanks for joining us on our fourth quarter call. With me on the call today are Tom Sargeant, our CFO, Tim Naughton, our President, and Leo Horey, EVP of Operations. Tim, Tom and I will be providing some initial remarks and then all four of us will be available to address any questions you may have.

In our comments today, I will be addressing some of the 2005 highlights and then providing some macro comments regarding our 2006 outlook. Tim will summarize our investment activity and give an overview of our 2006 market expectations and Tom will be focusing the majority of his comments on providing additional commentary on our financial guidance.

During 2005, we enjoyed the strongest department fundamentals in five years. The strong fundamentals were driven by improvement in apartment demand and relatively modest levels of net new apartments. Nationally, apartment demand improved significantly during the year driven by sustained job growth which totaled approximately 2 million jobs. Despite improving fundamentals, construction costs and the super heated condominium market kept the construction of new market rate apartments in check and to help the national supply situation even further, a record level of condominium conversion activity removed approximately 190,000 existing rental units from the competitive marketplace. Against these improving fundamentals, AvalonBay performed very well. We executed according to our original business plan where warranted while moving aggressively during the year to capitalize on market opportunities as they presented themselves.

Regarding 2005 performance overall, I want to highlight three major areas -- same store sales performance, development in disposition activity, and earnings and stock price performance.

Let me start first in the area of same store sales. The improving fundamentals and the intense focus from our property operations group resulted in the strongest revenue and NOI performance since 2001. When comparing the quarterly results one year ago, we achieved occupancy gains of over 100 basis points, had concessions for move decline by approximately 40%, and revenues on a cash basis grew by 5.7%. These results are certainly a significant improvement from the essentially flat revenue performance during 2004.

In terms of development activity, it was over four years ago that we began the ramp up of our development pipeline and of our development and construction organization. By year end '05, we had $1 billion under construction, the largest in our Company's history and the largest in the apartment sector. Equally as important, we have 3 billion of additional development in the planning stages which is an important source of future growth. The billion of new development under way when stabilized will result in value creation of approximately $0.5 billion given the current spread between development yields and market cap rates. Also during the year, we moved aggressively to capitalize on the very attractive sales environment, particularly for quality assets in coastal markets which are very attractive to condominium converters. We almost tripled our initial sales expectations for the year, selling over $350 million at an average cap rate below 4%.

In terms of earnings and stock price performance, we ended the year with FFO growth in excess of 12%, the highest in five years, and total shareholder return of approximately 23%. We are not only pleased with our performance in 2005 but our strong results in 2005 brings our three-year annualized total shareholder return to 38% which is the highest of any multi-family REIT.

So with that, let me shift to some initial thoughts with regard to our 2006 outlook. While we saw improving fundamentals in '05, we expect to see even stronger apartment fundamentals in '06. The housing market is cooling. Condo conversions are reducing rental housing stock. Home affordability continues to weaken and new rental deliveries remain modest. Combined with solid job growth and household formation, the fundamentals for our business are decidedly positive. These favorable fundamentals combined with very high occupancies in our markets set the stage for a solid '06. This is reflected in our portfolio performance as we're seeing healthy momentum in increasing rental rates and falling concessions despite the normal seasonal challenging experienced in late Q4 and early Q1.

But given the outlook for improving fundamentals throughout '06, I want to share with you a couple items that will be focused on and an area of our business where we have some concerns. In terms of area of focus, the first is on our existing portfolio. We will be focused on maintaining the high occupancy platform we enjoy today while continuing to reduce concessions, provide great customer service and pushing new leased rents. As a result of these actions, we expect to realize revenue growth in excess of 5% for the year.

Secondly, we'll continue to be an active asset manager looking to be an opportunistic seller and a selective buyer. We're continuing to enjoy very strong sales prices, fueled in part by continued, aggressive condominium conversion activity. In order to minimize market risk, we will be focusing our disposition activities in the first half of the year.

Third, we'll continue to accelerate our development activity under way. Throughout the year, we expect to move from the already high level of $1 billion under construction to approximately 1.5 billion under way in the second half of this year. We have healthy markets, a robust pipeline, and the balance sheet and organization to execute a volume at this level. Our development activity is an important source of future NAV and earnings growth.

Shifting to a concern, one area where we do have concern is in the area of cost escalation, both at the property level and in terms of development costs. At the property level, the concerns in the area of utilities, principally in the area of utilities and real estate taxes, which collectively make up almost half of our cost structure. We're expecting above average increases in both these categories and are very focused in proactively managing our exposure in these areas. In terms of development costs, we're continuing to see significant escalation in both land and construction costs. While we're certainly not immune to these cost pressures, our large land pipeline and the economies of scale we enjoy in the construction area do partially insulate us from some of these pressures.

But overall, we are optimistic about the market fundamentals and our expected performance for the year and it is against this optimistic outlook that the board recently approved and we released on Monday an approximate 10% increase in our dividend. Now with that, I am going to pass it to Tim who will provide some additional highlights on our investment activity as well as providing some comments on our 2006 market expectations.

Thanks, Bryce. As Bryce mentioned, I will provide a summary of '05 investment activity, including some highlights from Q4, and then provide an overview of our outlook for our various regions along with our 2006 investment plans. Starting with 2005, during the past year we started 12 communities totaling almost 900 million, including 300 million in the fourth quarter. We completed just over 400 million in 2005. As a result, total volume under construction grew by about a half a billion over the last year to its current level of just over 1 billion. As Bryce mentioned, despite this level of new starts which represents our highest level to date, our shadow pipeline and development rights remained right around 3 billion, roughly unchanged from this time last year. We have been able to replenish the pipeline at about the same rate we've drawn it down over the last twelve months.

We were most active in the Northeast and the New York Metro and Boston markets which accounted for three quarters of our starts in 2005. We also had starts in Southern California, Northern California and D.C. We added to the development rights pipeline in California, Seattle and New Jersey, all markets where we increased our focus in 2005.

Given that improvement in market fundamentals is broad based, we are currently pursuing new business opportunities in all of our markets. Yields for those deals completed this year averaged 8% while those currently under construction average in the mid-7 or still about 300 basis points above prevailing cap rates.

Shifting to transaction activity starting with dispositions. In 2005, we sold 350 million of existing assets, about three times our original expectations. [technical difficulty]

Ladies and gentlemen, the conference will resume momentarily. Please continue to hold. Ladies and gentlemen, we are experiencing technical issues. Please continue to hold. Once again, ladies and gentlemen, we are experiencing technical issues. Please remain on line. Your lines will be on silent hold until it begins. Thank you. Ladies and gentlemen, today's conference will resume momentarily. Thank you for your patience.

Miss Walsh?

Are we in --?

You are back in the conference.

We are. Okay. Tim, you want to explain? We had a little high winds down here in D.C. and we lost power temporarily so we got kicked out of the call. But we're back and Tim is going to pick up where he left off.

Okay, thanks Bryce. I'm going to try to retrace a few of my steps here because I continued for a little bit after we lost power. In any event, I was talking about 2005 development activity and I will pick back up with really where our regional focus was. We were most active in the Northeast, in the New York Metro and Boston markets, which accounted for three quarters of our starts in 2005. We also had starts in Southern California, Northern California and D.C. We added to the development REIT pipeline in California, Seattle and New Jersey, all markets where we increased our focus in 2005. Given that improvement in market fundamentals is broad based, we are currently pursuing new business opportunities in all of our markets.

Stabilized yields for those deals completed this year averaged 8%. While those currently under construction average in the mid-7's, we're still about 300 basis points above prevailing cap rates.

Shifting to transaction activity in 2005, I will start with dispositions. We sold 350 million of existing assets, or about three times our original expectations. 90% of this volume was sold to condo converters. The economics of these sales far exceeded previous years. The average cap rate of 3.8% was more than 250 basis points lower than the previous five year average. We achieved an 18% unleveraged IRR over an average hold of eight years. The economic gain achieved was about 180 million or 100% on our investment.

In addition to these sales, we will sell another 120 million early in Q1 that were placed under contract last year, including the closing of Avalon Estates in Boston that just occurred in early January.

On the acquisition front, we bought selectively within the investment management fund this year. We closed on 4 assets totaling 100 million, including 75 million in Q4. Each of these assets were value add opportunities and were bought at a weighted average initial year cap rate of 5% and average projected post renovation yield of 5.8%. To date, we purchased eight assets for the IM fund totaling 210 million and we have another 90 million under contract that should close in Q1 or early Q2. Along with estimated redevelopment costs, about 330 million has been committed to date for the fund.

In summary, 2005 was a year where we ramped up our investment activity, particularly in the area of new development and dispositions. Given the strength of the condo market, there was a unique opportunity to harvest value from our existing portfolio. And improving fundamentals in our apartment markets also made new development compelling in virtually every market, including markets where we've been inactive for the previous two to three years.

I would like to shift now to our outlook and investment plan for 2006. As Bryce mentioned, apartment market fundamentals are currently very favorable and we expect them to improve in 2006. In addition, these solid fundamentals are broad based with virtually every market seeing sequential improvement in '05, which we expect will continue in '06. Let me take a couple minutes to highlight what we're seeing in the various regions. In general, we expect the west coast markets to pose stronger growth in '06. Fueled by the combination of solid demand supply fundamentals, lower declining home affordability and an accelerating recovery in Northern California. The Bay Area turned the corner in 2005 as job growth began to take hold across the region, including San Jose. Portfolio performance in Northern California accelerated throughout the year and by December, year-over-year growth in same store revenues was 6% and concessions had all but disappeared. The region posted the strongest sequential growth and same store revenues in our portfolio in Q4. As a result, Northern California enters 2006 with the most momentum of any region. San Francisco's position, particularly, outperformed given the lack of new supply and the conversion of rental housing stock taking place in the city. Many parts of the city are currently seeing double digit rental rate increases, including Mission Bay where we have seen market rent increases in Phase 1 north of 20% since early last year.

Southern California should see its run of strong performance continue into 2006. Healthy job growth combined with a high occupancy platform and little new rental housing supply will continue to propel this region's rental housing market. Orange County and San Diego, in particular, have seen a significant amount of existing housing stock converted to condominium as well as many planned rental communities converted to condo prior to or during construction.

Seattle is experiencing a booming job market combined with modest rental housing supply, a combination that should continue into '06. This region posted solid increases in '05 and is currently seeing year-over-year same store revenue increases of 6 to 7%.

Shifting to the east, the D.C. market benefited significantly from the condo conversion boom as more than 9,000 units alone were removed from the rental housing stock in the first three quarters of 2005. In addition, the projection of 10,000 rental housing deliveries in '05 became less than 4,000 as many new communities were converted prior to initial occupancy. Job growth in '05 was strong at 70,000 and is expected to moderate somewhat but still be in excess of 50,000 in '06. With economic occupancy running close to 97%, D.C. should continue to enjoy good demand supply fundamentals this year.

The story in the Northeast is a bit more mixed, although still positive. Job growth should improve throughout this region, although at a more moderate rate than the rest of our markets. Boston's recovery is lagging somewhat, but the market should see decent improvement in 2006 as job growth is starting to take hold there.

Conditions are more positive in the New York Metro area. Manhattan and the inner bureaus are experiencing healthy rental rate improvement and should easily absorb new construction deliveries over the next couple years. Northern New Jersey and lower Fairfield are experiencing a solid rebound due to very little new supply being introduced in those submarkets over the last couple of years. Our Hudson River waterfront assets, in particular, have stabilized and are now seeing average rental rate increases of around 10%.

Finally, Chicago is just starting to see positive job growth for the first time in a few years. If the 60,000 new jobs that are projected do in fact materialize in '06, Chicago's recovery could accelerate during the year.

So overall, 2006 figures to be stronger than '05 in virtually every market. Markets with a combination of solid demand supply fundamentals and low home affordability should outperform. The more volatile submarkets of Northern California show the most momentum as we move into 2006 and probably offer the best opportunity for positive surprise. Stable markets such as Southern California and D.C. should only get stronger this year, extending their multi-year runs of out-performance. Markets still in recovery like Boston and Chicago should lag somewhat, although should still show notable improvement this year.

With this overall favorable backdrop, we will continue to be active on the investment front in 2006. Starting with development, we expect to start around 750 million this year with the activity to be more evenly distributed between east and west coast. Combined with 2005 starts, volume under construction should approach 1.5 billion by mid-year or almost three times what we had under construction at the beginning of '05. Initial yields for our development pipeline will migrate to approximately 7% as a result of two factors, construction cost increases which have outpaced increases in effect of rental rates over the last year, and secondly, a greater concentration of starts in West Coast markets which generally have lower going-in initial yields. Yields will be somewhat protected, however, by favorable land positions as well as strengthening market conditions. Because we underwrite based upon current rents, we expect individual deal yields to improve as we move through the period of construction. For example, as I mentioned earlier, rents have improved in the Avalon at Mission Bay submarket by over 20% since we started construction of Phase 2 early last year but because we have not yet begun lease up of this community, these increases have not yet been reflected in the economics of this development.

Our outlook for dispositions calls for approximately 250 million in asset sales in '06 with most of the activity to take place in the first half of the year, including 120 million to close in early Q1 that I mentioned earlier. As we've done in years past, we will continue to monitor the transaction market and weigh disposition opportunities versus other forms of capital to potentially adjust our plans during the year.

On the acquisition front, we will invest principally within the fund and continue to be selective in searching for value add opportunities in our existing markets where we believe our skills and local market knowledge provides us some form of advantage.

Finally, we will substantially increase our level of redevelopment, both on fund assets and within our stabilized portfolio. Redevelopment will become a bigger organizational focus for AVB over the next few years as the size of the fund grows and our markets improve. The next few years should provide an attractive opportunity to invest additional capital in our stabilized portfolio, particularly in California, where our assets are generally older and markets should support repositioning efforts.

So overall in '06, we expect already current healthy apartment fundamentals to further strengthen. This will result in improved operating performance in our portfolio. In addition, we will continue to be very active on the investment front, particularly with value add opportunities of new development and redevelopment. As a result of increased development activity really starting back in the second half of '05, new deliveries will accelerate in 2007 and 2008 when this new investment activity should materially bolster earnings growth. Tom will now provide further color on 2005 performance and our outlook for 2006.

Thanks, Tim. First a quick note on the quarter and the year. For the quarter, we performed largely as we expected. Revenue was slightly better than expected with 5.2% growth over the fourth quarter of last year or 5.7% on a cash basis. Expense growth during the quarter was 3.7% and NOI growth topped 6% for the first time since 2001. Operating performance accelerated during the quarter which was encouraging as we head into 2006 providing our outlook. FFO per share was up 5.7% year-over-year. For the full year 2005, NOI increased 4.2% with revenue up 3.6 and expenses up just 2.4%. Full year FFO per share grew by 12% to $3.77 per share. This exceeded our original estimate of $3.61 and the better than expected earnings are attributable primarily to lower interest expense as well as higher NOI and non-routine gains from rent.com and land sales. These non-routine items make up -- make it harder to understand the impact of our operating trends on FFO growth, but we can adjust for these items to see that operating FFO per share was up 8% on the quarter and 10% for the year. Operating FFO growth came primarily from new development lease stabilization as well as growth from our same store assets. This growth is noteworthy when considering that we sold 350 million of assets in 2005, delevering the balance sheet in preparing for additional growth to come in '06.

With that brief recap of '05, I would like to turn to the outlook we provided in last night's release. Our 2006 revenue growth projections rely principally on third party job growth forecasts combined with our own estimates for supply. We expect revenue growth of 5 to 6% which is higher than the overall forecasted growth rates for the overall U.S. markets. These growth rates are also above our long-term trend line for our markets, but this is appropriate given that most of our markets are in an early growth phase after recovering from the recent downturn.

We expect FFO per share will be within a range of 3.95 to 4.15. FFO per share growth in '06 will come largely from the same store NOI growth. New lease subs will also contribute to earnings growth but will somewhat temper the growth by the ramp up in new development and the related initial operating deficits that occur prior to initial occupancy. Earnings growth supports additional dividend growth and as Bryce mentioned, the board announced, or we announced that our board voted an increase of the dividend by 9.8% effective for the April dividend. Throughout the recent downturn, we maintained a dividend fully covered by recurring cash flow and after this increase our dividend payout ratio is expected to be about 77%, which is one of the lowest payout ratios in the sector. We expect '06 will be a big year for development as Tim mentioned with about a range of 575 to 700 million of capital outlays for new development. Our financial structure supports that expanded development as the key metrics used to measure financial strength continue to improve. For example, at year end, debt to market cap was just 26% and that is the lowest in the sector. This compares to 30% in 2004. Our fixed charge coverage ratio is at 3%. NOI from unencumbered assets is 85%. As you know, assets that are unencumbered with debt or tax protection, as well as great market locations and the physical quality of the assets, are all attributes that make our assets highly marketable and attractive to buyers and this lends support to our planned disposition program which is expected to be between 225 and 300 million as these disposition proceeds continue to be a very attractive source of capital and will help fund this expanded development pipeline.

To conclude, we're encouraged by the accelerating fundamentals and the earnings growth during 2005 and we're looking forward to continued growth in '06. Prospect for earnings growth supports our recent announcement of the 9.8% dividend increase. We enjoy great access to cost effective capital and a balance sheet that's well positioned for expanding development pipeline and an established source of capital for acquisitions through the investment management fund. Continued sustained job growth and the direction of interest rates are two external forces outside our control that will most impact our financial outlook in 2006. With those comments, I will turn the call back over to Bryce who will conclude.

I think that does conclude our remarks and Operator, we would be glad to entertain any questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Lou Taylor with Deutsche Bank.

Hi, good afternoon, guys. Bryce, can you talk a little bit about rent growth and how aggressively are you pushing rents and are you seeing any resistance anywhere?

Lou, I will start in and Leo, you may want to contribute. We certainly are pushing for rent growth. Really, as we mentioned in 2005, we would be focused first half of the year on building occupancy which we did and then latter half of year on reducing concessions which we did, and now really pushing on rental rates. So there sort of is a sequence to that. Leo, in terms of market by market, where we might be seeing the most opportunity or the most pressure, do you have a comment on that?

In truth, I hope to see people pushing back in all markets because it means we're pushing as hard as we need to be pushing. If I was to give you one example, we've had huge rent growth based on rate in L.A. and you saw occupancy pull back a little bit there, so we watch it, but it is an interactive process. We try to get that 96.5% occupancy level and you can see where we're accomplishing that and we push rate hard. By pushing rate, I mean either increasing market rents or pulling back concessions, and there is no market where I believe we've hit a ceiling where we don't feel good about it. There are markets where we need -- where we could see some more occupancy.

Okay. And then, Tim, on the investment side, sounds like you have a good portion of the positions set almost already or close to being under contract or under contract. Are you seeing condo converters pull back at all and if the bid stays strong throughout the year, do you expect to maybe even sell more than your current guidance range?

Yes, Lou. Starting with the second part of that, as I mentioned in my prepared remarks, we will weigh additional disposition opportunities versus the other forms of capital much like we did in 2005 and we increased I think from our initial guidance about 125 million to about 350 million. In terms of our guidance for next year, you're right. We have about half of it already committed if you will in the form of a contract and the form of contract, and the other half we're likely to push out in really the first part of the year. Portion of that's likely to go to condo converters. Portion's likely to go to income buyers. There is some market, principally in the Northeast, where we just haven't seen the same level of appetite from the condo converters, certainly markets like D.C. and parts of Southern California. You're starting to hear some of the marginal players, maybe some of the smaller condo converters, starting to pull back where they may be having trouble with financing. You're definitely hearing some of the financing sources are starting to pull back in certain markets. Northern California, we're still seeing a pretty healthy appetite on the part of condo converters. It is really market by market.

Okay. And the last question for Leo, on the expense side, what's driving the higher expenses in southern Cal and the Northeast?

Are you talking about for the full year?

Yes.

Okay. In general, what's driving it in the Northeast is the payroll and the property taxes and the utilities. That's, in most of our markets, that's where the challenges have been and the other markets you asked, the Northeast and where else?

Southern California.

In Southern California, year-to-date, it is again the same categories. We've had some challenges with payroll and property taxes to a lesser extent because of the issue with the cap that we have there and then some utilities.

Great. Thank you.

Your next question comes from Ross Nussbaum with Banc of America Securities.

Good afternoon. It is Karin Ford here with Ross. Can you talk about how did the revenue growth trend through the quarter? Did it start out lower than the 5.2% and trend up or did it go the opposite direction during the quarter?

This is Leo. Again, revenue did trend up throughout the quarter and the good news is what we continue to see is increasing rates which we feel very good about.

Okay. Secondly, on Riverview North and the second phase of Chrystie Place in the development pipeline, each of those are pretty good size projects, over 100 million. How come you're not looking at doing a JV on those and how much do you think is too much development risk in the New York marketplace?

Karin, this is Tom. JV's are forms, we use JV's in developing sparingly and generally use it to mitigate market risk or concentration risk. With a $9.5 billion balance sheet, those deals today don't look nearly as big as they did two or three or four years ago. If you look at the Riverview development opportunity, that is next, it is adjacent to a very successful phase 1 of Riverview so we've proven the market and understand the leasing challenges that could occur in that market and so we're very comfortable taking that market risk. Chrystie II, that is a development opportunity that is adjacent to Chrystie I which was a very successful lease-up. We don't have the retail exposure in phase 2 and feel a lot more comfortable taking that market risk, especially given that phase 1 is a joint venture. So again, we use screens to determine which assets we develop through a joint venture and we feel comfortable preceding with those two ventures in a non-JV format. In terms of how much development is too much in New York, it is a big market. It is a market we would like to have more assets in and, Tim, I don't know if you have anything to add to that. We have plenty of room to develop in that market before we feel like we're over allocated. Right now we're under allocated in that market.

Yes, I think that's right Tom. I think it is really more of an issue of overall portfolio allocation. I think we feel like we understand the economics of those communities pretty well. They are second phases of multi-phase deals where the first phases were extremely successful, so I don't think anybody would have wanted us to share the economics of the second phase on those two particular deals, and when we look at overall portfolio allocation, we're comfortable with the overall exposure that these deals and even some that might come behind it would give us relative to the rest of the portfolio.

Makes sense. Okay. One final on your '06 guidance, can you just tell us what your assumptions were for job growth, interest rates, G&A and any one-time items in your guidance?

All of those assumptions you can find in Attachment 14, and I just refer you to those in the detailed attachments.

Okay. Great. Thank you.

You're welcome.

Your next question comes from Jon Litt with Citigroup.

Hi, it's John Stewart here with Jon Litt. Can you reconcile for us your comments that given your concern over escalating expenses and it sounds like higher construction costs are a part of the reason for the squeeze on development yields, what gives you confidence that you will be able to contain expense growth at 3 to 4% in '06?

Well, Leo will speak to the 3 to 4 on property expenses. I will let Leo address that and the earlier comment you're referring to was certainly in the area of construction costs which in terms of construction costs as I mentioned in my comments, a portion of those costs, certainly the land with which we've had under control for a long time and in fact as well as the direct construction costs which were are typically locked in early in the job, gives us the confidence that we're able to maintain our budgets on the construction costs. On the operating side, Leo?

With respect to expenses for '06, the way we reconcile them is, as you know, about 70% of our expenses come from the categories of property taxes, payroll and utilities. Those are areas that are clearly under pressure, although property taxes because of our California exposure are somewhat tempered, and what we're doing to offset those and what we've been doing all along is we're focusing on other categories. We had great success in '05 with respect to redecorating costs. We actually got our hard costs for redecorating down from the previous year, and in the area of marketing, we're just trying to be smarter. We're using other sources and we've been driving those costs down. We have some pressures in the big three categories. We're actually making strides on some of the other categories. Bryce, do you have any other?

One final comment in the area of utilities. While utility rates impact everybody, I think approximately 85% of our utility costs are directly born by the residents given the newer nature of our portfolio and the direct metering that we do. We're probably less impacted than others with an older portfolio that doesn't enjoy that benefit.

Okay. Can you give us a sense for how you expect the quarterly trend in same store NOI growth to play out over the year? Do you expect the momentum you had in the fourth quarter to carry on into the first half? How do you see that playing out over the course of the year?

Yes, this is Tom. In terms of the NOI trend going into the first quarter, we're encouraged by the acceleration and as Karin Ford I think asked, we were -- we did see momentum in the overall growth rate in revenue through December. In fact, December revenue was 6% year-over-year so we're encouraged by that. If you look at the overall trends for NOI, again, they're seasonal, so you have to look to what happens, particularly in the third quarter with expenses, as we turn apartments and expenses grow pretty aggressively. We think the normal seasonal patterns for NOI growth will continue next year, so I don't really know what additional color I can add there other than we did end the year on a good note on the revenue side and expect expenses of the 3 to 4% guidance that we gave you would fall within historical normal patterns as they occurred during the year.

Okay. And then lastly, can you comment on the two assets you're reportedly acquiring from Arch Town and your strategy as far as increasing exposure to the Chicago market?

Jon, this is Tim Naughton. I don't know that we ever announced we're buying two assets specifically from any one seller. I will speak more generally to the Chicago market. We are, that is a market that we would like to increase our penetration in and I think we've said in quarters past that in both Southern California and Chicago are markets we would like to increase allocation over time. We believe we're underallocated as you look at the entire portfolio. So we're going to look to do that through, principally through acquisitions initially, just because of the timeframe it takes to get new development going, but we do have a development team on the ground now in Chicago and we're looking through to try to build both the development pipeline and the overall portfolio through acquisitions.

Okay. Thank you.

Your next question comes from Chris Pike with UBS.

Good afternoon, everybody. A couple questions, folks, from development. Actually let me take a step back here. To follow up with Karin's question on the '06 guidance, just wanted to be clear. On Attachment 14, it doesn't speak of any type of one-time item land sale, non-core disposition so we should assume that the 395 to 415 is a pretty clean number in terms of that. Correct?

Correct. That's how we always provide outlook. We don't anticipate land sales. It is very hard to anticipate land sales or nonrecurring items. It is a pretty clean outlook.

Excellent. In terms of development, Tim or Tom, the 75 to 100 million of land, is that reflected in the 575 to 700 million in cash expenditures or is that in addition to?

I am going to say it is separate from, but I am going to verify that as we continue. I have a schedule on that.

And that is land, that's not options or rights that you're acquiring, correct?

Correct.

Now the 45 million in cap interest, is that reflective of a mid-point between the 575 and the 700? Or is it top end or the bottom end?

Do we capitalize interest, Tom?

Yes, I am sorry. Ask me the question again.

Tom, the $45 million in cap interest that you guys talk about on Schedule 14. Should that be applied to a mid-point of the total cash expenditures for development in '06?

Yes. I think it is going to be fairly ratable.

Just two more quick questions here. In terms of land costs, you guys have talked about escalation in raw costs. On a pro forma basis, what's the land as a total or as a percentage of your total development costs going forward?

Chris, this is Tim Naughton. It is typically the 15 to 20% range. I think it is probably 16 or 17% today. Typically, construction is about 60 to 65% of your cost structure and the balance can be made up in the form of soft costs, design, entitlement, permits, et cetera.

And that 16%, that's simply because you've held the rights on the land for some time. That's not new land that --

That wouldn't reflect market value of the land. That would reflect our costs and I think we said in the last quarter our average implied costs per unit is just over 30,000 per unit for a land in the development right pipeline with average construction costs a little north of 200,000, you get to 15%.

Okay. Just a qualitative question, perhaps for you, Tim. In terms of the entitlement process, have you guys found it more difficult, maybe a little more drawn out, push back from local municipalities or some NIMBY groups, especially in the more in-fill locations?

Mostly I would say yes to that question. There's certainly more going through the system which slows things down. I'd also say that some of our deals by their nature, just maybe are taking longer because they just may be more complex than, in terms of design and total program than maybe we've had in years past. I will say, though, there are some in-fill sites, particularly downtown sites, where the permitting process can be quite fast. Where they tend to take the longest is close in suburban, that's where NIMBYism really rages the most. It typically isn't in a CBD type location where people just expect stuff to get built on an empty lot.

Okay and just one last question here. Sorry about this and I will yield the floor. Given that the recovery in apartment markets that you guys have witnessed in '05, has that resulted in perhaps a little slower pace in fund acquisitions than originally planned when you set out the fund some time ago?

The strength of the market, I think it is really just more of a function of where we've seen asset valuation and pricing to the extent I guess the extent that that's a function of people's read of the strength of the market maybe but I think it has really been, we're really looking, as we've said, for value add opportunities, just a lot of capital out there right now and we've been sifting through it pretty carefully, so we expect to continue to be pretty selective, very selective, in terms of where we think, what we have to offer in terms of our skills and our franchise where we can add value through a number of different ways to get what we hope are above market type returns.

Thanks a lot, folks.

Chris, Tom Sargeant. Wanted to jump back in and validate that it is separate, that the cash disbursement development does not include the land underneath.

And all the carries are capped up into the 45 million as well?

Yes. Great. Tom, I have a couple more questions. We can just chat off line. Thanks a lot.

Your next question comes from David Harris with Lehman Brothers.

Good afternoon. CapEx was just over $470 a unit. Looked like that was up 33% over the '04 number. Any particular color on the pace of the increase and what can we expect in the current year?

You have to remember that that category is stabilized and it's not just same store, so it is really hard to compare that and say that it is apples to apples. We're showing it is not the same basket.

Okay. What can we assume for is a good number for '06?

A good number for -- ?

Compared to the 444, Tom.

The full 71 I think you actually reported but --

We haven't provided any guidance other than our normal operating expense growth guidance, and it is embedded in the 3 to 4 that we gave you. These are costs that hit the P&L and that's included in the 3 to 4% guidance.

David, let me make one general comment and then Leo may have a specific response to the question. I am hearing you question a couple things, one is a specific question and the other is a more general question about the direction of CapEx. The direction of Capex in our portfolio is up. I think we actually commented on that a couple times this past year that as asset values have risen dramatically across the nation and certainly in our markets, we're looking more opportunistically at our existing portfolio of what can we do, what should we continue to do to maximize the value and the value creation through the portfolio? So by whether it is new development, value added, whether it's acquisition rehab value added or whether it's redevelopment of some of our existing assets or just a little bit more TLC to some of our existing assets, has been an area of focus for us. So that is one reason why the trend would be up some and I think you will see it marginally up in the future as well.

David, I just want to apologize. I completely misheard your question. The 471 is CapEx. I thought you said maintenance expenditures. That's off maintenance we do expend and we include that on that schedule, so I apologize for my misunderstanding.

No, probably was me speaking too rapidly. Just so we're clear, maintenance I think you call it nonrecurring capital expenditure, but I think we're talking about the same subject now.

We are. To the right is other maintenance which is 13.91 per unit. In terms of what that number, the 471 of CapEx per home is going to be in '06, it is probably around 500 per unit.

Right.

I think that's a good number.

Okay. Any reason why it rose so -- other than the comments about spending a little more TLC, et cetera, it was a substantial increase over your '04 rate.

We are redeveloping our own portfolio, and that's providing some growth in that number.

Leo, why don't you --?

David, we've just been spending some on assets in California. There has been absolutely no change to our CapEx policy. We have it the exact same way that we've always had it. It really comes down to expenditures on some repairs that need to be made and a lot of it is going to the California portfolio. They expect a similar level in the coming year.

Okay. Okay. In the context of your I think price, it was you, perhaps Tim as well, about looking to sell most of your properties in the first half of the year and some concern I think about sustainability of the condo bid, could you just give a general comment as to what you're seeing in terms of any change in the total cap rate environment? Are you witnessing any softness in cap rates as we speak today?

Let me just talk a little bit more macro for a second and I will let Tim address the issue of cap rates. In terms of cap rates are driven by lots of factors. If you just step back and look at the overall housing market which certainly the condo portion of that has a material impact on cap rates, if you look at new home sales, they really peaked pretty much last summer. If you look at existing home sales, they're basically flat year-over-year and they're down in the west and the Northeast, areas of highest home affordability. If you look at existing home sales on the market, it is at an all time high and condo inventory is up 25% from a year ago. While the market is still strong, certainly by any absolute standards, there is no question by the data and certainly by our own knowledge of the marketplace that things have and are cooling off and Tim addressed that a bit in his earlier comments about some of the potential purchasers having a little bit more difficulty in the financing side as banks see some of this data and they start to pull back as well. While I don't think we've seen any material degradation in cap rates to date, our businesses, part of our business is risk management. To the extent we can execute earlier in the year and reduce some market risk, we're going to do so.

Okay.

I was going to add to that. In terms of income buyers, we're not seeing really them pull back at all. We're still seeing very aggressive, what I think are aggressive cap rates relative to history there, about 4.5, 5% across our market, and as Bryce mentioned, if there is any softness, it is really in the condo converters which typically were 100 to 75 basis points below the income buyers.

One final point related to the condo if I may. Is the 190,000 condo units withdrawn from the market that I think Bryce you referred to in your opening remarks, what's the source for that information?

Real Capital Analytics.

Okay. And you feel that's a pretty reliable source because the condo data generically is a very difficult thing to pin down.

It sure is. We think they're as good as anybody and I think more importantly, at least if you're looking for trends or consistency, their data for 2004 nationally was about just under 80,000 units converted so you can see the magnitude of the change from '04 to '05. So the absolute level may or may not be be totally accurate but I think the relative number is pretty accurate.

Then if we assume 300,000 is the overall supply level, approaching two-thirds of the total new supply being taken up condo.

I think it is actually a little, even a little better than that. The total five plus multi-family data, at least the most recent stuff I have seen, is about 370 nationally. Of that 370, about 250 is rental because about a third of it is for sale. About a 250 net new rental which includes some affordable, but just deal with that 250 and then you say 190 of it, not 190 of it, 190 of existing as being converted, you have basically about 50,000 net new.

Okay. Great. Thanks so much.

Your next question comes from William Atchison with Merrill Lynch.

Thank you. Gentlemen, would it be possible to drill down a little bit further in your financial outlook guidance on expense growth say just in California in '06?

No. I don't think it is appropriate to parse by market. It's pretty hard to come up with outlook in the aggregate and be accountable for it, but then to do it by market, it really becomes too challenging.

I was just hoping to compare it to a couple of your peers that have mostly California based portfolios and have come out with projections. Is there an appreciable difference would you think between Northern California and Southern California?

I don't think -- I think we have to rely on the outlook we gave you.

Okay. Okay. On the 75 to 100 million in land for development, I heard you mention a 30,000 per unit in development pipeline. Does that also apply to the 75 to 100 million additional?

This is Tim Naughton. It does not. That just really is for the land that we'll be buying this year which is I think quite a bit north of the 30,000. The 30,000 unit really applies to the entire development REIT pipeline, 47 communities of which we own about 150 million of that land and we option about 225 million of that land for about 375 million in total land under control representing a little over, between 11 and 12,000 apartments.

Now you've mentioned in the past a range between 50,000 and 100,000 per door. Are we close to the higher end of that range now?

I think for condos, probably, but again, it just depends on the direction of the condominium market. I would say for rental, you know, you're not seeing rental guys paying 100,000. They're generally getting shut out of that kind of activity.

Okay. Again on the financial outlook page, the corporate G&A property and investment management expense, the range is 0 to 5%. Why such a wide range and is it possible to sharpen it any?

Bill, I think 0 to 5 is a fairly narrow range. One thing to remember about the growth in G&A in 2006 is that we did have some one-time items in 2005, including a severance payment of 2 million. We did have a legal accrual of 1.5 million plus some other legal. One of the reasons why that growth actually is 0 to 5, that's kind of at the low end of a range one would expect in an inflationary environment, is because we do have one-time items in '05 that are keeping the growth rate down.

Thank you, gentlemen. Good luck.

Your next question comes from Rich Anderson with Harris Nesbitt.

Thanks. I will be brief. Bryce, you mentioned things that you're worried about, your concerns. I'm curious that you didn't bring up the condo bubble and considering the quality of your portfolio, does that keep you up at night at all that we could have a sort of sudden reversal and 125,000 units that are under development for condo could come to the market as rental?

The condo market has a number of potential impacts on our business. They're not all positive. They're not all negative. Right now the strong market is helping us in that it is diverting the new starts, a third of them as I mentioned earlier going to condominium as well as the conversion activity that you just mentioned. It is also obviously helping us on the sales side. But it is hurting us, too. The strong condo market, in fact, the strong housing market is definitely hurting us in the area of construction costs, definitely hurting us in the area of attracting and retaining people, so there's some pluses and minuses.

You could get impacted by a glut of supply, right, if things happened in a sudden sort of fashion?

Well, let's pars out a bit. When you say a glut of supply, the vast majority of the units that are being developed as condominium today were originally planned, many of our markets were originally planned as rental. So it is not necessarily new stock. It is a diversion of what previously was rental stock. Similarly whether it is the 125 number you mentioned or the 190,000 that I mentioned, that's existing rental stock becoming condominium.

I got the 125 being one-third of 370 that's permitted right now.

Well, in any event, I guess the short answer to your question is do we worry about it? Yes. We worry about the housing market . We worry about the condominium market but what we really focus on is what can we do to mitigate risk and as I mentioned, one of the ways we can mitigate risk is by accelerating sales which is what we're doing, is continuing to focus on markets that have high constraints on supply, which includes the development of new condominiums, and beyond that, just continue to really monitor the marketplace and react accordingly.

Okay.

Tim has one comment here.

Yes, Rich. I think it also just depends under the conditions on which that 120,000 or some portion of would come to the market as rental to the extent that you're still in a growing economy. It is just the reason be converting to rentals, there is not as much demand for home ownership for condos and that means there would be more rental housing demand. I think the bad end of that scenario would be if as a result of a faltering economy.

Okay.

Which isn't our expectation obviously.

And on the redevelopment, can you give us some numbers about, you talked about ramping up redevelopment. Can you mention, maybe quantify that, how much and would you expect your returns to sort of be in the same line as they've been in the past, sort of 10% type incremental returns?

We're looking at starting between 6 to 8 this year, communities, some fund assets and some from the stabilized portfolio. In terms of incremental returns, they're typically around 10% on the incremental capital being expended which often times is only about 10% of the total asset value, so on the margin it really doesn't make a big difference, but generally it is accretive on the margin.

Thanks.

Your next question comes from Dave Rodgers with Keybanc Capital Markets.

First question is for Tim. Tim, maybe you can comment or give me a little bit of color. We know that historically with the condos we have seen a lot of upward pressure on entitled land. Are you seeing the same type of pressure for raw land and if you see that start to back off, would that be an early indication that the condo boom may be playing out?

You know we haven't seen it as much on raw land certainly because generally the condo guys just aren't, they're going to be more concerned about timing. Some of the public home builders might be an exception to that, but certainly the more private entrepreneurial condo developers are generally not interested in these 3 or 4 year entitlement deals, and it is more about market timing for them so they're more willing to pay a premium whether it be on land or frankly even construction costs to meet a marketing window than to try to create value through the entitlement process. We just haven't seen as much pressure from the condo guys on the longer entitlements.

And then one more question for you. The Juanita Village, when that transaction is done, will that be consolidated or unconsolidated?

This is Tom. Actually that is a -- that transaction will not be consolidated. When we finish and our partner funds the costs, we will not have an equity interest in that venture but a carried interest, so it will not be on our balance sheet.

Okay. And do you have any 1031 monies outstanding on the balance sheet that you'd have to put to work for your own account this year?

We do have cash in escrow if you note between years did build and that is a 1031 exchange escrow that we will put to use in development activity in 2006, not acquisition activity but development activity.

It is a relatively modest amount.

It is in the 20 million range, yes.

And last question, could you comment again, Tom, I think we talked about it in the third quarter. Could you comment again on some of the one time items that may hit G&A, particularly in the fourth quarter?

The one time items that hit G&A in the fourth quarter include the expensing of the cost related to a retiring board member. We also had some bonus accruals which I wouldn't consider them one time but they were performance bonus accruals we made. There was also additional legal accruals made in the fourth quarter that did drive the run rate up in the fourth quarter. If you're looking to adjust G&A to do your outlook for '06, I would say the fourth quarter run rate for all G&A categories is slightly high. You probably want to trim that some and then use the fourth quarter as adjusted for your 2006.

Okay. Thank you.

Your next question comes from Jamie Feldman with Prudential Equity Group.

Thank you very much. Could you just provide your current status or your current opinion on conditions in the Boston market and specifically your outlook for job growth supply and demand and then your developments in process, kind of how those are coming along?

Sure, Jamie. This is Tim Naughton again. In terms of our outlook for Boston, currently job growth is a bit sluggish. We do expect it to pick up as we move through 2006 and are expecting right around 1% to slightly above job growth which is below the average for our markets. I think we mentioned earlier we're expecting the market average to be at 1.7 and Boston just north of one. Supply for the most part is in check. It is running a bit higher than levels in the past, but mitigated by some conversion activity. I think we'll see about maybe 2,500 new apartments in Boston in '06 but we also had about 1,500 converted in '05, so we've been able to maintain occupancies in the 95% range but haven't been able to get as much traction on the rental rate side. We are starting to see some improvement in terms of renewal rents which are often the first sign of markets in kind of early stage recovery and I think we're seeing renewal rent growth of around 5% right now which obviously is quite a bit in excess of what we reported for the quarter for the portfolio. I think they are probably some other portfolio reasons for some of the performance in Boston. Leo, maybe you can comment on that and then I can comment on how the various developments are going.

Yes, Jamie, this is Leo. One thing that did occur during '05 which we've taken aggressive advantage of is that we have the ability now to sub-meter for water and in early second quarter we started pushing that through. That might be dampening some of the new move-in rent growth we're experiencing, but we believe it is the right thing to do and we moved aggressively on that.

You may just clarify when we say sub-metering water, meaning that the resident picks up his or her share of the water expense. It does, it can't have the impact of dampening rent growth. And Jamie, just in terms of communities under construction, we just started too this past quarter, one in Woburn and Danvers, both on the north side of Boston, so not really much to report there other than construction is going fine. We do have one other community, two other communities, Chestnut Hill which is still relatively early stages construction, haven't started leasing there yet, and then the one community that's pretty far along is Avalon Bedford in Bedford, Mass. and we are pretty well through the lease-up there and actually have seen a materially -- some strong improvement there over the last three or four months where kind of initially we were offering up to two months concessions on lease open. I think now, Leo, we're not offering any concessions. We have seen a material improvement there on at least the one lease we have active.

Given how market conditions are improving slightly, do you wish you had waited a little longer to start building any of those projects?

You know, based upon where construction costs have gone, probably, no, we wish we would have started them sooner. To put more color to that math or a little more math to that, construction costs I think probably a lot of people have mentioned are up 15 to 20% over the last 12 months, so that make up for a lot of years with modest rental rate increases. Across the portfolio, maybe we've seen 5% rental rate increases, so I think probably in the long-term, our yields will be enhanced and for having started when we did.

Okay. Then just to follow up the submeter for water, is that a normal market condition?

It is a typical market convention across our portfolio. Massachusetts only provided legislation that allowed us to do it beginning in early second quarter.

Thank you very much.

Your next question comes from Mark Berry with Green Street Advisors.

Just one question which is about the momentum of the strong momentum of rent growth. Do you have any sense how fast the underlying market rents might be moving upward compared to your reported average rental rates?

I can tell you that year-over-year, across our portfolio, market rents are up about 3%, but I hesitate to have you focus on that because really we focus on effective rent change, and I can tell you year-over-year concessions are also down 43%, so you really have to look at both components and really point more to the revenue and what's going on with revenue to show momentum. Is that responsive to your question?

Do you have any sense for where it might be on an effective basis, then?

Well, effective basis is the type of growth you're seeing on a quarterly. Tim, you want to add?

I think we're seeing probably same unit effective rental rate growth around 5% market and obviously you have to put increases in occupancy on top of that. In terms of sequential revenue growth, we saw sequential revenue growth over 1% this past quarter on a low turnover quarter which if you annualize that out will be pretty consistent with what we saw in Q3. However, historically it tends to trend down in Q4 just because of seasonality issues. We haven't seen the same, I think as Bryce mentioned in his remarks, we haven't seen the same impact of seasonal issues this year as we have in years past.

All right. Thanks.

Your next question comes from Richard Paoli with ABP.

I only have one question with 26 parts. No, only kidding. It is getting long here. Could you guys just flesh out on the expense growth a little bit? In your, I guess your commentary in the press release, you talked about the one-time item on the ground rent. What is, if we took that out, what would the normalized growth rate for the same store basis be overall in your assumptions?

Rich, this is Leo. The ground rent issue that's mentioned in the release equates to about 50 or 60 basis points across the portfolio.

Okay. So it would be like almost like 3.5 to 4.5 would be the range that you are looking for, is that right?

Exactly.

Save for the ground rent issue?

Exactly.

My next question is on the overall on the development pipeline that you guys have in the supplemental, could you just maybe shed a little light on what are you guys, if you could remind me, what do you underwrite to on terms of occupancy and then if you can give an average NOI margin based off of these rents that you're giving.

Rich, Tim here. In terms of occupancy, it tends to be done on a market by market basis. We typically wouldn't underwrite more than 95, 95.5, economic, actually any more than either 94.5 to 95% economic occupancy. In terms of margin, you know, you have to look at it if it is going to depend a lot on the mix of the portfolio and I just don't have a sense for this particular portfolio, whether it is 28, 30, 32%, Leo?

It varies pretty widely and it varies based on where the assets are located. I mean, the taxes in Chicago drive margin down.

Right, right.

And in California and the margins up. So it really varies.

Right. Let me just ask a slightly different question. Is it safe to assume that on some of these phase two projects you have listed the margin generally would be higher because you're looking to share certain services and like with the sister property that pre-exists?

This is Leo. Absolutely. We're looking for economies of scale when we bring more apartment homes into a market.

Okay. Thank you.

There are no further questions at this time.

Thank you. Thank you for your time today. We look toward to seeing many of you over the next couple of months at a variety of investor events and have a good day.

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