艾芙隆海灣社區公司 (AVB) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Avalonbay Communities First Quarter 2006 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Gary Peteman, Director of Investor Relations.

Thank you, Michelle. Good afternoon and welcome to the Avalonbay Communities first quarter 2006 earnings conference call. I'd just like to begin by introducing myself. I'm actually the new Director of Investor Relations taking on over for Alaine, who has done a wonderful job, but has moved on to other duties within the Company.

Please note that forward-looking statements may be made during the discussion. There are a variety of risks and uncertainties associated 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-Ks 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 website at www.avalonbay.com/earnings, and we encourage you to refer to this information during your review of our operating results and financial performance. With that, I'll turn the call over to Bryce Blair for his remarks.

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

In my comments today, I'll be addressing three topics. First, an overview of our performance for the quarter and our revised financial outlook for the year. Secondly, a discussion of economic and market fundamentals impacting our business, and finally, a summary of our portfolio performance. Then Tim will be updating you on our investment activity.

Let me begin with a brief review of our quarterly results. Last evening, reported EPS for the quarter of $1.49, and FFO per share of $1.15. The EPS results generated a year-over-year increase in excess of 60%, and that is driven largely from significant gains from our asset sales. Our FFO per share of $1.15 reflects a year-over-year increase of approximately 20%.

Both our EPS and FFO numbers were benefited this quarter by a sale of the land parcel in New Jersey, which resulted in an unbudgeted gain of $0.17 a share. So if you carve out the land gain from this quarter and similarly carve out the non-routine items from last year's numbers, it would result in operating FFO of just over 10%. The strong operating FFO was driven primarily by our portfolio NOI growth, combined with growth from our new development activities. Based upon the land gain and the strong first quarter performance, we have raised our full year outlook to a range of 4.18 to$4.32.

We're pleased with our performance this quarter and now I'd like to shift to a brief review of the economic and market fundamentals which are helping to drive our strong performance.

As we expected, 2006 is turning out to be a strong year for department fundamentals. In fact, it's likely to be the best fundamentals we've seen in our business since 2000. Nationally, job growth is expected to be approximately 2 million jobs this year, and demand for rental apartments is being helped by this strong job growth, combined with some relief from the competition of the for sale market.

The high absolute home prices and rising mortgage rates have dampened the competition from the for sale market. When measured, we effect that the for sale market has on our business is to track the reasons residents move for giving out of one our communities. While purchasing a home has always been one of the major reasons given for move outs, we saw this percentage of move outs due to home purchases climb steadily from the low 20s in early 2003, to almost 30% in mid-'04. The percent of move outs due to home ownership during the first quarter of this year dropped to about 21%, that's the lowest level we've seen in three years and is a clear sign that the competition from the for sale market is abating.

Strong demand is being met by a limited supply of new apartments, particularly when you consider supply on a net basis after the effect of condo conversions, which has been price significant in certain markets and particular sub-markets. The net new supply of apartments in Avalonbay's markets overall is projected to be only about 20,000 units in 2006. That's a level roughly equal to what we saw last, and this year we have stronger job growth, and it's less than half the average saw we supply during the 2003 through 2004 time period. So the combination of the strongest demand and the lowest net supply that we've seen over the last five years is resulting in very favorable market conditions.

On our year-end conference call, I indicated our portfolio focus for the year would be on maintaining high occupancies will continuing to reduce concessions, and to provide great customer service while pushing rents. During the first quarter, we executed according to those objectives, seeing our occupancy improve over 100 basis points and our concessions per move in decline by 50% on a year over year basis. Revenues grew by 6.1 on a GAAP and 6.5 on a cash basis compared to the prior year. Combined with modest expense growth, this resulted in NOI growth of 7.6%, the highest in five years for Avalonbay.

In terms of regional performance, the mid-Atlantic and southern California regions continued their steady, strong performance. Pacific northwest and northern California regions are showing accelerating growth, and the Northeast and Midwest regions, while showing positive revenue growth are lagging somewhat behind the other regions.

For the balance of the year, our portfolio performance will be impacted by a number of positive as well as some negative pressures and I want to touch on a few. On the positive side, will continue to benefit from strong market conditions, which when combined be great customer service should result in stable occupancies in our portfolio, modest levels of concession, and increasing market rents. On the negative side, we'll be running up against tougher comparison periods as our occupancy improved throughout last year, ending last year at almost 97%. Therefore, as we move into the second half of this year, we expect the majority of additional revenue growth to come from rental rate, and don't anticipate much additional occupancy gains. On the expense side, while we're pleased with our performance holding expense growth to less than 2.5% last year, we're likely seeing increasing expense pressure this year, particularly in the area of taxes, insurance, and utilities.

The strong market fundamentals has been a factor in how we've approached different aspects of our investment activity and Tim will now provide an update on our acquisition, disposition, and development activity.

Thanks, Bryce. As Bryce mentioned, I'll provide an update on investment activity for the quarter, focusing upon development, dispositions, and acquisitions.

Let me start first with the development. We're currently active in all of our markets and continue to ramp up development activity, which we will anticipate will reach 1.5 billion before mid-year before leveling off. We're well on our way to that figure at total volume under construction reached 1.3 billion by the end of the quarter, we're about 250 million higher than last quarter.

During Q1, we completed one community and started two others. The two new starts were in the New York and Seattle markets. These include the second phase of our high-rise community, Avalon on the Sound and Newer Shell New York, and Avalon Main Bower, a mixed use development in downtown Bellevue, Washington, an area that has seen a significant amount of high end commercial development over the last few years. We've controlled each of these development rights through options for almost eight years, and have been deliberate about timing the start of construction until each market, in our judgment, could support new development based on underlying fundamentals. In fact, both of these markets have improved significantly over the last one to two years, as evidenced by operating performance in our current portfolio.

Phase one of Avalon the Sound has seen rental revenue grow at around 7% over the last year, while the sister community known as Avalon Bellevue has increased by 10% over the same period. Given the positive momentum in their respective sub-markets, we believe that these two large development communities will be delivered into strong market conditions.

The average stabilized yield for the development portfolio stands at 7.1%. The change from last quarter is primarily the result of a changing basket of communities. We expect average development yield to remain in the 7% range for the balance of the year.

In addition to the two new developments, we started two redevelopments this past quarter, both from our stabilized portfolio. These communities are located in the Chicago and Connecticut markets. Redevelopment will become a bigger focus for us over the next few years, as markets strengthen and we invest in value-added opportunities for the IM fund.

And finally, we continue to replenish the development rights pipeline, which currently stands at about 2.9 billion. We've recently added development rights in several markets, including northern California, northern New Jersey, New York, and L.A.

A few of the larger opportunities are worth mentioning. The first is a development right in northern California located at the Pleasant Hill Bart station in the Walnut Creek sub-market, arguably the most attractive sub-market in the East Bay. This is a public private venture with the City and Bart, and represents the third venture with Bart we've undertaken in the last couple of years in the East Bay.

In addition, we have two new development rights in New York, one in Manhattan, located off of Central Park North. And the other in downtown Brooklyn, located directly across from Metro Tech Center. This contains 6 million square feet of office, the largest concentration of office space in downtown Brooklyn. These three development rights are all capital intensive urban redevelopment projects, an area of focus for us over the last few years and representative of the breadth of opportunity we continue to pursue.

Let me shift now to transaction activity. The transaction market continues to be very active, although the mix of buyers is changing somewhat. Income buyers are becoming more prevalent and taking share from condo converters, particularly in housing markets where a lot of conversion activity has already occurred. In these markets, such as D.C. and San Diego, diverters and their financial partners and lenders have pulled back significantly. In other markets like the Bay area and New York, converters are still active, although the premium that they are able to pay relative to income buyers has declined, and in many cases, is at par with income buyers who are often willing to pay cap rates in the low 4% range for core acquisitions. Despite somewhat higher interest rates, cap rates remain low as income buyers are now underwriting higher growth in cash flows over the next few years. Obviously, there's plenty of visibility and support for property performance, as evidenced by our own same store NOI growth of 7.5% this last quarter, as well as a growing confidence that fundamentals will remain strong over the next three to four years.

In terms of our own transaction activity, we are well on track in the area of dispositions, having already completed about two-thirds of planned volume for the year. In Q1, we sold two communities located in Boston and San Jose, totaling over $120 million. And in April, we sold an asset in Stanford, Connecticut, for just over $60 million, bringing our year-to-date total to just over $180 million. Each of these communities was developed by Avalonbay and reside in markets where we've been looking to reduce our trim our positions. These assets were all sold to income buyers, although condo converters competed in each case. These assets sold at an average cap rate of 4.4%, and unlevered IRR of 16.5% over an 8-year average hold period and an economic gain of $78 million.

In addition to these income property sales, as Bryce mentioned in his remarks, we did sell one parcel of land in Jersey City, New Jersey, for $15 million, and an economic gain of $13 million. This land was sold on an unentitled basis to a condo builder and is adjacent to the Tower at Avalon Cove, which we sold last quarter, or Q4, to a condo converter.

On the acquisition front, we bought one community last quarter located in downtown San Francisco. This is a mixed-use community located south of Market and containing 160 apartments and a 32,000 square foot whole food store. Our other communities in this submarkets, Avalon Towers by the Bay and Avalon at Mission Bay are currently enjoying strong double digit rental rate growth. In addition, we are current in various stages of due diligence on another 100 plus of acquisitions in the Northeast, which if they proceed beyond due diligence may close by the end of the second quarter.

To date, we've closed on acquisitions for the fund with a total projected capital investment, including redevelopment costs, of $330 million. Including deals in the pipeline, we'll have about one-half of the funds potential investment capacity completed by mid-year. We anticipate that we will continue to acquire at a measured pace within the fund over the remaining investment period, which essentially takes us to the end of '07 or early '08.

So in summarizing investment activity, as market fundamentals remain strong, we will continue to maintain an active development and redevelopment program. We will probably complete our planned disposition volume by mid-year, but as we've done in years past, we'll evaluate whether it makes sense to expand dispositions relative to other source of capital, and finally, we'll continue to seek value-added acquisitions in a measured way.

With that, I'd like to turn it back to Bryce who will offer some concluding remarks.

Thanks, Tim. We are pleased with our performance for the quarter and think we're well-positioned for continued strong performance throughout '06 and into '07. For those of you who have had the chance to review our recently-issued annual report, you'll see that the title, you may remember the title of the report is, positioned for growth.

When I use that term, I'm referring to five aspects of our business. First, that our markets are positioned for growth, with the strongest market fundamentals in five years. Second, that our portfolio is positioned for growth with one of the highest portfolios, enjoying high occupancies, declining concessions, and increasing rental rates. Third, that our development activity is positioned for growth, with approximately 4 billion of development either underway or in the planning stages. And fourth, our balance sheet is well-positioned to execute on this growth with debt to total market capitalization of only 20%, the lowest in our sector. And finally, our organization is positioned for growth, with deep and seasoned real estate professionals throughout all facets of our business. So I do believe we're well-positioned for growth on many levels and are seeing this reflected in our first quarter results and our updated outlook for the year.

With that, Michelle, we'd be glad to address any questions.

Thank you. [OPERATOR INSTRUCTIONS] The first question comes from Ross Nussbaum at Banc of America Securities. Please proceed with your question.

Hi, it's Karen Ford here with Ross. I wanted to follow up on Tim's comment about redevelopment becoming a larger focus for the Company, ask about how big the program could be and what your targeted yields would be as you're putting the program together?

Sure, Karen. With respect to the size of the program, we're anticipating we'll start probably between 6 and 8 this year, a portion of that would be from our existing portfolio and a portion of that would be on behalf of the investment management fund, which as you know has a value-add focus. So about 6 to 8 this year, I think it could expand to maybe 8 to 10 in a given year. It is somewhat cyclical, in terms of our focus in redevelopment. Generally we'll be focused on redevelopment when the market conditions are strong enough that we believe the market can support a repositioning of the assets. So that's the first part of your question. The second part of your question?

Just targeted yields.

Targeted yields, general in terms of incremental capital, it's going to be in the neighborhood of 10% on the incremental capital space then.. It may vary by a couple hundred basis points one way or another.

Secondly, I wanted to ask about construction costs. What are you seeing there? And when do you think fundamentals will start increasing quickly enough to offset cost increases and start raising expected yields?

Good question. I think we talked about this a little bit last quarter, and I don't know it's changed much since then. We've seen roughly on a year-over-year basis, construction costs inflation on the order of 15 to 20%, which construction costs usually make up about 60 or 65% of the capital structure, so roughly results in capital cost increases we'll call it 10, 12, 13%. And you've seen with last quarter, we're seeing NOI increase in the 7 to 8% range. So it's starting to catch up to the total capital budget, but still, the capital budget, at least over the last 12 months, which outpaced NOIs, which probably results in a dimunition of yields on the order of 30, 50 basis points, and apples to apples basis, one year over the next. Construction costs will have to come down to the single digits on a year-over-year basis, is the short answer.

Do you have any expectation when that might cross over?

We're starting to see a little -- at least in the first quarter, a little bit of softening, on the rate of increase. I'd like to think with at least in some of our markets with the condo markets starting soften, we're going to get back to a bit more normal construction cost inflation, which for a long time was in the low single digits.

Okay, thanks very much.

The next question comes from Rob Stevenson of Morgan Stanley.

Good afternoon, guys. Just a follow up on Karen's question. Tim, one of the benefits you've had in a lot of your markets has been the lack of office development. If we start seeing office developments ticking up, given the fact that you guys are moving into more mid-rise, high-rise type of stuff, is that going to start pushing costs back up again?

I suppose it might on, as you said on some of the high-rise and some of the mid-rise that we do, Rob. The wood frame, [INAUDIBLE] is still a big part of what we do and those subcontractors tend not to cross over. But clearly in terms of things like concrete and steel, and particularly on the high-rise, I suppose that could have some pressure.

Okay. And then on the three new development rights that you talked about before, the two in New York City and one in northern California, are you likely to do those in a joint venture, or individual joint ventures? I know you guys in the past on the big, more complex, costly ones have tended to trend that way. Are you still trending that way, or are you thinking you're big enough now to just do it on your own?

The Pleasant Hill deal actually is a joint venture by nature. The deal with the landfiller, just so we're clear on that. With respect to to whether we want to, we anticipate doing any on a financial joint venture --

Rob, this is Tom Sargeant. We have some criteria we've applied pretty consistently about joint ventures on development, and at this point, we are largely comfortable that anything we take on in the next year, we can do on our own balance sheet. Other than those deals that come across the threshold that require us to participate in a joint venture partner because of a land owner has the land or we have some other partnership arrangement that we're stepping into. But generally speaking, we feel like the deals we're doing, the large deals we're doing, the high-rises, for example, Sound, we are a larger company we are today than we did the prior joint venture there. Similarly with Riverview, it's a proven market. Christy Place II and III, we plan to do on our own balance sheet. Again, we've proven that market out and reduced our risk by doing a joint venture on Phase I.

And earlier Bryce commented move outs to home purchases dropped in the low 20% ranges. Is that consistent across the markets, or is there one or two markets in particular where that's still trending high?

Rob, this is Leo. As you might expect, where home prices are lower, we still have more home purchases to move out and where home prices are really high, it's come down. So it's still in southern California, things have moved back in general across the portfolio. But it does vary based on what home prices are.

Okay. And then what was unit turnover during the quarter?

It was 43%, which is down 3% from the same period last year.

Okay. Thanks, guys.

The next question comes from Jonathan Litt of Citigroup. Please proceed with your question.

Hi, it's Craig Meltzer here with John Litt and John Stuart. San Jose had 6% revenue growth year-over-year. Can you talk a little bit more about this market and the expectations relative to the other submarkets in northern California?

Craig, Tim Naughton. I'll take a stab at that. Certainly San Francisco's led northern California. I think we've spoken to that in the past, particularly with respect to our south market assets. But San Jose has been gaining traction here as of late. We are starting to see job growth in that market. North of 1%, where job conditions had been stagnant. And the other thing we did see, we have seen quite a few condo conversions in that market as well. You've had some --the fundamentals have turned around fairly quickly in some ways in San Jose in the last two or three quarters. It continues to gain traction and it continues to have momentum from what we reported in Q1.

What's your interest in further reducing your exposure to this market, since it's such a significant portion of your portfolio?

I'm sorry, the question was?

As far as reducing the potential exposure to San Jose, considering it's so large a portfolio. Are you comfortable with this level of exposure, or would you like to see it change?

Craig, this is Bryce. It's something we could like to continue to monitor. We have lightened our load there a little bit over the last couple years, both by sales, but importantly, by developing larger volumes in other regions. We haven't begun anything new in that sub-market. It's not far have from where we want to be, but continue to monitor it and be opportunistic as we see opportunities.

And for the whole portfolio, I didn't see the sequential results in the release. Do you have those numbers, same store?

Leo, why don't you give color on that?

Sure. Sequential results for the first quarter, we are up 1% in revenue, and just to give you a more specific, we were up 1.3% rate, and we're off .3% in occupancy. The last quarter, we were at 96.7, this quarter, as we reported, we are at 96.4.

To give you some perspective there, you need to remember that our expirations varied throughout the year. In the fourth quarter and the first quarter, our lower expiration periods, and the second quarter and third quarter are higher expiration periods, which the time we have more opportunities to renew people at higher rents, or move new people in at higher rents. The other thing is, in the fourth quarter, I believe, that we were more like .7% on the rate side, and .4% positive on the occupancy side. So as you can see, the shift really is toward a move to rate increases.

Thank you.

Our next question comes from David Harris of Lehman Brothers. Please proceed with your question.

Thanks. Good afternoon, everybody. I was wondering with regard to your comments with regard to expenses on a go-forward basis, how sensitive those numbers are with regard to turnover assumptions. I picked up from Leo, the reference that turnover was down a little in the quarter. And I wonder if you're assuming normal levels of turnover over the balance of the year, and if we see higher levels of turnover, how much impact that might be?

David, this is Leo. We are expecting the normal turnover level throughout the balance of the year. To try to give you some perspective, the hard costs on a turnover are about $400 fully loaded when you consider marketing, you consider payroll and stuff like that, and downtime. It can be four times that high, so that may give you some perspective, if turnover actually went up substantially.

What percentage over the whole portfolio would be assuming -- what would be your normalized number for the year?

It would be about 58% for the year.

Somewhat associated question, this is probably one more for Bryce than anybody else, I think. Obviously, the withdrawal of units to condo conversion has been somewhat of a benefit in the supply and demand dynamic. As the condo market softens, how much of a risk is that units in the hands of speculators come back on, as the price per sale, units, which are perhaps going to induce higher levels of turnover. And also, ultimately, in the absence of really any strength in that market, do these -- some of these units come back on for rental units, which is also might impact the supply dynamics?

Well, David, there's no doubt that some of the condo conversion activity will come back as rental. The magnitude of which is prone to a lot of subjective guessing. Some numbers that are thrown out are 25 to 30%, could come back as rental. Similarly, there's a number of rental deals, permanent deals, that have gone to condo, that may come back at rental as well. There's definitely some variability on the horizon. Having said that, there's no doubt that the markets have and continue to be benefited by the decrease in rental stock.

One example I think I may have touched a little bit on last quarter or the quarter before, looking just specifically at the San Francisco sub-market in our Mission Bay community, where, over the last 18 months, there have been 2,000 units taken out of that sub-market due to condo conversions. And at a time where jobs in the Bay area have been pretty modest, at about 1%, we've seen rent increases in our community, effective rent increases of close to 20%. So there's a very direct and real, obviously, the laws of supply and demand are alive and well, and even with modest supply increases, when the supply decreases, the fundamentals improve. In the Bay area and that particular sub-market, we have not seen much in the way of shadow market coming back to compete with us. One thing we are watchful, though, to the extent there was going to be much coming back, it would tend to happen later in the year, meaning the spring, summer are kind of prime markets for people to kind of sell their homes or condominiums or for developers to do so. It would be sort of the tail end where people might get a little bit more pessimistic and move into the rental business. We're not assuming they're not going to come back, but no question a net positive to the market.

Okay. One final question for Tim. On the new Rochelle development, I think Tom referenced the fact you did that on joint venture last time, this time you're taking on 100%. If I remember back, the first phase was slow to gain traction. Is my memory serving me correctly?

In terms of lease, David?

Yeah, and also to achieve your rentals. I think you referenced a fairly healthy environment today, but it seems, I think, if I recall correctly, it was a bit slow going on this project, was it not?

We had higher rates that exist in the market today. When we leased out Phase I was in the 270s per square foot and today the market is in the 230s, 240s, which is recovering, coming off a bottom of 225, 230. And I think I mentioned in my remarks, we're seeing rental revenues grow at about 7%. It had declined or had been stagnant for about the time since we finished the lease up. I think market conditions are a little bit better as we are going through the lease up, and really started to suffer more after we had actually initially leased up that first phase.

Okay, thanks so much guys.

The next question comes from Craig Leopold of Greenstreet Advisors. Please proceed with your question.

Just a follow up on that last question on Sound. So if rents are down from when you first delivered phase one by 10% or more, construction costs are up, how different is the yield today veer versus your expected yield when you started Phase I.

When we started Phase I, I'm thinking '99, 2000, we were underwriting most deals close to 10% and today, that deal is probably in the mid-6s, just to give you a sense.

And related -- you mentioned that the decline in yields on your stuff under construction is a changing basket, but I'm curious how different new deals are that you're putting into the pipeline, versus the 7% stuff you're putting into the construction. What are yields at the margin for new development deals?

Mid-6s, mid- to high-6s.

And last question, catching on something Bryce note. Looking at supply, given how aggressive condo developers have been in trying tor source land, we're now hearing about apartment fundamentals are improving significantly, so I would expect even more aggressive behavior on the part of for rent developers. We also maybe are exposed to some of the stuff that was slated to be for sale maybe coming back to for rent. What's your more intermediate term outlook from a supply standpoint?

Craig, this is Bryce. Pretty optimistic. The one thing that's probably obvious but worth mentioning is 190,000 rental units that were noted as being sold to converters last year don't come out of the stock until this year, really. There's a lag we sell an apartment building of 500 units to a condo converter, he puts his market in place and starts to sell them over the following year. There's a lag time between the date last year of conversions and the impact into this year and I'd say into early '07 of the effect of that. So pretty optimistic in that. Beyond then, it's kind of a wild card. In other words, how much will be sold to converters this year that will be taken out of the stock into 2007. That would just be a guesstimate on any of our part.

Yeah. I'm just trying to think about how long fundamentals remain as positive as they are today. Is this a three-year run or a five-year run? And I know I'm asking you to crystal ball, so apologize for that, but that's where I'm coming from with my question.

Let me try to crystal ball it a little bit, because no one can prove me wrong. One of the things is to look beyond the effect of supply and continue to focus as we try to do with our residents and ourselves, the relationship between what's happened with rental rates and what's happened with home prices. And what's happened with household incomes. We are just looking at some data -- our rents today within our portfolio, and it's not a pure, totally clean same-store comparison, but our rates today are about $1600 per month for our portfolio, which is almost exactly what they were five years ago in 2001. So we kind of peaked in that time period, saw declines in '02 and '03, stabilized in '04, and started to grow in '05 and '06. So we're basically back at '01 levels. At that same time period, the average home price was $240,000 per home, in our market. Today it's over $420,000. So rents have stayed flat, home prices are up 80%. During the same time period, incomes are up about 10%, a little over 10%. So the relationship between rents and home prices is -- we're seeing that tip back in our favor as mortgage rates have moved up 50 basis points or so over the past year and 150 basis points from their low that that quality, or that value relationship between the two is solidly in the renter's favor, particularly when people don't feel there's much appreciation left in the home sales market. And that's what we're seeing on-site. I'm very optimistic from that proposition point of view. A little bit concerned about whether too much supply will come into the markets. Our strategy has always been to focus on the markets that are more supply constrained. So I think we'll feel less pain than others might if things start to heat up on the supply side.

Right. Thanks, Bryce.

The next question comes from Richard Paoli if ABP Investments.

Hey, guys. Sorry if I'm asking a repeat. I had to pop off the call for a second. But a couple of quick questions. On the development pipeline, how's the absorption been versus planned, I see, especially Avalon and Bedford Center, 100% completed. Very close to being a full on a percent-leased basis. I guess that's as an of end of period, but you have a Q3 stabilized operations. Is this asset effectively full now, and how about the other two that are leasing assets. What are you experiencing versus your performance?

I think there are maybe three other that are leasing. Two in southern California, one in long Island, Rich. This is Tim. Since there's only three, there's really not a lot of data there. You're also in the first quarter, which tends to be a slower absorption period. But we're basically at or above plan, at least for the first quarter of the year. I think the real test is going to be as you get towards the back half of the year when deliveries are about twice what they are in the first half of the year.

And just for reference points, what do you guys basically pro forma on a per unit, per month lease up. I guess it varies per project.

Number of units per month? Typically we'd look to lease a community within a year, so that we're not leasing over top of ourselves, as renewals start coming on. So it would be a more modest absorption pace for a 200-unit community that has higher rents, for instance Large community, 500 units. It could be as much as 45 or 50, as what we'd program and market to.

I have a couple, two more little quick questions. Under real estate taxes, maybe you can educate me a little bit. And I think in the past I might have asked this, but I can't recollect. What's the process with your -- I guess what you hear from the municipalities on what the comes year tax increases are? Have you already gotten communication for what the '06 bill will be and where are you on that process?

Rich, this is Leo. The process differs by jurisdiction. And it really varies pretty widely. For instance, some jurisdictions may go years without doing reassessments, while others do them annually. And then their fiscal year can vary also. Sometimes it's a July through June, sometimes it's a calendar year. In general, what we're seeing is when assessments, when properties are being reassessed, we're seeing the assessments go up. In many cases, we're seeing the tax rate come down because the assessment increases might be more substantial. And as they work through their budgets, they're able to bring the rate down. In jurisdictions where they don't assess regularly, we're seeing the tax rates go up, 3 to 5% and you have to remember that a big portion of our portfolio is in California, which is subject to Proposition 13, so in that case, it's greatly tempered, the tax issues are greatly tempered with respect to our portfolio.

Right, right. Okay. Because you mentioned it on the operating expense, something that's giving you pause. So I'm just kind of wondering if you could remind what you got, I don't know if you disclosed, but what you had baked in for your full year operating, real estate tax increase?

We didn't disclose that last time, Rich, but it is above the range we had given you. And I think I mentioned last time that there were other categories we were using to offset increases in that area. We are anticipating that property taxes is an area of pressure. I will also assure you that we stay very close to it and use all remedies to ensure that we keep our assessments as low as possible.

I don't doubt that. Thanks, guys.

Rich, we did give guidance of the overall expense growth we expected in the 3 to 4% range. We just didn't parse it by--

Right. Thanks.

The next question comes from Christine Kim of Deutsche Bank. Please proceed with your question.

Just a follow up to the redevelopment discussion. You mentioned that you were planning on adding probably about six to eight properties this year. What does that represent in terms of dollars and the total expected investment?

Christine, Tim Naughton here. On a typical community, it may be $5 million. Just to put some rough numbers to it, so you're talking $30 to 40 million incremental capital.

Okay. And also in terms of the rent increases, you guys are doing a good job pushing rents, are you seeing any pushback from the residents?

This is Leo, as we push rents harder, certainly we see pushback. But we're not having problems maintaining our occupancy, and we are seeing that rent increases continue to grow. We have seen on positive trend that has continued on new move-in rent increases, and we have done well increasing renewals and turnover has remained consistent, or as I mentioned earlier, that this quarter it was actually down. So sure people push back, sure we're getting people that are coming and discussing it more, but when they go out to the market, they're seeing that we're in a pretty good place.

Great. And my last question is on Chicago. It looks like you had a pretty significant sequential drop in occupancy there. Can you touch on that market more and what your outlook is for Chicago?

This is Leo again. With respect to Chicago, I think last quarter we talked about the fact that we thought Chicago was going to be a little slower to come around for us. One of the things you have to remember, the bucket for us is only three communities there. With respect to Chicago, job growth is coming around, you hear about supply, the condo conversions. The condo conversions are really occurring downtown, as our portfolio there is more suburban. So we're really not benefiting from that reduction in supply. And then to be quite frank with you, we probably were a little overaggressive with rents. If you recall last quarter, our occupancy was about 2% higher and we probably pushed it a little bit higher. We feel good about the market, we feel good about where we're positioned and are looking for better results as we go throughout the year.

Okay. Great. Thank you.

The next question comes from Rich Anderson of Harris Nesbitt. Please proceed with your question.

Hi, it's Rich Anderson here with Carmen Electra. [laughter] I wish. How many Whole Foods do you have at your properties?

Rich, Tim Naughton here. We only have one now because the one in New York hasn't opened yet. It's under construction.

Okay. You mentioned another one in, I guess earlier in your --

Yeah, that was the one I'm referring to. I'm sorry, there's one in downtown San Francisco which was on asset that we bought on south of market. And the one you're probably familiar with in New York City is not yet open. It's currently under construction.

Have you ever given thought to aligning yourself with a Whole Foods or somebody like that get a joint venture or anything like that type of structure?

Sure. We're always talking to retailers in general in terms of trying to understand what their needs and objectives are across the country. We're actually doing a couple of Safeway deals, by the way. And we're talking to Safeway on a number of other deals, as well. The conversations aren't with just one grocery store, for sure, particularly if they will have have a position in that submarket.

In terms of Christy place, it's locked into a JV. Considering the strength of the Manhattan market, do you have any ability or plans to unwind that joint venture in the near term and have 100% ownership in the asset?

Rich, this is Tom. We really can't speak to plans with respect to what joint ventures we might buy out. It's just not appropriate to talk about it on the call. We're happy with our partnership there. We're also happy with the financial arrangement that we worked out on that joint venture. So we're very pleased with the overall relationship. It did serve to mitigate risk when we first developed in Manhattan in 2001 for the first time and we had 90,000 square feet of unleased space. Subsequent to that, the market improved. We got a Whole Foods lease, and we finished the lease up ahead of pro forma. So it's worked out for everybody's benefit, but we can't really discuss any plans we'd have to buy out a joint venture partner.

Okay. In terms of the stabilized yield in your development of 7-1, what's the lowest you would go. And maybe you want to say in absolute numbers, but maybe as a spread over what prevailing acquisitions would go for. How aggressive would you get from a development standpoint, from a stabilized yields perspective?

Rich, as you mention in your question, there is no absolute number. A lot of it has to do with where we see the direction of the market. We talked about Avalon on the Sound earlier, which called it mid-6s, importantly, we see that market moving in the right direction. If it were in the mid-6s and moving in the other direction, I would tell you we'd be uncomfortable pulling the trigger on that deal. So it's going to be a function of the kind of accretion we see, but it's also going to be a function of where we see the underlying fundamentals. But typically, if we're at 7-1, just to give you a sense, the yields probably range, you know, roughly kind of in the 6 to as much as 8%.

Last question is, you talked about the acceleration of the development pipeline to $1.5 billion and then maybe leveling off at that level. What about the longer-term plan to pull back on development? You must be, in terms of when it's appropriate time to deliver product to market, three or four years from today may not be the right time, as we all know. So what's the longer-term strategy, and do you have your eyes set on a strategy to rein in the development effort a couple years down the road?

Rich, this is Bryce. Clearly development has always been and I believe will always be a significant component of our strategy, but we have regulated it in the past and we will regulate it in the future depending on market conditions and the risks. We cut back pretty significantly as appropriate in the '02 and '03 time period, but importantly, we did not drop rights we didn't dramatically reduce our staff. And in fact in the '04, '05 period is when we were really building the development right pipeline, which we're starting to see the benefit of that into '06 and '07. So to something that we absolutely have and will continue to regulate, but our commitment to development, I expect will always be strong and it is a very long-term business. The average time for our deals as you know from following our company well, is about six years. Tim just mentioned two deals we've controlled for eight years. Sometimes we'll ride the development right through a weak period and execute it in a stronger period. But also it's interesting to note and not counter-intuitive that the deals that we began in the weaker time periods are the deals we had much better construction cost performance on because it was not as hot a market. So your capital costs are with you forever. Rents move up and down, but I think it's important to point out that it isn't always best to start a community in the strongest of market conditions. You want to start it when the markets are improving, not when they're at their peaks.

So it's conceivable that the existing development pipeline now at 1.3 billion and going to 1.5 could drop back into the 6, 700 million type of range should you see fit, that's a reasonable number?

Sure. It could increase beyond that, and Tim is just saying it's going to level out -- it's not going to keep going to the moon, but it may stop at 1.5 billion and may head north again or may head south again depending upon the risks and opportunities as we see them. And to yours or an earlier question, the relationship between development yields and acquisition yields. If those start to converge and we think a better use of our capital would be to buy versus build, we would do that. That's not what we're seeing today. We still see the spread to be attractive and warrant the additional risk of development.

If you knew going in that the yields were going to impress to the degree they have in your development pipeline, do you think you would have been as aggressive two years ago? They've compressed in some cases 400 basis points, 350 basis points, would you have done it?

Absolutely. Look at what's happened -- similarly same compression we've seen on cap rates. And one of the things we look at and track is that spread between development yields and cap rates. And that spread has stayed in an absolute term about the same, on a percentage basis, it's as large as it's ever been. So the value creation from our development is higher today than it was a couple years ago, even though the yields are lower.

Understood. Thank you.

Thanks.

The next question comes from Jessica Tully of Credit Suisse.

Good afternoon. I was wondering if you could comment a little bit about the Boston and Long Island markets. Is it job growth or is it less condo conversion, especially in Long Island that's causing results not to be as quite as strong in some of the other markets.

Jessica, Tim Naughton here. I'll start with Boston, and Leo, you may want to jump in on either Boston or Long Island. In terms of Boston, I think Bryce mentioned in his remarks, it is lagging somewhat. I guess I would say it's a lagging recovery. We are starting to see modest job gains in that market on the order of 1% on an annualized rate of the last six months. We're expecting about the same in '06. We are starting to see out-migration slowing and office absorption building a bit. In addition, there have been some conversions of rental housing stock. So I think we're seeing some of the same positive trends we've seen in our other markets, we're just seeing it later and it's a little more muted. And then lastly, I guess I'd say it's really starting to men fast itself in renewal rate increases. Leo, I think we're seeing renewal rate increases in between 5 and 6% in Boston, which oftentimes is a leading indicator that the market is starting to gain some traction. With respect to Long Island, Leo, do you want to?

This is Leo, with respect to Long Island, we feel pretty good about where Long Island is at. As you saw for the quarter, the rent growth is about 3%. All that basically coming, in fact, more than all of it coming on the back of rate. What I can tell you is sitting here today, that market, our portfolio occupancy is in excess of 98%. You have to remember that it really represents three communities. So again, it's a small pull of properties, but we feel the properties are well positioned, that the fundamentals are there and that we should see improvement as we go throughout the year.

And I would guess on Long Island, there's probably less percentage-wise condo conversion, as well, right?

Yes, very little I'm aware of at all.

Thanks very much.

The next question comes from Steve Swett of Wachovia. Please proceed with your question.

Thanks. Good afternoon. On the development rights pipeline, you guys have done a great job of keeping that very full, even as you've ramped up your development, your active development pipeline. Bryce, is that something you guys, you think you continue to do, or is it something that naturally should start to come down to a lower absolute level?

No, it should continue to increase. We work it very carefully to, it is certainly somewhat dependent upon the market opportunities we see, but it is not bien accident that the development right pipeline grows first before the development community pipeline does. So we expect it to continue to increase, as our penetration in the markets continue to increase.

And it seems that you -- that there's more of the opportunities where you have bought the land, as opposed to to the past. I think you guys have been able to lock it up with options a in a little bit more of the instances. Is that a product of the market today and a nature of the properties as well as the competitiveness?

I think it's both those factors. You're right, our heritage has been to really almost exclusively climb up through option contract. We still like to do business that way, however, in a very competitive market, those opportunities are more difficult to get. And secondly, where we've had an option for some time period, typically, these aren't ones we just buy the land on. Their ones we have an option and the option comes to term and the seller is reluctant to extend the option and we have a favorable land position. So we're just going to buy it.

Okay.

And that's been a good strategy for us, as we've been able to control our basis.

And then final question, on the financing side, perhaps for Tom. You've got a very significant pipeline. You mentioned that you are largely through your asset sale plans for this year. Tom, any thoughts on either expanding the disposition program, as a source of funding going forward, or just other options that you guys are considering to fund your pipeline into next year?

Steve, just a quick recap of our liquidity we have about 700 million of development outlays this year and asset sales represent about $250 million of that. We'll issue another $200 million of debt both unsecured and asset specific debt. And with no balance out on the credit facility, $50 million in cash on the balance sheet, $70 million of retained cash during the year, we have no liquidity pressure at all. So we don't need to look further, because we've already met our needs, largely.

I wasn't meaning to suggest you had a liquidity pressure. It was more for your thoughts on how you would look to fund that.

I think you could expect that one, we donate generally comment on market offerings that we plan. A couple things to consider, 85% of our assets are unencumbered and we're about 22% levered. So our options are wide open on the capital markets front and it really depends on the prevailing capital market conditions at the time we need liquidity. It's really hard for me to comment on what we might do ahead of the time. I mean, if you look at where your rates are right now and the spread over that you would probably see a debt issuance of slightly over 10%. There is negative leverage right now prevailing in the marketplace at least on the acquisition side. On the development side we certainly are accretive at 6%. We have lots of options and at the time we need the liquidity, we'll take a look at market conditions at the time. But 6% right now, it may seem high, given where we were a year ago, but it's still at very attractive rates, so we would feel fine if we did a dead offering at 6%.

Fair enough. Thanks.

We have reached the end of the allotted time for questions and answers. I would like to turn the call back over to Bryce Blair for closing remarks.

Thank you, Michelle. I want to thank you for your time today. I look forward to seeing many of you at [MAYREIT] in June. I also want let you know in advance I will not be participating in the second quarter call in July as it conflicts with a previously planned family holiday, and I know you'll be well served with Tim, Tom, and Leo. So thanks again for your time. And I look forward to seeing you in June.

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