艾芙隆海灣社區公司 (AVB) 2007 Q1 法說會逐字稿

Welcome to the Avalonbay Communities first quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. John Christie, Director of Investor Relations and Research. Mr. Christie, you may begin your conference.

Thank you, and welcome to Avalonbay Communities first quarter 2007 earnings conference call. Before we begin, 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's a discussion of these risks and uncertainties in last evenings press release as well as in the Company's Form 10-K and Form 10-Q filed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms which may be used in today's discussion. The attachment is available on our website at www.Avalonbay.com/earnings and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I will turn the call over to Bryce Blair, Chairman and CEO of Avalonbay Communities for his remarks. Bryce?

Thank you, John, and welcome and thank you all for joining us on our first quarter call. With me on the call today are Tim Naughton, our President; Tom Sargeant our CFO; and Leo Horey our EVP of Operations. On our call, I'll provide an overview of our first quarter results and then we'll touch on general economic and market fundamentals. After that, Tom will provide some additional comments on the change in our accounting for land leases, Leo will discussion our revenue performance, and then all four of us will be available to answer any questions you may have.

Starting first with the review of our quarterly performance, last evening, we reported EPS of $0.56, an FFO per share of $1.11. These numbers do reflect the non-cash accrual of land lease payments which Tom will address further in his comments. After adjusting for the land sales in both periods, our year-over-year growth in FFO was 16%. This strong growth was driven primarily from same-store sales performance as well as meaningful contributions from our newly developed communities. Regarding our same-store sales portfolio, we achieved 6.6% increase in revenues which when combined with moderate expense growth resulted in NOI growth of 8.5%, and Leo will provide additional color on our revenue performance by region, but first I wanted to take a few minutes to discussion the overall department fundamentals in our markets.

In the second half of last year, we outlined our view that '07 would be a year of strong but moderating fundamentals. The current economic outlook, the real estate market and indeed our first quarter performance is confirming our original assessment. NOI growth of 8.5% can only be described as strong yet it has moderated from over 10% last quarter and is expected to continue to moderate throughout the balance of the year.

I want to touch on three key areas driving the strong but moderating department fundamentals. Jobs, apartment supply, and the for sale market. Jobs both in our markets and in the nation as a whole are expected to grow at a rate of just over 1% for '07. While 1 to 1.25% job growth is healthy it is materially less than the 1.5% plus we experienced in '06. Avalonbay's market had the strongest projected job growth in '07 includes Seattle, Northern California, and DC while the markets with the weakest projected job growth are New Jersey and Long Island.

Turning to supply after two years of very low levels of net new production, the supply of new apartments is returning to historical levels. For Avalonbay's markets we project the addition of about 35,000 new apartments which translates into 0.6 of 1% of existing inventory. This is in line with a ten year average for our markets and compares favorably to the U.S. as a whole which is projected to see net new supply of about 1% in '07. The Avalonbay markets with the highest level of expected supply are Boston and DC and those are the lowest are Long Island, New York, and Chicago.

The lower job growth and a return to more normalized level of new supply logically is leading to more moderate apartment fundamentals. That's a trend we expect to continue seeing for the balance of this year.

Now, no discussion of our business is complete without considering the help, the for sale market and its impact on apartment fundamentals. The short story is the for sale market remains weak and this weakness has a mix although generally positive impact on our business. Just a couple stats--New home sales are up 24% from last year, and are down 40% from the peak levels just 18 months ago. New home inventory stands at almost eight month supply. Mortgage delinquency and homeowner vacancy rates have risen a level significantly above their historical levels. What does this all mean for apartments? Well, on the positive side, the weak for sale market and concerns about home price declines has positively impacted the customers attitude towards renting. Less competition for land, subcontractors, construction associates and materials positively impacts key aspects of our business. And tighter credit standards which are a logical response to the subprime fall-out will also help apartment fundamentals.

But there's a couple negatives as well. Unsold condo inventory and rising homeowner vacancy rates provide a shadow market of competition for our communities. A slowdown in the housing market could result in a dampening of job growth, slower consumer spending and ultimately slower economic growth. While there are some pluses and minuses on balance, we think the slowdown in the for sale market is having a positive impact on apartment fundamentals and our performance.

In summary, job growth is strong but slowing. Supply is returning to historical levels and the for sale market remains weak. These factors are combining as expected to result in revenue performance that is strong by historical standards but has and will continue to moderate from the peak late last year. With that, I'll turn it over to Tom who will provide some additional comments on the change in our accounting for land leases.

Thanks, Bryce. As Bryce noted, we recorded a non-cash charge in the fist quarter and for the prior years. As a result of the change in the Company's interpretation related to accounting for land leases. Substantially all of the adjustment pertains to one land lease and I thought it would be helpful if I provided a little background on that lease and then discuss the non- cash impact of the accounting change. This land lease was signed in 1999 and the apartment community that was developed on the land, Avalon at Rock Spring was completed in 2003. Total cost for the community is about $46 million and for those not familiar with the asset, it's a Class A 386 apartment home community located in Bethesda, Maryland just off I-270, a very desirable infill location. We estimate that the value of the asset today is north of $90 million, so you can see significant value has been created by the venture today and most of that value accrues to Avalonbay.

The asset is held in a consolidated JV where the land lessor is also our partner. The land lessor partner currently receives an annual lease payment of approximately $1 million that escalates each year, and Avalonbay receives a preferred return on its capital that also escalates each year. GAAP accounting and specifically SFAS 13 requires that the cumulative undiscounted land lease payments over the 90 year lease term including any fixed escalations be straight lined over the full lease term unless there is an alternative period over which to straight line, that is a rational systematic and better reflects the expected period over which the land will be used.

Our previous accounting employed that alternative using a shorter, straight line period that represented our expected holding period of the asset or our participation in the venture. A review of industry practices and changes by other companies in recent years suggest that straightlining lease payments and related escalations over the 90 year life of the lease is a more appropriate application of SFAS 13. This change in accounting has no cash payment implications but does require us to accelerate the recognition of future rent escalations into current and prior periods. The net effect of all of this is that in addition to recognizing the current annual land payment of about $1 million today, we must also recognize an additional non-cash annual expense of $10 million. Future payments are not discounted to present value, the results in accrued expense that are significantly higher than the actual cash expense paid to the lessor.

Accelerated recognition of future rent escalations in the current period, the current period and prior periods does not change the total amount of waste payments over time. It doesn't change the economics of the transaction, and it doesn't change our cash flows, and it doesn't change the value we've created to date. Note that amending the lease terms so that the lease escalations are tied to CPI rather than fixed would avoid the excess non-cash expense and we plan to seek such an amendment. Another option is to sell the asset or our interest in the joint venture, under our 2007 or 2008 disposition program. However, the timing and our ability to obtain an amendment or possible sale is not certain, and until then, we will recognize the full charge through our earnings and FFO from continuing operations. It's also important to note that if the asset or our interest is sold, the cumulative accruals in excess of the cash payments would reverse and be recorded as additional gain.

As for how this accounting change impacts our financial reporting outlook for the year, it really depends on the timing and terms of either a lease amendment or a sale, which we can't predict today. Our current estimate of the annual impact is approximately $0.12 to $0.13 per share. We included $0.03 per share in the second quarter outlook for additional non-cash accruals as we expect this lease as it exists today will be in effect at least through the next quarter. We will provide updated outlook in July when we have more visibility on a possible lease amendment or sale as well as operations for the year.

I'd also like to point out that the value we believe we've created through the transaction is consistent with our historical focus on creating value for shareholders as well as FFO and earnings growth. At the same time, we can't ignore the financial reporting impact of applying straight line lease accounting to this venture, and we intend to do what we can to eliminate the addition of non-cash accruals as soon as possible. So in summary, the accelerated expense recognition is a non-cash item with no impact on the economics of the transaction or the Company's cash flows. We believe significant value created through this transaction can be realized through the sale of the future date. And finally, we will seek to eliminate the excess non-cash accruals through a lease amendment or other transaction, but the ability or time frame to achieve this result is uncertain. That concludes my remarks and I'd like to turn the call over to Leo who will review our first quarter revenue results.

Thanks, Tom. Last night, we reported year-over-year same-store revenue growth of 6.6%. This was comprised of a 7% increase in rental rates and a 0.4 % decline in occupancy. For each of the three months of the quarter, occupancy was stable at 96.1% but as we moved through the quarter, the year-over-year change in revenue moderated from 6.9% in January to 6.4% in March. Prospect traffic was consistent with the same period last year and resident turnover was up slightly to 45%. Market rents increased 1.2% from the previous quarter and concessions per move-in averaged approximately one week's rent. For the quarter, the rental rate change was consistent with our expectations while occupancy was slightly less than we originally projected.

Looking more closely at our portfolio, our strongest looking more closely at our portfolio, our strongest markets are on the West Coast. Seattle and Northern California lead the way with 12.7% and 9.1% year-over-year first quarter revenue growth respectively. This performance is fueled by strong job growth that exceeds the U.S. average, helping to create favorable demand supply conditions. These markets were more significantly impacted by the last downturn and are expected to continue outperforming given their local business cycles, given that their local business cycles tend to lag those of other regions. The performance in Southern California remains steady. Both prospect traffic and turnover remain at historical levels, and demand supply fundamentals while moderating continue to look favorable. These factors coupled with the lowest housing affordability in the nation suggest continued solid performance from this region.

On the East Coast, the Mid Atlantic continues to perform well. The Washington D.C. Metropolitan area is experiencing some pressure from condo reversions concentrated in sub markets inside the beltway and net new apartment completions as a percentage of apartment inventories is higher than typical at approximately 2%. This contributed to the sequential quarter decline in occupancy. Fortunately, continued strong job growth is helping to absorb the rental inventory and year-over-year revenue gains remain favorable. The outlook for this market is clearly dependent on a continued job growth that is projected.

The Northeast remains the region with the most modest year-over-year revenue growth at 4%. This figure continues to be constrained by our performance in Boston where the first quarter year-over-year revenue growth was only 0.5%. Without Boston, the Q1 revenue growth for the Northeast would have been approximately 5.5%. Market conditions in Boston remain challenging despite the improving job growth and most sub markets have new lease-ups that dampen the Q1 performance. However, as of April 20, occupancy improved to greater than 96.5% and concessions are being reduced. While we expect only gradual improvement for the remainder of the year, the improving job growth certainly appears to be helping this market.

So in summary, we performed largely as expected during the first quarter. Year-over-year revenue growth is moderating but remains healthy, while new apartment supply is increasing, continued job growth is supporting rent increases. Occupancy remains solid, and we believe we are well positioned entering the Spring leasing season, a period when increased prospect traffic is necessary to accelerate revenue performance. With that, I'll turn the call back over to Bryce.

Well, thanks, Leo, and we'll now be pleased to take questions from anyone who has them.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Paul Morgan with FBR.

Good afternoon. Could you just comment on the -- you mentioned the concessions and I just want to get a sense of you break out the same-store revenue growth gap in cash and whether we can expect that 4.7% number to -- what we should look for that the rest of the year and maybe on a market basis where you see the most concessions?

Sure, Paul. This is Leo.

Hi.

With respect to concessions, as you know we report our concessions on a GAAP basis. We've been doing it this way for years. We provide the cash basis concession number just because some of our peers report it that way and it gives some additional information. The truth is that GAAP concessions are sometimes, I mean GAAP revenues are sometimes going to be higher and sometimes cash revenues are going to be higher, so it's going to depend over time. I can tell you that over time, these numbers should converge and I'd expect somewhere in the fourth quarter of this year or the first quarter of next year that these numbers will converge again.

With respect to concessions overall, as I said, they run about a week. The highest concessions giving you specific submarket data is in New York, Boston, and Fairfield and those were all running around about a half a month's concession, so in those three markets that's where we have the biggest concessions. I would also want to emphasize that the use of concessions can often be a marketing tool, so when you look and say well, New York is incredibly strong, why would you be using concessions? Well, we might be raising market rents and then using concessions because that's what the market dictates. New York would be an area where that might be likely because of rent controls and things along those lines. And then finally with respect to cash concessions, we don't forecast those into the future so it's hard to give you any inside as to where those are going.

One other question, in terms of the tighter credits that you mentioned, there's been some commentary out there that they would potentially primarily have an impact on lower price point renters, and I just wanted to get a sense of whether you would agree with that or whether you think that at your price point, you may benefit from fewer move outs to home buying just simply because of the tighter credit standards.

Paul, this is Bryce. I think the conventional wisdom is that it does have a greater impact on the product, but there was just a recent article I think it was today's paper indicating that as much as 50% of all mortgages were subprime mortgages, so I think that people are still learning the extent of the impact, but in any event as the B's are positively impacted, the A's become positively impacted and vice versa, so a rising tide in the B 's will certainly benefit the A's.

Okay, thanks.

Your next question comes from the line of Jonathan Litt with Citigroup.

Hi, it's Craig Melcher here with John. Tom, can you touch on the full year 2007 guidance? Did you mention you weren't going to provide an update this quarter?

Craig, that's correct. We historically don't update full year outlook until mid July unless there's been a significant change. For example, last year we did update at this time because we had a large land sale in the first quarter and you pretty much had to update because of that land sale, so we will report -- we will provide an outlook in July that gives both additional visibility on operations as well as the resolution of the land lease.

Okay, but even with the land lease payment in the first quarter you're still comfortable with the range that's out there?

Yes. We're not really updating our outlook. We gave second quarter outlook but we're not updating our outlook for the full year.

Okay. Can you talk a bit about the Brooklyn submarket? The two year big developments in the Wright pipeline are there and just wanted to get a little bit more color on your thoughts on that market versus Manhattan.

Sure, Craig. This is Tim. Certainly Brooklyn is going through, it's own Renaissance and its revitalization. Both these sites are in the downtown Brooklyn area, approximate to the Metro Tech Center where you got several million square feet of occupied office space and a very deep employment base, and so rents, interestingly rents have more or less tracked that of Manhattan in terms of on a percentage basis so Brooklyn Is benefiting from the strength of really all the burroughs right now and is just providing we think a really great opportunity over the next 5 to 10 years as it continues to revitalize.

Is there a yield differential between the projects in Manhattan versus Brooklyn?

Maybe a little bit. Generally in New York, you're talking about at best in the six's and I would say there's probably some deals in Manhattan that are underwriting more in the 5s.

Last question is on the ground leases. Are there any developments that you have under way that would be impacted materially from the accounting treatment?

No. Really, this land lease issue primarily relates to one land lease at one community. The other land leases that we have, we've reviewed them and we're comfortable that this issue doesn't exist on those land leases or if it does it's not material.

Thank you.

Your next question comes from the line of Alex Goldfarb with UBS.

Good afternoon. If you could just talk a little bit about based on your historic perspective, how the shadow market for rental condos, rental homes, how you think that impacts the professionally run apartments?

Alex, this is Leo. With respect to condominiums, markets that we're watching most carefully are Washington, San Diego, and Chicago, which is where most of the condo conversions occurred. In San Diego, we only have one property downtown which is where most of the condo stuff has occurred. We haven't seen a lot there yet. In Chicago again it was downtown. That's not where our properties are located. They are out in the suburbs. In DC, as I mentioned in my opening comments they are more around the beltway. We only have anecdotal evidence at this point and we haven't seen a lot of impact. With respect to historically how have we been impacted? We generally don't see that the individually rented apartments or condos impact our communities because people are choosing either professional management or non-professional management. The bigger issue for us is when complete communities are looking to convert and then they become just another supply and they would be dealt with just like any other lease-up that we're dealing with in a submarket in which we operate. So are we watching it incredibly closely? Yes. We haven't seen any specific evidence, although we believe we are feeling a little bit of it in the DC area and then I've mentioned the other markets that we're watching carefully for this issue.

Okay. Next question is Tom, I know that you weren't updating your guidance but based on your comments of $0.12 to $0.13 impact from this accounting, I suppose it's reasonable for analyst community to include an extra $0.03 to $0.04 per quarter until there's a resolution on this?

I think that's correct. It's $0.13 a year so you're going to have a quarter with $0.04 and then three quarters with $0.03 is way the math works so I'd say $0.03 for each of the rest three quarters during the year and then if we resolve this early, those charges would go away.

Okay. And what was it that gave rise to it this quarter? Like what do the accountants, because presumably with all of the accounting stuff in the past few years, the accountants have been through all the books, so what is it that brought it up this quarter?

Well, it's hard to say why this quarter versus any quarter, but we apply, we reviewed the lease accounting for this years ago and came to the conclusion that this alternative method was appropriate. We asked the auditors to look at the specific lease in connection with another joint venture and they helped us think through the accounting and what they felt like the appropriate accounting was.

Okay. My final question is just on Fairfield County. Looks like rent growth ticked up a little bit. Are you seeing an increased demand from the whole hedge fund community up in the Greenwich area?

Alex, this is Leo. I can't tell you that it's specifically related to the hedge fund community. Certainly, our performance is stronger in Southern Fairfield County and the Stanford area that benefits from the New York City market and that, it may be hedge fund related or it may just be the strength of New York City bleeding over.

Given the compensation that we've seen coming out of some of these hedge fund managers I'd like to think they are living in our apartments but they probably are not.

Thanks a lot.

It's certainly helping the Fairfield County area.

Your next question comes from the line of Mark Biffert with Goldman Sachs.

Yes, hello, guys. Looking at your development yields, I notice that again sequentially the yields compressed another 20 basis points. How do you see those yields going as you add projects in the next 12 to 24 months?

Mark this is Tim. You're correct. The average projected yield did come down from 6.8 to 6.6 this quarter, just to elaborate on that a little bit more. Part of that was the bucket -- a little more than half of it was the bucketed communities as a couple of communities that completed Mission Bay, and San Francisco and Bowery One in New York had projected yields of, had stabilized yields of over 7.5% and I bring that up just to remind everybody that we do project our yields based upon current market conditions at the time that we start construction, but as we move through lease up, oftentimes in a period where the markets are healthy, we see some healthy escalation which we did see at those two communities and we do still expect to see it at this bucket of community. So while the average projected yield is 6.6, we would expect a stabilized yield of this basket of communities to be something North of 7 by the time it stabilizes. And again, just to provide a little bit more perspective, over the last five years, 2002 through 2006, our completions in each one of those years, the average initial stabilized yield was North of 7.5%, it was between 7.5 to 8% in each of those years. So we do anticipate the 6.6 will translate into a higher number, once it's stabilized, but based upon current conditions as the buckets are changing, it may move around 10, 20 basis points one direction or another from quarter to quarter.

And then on the acquisition side, can you just give an overview on where you're seeing cap rates move in central business districts versus the out lying suburban areas?

Sure. I don't know that we seen a big movement, to be honest. I think it's been more market based as opposed to submarket based. For the most part we are still seeing cap rates in the 4 to 5% range, closer to 4% to be honest, Northern California, Seattle, Manhattan would all be in the 4% range, DC, Southern California in the low 4, and I know some others have reported they felt like some of the more outlying areas are starting to see some separation in cap rates. We really haven't seen that from our perspective as we looked at acquisitions and dispositions.

Okay, thanks.

Sure.

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

Good morning. Leo, getting back to the GAAP versus cash revenue growth, would it be fair to say it's probably more appropriate to focus on the cash number to get a feel for where those numbers converge and also what's going on in the markets today?

Craig, I would really focus on the GAAP numbers and then just watch the direction and the trends that the GAAP number s move. It would be difficult to get into the complete explanation of -- the technical explanation of the conversion from GAAP to cash, but it occurs over a long period of time because we're amortizing leases, the cash concession over a 12 month period so we have to look back to make the comparisons kind of over a 24 month period, and so I really think that the best approach is to just look at the GAAP numbers that we're reporting and then watch the trends that they take over time because we are consistent in how we report those numbers.

I guess doesn't that mean though that the GAAP numbers are basically smoothing what's happening in the market, and that if you look back to the difference kind of from say the third quarter growth rates, the cash number is down 400 basis points in terms of revenue growth while the GAAP number, I guess is down only 70 basis points. So it seems to me that the cash number will be more indicative of what's really happening in the market, because more sort of realtime information.

Craig, this is Tim. I think on the margin when you're looking at it on a year-over-year basis you may be right. I think you got to be careful on a sequential basis because cash concessions are going to be a function of the number of move outs and move ins you have in any one period. So for instance, in the second quarter, all other things being equal, market conditions being steady, the second quarter you're just going to have more cash concessions than the first quarter.

Okay.

Does that make sense?

Yes, it makes sense sequentially and I guess I was more focused on the year-over-year number.

Yes.

How about, you mentioned when you said concessions, it's a week per move-in on average?

Per move-in, yes. I'm only talking about move-ins and on the average move-in, it's about a week concession so in truth, our average rent, market rent is about $1,800 and our average concession is about $450 per move-in.

Okay.

That make sense?

Yes. Absolutely. And I guess one last question on DC you mentioned that maybe some of the condo reversion activity, you're starting to see that in terms of the sequential occupancy decline that you guys experienced of 140 basis points going from the fourth to first quarter. Is some portion of that seasonality or do you attribute most of that to the condo reversion activity, i.e. fundamentals?

Certainly some of it is seasonality. We do the best that we can to take the seasonality out by managing our expirations during periods when we know that traffic declines, but some of it is seasonality, you're correct.

Okay. Thanks.

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

Good actually, guys, it's Dustin Pizzo here with Ross. Bryce, what do you think it will take at this point to get Boston to really turn the corner?

Well, as Leo mentioned, we have seen some pick up in the job side in Boston, so more jobs will always help, but really what's impacting Boston right now is more in the supply side. We've been active in Boston for a little over 20 years and we've never seen this volume of apartments being developed. There's just shy of 4,000 apartments under construction today in Boston. That's a big number for a relatively modest market. So I think it's fair to say that the success of Boston over the years has attracted more competition than we've seen in a long time, and that supply is going to take awhile to be absorbed. So we like the market long term, and jobs are improving, but we just have to get through this supply blip.

Okay. And then I guess Leo, can you provide a bit more color on what the year-over-year rental rate growth looks like in Manhattan, because I think the same-store results for New York just reflect the Westchester assets correct?

Exactly. The truth is we don't have any same-store properties in Manhattan specifically, so when you look at New York, people typically think about Manhattan and the numbers are a lot higher. These are primarily Westchester, we also have an asset un Rockland and in Dutchess County. Clearly our experience, at least in leasing up communities in Manhattan has been very positive as we've seen our rental rates grow pretty substantially, I'd say on the order of probably--.

Just when is Christy Place supposed to hit the same-store pool?

I'd have to think about it. The way we handle our same-store sale pool is the asset has to be stabilized for an entire calendar year starting January 1, and I am not sure what year that will occur. That may be not until '08 or '09.

Actually that's a JV asset so it would never find its way into the same-store bucket but Bowery two and three, which are across the street would find their way in once they stabilize.

Okay and I believe Ross has a follow-up as well.

Hi, guys, good afternoon. Bryce, have you given any thought to selling down your exposure in Boston given the supply that's coming on, it would seem to me like you're going to see some pretty subdued rent growth there for the foreseeable future.

Well, Ross, we have commented that given the amount of development opportunities we have in Boston, where we'll be managing our concentration in Boston through sale of stabilized assets and recycling capital in that market. When the right time to do that is something we're always thinking about. We will be lightening up there a bit this year, but there's no whole scale concern that we have, we've got to liquidate a significant portion of Boston. It's going to be more recycling into new development activity.

Okay, and then my last question is with respect to the same-store revenue and NOI guidance that you had given previously, and I'm trying to measure that against your comments of moderating fundamentals and are you suggesting -- I'm trying to get a sense of in order to get to the mid point of your prior guidance which I think on the same-store revenue front was about, it was I think a range of 5 to 6.5%.

On revenue, it was 5 to 6.5 and NOI 5.5 to 7.5.

Right. So I guess I'm asking, in order to hit the mid point of that it would suggest that same-store revenue growth would have to slow to 5, 5.5% by the end of the year. Is that what you're currently -- is that math right and I guess is that what you're thinking at this point?

Well, yes, it is. The mid point of the guidance would put you in the high 5's for the full year, so to get there obviously you are going to have to be below that towards the end of the year and that is what our expectations are really driven by the fundamentals we see of moderating job growth and return to normalized supply. And if you look at the trend we've seen from the fourth quarter of last year to the first quarter, you can start to see that moderation. Still very strong growth, but a moderation.

Thank you.

Your next question comes from the line of John Stewart with Credit Suisse.

Thank you. Tom, what was the original holding period that you were amortizing the land lease over?

Six years.

Okay, so I guess the -- I'm just trying to get a sense for to what extent the decision to potentially sell could be influenced by the accounting?

I think we've created a lot of value in the asset and we generally don't buy or sell assets because of accounting. This is a little different and if we can't get a lease amendment, we are committed to resolve this differential so we've created a lot of value. It's a great time to sell assets and this asset has a lot of value that will accrue to Avalonbay, so I think you just have to stay tuned as we work through this to see if it will resolve through an amendment, the sale of the asset or the sale of our interest.

Is there a potential that this will give rise to a material weakness?

We haven't really considered that yet. We think that the accounting that we applied, we had a strong basis in applying that accounting. If it is a material weakness, it would be a 2006 item, because of the 10-K that we'll amend, but we really haven't done that evaluation.

Okay. And then it just sounds like things are kind of playing out as you expected, particularly Bryce referencing the strong but moderating fundamentals. Is it fair to assume that apart from the change in accounting for the land lease that nothing has really changed your outlook?

We really -- we aren't prepared today to update our outlook. We would like to get some visibility into the peak leasing season as well as the possible lease amendment before we really give you additional color on the rest of the year. We did give the next quarter outlook, which does include the amendment or the fact that the lease will probably still be out there in its current form, but beyond that, it's too early in the year really to say how the year is going to go.

Thank you.

Your next question comes from the line of Lou Taylor with Deutsche Bank.

Thanks. This question is for Leo. Leo, can you comment on the moderate expense growth for the quarter? Was that seasonal, weather related, what's your outlook for expenses the balance of the year?

As we said, the expense outlook that we gave for the year still holds, so we gave a range and it was in our outlook. With respect to the first quarter, I would tell you that the expense growth obviously was moderate. We had some help from some property tax situations that went our way, but we also had some challenges in '06 where we had some benefits, so the first quarter expenses were a little better than we expected but consistent with where we thought the year was going.

Okay. The second question just pertains to move out trends as market rents are rising here, are you seeing move out patterns change, whether that's to people going to smaller units or lesser quality communities or moving further away, anything in the move out trends that are coming from the higher rents?

Lou, no. As I said, turnover was up slightly. A year ago it was 43% in the first quarter. This year it was 45%. When we track obviously reasons for move out very carefully, we track obviously if they are moving out to home purchase. We aren't seeing a big difference there. It's been -- it was 24% in the first quarter of this year, slightly higher than last year, but not materially. We also watch very carefully if the reasons for move out are related to financial situations. Typically that runs 8 to 10%. In the first quarter it was about 8.5 so we haven't seen any indication that people are leaving because we're pushing rents aggressively and I will tell you that we are going to continue to push rents aggressively.

Last question is for Tim. With regards to the development yields at 6.6, how do they break down by deliveries? Are they a little bit higher on your '07, early '08 deliveries, and lower on your say '09 deliveries?

Absolutely, Lou. Again, just because we haven't generally projected any escalation before we actually start leasing, so as communities start working through their lease ups they do get the benefit of the last year and a half or so of strong fundamentals and that is, again the examples I used from last quarter, the second phase of Mission Bay and Bowery One in New York both saw very healthy escalation in their yields as they move through construction and lease-up.

Great. Thank you.

Your next question comes from the line of Steve Sakwa with Merrill Lynch.

Good afternoon. Bryce, I guess just trying to sort of reconcile your comments with the fact that the home builders, their basically peak selling season which has started seems to be much weaker than expected and yet I guess you guys don't seem that much more confident or optimistic about your business, and I guess is that really just driven by the fact that the condos are coming back and the supply before that I guess things would have been better?

Well, as I was trying to say in my comments, the impact of the for sale market on our business is not always one way. There are offsetting components to it, so while we're seeing some help in certain areas, in other areas, and you mentioned one of them, competition, we're seeing some headwinds, so it is something that on balance we see as a positive but I don't want to be misinterpreted on that. We just always try to give both sides of the impact on our business and certainly, I'd mentioned, it wasn't last quarter t was the quarter before, this literally almost across the street from our headquarters here in Alexandria, two towers and each one has 300 units in it, they were both going to be condominium and one is now going to be fully rental and that's going to compete with our community down the street so as Leo mentioned, when you have a whole building coming back as rental, that is new supply. It is just the same as if Lincoln or TCR was putting up a building next to us so those things are happening in our markets and we just need to be realistic about the impact to our business.

Okay, and then secondly, could you maybe just address construction costs and what you're seeing for the shadow pipeline and whether the costs may be moderating in some places, because the single family market is moderating or are you expecting I guess cost savings on some of these future deals?

Steve, I think we haven't seen a huge change I would say from last quarter. I would still say costs seem to be decelerating, not declining but decelerating, and what we're experiencing year-over-year basis, kind of low to mid single digit increases. You are starting to hear more and more about subcontractors backlogs and margins starting to decline and certainly some labor shortages are easing, and I think commodity prices, while still volatile when you look at year-over-year trends are probably more favorable than they were a year ago. So I think those things are helping us on the construction cost side, and in terms of whether those translate into savings, it's as much about execution as anything else, as most of the savings that we experience is in the form of safe contingency.

And just maybe to add something, Tim. In our business, you can really think of it being broke in two different areas in the sense of wood frame versus high rise construction, sort of suburban versus urban, and the wood frame, we have seen more relief than we have -- or we have seen some relief and in the high rise we've really seen no relief. Lumber as you may know is at a five year low, as many of the lumber producers geared up for demand that is backing off because of the home builders backing off, where on the flip side of that in terms of the urban construction when we're dealing with concrete construction in Manhattan or San Francisco or Seattle or in terms of high rises we're competing against office guys and the office Markets are on balance pretty strong, plus a lot of public works projects that are happening. So we still see more tension, if you will, around costs on the high rise and seeing some relief on the margin on the wood frame.

Okay, if I could just maybe ask a follow-up. Bryce, I guess given your outlook, are you changing at all your return hurdles on I guess future development projects? Are you kind of trying to raise the bar or have you changed the bar in terms of where you'll underwrite and the yields you'll accept to put new projects into the pipeline?

We look at our, well as you may be familiar with, how we do it, we have a yield matrix which is how we price risk for each and every individual deal which is based upon our assessment of the capital markets, our assessment of the real estate markets in terms of supply/demand and our assessment of the risk of the individual transaction. So we update that actually twice a year based upon the market and the capital side and we price every deal individually, so as we see markets improving, our expectations for markets improving, or deteriorating, it does impact how we look at the yield. I don't know if Tim, do you want to provide any other comments on that specifically?

Yes, I would. We do look at where we are in the cycle, Steve, which I think may have been part of your question as well. Certainly as we move more towards mid cycle away from earlier in the cycle, we would expect all other things being equal, cost of capital, everything else, we would expect a higher return for every dollar of invested capital.

Okay, thanks.

Your next question comes from the line of Rich Anderson with BMO Capital.

Thanks. Good afternoon, everybody. Just first maybe like a sort of stupid question. Why is it a $0.04 of a hit in the first quarter from the straight line and $0.03 in the second quarter? Is that because you issued equity early on in the quarter? Is that the correct math?

Well, it's rounding really, Rich. You look at $0.13 a share, you have to spread it. You can't really parse $0.01.

Okay. Just trying to understand.

Yes, we pick $0.04, $0.03, $0.03, and $0.03 and that gives you $0.13.

Just one question, really. The monster land purchase in Brooklyn, $70 million, obviously, you see something in that market, although my understanding is you had an opportunity to team up with Acadian Fulton Mall project that they're undertaking and I was wondering what you didn't see there as you turned them away is my understanding but what you do see generally in Brooklyn.

Rich, Tim again. I commented earlier on Brooklyn, we are very positive about Brooklyn and in addition to the large land purchase you referenced, we actually added a new development right in Brooklyn as well, so we look at every opportunity differently, both in terms of the projected returns as well as the underlying risk, and we're going to allocate capital to those deals where we think the risk adjusted returns are the highest, and the two deals that we have in the pipeline represent the two deals we feel best about that we pursued in Brooklyn.

Okay, thank you.

Your next question comes from the line of David Harris with Lehman Brothers.

Yes, good afternoon. Following somewhat from Steve Sakwa's question, Tim, where do you think we end up the year-end in terms of the size of the development program of the cost under construction?

Hi, David, in terms of what's under construction?

Yes.

Or the entire development?

No, not the entire, the 1 -- the number that would be comparable to to the 1.4 billion or so that we've got on at the end of the quarter.

It should move up, David. I think we mentioned we expect to start about a billion this year and we are not going to have that much in completion so we expect it to be in the 1.7 to 1.8 range by the end of the year.

Bryce, could I just go back to you? Obviously you portrayed somewhat of a mixed picture. You're saying on balance you are coming out more in favor of the environment being positive for you but there are some, call it clearly some negative emphasis. I think the weakness in the housing marketed and subprime has taken everybody a little by surprise. That's a sort of negative dynamic Wouldn't that cause you to be a little bit more cautious about expanding the development program so aggressively between now and year-end?

Well, David, one of the things when we think about the market, we're always reminding ourselves and trying to communicate that we're thinking about relative to our overall portfolio, not just what we have under development, and I think sometimes what we have under development gets an undue level of scrutiny. If I'm concerned about the market in Boston as an example, we have 14 stabilized assets there in Boston and we have four under construction, so if I'm concerned about the market in San Jose, so if you understand the emphasis I'm trying to make. So where we look at it from the development point of view is that we are going to build them once but we are going to lease them each and every year we own them. So we're not as sensitive, I think, as some may think we should be to the actual timing of the developments.

We do regulate it and you saw us regulate it pretty significantly in the '02 '03 time period where we had very significant concerns long term about certain markets like in Seattle where we were very concerned at that point long term and we wanted to take a wait and see and we stopped the development mid track. I don't see the subprime fall out as a long term issue that would cause us to think about stopping a development or unduly delaying one. So we take it in a composite view in terms of what's happening in the overall markets that we operate in and whether we want to be a long term holder of the Real Estate there and if we do, we're going to look at is this an appropriate time from the point of view of construction costs, competition, and certainly the overall economy.

Okay, it still seems like a terrific time to be a seller of quality assets, the two you possessed, could you just remind me where we are in terms of disposition plans for the year? It doesn't look like you did nothing in the first quarter.

We did not, David, which is unusual, as you know. As you know, a lot of times, people putting together their disposition plans kind of early in the quarter and activity tends to be more back half loaded, but our guidance was in the $150 million range for the year, which is down a little bit from what we did last year.

You used to be pretty opportunistically driven. That's only a couple of properties isn't it, Tim?

In terms of our disposition, it's more than a couple, just because there's a few smaller properties that we're looking to sell, but I think we've got four or five in the plan.

Okay. Great. Thanks much.

Your next question comes from the line of Dave Rodgers with RBC Capital Markets.

Question for Tim. Given kind of your conservative comments about condos overall, particularly the reversion, but could you comment on the new completions of condos? Is it getting to the point where you're starting to have discussions about potentially acquiring these assets, even in the fund, or have we not gone that far and they are still trying to market these out in the market?

Dave, it's really as far as I've seen, it's really only an issue in the DC market interestingly, and Southern California, particularly LA, and Orange County, there was a lot planned and a lot just getting ready to start, but never either really broke ground or didn't get far enough into it where they couldn't stop or turn back and conversely in DC we have seen a number of opportunities that we've looked at that are being converted to rental before they close the first unit, so in essence, the builders chose to cancel the contracts that were in place, convert it to rental and sell it to an income buyer.

I'd just add to that, Tim. I think the question was directed at stabilized condominiums but we are seeing in effect this quarter, we have a new development right in San Diego which was a condo deal that a home builder had started or had stopped after we got the foundation in the ground and we were able to negotiate the purchase of that to complete it as apartments so we are looking, we're looking both in terms of land or partially built deals as well as opportunities in terms of completed assets.

And is land pricing finally beginning to adjust to that?

Well, it's interesting if you look at the San Diego opportunity, it was a site that I think sold to the condo guy probably a couple years ago at a price almost double what we could pay for it or I think about 50% above what we could pay for it. He took a hair cut to sell it to us, but we're still paying pretty full price for it. So the land is coming back to rental economics but it is still pretty expensive land. You're not seeing fire sales out there, but you are seeing homebuilders having to take hair cuts when they bought at the top of the market and then put in a lot of infrastructure into these sites.

Thank you.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Richard Paoli with ABP Investment.

Good afternoon, all. A couple questions. The cash on your balance sheet is obviously high from the equity offering. What could we expect with the trend for that and then I have a couple other follow-up questions.

Hi, Rich. This is Tom. We should be through that cash by the end of the third quarter.

By the end of the third quarter?

Yes.

And you have 260 some odd million of debt maturing this year as per your statements. When is that, is that a lump or is it a couple small deals?

There's two pieces. One is in August and one is in September, and the blended rate, if you add them together is about 6%.

Okay.

It's 250 million in total I think.

Right. And what are you getting on your cash now? Is it like Treasury or something like that.

5.25.

Okay. 5.25. Okay. And then one other question, actually two others, one still related to the debt issuance. I don't know if you've, Tom, this is probably directed at you but looks like Kimco issued a pretty promethean deal with respect to their covenant packages. Have you looked at that and I'd like to hear your thoughts on that and then one other question probably for Tim.

Well, that's a very current event that happened I guess on Monday, and we've been pretty focused on this call, so I haven't really studied the covenants and I'm awhile out before we're looking to do our next debt deal, so we will study the covenants. We generally have not been aggressive on changing covenants. What we will be protective of is where a bond buyer wants another bite at the apple in terms of a covenant for change of control without giving up something else and that's something we're going to watch for. We're not necessarily looking for wholesale changes in covenants but we don't want to go backwards by just adding another covenant without giving something up so we're going to be very careful when we issue our next debt deal.

Great. And then Tim, just could you guys, I don't know if you know this number but help me understand if I look from a credit score prospective, where your average tenant is today, and how that kind of correlates to prime, or subprime type of borrower, because obviously there's been a whole class of people that are kind of closed out of the residential market at this point, especially in places like California, but yet given the disparity in the affordability, they probably would qualify for living in an Avalon apartment given the distance between rents and payments especially when you consider taxes and the whole banana.

Rich, this is Leo. I'll take a first shot at that. I guess I have three thoughts with respect to our residents. First, just so you know, during this last cycle, we never changed our credit scores, if anything, we increased our credit scores to give you an absolute number, at which we qualify people, I can't quote those numbers right now. I will tell you though that our average resident pays somewhere around 22% of their gross income in rent. Now that can vary widely from 17, 18% in a very expensive high rise, well located high rise. If you went to a more tertiary location, it could run up to 24%, and I guess one of the other things I've been watching is how bad debt has moved for us to make sure that there's no issue there, and in truth, and while it's only one quarter, our bad debt is down from a year earlier, a year earlier for first quarter of '06, our bad debt ran about 0.45 in the first quarter of '07, it ran about 0.35 so we believe our credit approach has been appropriate, and we believe that we're well positioned for when those people can't make the payments to enter our apartment homes.

Right. Is it fair to say and I guess you hadn't commented on perhaps but where the level of notices are with respect to tenants moving out and sort of what I envision the normal cycle to be is that once the summer comes and schools over and what have you, a lot of transaction activity actually gets consummated in the single family as well as in the multi-family, and when we have a view really on kind of move outs for home purchases really nose diving if that's the case.

To give you some background about 20% of our expirations occur in the first quarter. About 28% occur in the second quarter, it jumps to about 32 I believe in the third quarter and then reverts back to about 20% in the fourth quarter, so we'll see a lot more activity in the second and third quarter that will give us more indication, but it's been pretty consistent in the 23, 24% range for a period now as to the percentage of our move outs related to home purchase.

And then just with respect to tenants kind of noticing that they aren't going to, letting you guys know that they aren't going to renew?

It depends on the submarket. In what we typically like to have is 60 day notice, but in somewhere like the Pacific Northwest, by regulation, you can only require a 20 day notice, so we really need to do as Tom was talking about earlier is get further into this peak leasing season and then at the end in July when we have our second quarter call certainly we'll be able to give you better insight as to how things are trending.

Thank you, guys.

Your next question comes from the line of Thayne Needles with Baird.

Leo, you just mentioned on average across the portfolio that the rents are running about 22% of gross income. Do you have a sort of a historical long term average for your portfolio where that number runs?

That is about the historical long term average. 21, 22% is what it has been.

Okay. One other question. You also mentioned the decline in the pace of rental rate growth from January to March. Do you have an April number that you could share with us?

At this point, we don't have the April statistics. So there's nothing I can give you at this time.

Okay and just one last question for Tom. Tom, the 130 million or so of cash and escrow that's on the balance sheet at the end of the quarter did that relate to the San Diego asset?

It's actually bond escrows, primarily it's not the San Diego asset.

Okay, thank you. That's all, guys. Thanks.

At this time, there are no further questions. Mr. Blair?

Thank you. We thank you for all your time today. We will see many of you in early June in New York at NAREIT, hopefully you all have received or saved the date for an investor tour that we are scheduled for June 4, the afternoon of June the 4th and we have invitations I believe going out within the next few days. So we look forward to seeing you in New York and hopefully many of you can participate with us on the afternoon of the 4th. Thank you.

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