艾芙隆海灣社區公司 (AVB) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Avalonbay Communities second quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks by the Company, 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. John Christie, Director of Investor Relations and Research. Mr. Christie, you may begin your conference.

Thank you, Lori. 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 Tuesday evening's 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 your review of our operating results and financial performance. And with that, I'll turn the call over to Bryce Blair, Chairman and CEO of Avalonbay Communities, for his remarks. Bryce?

Thank you, John, and welcome to our second quarter call. With me on the call today are Tim Naughton, our President; Leo Horey, our EVP of Operations; and Joanne Lockridge, our Senior Vice President of Finance. Tom Sargeant is not on the call today, as he is away on a previously scheduled family vacation. On the call, I'll summarize our results for the quarter, and then provide some comments on the apartment market and the impact of the slow down in the for-sale market. Tim will then provide an update on our investment activity, and I'll follow-up with some comments on our updated guidance. After that, all four of us, Tim, Leo, Joanne and I will be available to answer any questions you may have.

First off, I'd like to address the timing of the earnings release, which was distributed a day earlier than scheduled. As you know, we regularly report in our SEC filings that we have $100 million stock repurchase program. Over the past week or so, REIT prices have declined significantly, and we wanted to be in a position to repurchase shares should the price remain depressed, or fall even further. Although we don't believe there are any surprises in our release, given the close timing to our earnings, we wanted to assure that our quarterly earnings were released before we repurchase shares under the existing program.

Turning to a review of our quarterly performance, we reported EPS of $0.61 and FFO per share of $1.17. The FFO per share of $1.17 represents a year-over-year increase of 18.2%, which includes the impact of our change in lease accounting discussed last quarter. The strong quarterly growth in FFO was driven by a combination of strong same store sales performance, as well as the growing contribution from our development activities. In terms of same store sales performance, we reported NOI growth of 8.4%, which was driven by strong revenue growth of 6.3% and moderate expense growth of 2%.

Let me turn to comments on some of the specific submarkets and then a bit about the housing market. In terms of specific submarket performance, our strongest markets remain D.C, Northern California, and Seattle, which are all experiencing year-over-year revenue growth in excess of 7%. Each of these three markets continues to experience solid job growth. When you look over the last six months, each market has enjoyed job growth of 1.5% or greater, with Seattle enjoying the strongest job growth of any of our markets, adding jobs at a run rate of almost 3.5%. Conversely, while Southern California rental revenue has remained solid at the 6% level, job growth over the last six months has been significantly weaker than the 1.5% job growth that the the region experienced last year. Consequently, we expect Southern California revenue, particularly in Orange County and San Diego, to moderate in the second half of the year as a result of less favorable demand/supply fundamentals.

Turning to Boston, while the actual results have been weak, the market is beginning to show signs of recovery. Job growth over the past six months has been solid at about 1.5%, and much of the supply of new apartments is being absorbed. W're seeing encouraging signs in the performance of our stabilized portfolio in Boston, with occupancies now at the 96% level, and concessions for move-in are down 50% from last quarter, and a similar amount from this time last year. While encouraging, the improving conditions in Boston are not expected to significantly improve actual revenue until the end of the year. This takes a while for the more -- stronger fundamentals to work through to the bottom line.

Turning to the for-sale market, the latest sales data confirms that the housing downturn is far from over. With new home sales down over 20%, inventory up over 20%, it would take some time for the industry to work through this backlog. Many potential home buyers are choosing to remain as renters, as many feel prices will decline further and will be reluctant to buy until there is clear signs that the market is strengthening, something we certainty haven't seen yet. And many aren't able to obtain the aggressive financing of years past given the appropriate tightening of credit standards. The weakness in the for-sale market clearly benefits the rental market, and this can be seen in the continuing decline in the home ownership rate. The recently released home ownership rate for the second quarter declined to 68.4%. This is the lowest level in four years, and is 1% below the peak experienced in 2005.

Now, while 1% may not sound like a lot on a base of 113 million households, represents over 1 million additional renter households today versus just two years ago. While the moderate slow down in the for-sale market is positive for our business, a major adjustment would not be. We expect, and the data suggests that the housing correction will likely be less severe in our markets. Let me give you a couple data points. First, one sign of the health of the for-sale market is to look at the current homeowner vacancy rate versus their historical levels, basically a measure of the excess supply in the market. When looking at this metric, all of Avalonbay's markets are at or below the national average. Nationally, the markets with the highest excess home vacancy rate are the more affordable markets, such as Orlando, Jacksonville, Tampa, Atlanta, their not the high cost coastal markets. And secondly, if you look at the rate of mortgage delinquencies, they're running at 3% of all mortgages in our markets versus 6% for the U.S. overall. So the data on homeowner vacancy rates and mortgage delinquencies would suggest that a major housing correction is less likely in our markets. Overall, I'd say our markets are performing largely as expected as a result of solid job growth, the weakness in the for-sale market and stable supply conditions. With that, I'll turn it to Tim who's going to provide an update on our investment activity.

Thanks, Bryce. As Bryce mentioned, I'd like to share some highlights regarding recent investment activity in areas of development, acquisitions and dispositions. Let me start with development, where our current development pipeline now stands at $5.8 billion, with almost $1.7 billion of development communities under construction, and another $4.1 billion of development rights in the planning and entitlement stage. This represents an increase of about $1.5 billion since the middle of last year, when the housing markets were in the early stages of correction. At the time, we stated that we were beginning to see increased deal flow and expected that our pipeline would start to expand. This has certainly occurred and reflects the advantages of a mature, well regarded development organization, combined with a strong balance sheet playing in our favor. During the second quarter, we started four communities totaling $360 million and completed one other. Two of the new starts are located in the New York, New Jersey markets in the Northeast, and the other two are located in Southern California. The starts in White Plains, New York, and Tinton Falls, New Jersey, were both development rights for a number of years as we worked through the lengthy entitlement and permitting process that is common in our markets.

Conversely, the two starts in Southern California, one in San Diego and the other in Anaheim, are on land that we recently purchased from a public home builder who entitled the sites for condos and had recently started site development. In each case, we were able to step in and assume not only fully entitled and permitted sites, but most of the subcontract and material commitments, as well, minimizing cost exposure on these. As a result, these are relatively low risk deals that allow us to continue to build our presence in the Southern California region.

In addition to these two construction starts in Southern California, we added two other entitled sites as development rights in California, one in downtown LA and the other in Mission Bay in San Francisco. These sites were also purchased from home builders who decided to abandon their plans for condos. We expect to start construction on both over the next six to 12 months. All of these communities have condominium [maps], which adds value to them as rental developments given the potential for an attractive exit at some point in the future. The site at Mission Bay is an interesting opportunity, as all the units there will be market rate, and therefore should be an attractive candidate to convert in the next condo cycle.

For those communities in lease-up, leasing is progressing well, as absorption and rent levels are at or above pro forma for most communities. The New York area continues to be strong, particularly in submarkets in or near Manhattan. At Avalon Riverview North, which many of you toured at NAREIT in June when we reported that we had leased 100 apartments in the first week alone, we continue to experience dramatic results. This community, which is located in Queens, directly across the East River from Midtown, has now leased 300 apartments in the two months since opening. During this time, we've seen one to 200 traffic per week, as many renters that have been priced out of Manhattan over the last couple of years are drawn to the value of this location with rents that are approximately 40% below Midtown. And in Boston, as Bryce mentioned in his remarks, we're seeing market improvement reflected in our lease-up portfolio, as well. Over the last 90 days in the three communities actively in lease-up in this market, we've averaged over 30 net leases per month per community.

Shifting to acquisitions and dispositions activity for the quarter, despite the turmoil in the credit markets over the last couple of months, the transaction market continues to be healthy, with cap rates remaining steady over the last quarter, around 4% on the West Coast and the low mid-to-fours on the East Coast. During the quarter, we bought two assets in the San Jose market totaling just over $90 million. One of the assets which is adjacent to our Countrybrook Community, will be wholly owned by Avalonbay. The other acquisition, Skyway Terrace, was purchased in the investment management fund. In addition, in July we purchased two more communities for the fund, one in Southern California and the other in northern New Jersey. The fund now has total commitments of just under $800 million and contains a well diversified portfolio of 19 communities dispersed across our six major regions. We plan to add two, maybe three more communities before closing out investments for the fund by the end of the year.

Moving to dispositions, while we did not sell any assets in Q2, we did close on two dispositions since the end of the quarter. These communities are located in Fishkill, New York, and San Jose, and sold for an aggregate value of $109 million. The average cap rate for these two assets was just over 4%, and the average unlevered IRR was approximately 17%. Both of these communities are located in B submarkets and taken together, provide evidence that we have yet to see any distress from the credit markets spill over into the property markets. In fact, we continue to see multiple bidders on all transactions, at cap rates in the 4% to 5% range, or basically the same rates we've experienced over the last year or more.

So in summary, we're active on the development front, where lease-up performance strengthened over the last quarter. And markets are supporting rent growth during the lease-up phase of most of the development portfolio. We've grown the pipeline as deal flow remains strong, and we're able to capitalize on a strong balance sheet, as well as a deep and capable development and construction organization. And finally, the transaction market remains active and vital, as we continue to sell and redeploy capital into new development, while buying and redeveloping within the fund. With that, I'll turn it back to Bryce for some additional remarks before opening it up for questions.

Thanks, Tim. I'm just going to provide a little color to our updated guidance and then a few summary comments. In our release we provided FFO guidance for the third quarter in the range of $1.17 to $1.21. And for the full year we narrowed our range to $4.60 to $4.70. The updated guidance reflects our expectations for continued strong, but moderating fundamentals in our markets, and is based upon updated projections for our investment activity. Overall the year is expected to play out pretty much as originally anticipated. The portfolio is expected to perform at the high end of our original guidance, investment activity is on track. Conversely, interest costs will likely be higher than originally expected, given the widening spreads in the capital markets.

In our comments this morning we focused on four points. First that we had a strong quarter. 8% NOI growth and 18% FFO growth. Second, that apartment fundamentals remain healthy, driven by strong job growth, a weak for-sale market and stable supply. Third, that investment activity remains robust, with almost $6 billion underway or in planning, and an active acquisitions and disposition program. Fourth, that our outlook for the year remains essentially unchanged from our original expectations. So with that, operator, we're now pleased to take any questions that anyone may have.

(OPERATOR INSTRUCTIONS) Jonathan Litt, Citigroup.

It's Craig Melcher here with Jon. When does the window open up for you to act on the stock buy back program?

Craig, this is Bryce. It really isn't a window. Obviously, we cannot trade in our stock if there's any material nonpublic information. And while we didn't think the release any contained any surprises given it was so close to the release, the prudent thing, and we thought the right thing to do, was to not be trading in the stock before we issued the release.

Have there been any stock buybacks? Was there any yesterday?

There was a modest amount yesterday, less than $15 million.

And how do you look at the decision for the stock buybacks relative to other uses of your capital, like funding the development pipeline?

Well, we look at a number of different metrics. Sort of the four key things we would look at would be, how is it trading relative to NAV? So a discount to NAV, a discount to firm value, would be one metric. The second would be what's the impact to FFO? And even at the depressed share price, stock buy back would still be modestly dilutive to FFO given the interest costs that it would be offset by. That would be a second. And a third would be impact on fixed charge coverage, which is something that's very important, and certainly watched closely by the rating agencies. And fourth would be liquidity, which touches on your point that we do have a very large development pipeline, a very accretive development pipeline, and we want to make sure that we always have capacity to pull that through. So those are the things we're looking at, and we look at it against other alternative investments, whether it be an acquisition of a property or a portfolio or something like that. So it's something we look at, and felt at this point it was appropriate to exercise some of the buyback under the existing $100 million authorization.

And then you mentioned the higher interest costs affecting guidance a bit. Can you just talk about what spread you're now expecting, and maybe a deal that you're expecting to do on the debt side to cause the change?

Well we're not -- we don't comment on any expected capital markets activity, so it isn't based on the expectation that we're going to be in the market next week. But clearly, I'm sure I don't need to tell anyone on the call that given the turmoil in the capital markets and the backup in spreads, that anyone trying to issue any security at this time would exercise -- would be met with higher rates. Whether that's going to continue for the balance of year, there's obviously different opinions on it. But we don't try to project what's going to happen in the marketplace, we try to reflect what is currently. So we thought the prudent thing was to reflect higher borrowing costs.

And what was the per share impact from that piece of the guidance?

$0.01 or $0.02. It's not a huge issue, but it is a negative drag on the earnings.

Thank you.

David Harris, Lehman Brothers.

Oh my goodness, I'm up early. Hey, Bryce or maybe this is Leo. I maybe missed this. Did you ever make any comment with regards to what you're seeing in terms of pressure today on condos? And maybe you could just sort of draw a little color as to whether you're feeling that more intensely today than you would have been three months ago? And what you think that's going to be like for the balance of the year.

Go ahead, Leo.

David, this is Leo. In the last three months we have seen a little more pressure from condos. Most of it is anecdotal, what I'm going to tell you. As we've discussed in the past, the markets where the condos were most prevalent, were in our markets San Diego, Chicago, and D.C. I am seeing a little more of it in San Diego without question. And what I'm seeing, or what I'm being told is when prospects are coming in the door, they're making reference, in San Diego, to gray market opportunities. And some of those gray market opportunities are at rents below the rents that we are currently charging at our communities. As you know, we have the community in downtown San Diego, Cortez Hill. We are also seeing it a little bit at Mission Bay. With respect to D.C., again, it's coming back anecdotally from prospects, and it has picked up a little. And with respect to Chicago, not hearing a lot. But most of our properties are not in the downtown, where most of the condo activity occurred. So hopefully that gives you some indication of what we're seeing and the trends that are occuring.

Okay. More generally than that, are there some single family homes coming on as rentals that you are feeling some pressure on? Or would you have the same sort of comments that you just applied to your condos?

The single family home market has not been a big issue. To say that it never happens would be misleading. When you're in Connecticut sometimes, we will -- and we're in some of the communities that we have, like New Canaan, sometimes we'll see some single family homes that will compete with our properties, typically for renters that are in transition. Bryce, do you have anything to add?

Yes, David, I did comment and we've started -- we're always trying to be a better student of the for-sale housing market. And we've really started to track this excess homeowner vacancy rate, for lack of a better term. And our markets, as I stated in my prepared comments, are at or below the national average individually. So it's markets where you'd see a high excess homeowner vacancy rate where you would expect either prices to drop dramatically, or people that simply give up trying to sell and start to rent. We're just not seeing a significant excess vacancy rate in any of our individual markets.

Okay. Jumping subjects. On the share buyback, it's a relatively modest program. How quickly could you get that renewed by your Board? Or up scaled or extended? Whichever way you want to describe it.

Well, it would take a Board vote and that's not the same as an act of congress. All it takes is a Board vote. It is something we are considering and we would disclose that immediately after a vote. But you could have a Board vote within a week, if you wanted to.

I know leverage moves around as a function of your share price. But are you happy to let leverage go up? Or is the ambition here to be leverage neutral?

Well, really less in terms of the evaluation of our share buyback, it's really fixed on fixed charge coverage on an incurred basis, not an expense basis, David. And we look at that -- we're really not looking at leverage ratio, we're looking at the impact on the fixed charge coverage incurred. Because that is the metric that is most important to our rating.

And you want to keep your fixed cost coverage where it is today?

Within the range of where it is today. Having it drift downward is okay to a point, but having it materially decrease is not okay.

Okay. One final question. As you look out over the next six months to 12 months, there's clearly (inaudible) in the capital markets. Clearly there are some folks that are thinking that property prices may be under pressure on the downside. Any thoughts and observations as to whether you might change the balance between capital allocation between development and acquisitions? (inaudible) end of the year?

I just want to make sure I understand your question. I mean, if cap rates backed up and we saw a better buying opportunity? Is that -- ?

Yes. Obviously today, I assume that many people would be looking at having to look for higher returns on development to underwrite the possibility that a completed development may be worth less in 18 months time when it comes out of the ground.

Well, it could. But so could the acquisitions you're buying today. They're all going to be subject to the same forces, whether they're up or down. We're always looking at the alternative, sort of the risk return between an acquisition, a development or a disposition, for that matter. And now as we just talked about a share buyback, which is the ability to buy our own assets at an attractive price. So to the extent cap rates backed up, and we thought that that was a best risk adjusted use of capital, we could easily reallocate capital from development into that program.

Okay. I'm hearing it through the early days to ask you to make a definitive call on that sort of dynamic.

As Tim mentioned, and Green Street just issued a piece, just came across the wire, I guess last night that we have not seen the backup in cap rates. It doesn't mean that you don't worry about it happening, or you even don't anticipate it. But it has not happened yet. And so -- .

Well, you've lived through cycles before, Bryce, as I have. And as every side that the markets certainly anticipating a decline in pricing, and you would expect that to follow from what's happening in terms of the cost of debt.

That's correct, and that's partially the reason we've been -- we started to buy back our stock for the first time in quite some time.

Okay, thank you.

Rich Anderson, BMO Capital Markets.

I might have missed this in the beginning, but is the NOI guidance range still 5.7 -- I'm sorry, 5.5 to 7.5 for the full year?

The guidance range -- .

NOI.

The guidance range remains the same. I did comment that we'd be at the high end of that range.

Okay, okay. Now in terms of the buyback, obviously, that was not previously included in your guidance. How much of the buyback activity is coming to the rescue to your full year FFO guidance for the year? Assuming it would be accretive?

No. That would be a wrong assumption.

Okay.

If you look at the FFO yield versus financing costs or debt costs, it is not accretive. But in terms of how much we have budgeted for stock buy back, that's not something we would comment on.

Okay. But when you gave your preliminary guidance for '07, obviously there was no buyback assumed in that number?

That's correct.

Okay. Last question is, since all my others were asked and answered, in terms of the late earnings report of the day late, understanding the rationale. But why not tell people why you're doing it, or have the conference call a day earlier, instead of creating all of this chatter about what's going on at Avalonbay? Why not put that sort of stuff to rest instead of making us wait 48 hours?

Well, I can appreciate some questions. I will say very clearly, from the time we release an earnings call, we will not entertain any discussions with individual investors. It would just be inappropriate to those investors who don't pick up the phone and call. And in a Reg FD environment, we're not going to be selectively answering a question during that period. So I know a number of you were looking for answers, and you can expect the same answer next time, which is we cannot comment between the time we release and the time that we have our conference call.

Okay, that's fair. What about an earlier -- having the conference call a day earlier?

Well, on the second point, we press release the time of the conference call well in advance. And it is a jigsaw puzzle to find an open slot. And in fact, the time of this call, 11:00, is a modification from our normal time of 1:00 just to fit into the amount of companies releasing. So it would be unreasonable to think that we would reschedule a call on short notice and fit into an incredibly earnings call calendar, of which you all are booked from sun up to sun down. So rescheduling the time of the call is not prudent, and answering questions in that 24 hour period would not have been prudent, either. So I still think we did the right thing. We just felt it was the right -- consistent with how we've treated the investment community, which is get the information out early when you have it and release it, and actually in this case, release it as a courtesy so that the investment community had it at the same time.

Could you have put the buyback commentary into the press release? Thereby, satisfying the fair disclosure issues you were referring to?

We have -- in our Q, we have always had that we have $100 million stock buyback program, so we felt the disclosure was adequate.

Okay, thank you.

Christeen Kim, Deutsche Bank.

In terms of the guidance towards the higher of the range for same store NOI growth, is that primarily a function of the lower expense growth rate this year? And should we expect these trends to continue in the second half?

Let me answer the first part and Leo can give comments on the expenses. Yes, we're seeing revenues sort of at the midpoint of our original guidance, expenses at the low end, which is pushing NOI to the high end. So that's sort of the macro-view. In terms of what our experience has been with expenses and what we expect, Leo -- .

Christeen, as you know, expenses can be somewhat volatile, and the third quarter is typically our highest expense period. So as Bryce said, we expect expenses to be toward the low end of the guidance range. But we could see some higher expenses in the back half of the year.

Are you getting helped specifically by one item or another on the expense side this year, or is it just a lot of little things?

I would tell you that the places that are challenges are the places that you'd expect. Property taxes is a challenge. Payroll is a challenge, and maintenance related. And where we're getting some help is clearly in bad debt. I think I discussed that last time. We've had very good experience there, and it's continued. And as I've discussed, we've looked for ways to reduce costs. And we're actually getting help from utilities due to some changes that we've made. And that -- so those have been offsetting those costs. But we are very happy with the way that we've been able to contain costs. And as we've discussed on previous calls, over the last few years, we really have made it one of our goals to look for ways to just function smarter and keep our cost growth much more moderate. And we believe that we're accomplishing that again this year. And if it continues in this path, it will be the fourth straight year that we really have capped our cost growth in the low to mid-two range.

Not to beat a dead horse, but what specifically are you doing differently on the utilities side?

Well, on the West Coast in California, we've actually swapped out meters at no cost to us, which allows the utility to read the meters without going to the properties. That's reduced some tariff. We've put additional emphasis on watching vacant utility cost and getting greater visibility on that. That's been a help. We've passed through and allocated some hot water costs where it's allowable, which has really been a benefit to us. And in truth, the first quarter, the weather in the Northeast was not as severe as was anticipated. So I think three of the four measures were things that we've been actively doing to try to contain costs in that area.

Great. And just in terms -- my last question. In terms of San Jose versus San Francisco, the performance in San Jose has been slightly better this year. Is that just driven by stronger job growth, or your larger footprint in that market?

In truth, both of those markets are very, very healthy, and we feel very good about both of those markets. One of the things that was a bit of a challenge for San Francisco in the first half of the year was Mission Bay I is the first phase of our Mission Bay Community and we were leasing up Mission Bay II. Mission Bay I is considered a same store community, so that put some challenges in place. But both of those markets are performing well for us, and we feel very good about both of them.

Great. Thanks, guys.

(OPERATOR INSTRUCTIONS) Alex Goldfarb, UBS.

Just going back to the stock buyback program, how much could you buy back and maintain your current comfort range with the fixed charge ratio?

Alex, that really addresses the issue of our intention to purchase, and I just couldn't comment on that.

Okay. Then the next question is, what's the update on the JV accounting issue? What's the update on resolution of that?

You're talking about the land lease adjustment?

Yes.

We've had discussions, but we have not had a resolution on it at this point. We are still hopeful to be able to resolve it. But given it is not resolved, we felt it appropriate and have reflected the assumption that it stays that way for the balance of the year in the [re-forecast].

Okay, for the balance of this year. But is there a thought that it could be resolved by year end, or it's just a comment that hopefully by year end?

Yes, there is definitely the hope, and I would say even the expectation that we'd resolve it this year. But for re-forecast purposes, since it is not resolved, we do not have an agreement, we have put it in the plan.

Okay. Final question is just thinking bigger picture. Financing your large development pipeline, and given where the capital markets have gone, what things are you guys doing to ensure that you can fulfill the pipeline that you've outlaid, if the financing markets go back to what they were like at the late 80s, early 90s when they weren't exactly that friendly to real estate?

Well I think the most important thing is doing what we've always done, which is to keep a strong and financially flexible balance sheet. We've taken, over the years, a fair amount of direct questioning about why we have a balance sheet with such a, quote, low level of leverage. And it is because we have such a large development pipeline. And so we really try to match the risk in our business with the structure of our balance sheet. So it's keeping your powder dry. We have, as we sit here today, we have nothing drawn on our line of credit, which is a $650 million line, which we have nothing drawn. We have disposition activity, which Tim has commented on, that is closing in the third quarter of this year. And we have the financial flexibility, whether it be in the debt or equity side, to finance that business.

Okay. Thank you.

Dustin Pizzo, Banc of America.

Leo, can you just expand a bit going back to your comments on the D.C. market? I guess yesterday, one of your peers cited it as a market where -- that the single family housing market was having a significant impact on growth, and clearly it sounds like you guys disagree with that, with commenting it is one your strongest markets?

I would tell you that D.C., the job growth does remain strong. But there is supply, and we are seeing the effects of condos. So what is our expectation? Our expectation is that it is moderating. I will tell you that we push pretty hard on rents. Over the last quarter, you've seen our occupancy fall. I believe we reported occupancy just above 95%. I will tell you that our physical occupancy at the end of July was in the 96% range. But we are seeing a little pushback on rate. Do we feel good about that market -- this market long term? Absolutely. But condos are becoming more of an issue, and we need to see continued job growth if we're going to absorb both those condos and the new supply that's coming.

Okay. And then, Bryce, just looking at the backup in the debt markets, has that had any effect, or do you think it will have any effect on your plans to lighten up a bit in Boston this year or early next year? And has it affected the pricing at all there?

Pricing of dispositions?

Yes.

I'll let Tim address that.

Dustin, just to be clear, you're looking for commentary on the asset pricing in Boston?

Yes, and just general activity.

Well, in terms -- I was trying to differentiate between asset and lease pricing.

Sorry, on the asset side.

Yes, on the asset side, I think we're starting to see things firm up in Boston. I think generally other folks are starting to see what some of what we're seeing, as Bryce had mentioned in his comments, in terms of availability starting to tighten up, occupancies increase. We're starting to see same unit rent growth. Generally though, I will tell you, in the suburban Northeast markets, those are probably the highest cap rate markets that we have in our portfolio. So when I talk about a 4% or 5% range, the suburban New England markets would be towards the top end of that range. And that's kind of where we've seen it over the last couple of years.

Okay, thank you.

John Stewart, Credit Suisse.

This is [Tevin Kim] with John Stewart. Turning to developments, I notice your expected rents on your Avalon Wilshire project jumped about (inaudible) from last quarter. Could you just comment on that, please?

Sure. This is Tim again. Yes, when -- we just started occupying at Wilshire really this past quarter is the key. And typically, we don't adjust the rents until we start occupying units, and we had been under construction there for, really since -- I guess since early 2006. And as you know, the LA market has been strong during that time. We just haven't recognized it in the average rents because we hadn't been in the market actually leasing apartments. So I think it really more than anything, just reflects the continued growth in rents in the LA market that's just starting to translate into our lease up there.

Okay. And if the expected increases in cap rates does come into fruition and your development yields get squeezed, in terms of (inaudible) does that change your business strategy? Maybe toning down your development pipeline?

I think Bryce spoke to that a moment ago. I don't know that it impacts the development yields themselves. From a risk adjusted return relative to other opportunities, obviously, that would change the equation, such that acquisitions would probably start looking more attractive relative to the development opportunities, because land and construction costs, as you know, doesn't adjust quite as quickly as interest rates do.

All right. Thank you.

Rob Stevenson, Morgan Stanley.

Can you talk a little bit about what you are seeing today in terms of hard construction costs? Have you seen any sort of relief there, or is it still sort of just flattening out?

Rob, it's Tim again. Pretty much the same as last quarter when we spoke to it. We're seeing deceleration, less pressure. We're not seeing declines in construction costs at this point. Certainly, some relief with respect to labor shortages. Probably a little different between wood frame and concrete, we're probably a little bit more relief in the wood frame area. And commodities, not as high in terms of year-over-year increases, but they continue to remain volatile. So there's some lack of visibility on commodities from, it seems like from one month to the next.

What was turnover rate during the quarter?

This is Leo. It was 62%, which is essentially flat from the previous year.

Okay. And have you seen any uptick or down tick in hard costs on turns?

No. I mean, I think I gave a number, and that number has been about the same. Obviously, we have had some pressure, as I mentioned earlier, on our maintenance costs, but hasn't changed dramatically.

Okay. And then lastly, Bryce, given the fact that the fund is sort of nearing capacity here, what's the thought about fund two? That's something that you're likely to do?

It's something we are evaluating, and that's about as much as we can speak to at this point. But the first fund has been successful from our point of view, and considering what's next for us.

Is there any restriction from fund one that that needs to be complete before you would start another fund? Or is there no restriction on that?

We're beyond that restriction at this point.

Okay. Thank you.

Karin Ford, KeyBanc Capital Markets.

First question is for Leo. I know you gave the end of July occupancy number for Washington. Do you have it for the portfolio overall?

At the end of July, the occupancy for the portfolio was about -- physical occupancy, just so you know, was 96.5%.

Okay. Secondly, I was interested in the busted condo deals in California. The sites that you bought. Are you able to buy those such that the yield when you build it out is more favorable than it would be if you guys were entitling from scratch? Or is it about the same?

Karin, this is Tim. Actually, the projected yields on those would be less, typically than when we would take it through the entitlement process ourselves, just because it's less risk.

Right.

And that's where it clears the market at. So if the average yields are -- if we were taking it through the entitlement process and we were expecting a 6.5, we would expect something less than that if somebody else would take it through the entitlement.

Okay. And I think final question is for you Tim, as well. The $5.8 billion pipeline today, sit up $1.5 billion since this time last year. If you were to guess where that was going to be a year from now, do you think that would be up, down, or about the same?

Depending upon market conditions, as with prevailing market conditions, I would expect it to continue to increase.

Okay. Thank you.

Craig Leupold, Green Street Advisors.

Bryce, for fear of going to far on this timing issue, if I'm understanding it correctly, all it really did is enable you to buy stock a day earlier. And was the price so compelling that you thought it really provided much of a benefit to go a day earlier? And/or were there any other benefits or requirements in terms of maybe providing financial information in other transactions that was the second motivating factor for doing this early?

No, there was no secondary. It was just the issue of getting it out and frankly, the information was ready. We had the information ready and we didn't see any reason why not to release it.

Okay. And in terms of the four deals in Southern California that you bought from home builders, is this something that maybe you guys become more concerned about? Or we should become more concerned about in terms of just supply concerns as condo deals, or things that were slated for condos and/or just for-sale product, quickly turn into new apartment supply? Is this sort of a unique situation, or is this prevalent in other markets, as well?

Craig, I think it's pretty unique to Southern California. One of the four deals, though, was in Northern Cal at -- in Mission Bay, which would be the third phase of Mission Bay. And to some extent it's happened in D.C. But in D.C., the condos were already built. And Little League Builders started canceling contracts and converted them themselves to rental. In the case of Southern California, they're a little bit further behind in the condo cycle. And in that case, they'd either just had started site development or had just completed entitlements, and those are the sites they're marketing. I think it's a window. A window of six or nine months is how we viewed it, where we'd have an opportunity to pick up some additional development sites in Southern California, in particular.

Okay. And then I just -- where -- do you know where in Anaheim is the new development site?

It's by the ballpark.

Okay. Thanks.

Dave Rodgers, RBC Capital Markets.

I think over the last year or so, you've talked about increasing your non-A exposure. How are you with respect to that today? And have you seen any change in interest for these assets, whether in pricing or just in overall demand?

Dave, this is Bryce. We have spoken about the benefits of having a mix of price points, whether it's in a submarket, and certainly across our portfolio, as well. The investment management fund allows us to purchase older assets. It gives us the opportunity, and that fund has generally been purchasing, not exclusively, but generally older assets, which then we're rehabbing. Additionally, we were holding some of our own assets longer and rehabbing it. So as Tim has mentioned on earlier comments, our rehab activity has grown dramatically this year from prior years. And I think by year end, Tim will have a dozen or more redevelopments underway. So that's how we're going about it. It's really in a measured way. It's not intended to move the needle dramatically. But just really to build a little bit more balance, particularly in some of our individual submarkets. In terms of pricing, I don't know, Tim, if you want to comment. I think that was part of the question, whether we're seeing any differential in pricing between the As and the Bs? Is that -- was that a part of your question, Dave?

Yes, and overall demand I guess when you're going to the table.

Demands for the apartments, or demand from our residents?

For the assets, themselves, not the units.

Dave, overall, there's certainly some players that aren't as active as they were, but there's still plenty of activity on all of our deals, whether it's an A or a B type transaction, whether we're on the acquisition or disposition side of that trade.

Okay. And then final question, Leo, could you give us a sense of the health of your tenants? Obviously, you're driving rents pretty good. But can you give us a sense of the health of the tenants qualitatively, and then maybe give us some details, traffic, trends, bad debts, and maybe any roommate situations or roommating up that you've been discussing internally?

Sure, Dave. I would tell you that our residents are -- we're qualifying the way that we always have. Bad debt for the quarter ran at about just less than 0.5%. So 0.45, that is very favorable to the previous year. Probably one of the things that's helping us on the expense side. It continues the same trend that we saw in the first quarter. In the first quarter, traffic was essentially flat from a year earlier. In the second quarter overall our traffic is up about 6%. So we feel very good about where we're positioned. You asked about are we getting -- I mentioned in D.C. we've seen some push back as we push rate hard, and things moderating and tempering there. The two other markets where I've seen some push back on rate are Chicago, where we saw turnover up a little bit, and you saw occupancy decline. I will tell you that in Chicago our occupancy did rebound by the end of the quarter physically to about 95.5%. And also in Orange County, where we pushed rate pretty hard, and we saw some occupancy declines there. But overall, the health of our residents is good. Bad debt is in check. We're getting reasonable traffic. And our conversion ratios remain good. So hopefully, that's responsive to your question.

It is. Thank you, guys.

Alan Calderon, European Investors, Inc.

First question for you, your nonrecurring maintenance CapEx seems to have come down pretty seriously from the first half of last year. I think it was about 202 per unit in the first half of '06, 47 per unit for the first half of '07?

Alan, this is Leo. With respect to our CapEx, we had some personnel transitions, so we got a late start. You can expect our CapEx for the year to accelerate in the back half of the year, and to end the year in that $450 to $500 per apartment home range. So there's no real change in the overall spend that I expect this year. It was just a delay in the early part of the year.

Okay. Can you expand a little bit more on the capital recycling? If there are specific markets you're looking to reduce? And also whether you're able to 1031 any dispositions into development?

Alan, Tim Naughton here. Generally, and I think we've spoken to this in the past. Generally looking over time the balance sheet stabilized portfolio to reduce exposure somewhat in Fairfield, and to some extend in San Jose, increase exposure in Southern California and Chicago over time. And in terms of 1031, we've done that in the past. But since we're generally using our balance sheet for development, it's just more difficult to trade into 1031s. Although we have done it to some extent in the past.

Is any of your development in a TRS?

In a TRS? Was that the question, Alan?

Yes.

Alan, as of today, none of our development on balance sheet is in a TRS. We do have some acquired parcels or for-sale that are intended for for-sale purposes, and we do acquire those through TRSs.

Okay. And final question. In your quarter-end held for sale balance, is that just the Fishkill and the San Jose assets? Or was there other extensive in there?

Actually, that was two assets. It was the Avalon View asset in Fishkill which was sold subsequent to the end of the second quarter. It's also another asset that has not yet been sold. The asset that we sold in California did not qualify under the criteria that we apply, and so that was added subsequent to the second quarter, and was sold in July -- or in August, actually.

Okay. So there's a third asset that is in the held for sale?

That's correct.

Okay. Thank you very much for your time.

(OPERATOR INSTRUCTIONS) Jonathan Litt, Citigroup.

Bryce, a question for you. It seems like we're in some times where there may be some uncertainty about what's going to happen to cap rates given the dislocations in the debt markets, and whether the debt markets get back on their feet and it turns out there's no change in cap rates. How do you manage that process? And what would cause you to determine that you need to -- these development deals, the yields maybe need to be reset a little bit if we start seeing cap rates moving up, and then you back off on doing more. I mean, is there a -- maybe you could just walk through the thought process, how you approach it?

Sure. I'll make a couple comments and Tim may want to jump in. First off, in terms of the acquisitions and dispositions, what it causes us to do is to feel good about what we've closed, and stay focused on getting the other ones closed. The (inaudible) concerned about things moving up or re-trades. So we're focusing on the dispositions. Secondly, in the acquisitions, it causes you to be a little bit more cautious. And while we're still in the market, I think like many buyers, you take a little bit of a breath and you're not quite as aggressive as you might have been 30 days ago. In terms of the development, I think as you know, Jon, we've got a pretty sophisticated way of looking at yields on developments. It's our so-called yield matrix, where we look at cost of capital and we look at what the appropriate risk premiums are for a variety of risks. And we use that for acquisitions, as well as development. So it allows us to triangulate, if you will, or iterate between those two investment alternatives. So to the extent acquisitions expected returns, or required returns go up relative to development, it would arguably -- argue for more of an allocation into acquisitions versus development.

So I think there's really two answers. One is tactically, in terms of how we act today, it's being aggressive on the dispositions, a little bit more cautious on the acquisitions. On the development, it is much more difficult to react quickly. What we have experienced, and what I feel very strongly about, is you have to be careful not to over react on the development side. These are deals that take, as I've said on many, many times, an average of six plus years between approval process, the construction process. And the reason we have a development pipeline today is largely because we had the gumption to remain committed to the development business in the '02, '03 period where it was pretty dark days, and we started to really grow the organization and build a development pipeline. So we're not going to over react to this discontinuity we have right now. But we certainly are going to monitor it. And as we've done in the past, we'd regulate development, if we needed to, by deferring starts or dropping deals. And we've done both in the past, and I know we'll do it again in the future. But we'll always do it with a mind of not cutting into the core of what is a significant source of value creation for Avalonbay.

I guess then that's the question. I mean, most of this is stuff that you control, but don't necessarily own. So the ability either to drop it or re-trade it is there.

Yes, we do have a sizable land holdings. Tim, the amount of land we actually have on the balance sheet is higher than it ever has been, Jon. so I want to make sure that's out there. It is -- Tim, the amount is -- .

Well, about 40% of the land that we control, we actually own.

We actually own.

Yes, so about $300 million.

But of the $5.5 billion total buildout -- .

There's another $375 million that we actually control through option, Jon. So that's the land I think your speaking to, that we either could drop it, or potentially negotiate to the extent you weren't meeting target returns.

And so then you would just monitor what's happening to the acquisition cap rate environment, and then make a go, no go decision, based upon where that is?

We do. We're always, as Bryce mentioned, we're always adjusting target returns based upon a number of factors. Probably the biggest driver of which is just your cost of capital and the conditions in the capital markets. Over the last few years, it's generally been driving target returns down. But as things change, we may be in a period in which it starts to move target returns back up.

I guess the question on the buyback is -- I mean it seems as though the markets have overshot on your stock price and many stock prices based upon the current cap rate environment. But the unknown of where it's going to go suggests that if you use a buyback and chew up a bunch of your liquidity in a buyback, the situation gets more difficult. Your ability to take advantage of distressed situations in terms being on the acquisition side gets reduced. How do you balance that thought process?

It's very difficult. You use analytics. But then you're making a judgement call, as you just said, Jon. We can look at discounts and FFO yields and fixed charge coverages. We need to, and we do look at all those things. But at the end of the day, you have to make an assessment about whether your capital -- whether there's going to be better opportunities in the future. And so those are the issues that we're always discussing, and will continue to discuss. We feel very good that we have the opportunity to do some of both. We certainly have capacity to buy back stock today. And we have, and would likely continue to, if the share prices stay at these attractive levels. But we're not going to use up all our liquidity to do that, that's going to cause us to put on the sidelines development opportunities that are more accretive or a potential future acquisition opportunity that might be. As you correctly pointed out, you never know. We have been under pressure last quarter and the quarter before to buy back stock, and I'm glad we didn't. We would have used up liquidity at a higher price than we could today.

Is there some thought process that you do, you look at other REITs, their share prices. I think one of the other REITs a while ago, rather than buying back their own stock, other stocks were getting hit. They bought back other stocks. Is there a thought process along those lines? Or where you can then resell it and regain the liquidity?

We certainly have evaluated that.

And that's not something that you found is a good use of capital to date?

To date, it is not.

Okay. Those are my questions. Thank you.

Chris Summers, Greenlight Capital.

Related to your FFO guidance for the year, what's the interest expense on the income statement that's embedded in that forecast? I think so far, your data has been like $40 million or something.

I'm sorry. When you say to date -- .

Your interest expense year-to-date has been about $45 million. $46 million on the income statement.

46.

Yes, what's the interest expense you're implying in the guidance for the rest of the year?

We're not giving specific guidance on that particular line item.

Directionally, would it be higher or lower?

Well, directionally, we're expecting that there is going to be widening of spreads and an increase in pricing, so that's built into our expectations.

Got it. And then I wanted to ask how is interest expense -- the capitalization of interest expense determined each quarter, since some projects are funded with corporate unsecured notes?

Well, with respect to capitalized interest, we apply the same policy to all development underway. And basically we use the weighted average of our debt outstanding in terms of the development expenditures.

And what portion of development expenditures do you assume are funded by debt?

We assume effectively 100% of development expenditures are funded by debt, either by property-specific financing if there's construction financing. Or at the weighted average rate that we apply from the corporate side.

Got it. And then you guys mentioned earlier you consider your NAV for buying back stock. What discount rate does the Company use to calculate your NAV?

We don't give -- we don't break out our calculation of NAV.

Okay. Final question, and I'll let you guys off the hook. You guys mentioned earlier that your stock repurchase is not going to be accretive. So I guess a natural question follows from that, why do it?

A lot of investments are not immediately accretive. When I say accretive, we're talking about immediately. I mean, buying a class A asset at 4%, 4.5% is not accretive to current year FFO. So it's no different. Or making investment in development which is not earning income until it's stabilization is not immediately accretive. We've always been focused on total value creation and NAV growth as primary drivers for making the proper investment decision, and that's how we would look at it.

Got it. Thanks very much, guys.

Rich Anderson, BMO Capital Markets.

Just one quick follow-up. Would you be able to say no if asked the question that you've been approached by -- have you been approached by the Tishman, Lehman team about Archstone assets?

Rich, we've said on many occasions, we just don't comment on -- that would be in essence, an M&A activity in the sense of a large acquisition. So we just don't comment on that.

But if it wasn't happening, you could say no. Right?

No. Because if we said no, then the next time I don't answer, it means yes. We just don't comment, and we're going to stick by that.

Okay, thank you.

At this time, there are no further questions. I will now return the call to Bryce Blair for closing remarks.

Well, thank you all. We know it's a busy week and a busy day, so we appreciate you guys being interested in our call and being on it. And look forward to talking with you in the future. Thank you.

Thank you. That does conclude today's Avalonbay Communities second quarter 2007 earnings conference call. You may now disconnect.