艾芙隆海灣社區公司 (AVB) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Avalonbay Communities third 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, Janice and welcome to Avalonbay Communities third 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 is a discussion of these risks and uncertainties in last evening press release as well as the company's Form 10K and Form 10Q 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'd like to turn the call over to Bryce Blair, Chairman and CEO of Avalonbay Communities. Bryce?

Thank you, John. And welcome to our third quarter call. With me on the call today are Tim Naughton, our President, Leo Horey, our EVP of Operations and Tom sergeant, our Chief Financial Officer. On the call I'll summarize the results for the quarter and provide an update on our markets and investment activity and then Tom will provide some comments on the current capital markets environment and Avalonbay balance sheet and liquidity. After that, Tim, Leo, Tom and I will all be available to answer any questions you may have.

Starting first with our quarterly performance, last evening we reported EPS of $1.58 and FFO per share of $1.19. The FFO per share of $1.19 reflects a year-over-year increase of just over 11% and is at the midpoint of the guidance we gave last quarter. FFO growth continues to be primarily driven by growth in our same store sales portfolio, as well as contributions from newly stabilized development communities. Overall the same store portfolio performed well, revenue growth of 5% combined with moderate expense growth resulted in NOI of just over 7%. Our portfolio remains highly occupied at 96.5%, which positions us well as we move into the typically slower winter leasing season. Also in last evening's release we reaffirmed the full year FFO outlook that we provided in July while narrowing the range. While department fundamentals remain healthy the rate of revenue growth has continued to moderate from the peek in the fourth quarter of last year. We expect the full-year revenue growth to come into the mid fives, which is consistent with the original guidance that we gave in January. Overall the markets have performed pretty much as expected during '07. In terms of specific submarket performance our strongest markets were northern California, Seattle and L.A. Each of these markets enjoyed year-over-year growth of 6% or better, as well as strong sequential quarterly growth. Seattle once again led in revenue growth and this is the fourth consecutive quarter that it has led in terms of our submarket performance. It reported revenue growth of 11%, followed by San Jose at 9%. Both of these markets have benefited from strong job growth, fueled in part by a strong technology sector.

Now as we look forward towards '08 there are a number of factors that will impact department fundamentals ... Jobs, the weakening for-sale market, changing demographics and new supply and I'll touch on each briefly. First, jobs are always a key driver for department demand. The job growth is projected to slow from the pace of about 123,000 jobs per month in '07 to about 100,000 jobs per month in '08. This slower rate of job growth is a concern for the economy overall as well as for apartment demands. Secondly the slowing for-sale market which helps us on the demand side and hurts a bit on the supply side although net-net the weak for-sale market is a positive for rental fundamentals. The sign of the weakness in the for-sale market recent data shows new home sales are down almost 25%, unsold inventory stands at almost 10 months with prices falling in almost all markets. Now the natural consequence of fewer home sales is the shifting of the home ownership rate back towards rentals after peeking at just over 69% a few years ago. The home ownership rate now has declined to 68.2% and consensus seems to suggest it may fall over the next couple of years as a consequence of the weak for-sale market, potentially another 100 basis points which would bring would bring the home ownership rate down to the low 67%.

With a 110 million households nationwide a small shift in home ownership propensity results in a large shift in rental demand. If the ownership rate falls by another 100 basis points over the next two years, it should result in a demand for an additional 500,000 additional rental units per year, 500,000 is a big number. And a shift of this magnitude is not unreasonable given the weakness in the for-sale market and would obviously be a significant catalyst for the rental market. A third driver to apartment demand is the increasing significance of the echo boomer demographic, the largest increase in renter households over the next five years will be in this 25-34 year old age group. And the growth in this age group is expected to result in an additional 150,000 renters per year over this time period. Collectively the impact of continued declined in the home ownership rate combined with the additional demand from the echo boomers will be a major driver of rental demand in the next few years. In fact, I think it will be a bigger driver of rental demand over the next few years than the impact of job growth.

Finally the supply of new apartments is expected to remain relatively stable over the next year at about 1% of supply nationally, about .8% in our markets. These projections assume some of the planned condo deals become rental. However, there's also a growing shadow market of investor single family and condos that enter the rental pool and although it is very difficult to track it certainly does contribute to the effective supply of apartments and so we're tracking this shadow market very carefully. Overall we'd expect healthy fundamentals into '08, the benefits of increasing rental propensity, the growing echo boomer effect and a stable supply environment should help insulate the apartment market from the negative effects of a slowing job market and competition from the shadow rental market. In terms of specific sub markets we'd expect the strongest market performance next year to continue to come from Seattle and northern California while expecting Boston and D.C. to lag primarily due to relatively high level of apartment completions in these markets.

I'd like to turn to our investment activity. During the quarter we completed three communities, one in L.A., one in northern New Jersey and the third in Long Island. We also began construction on three new communities, two in the Boston suburbs and one in northern California. Overall we have over 6,000 apartment homes under construction totaling just over over $1.7 billion of activity. With the weakness in the for-sale housing business and the uncertainty in the credit markets we are seeing an increasing number of potential new development opportunities however we're really not seeing many distressed sellers. Given the size of the current development pipeline we're continuing to be very selective in terms of new opportunities. Shifting to lease-up activity we currently have ten communities in active lease-up with rental revenue and leasing velocity meeting our budgeted goals. The actual velocity not surprisingly very substantially among communities based on the size of the community and the submarket location. Overall across these ten communities we averaged about 30 leases per month per community for the quarter. With the strongest lease-up performance was at our Avalonbay Riverview community in New York. In this community we experienced a lease-up pace of over 60 apartment homes per month for the quarter.

In terms of new acquisitions we acquired four communities totaling $95 million, three of these were for the fund, one was purchased as an Avalonbay wholly-owned community. In terms of dispositions we sold three communities totaling approximately $130 million during the quarter and just last month we completed the sale of our partnership interest in Avalon Groves in Stanford Connecticut for $63 million, collectively these sales totaled $195 million and allowed us to manage our concentration in certain sub markets while raising cost-effective capital for recycling into our development activity. So overall a pretty active but balanced quarter in terms of investment activity. We completed construction on three communities, started an additional three and maintained our development underway at $1.7 billion. We acquired four communities and sold four as well. Although given the size of the deals and the involvement of the funds the transaction yielded about $175 million of capital for re-investment. With that, I'll pass it to Tom who will provide some comments on the capital markets and Avalonbay's balance sheet and liquidity.

Thanks, Bryce. And good morning. My comments this morning focus on the capital market conditions and liquidity as they relate to our business, and I'll also speak to the potential impact of the current market environment on the company. I'll then conclude with some thoughts on how we're responding to both the challenges that exist today, as well as the opportunities.

First, increased volatility in the capital markets related to real estate characterized by widening credit spreads and reduced liquidity. Today unsecured debt spreads are at least 75 basis points wider than the lows that we saw earlier in the year. Secured debts through Fanny May and Freddy Mac have widened 30-50 basis points which is relatively modest compared to other collateralized debt products. I think it is important to note that Fanny and Freddy provide a very important source of liquidity to our sector and have helped to stabilize the values during the volatile credit market conditions. Overall, however, we've observed reduced liquidity in our business, evidenced by reduction in the debt financing activities for REITs over the summer and reduced velocity in sales transactions.

Turning to the potential implications to our business, these would include a threat of higher financing costs, and the possibility of higher cap rates. First, speaking to higher debt cost or the potential for higher debt cost, we see a potential for higher debt cost from rising spreads, but it hasn't been realized as wider spreads have been more than offset by declining U.S. treasury yields. As an example, a ten-year unsecured offering in June would have priced at around 6.25% and today that offering would price just over 6%. Thus, our all-in cost of borrowing is about the same as before the financial markets began resetting in the second quarter. Tax exempt interest rates moved up modestly during the year with floating rates ranging from 3.3 % to 4% before settling around 3.5% today. Somewhat related to spread widening is reduced liquidity which has the potential to impact cap rates. Some data sources have noted upward cap rate adjustments in second tier markets or have generalized that cap rates are up. Our view is that cap rate adjustments today are too market or submarket specific to generalize an overall increase. For our strongest markets, primarily west coast, cap rates remain very firm and other markets we've observed some modest upward movement but overall cap rates in our markets have been relatively stable given market volatility, although we'd note transaction velocity is down. This view is confirmed by our recent transaction activity. It is also important to note on cap rates that building costs are a factor in how much cap rates can move, as high replacement costs serve to limit the potential for downward valuations that could arise from cap rate adjustments. So to date higher spreads and reduced transaction volume and constrained liquidity have not had a material impact on our business. Further, these risks are somewhat mitigated by the quality of our balance sheet, our markets and our assets that become more sought after as risk positions reset and investors reach for quality.

Looking a little more closely at the quality of our markets in our apartment communes, we note that our markets generally have low housing affordability levels that make rental economics attractive. We generally see lessening supply in our markets and have seen less condominium conversion activity than some of the southeast and southwest markets. And so we expect a lesser impact from condo reversions on our portfolio. These market qualities combined with well-located apartments help sustain NOI growth which ultimately will translate into additional financial flexibility. And these attributes were tested and validated during the year, as we've already noted how little cap rates have changed in the face of increased market volatility.

Turning to the balance sheet, we generally view our balance sheet as the first line of defense from external risks. We enjoy great financial flexibility that helps mitigate any adverse impact from increased market volatility, helping to preserve and enhance value. We have low leverage, just 25% of our total market capitalization today, and low exposure to floating rate debt. Our fixed charge coverage is strong at our current ratings level and NOI from unencumbered assets is high. Note that adequate committed liquidity exists today to complete the construction activity we currently have underway today. So overall this means that we have access to liquidity that remains readily available and at a cost that is about the same as we could have achieved earlier in the year. But market volatility makes us cautious on the outlook for liquidity and pricing so we've responded to enhance our financial flexibility and I'd like to take you through a few things we've done.

First, we've taken steps to expand our credit facility from $650 million to a $1 billion. Our facilities priced at 40 basis point over LIBOR and our low level of floating rate debt today allows us to increase our balances under the line gaining an attractive source of capital in a declining rate environment. Secondly, we're closing on asset sales to income investors at attractive cap rates which have averaged 4.6% in the third quarter on three closed transactions that total about $127 million. We're resolving partnership interest that provide liquidity and value to Avalonbay while helping to achieve certain portfolio allocation goals. In October we sold one partnership interest in Avalon Grove in Stamford, Connecticut for net proceeds of over $63 million and finally we've reactivated and expanded our stock repurchase program increasing the program to $300 million. In August and September we opportunistically purchased $115 million of our stock, and an average price of approximately approximately $111 per share. And we'll continue to allocate capital between stock repurchases and development, seeking the highest risk adjusted returns.

So to summarize current market conditions are challenging but our financial flexibility is strong, and helps insulate us from volatility. The impact of changing market dynamics on our business have been modest. And our response has been measured. We've expanded sources of liquidity. We've selectively repurchased our stock. We've sold assets. And we've unlocked value embedded in joint ventures. And we believe we're well positioned today to respond to both challenges and opportunities offered by the market. And that concludes my remarks. And, Bryce, I turn it back to you.

Well, with that, Janice, we're prepared to take any questions that anyone may have.

Thank you. (OPERATOR INSTRUCTIONS). One moment please for your first question. Your first question comes from the line of Jonathan Litt with Citigroup.

Hi, it is Craig Melcher here with John. Question on the shadow housing market. How do you think your higher price point assets compared to a lot of other apartment assets in your markets is positioning you from the impact of the shadow supply of the homes and condos getting rented out?

Craig, this is Bryce. You know, the shadow market is a very broad market. It includes new single family homes that haven't been sold, existing single family homes that have been on the market a long time, as well as condominiums which are both at the high price point and the low price point and so I think it would be difficult to generalize that the shadow market would more adversity impact one asset class versus the other and as I stated in my comment it is is just extraordinarily difficult to get specific data on it. However, you know, when you have 800,000 plus, unsold apartment -- single family and condominiums, it is a factor that you just need to be cognizant of and watch carefully. And so I don't think it is clear enough to target it by asset class but it is certainly something that the whole industry needs to be cautious about.

Can you expand on, a little bit, why the northeast region was-- saw the deceleration it saw?

Leo, you want to touch on that, maybe characterize the different submarket performance?

Sure. Jonathan, this is Leo. Just to give you perspective, as you know we reported 2.8% growth in the northeast. If you were to eliminate Boston from that total, it increases to 3.7%. So in general, you know, Boston has been a challenge for us. But as we discussed last time, Boston has been doing a little better. We've seen concessions come down in that marketplace. And occupancy has stabilized around 96%. But I believe what we've been saying with respect to Boston is that while things are going a little better, it is going to take a while for it to work itself out. The second market that clearly was a challenge in the northeast was Long Island. I'll tell you when you look at the market fundamentals in Long Island, job growth is low, supply is low, but it is also a market where you have a high propensity to purchase. In other words, it is up in the mid-80s, the propensity to purchase in the Long Island market, and that's created some challenges for us. I would tell you also, being quite frank that we had some personnel turnover both at the on-site level and at the overhead level that I think added to some of the challenges that we saw in Long Island. The other markets, Fairfield, New York, northern New Jersey and central Jersey I think all performed a lot better so, to look at the northeast, 2.8% overall but two of the markets were clearly a drag. Does that make -- does that answer your question?

Yes. I think -- yes, I'm not sure why the propensity to buy would suddenly impact it in a particular period because that's been there longer term. So I'm not sure why that would hit Long Island, maybe it is more personnel related. But overall the numbers seem a little weaker than where the -- , what you are seeing in your other regions, and I'm just wondering if you could attribute any of that to the condo market, financial crisis or if there are any other macro trends that you can

The condo market has not been as big a deal. It wasn't as big of an event in the northeast. And then having watching the financial markets, absolutely in New York City, we've been watching it very carefully. But we haven't seen that events on Wall Street have impacted our portfolio. In fact, if you look at the northeast the best proxy for how New York is doing is northern New Jersey for us. Because, as you're aware, Westchester and Rockland counties is what makes up our New York portfolio and in our northern New Jersey portfolio it is waterfront assets and those products have been doing well and certainly in Manhattan our lease-ups have been doing well and outside of Manhattan at Avalon Riverview that lease-up has been doing well so the two things you pointed to we haven't seen evidence of that at this time.

And is there plans to do another investment fund with the capacities that exist the first one almost full?

Craig, this is Tom. We like the investment management business. And we think we've created a lot of value for investors through the fund. We generally don't discuss our future capital markets activity, whether it is a debt offering or whatnot. But this would clearly fall in that category. Having said that, we are considering our options to fund future value-added acquisition activity. And we're going to continue to pursue acquisitions opportunistically.

Thank you.

Your next question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed with your question.

Thanks, and good morning, everyone. The first question is last quarter you mentioned that you were -- your operations were trending towards the high end of guidance offset by higher interest expense, bringing you to the middle of your range. I think I had that down right. Now you are talking about how interest expense in absolute numbers aren't rising because treasuries have come in. So how would you characterize that statement from last quarter, and how it would present itself this quarter?

Rich, this is Bryce and then, Tom, you can --

And I -- the caveat being that you've -- you shrunk your guidance toward the midpoint of the range now so.

Right. I guess I'd start there, that in terms of guidance for the year and for the quarter remains unchanged, and so there has been no change there. I think -- and let me just give some color on -- in terms of guidance for the year, certainly not for next year, but for the year, what we stated last quarter and remains true today is that we see our revenue coming in basically right in the middle of the guidance we gave in the beginning of January, which was between 5 and 6.5%. And we see revenue coming in in that mid to higher fives. In terms of expenses, we'd given guidance that we're going to come in significantly under for the year, which puts our NOI for the year at the upper end of the guidance that we gave in January. So that's in terms of at the portfolio level. In terms of for the company the full-year guidance as I said remains unchanged. I think the comment that you're referring to is that our interest expense increases through the year because of the fact that we're developing a lot. And therefore we are increasing, we had cash in the balance sheet at the beginning of the year from the common offering and those dollars have been expended and now we're expending dollars and the line balance is building, it wasn't that the interest rate has increased.

Okay.

Although certainly in the second quarter we were concerned about that, as was everybody given the volatility in the capital markets.

Okay.

Tom?

No change then from an operating standpoint?

No, no change from an operating stand point.

Okay. Have you guys -- now that we're getting close to $100 a barrel thought about the implications of rising gas costs on your ability to raise rents?

Rich, this is Leo. I guess I would respond in a couple of ways to the rising gas costs. Number one, overall rising gas costs or rising oil prices do create concerns because at some point people are going to allocate dollars or are going to have to allocate dollars there and may have to allocate it away from rent. I would remind you though that our average renter pays in the 20, low 20% of their gross income in rent. So they have the capacity to pay more. I think we're in a little better shape there because our renters are, in general, more affluent. And I would tell you that we have done research on oil prices and how they move through the economy and how they affect our utility costs and we tend to see a multi-quarter lag but we haven't felt any push back from those rising oil prices as of yet.

Okay. Last question, just looking at the, you know, fairly extensive development rates schedule, which -- really no change, but would you be able to to quantify high dilutive that is sort of on an ongoing basis for you, that own land that isn't earning you anything at this point.

Rich, this is Tom. There's a lot of ways to speak to dilution. In terms of the land that we have on the balance sheet that we hold for development we capitalize interest on that and therefore it is really not dilutive to earnings, it is dilutive to fixed charge coverage, which is something that we watch very closely, but it is not dilutive to earnings.

Even though it is not under development yet you are able to capitalize that interest?

As long as you're pursuing it for development you can capitalize interest. If we were holding it for investment purposes and planned to sell it, we wouldn't capitalize interest. And some of the land we actually don't capitalize interest on for that reason.

Okay. Understood. Thank you very much.

Rich, one last comment you used the term we're shrinking guidance. We narrowed the range.

Narrowed. Bad word, bad word.

Yes. I'm a little sensitive to that so I wanted to point that out.

I say bad words every once in a while.

That's okay. We all do.

Okay, thanks.

Your next question comes from the line of Christeen Kim of Deutsche Bank.

Good morning, guys, I'll try not to use any bad words. In terms of -- Bryce, you talked about how the slowing housing market will have a positive impact on your business. Have you seen that filter through into your move out to purchase ratio?

The move outs due to home purchase is now in the low 20s, I believe Leo?

--23%, down about a percent, Christeen, from last quarter but in the range that we've historically operated in, which is about 20 to 25%.

But that was down from the high that we saw about 18 months ago that was, like, 28%. So it's -- historically we see in the 20, 25% it is in the -- sort of mid-to low portion of that but down substantially from where it was when the market was quite strong and so I think that the answer is yes, we do see a very direct translation into our how our residents make choices.

Are you seeing any noticeable difference in that change by market?

Not significant. Leo, is there --

No. It really still correlates with home prices. So in places where home prices are generally more affordable, that is where we see the higher percentages and in places where it is not affordable, that is where we see less home purchases.

But in terms of the rate of change--

The rate of change isn't substantial.

Okay. And I know it is a little premature to be talking about '08 but, Bryce, based on your commentary it sounds like some of the impact of a slowing job growth may be offset by some of the positive factors that you spoke about. Is it fair to assume that if market conditions stayed the way they are now 2008 could be a very similar year to 2007?

Not prepared to make that statement. We give our guidance in January and that would be where we would comment on that. I will say though, Christeen, one of the things that I was trying to focus my comments a by bit on is where historically if you have stable home ownership propensities and relatively stable job growth department fundamentals and therefore revenue is reasonably predictable but at a time of volatility, which I think we're seeing some in terms of the economy, we're certainly seeing some in terms of the housing market and volatility is not all bad, obviously. Volatility in demographics, in terms of changes, I think in the coming years the fact that -- the impact from changing propensities and the impact of changing demographics will potentially be a materially more important than the rate of job growth as it impacts apartment fundamentals. And so that is something that people just, I do not think have been as focused on and that is something that would be important for people to watch carefully.

Great. And my last question is have you guys bought back any shares following the end of the quarter?

We have not purchased any shares since the end of the quarter.

Great. Thanks, guys.

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

Good morning. Bryce, I want to talk a little more I guess on Boston and given what has gone on there from a fundamental standpoint, fairly weak results. My first question is what has happened on cap rates in Boston and what has kind of been the investment appetite there for others? And also wanted to understand, I know you guys don't talk about development yields specifically, but just wondering are development yields in Boston much different than the balance of your development yields kind of given all that, you have a lot of exposure, still coming or being built up to Boston in that 16, 19 active projects are in Boston and five out of 50 or 52 development rights are in Boston. I know it is a market where you have a lot of expertise on the development side but at what point do you start to pull back a little bit in Boston.

Craig, this is Tim. Why don't I take those? And first of all with respect to cap rates in Boston, I think Tom had mentioned we've seen little evidence of any movement in cap rates in terms of actual trades but the stuff that's in the pipeline which includes a couple of deals in Boston we are seeing some movement, maybe as as much as 25 basis points let's say generally in the suburban northeast, and maybe even the Mid-Atlantic and I would say Boston would be in that category as well. In terms of investor appetite, it is hard to say. A lot hasn't traded in Boston the last -- the last couple of years. It is not the same level of appetite clearly as on the west coast or many of our other markets but I'm not sure that it ever has been honestly. You'll still get enough bid to make it a competitive process but it is not as deep of a pool as, say, a Seattle or San Francisco today. And lastly with respect to development yields, I would say they're largely consistent with the rest of the pipeline, if not a little bit better on a going in basis and while some of the deals that we may have started in 2003-2004 may have trended down just given what was going on in that market, today we are seeing the yields start to stabilize, pretty healthy numbers, high sixes to low sevens, such that we're confident that we're continuing to create pretty significant value in that market.

Where do you think on an absolute basis cap rates are roughly, give as wide a range as you feel comfortably, obviously?

I think they're still low fours say on the west coast some urban markets to as high as 5%. I don't think they're north of five anywhere in our markets, and that would maybe be in the suburban northeast. So somewhere between the low fours and 5%

Sorry, Tim, I'm trying to be more specific about Boston specifically.

Boston would be at the high end of that ranging, if I had to pick a number I would say 5% of the cap rate where things are trading.

Great. I think Andy has a question or two.

Good morning, guys. Can you break down Los Angeles between L.A. and Ventura Counties and talk a little bit about the relative strengths and weaknesses of those two submarkets?

I can only talk about it anecdotally. I will tell you that L.A. is stronger than Ventura county. We only have one asset out that way. And it is out in [Cabario] and it is more challenged typically than the assets in, more L.A. proper. Certainly we feel and perform a lot better in the Woodland Hills, [Canoga] area than we do out towards Ventura.

Okay. Similarly, it looks like your yields on redevelopment came down about 100 basis point, can you give us a little color on what;s going on there?

Sure, this is Tim, is really just a bucket issue. We started three new redevelopments and those are deals that were either acquired recently, I-fund deals or another deal, it just was lower yielding relatively to the time at which it was acquired so it is really just a mix issue.

Fair enough. One last question, what kind of rent increases are you seeing on renewals versus new leases?

This is Leo again. Renewals are in the 4 to 5% range over the portfolio, whereas new leases are over the entire portfolio in the 1 to 2% range.

Great. Thanks, guys.

Your next question comes from the line of William Acheson with Merrill lynch. Please proceed with your question.

Good morning, gentlemen. How are you?

Good.

On the D.C. market, could you give us a little bit of a primer? I mean, your -- the rent rate increases were fairly weak sequentially, roughly a quarter of the REIT average but you did build occupancy. There's an awful lot of condo supply coming online there. Can you give us a feel for the tenor of the market as to how much competition you expect from perhaps some of those coming into rental supply?

Bill this is Leo. Again, job growth has remained fairly strong in D.C. but, supply is evident. There is a constant supply it is higher than some of our other markets. We are seeing some communities that were going to go condo are coming in as apartments. Most of the information we have about condos is anecdotal. There isn't really a good source of information there. We try to monitor it through the realtors, for reasons for move out, for other residents and as you pointed out in the D.C. area specifically we have stabilized occupancy, and that is what we did over the last quarter. In general, more of the supply is coming in in the northern Virginia area than is coming in suburban Maryland or D.C. Proper. Is that responsive to your question.

Yes, yes, it is, thank you, it is rather frustrating we can't get better numbers on some of these things. Turning to development, your projected development spend in the fourth quarter roughly doubled to $360 million versus what you were forecasting last quarter. That's an awfully large increase. Can you give us a little bit of an idea what was going on there?

Bill, you're referring to attachment 10? Which --

Yes, that's it.

Are you talking about remaining to invest, right?

I'm looking at total capital cost invested during period. It is the -- the second column. The number of units stays roughly the same. The cost of homes completed stays roughly the same. But total capital cost goes up to $359.285 billion a from 180 million. We can talk offline on this.

Yes. That might be better. Because it is a relatively complex schedule there in terms of incorporating projected new start activity as well.

Okay. And just one last question on development. Lexington Hills, just doing the math, it looks like, average leases completed during the period worked out to about three leases per week. Is there something structural preventing more leases from being done. Is there a substantial number of units not ready to be leased or what is going on?

The third quarter average per month that we have, and it may have just been the period and how it moved is we were doing about 14 a month at Lexington Hills average over the quarter. So I'm not sure how we're getting a three.

Three per week he said.

Yes. But I think -- as a schedule attachment H says we've only completed about 24% and we leased about 31%. And I think part of it is -- part of it is just an inventorially issue that you often see early on through the lease-up, I would expect that that would expand as more deliveries come on line.

Okay. That's what I thought it was. Thank you, gentlemen.

(OPERATOR INSTRUCTORS). Your next question comes from the line of Alex Goldfarb with UBS. Please proceed with your question.

Thank you, good morning. Just the first question is on concessions. They seem to be remaining low as a a percent of rent. Just want to see where you guys think that this -- will it stay this low? Are you saying any variance by market on concessions?

Alex, this is Leo. Concessions are running about $300 per move in right now, which is up just slightly from a year ago. But it is down pretty substantial from last quarter. Down about 40% from last quarter. We use concessions where we believe it makes sense but in specific markets where concessions may be more prevelant would be places like Long Island and Chicago. And we use concessions more just as a marketing tool than, than any specific structural need it is in response to specific issues in a market.

Okay. The next is just timing on resolution of the JV accounting issue and if you think that this will spill into '08.

Alex, Tim Naughton here, that's -- I think it is probably the land lease you're speaking to.

Yes.

Out of Rock Spring. We're continuing to have discussions with -- actually which is a JV as well with our partner and land lessor. It is a complex issue, made more complicated by the fact at that they have an equity interest in the asset as well so no resolution there, something we're continuing to have discussions on but, Tom, want to comment a little bit more as we think about it in '08.

Yes. Alex, I think for planning purposes, and just to be real clear, when we are going to -- when we prepare our outlook for next year, and we give that in the first quarter, we are going to prepare that outlook as if that land lease accounting remains the same as it is today. In other words, that it is not resolved. The reason I'm being so specific on this is that I do think there's a lot of noise over this land lease both in the fourth quarter and next year. So for planning purposes we will give outlook that does not have that land lease resolved and would suggest that those that are preparing their estimates for next year do the same.

Okay. And just the final question is on New York, residential supply is -- seems to be surpassing prior peaks. Just want to know what your thoughts are and how the level of residential construction could affect, you know if that will siphon away any of your potential renters or if that affects yields on the projects that you guys have planned in New York.

Alex, this is Tim. Certainly we haven't seep the effects of it yet, particularly in close-in New York as Riverview and Bowery Place we continue to have healthy absorption and rent increases. I think you you saw in Bowery we actually noted a -- over a $500 average rent increase from the original pro forma this past quarter. We're certainly not seeing any evidence of it in -- closer in. Yet I think the issue in New York is about to be the amount of construction really in the Burroughs, not in Manhattan itself, that is really where the net increase and supply but when you look at it on a relative to the underlying population base, it is still pretty low, well under under 1% in terms of new supply being added into the marketplace there.

But you're still targeting the high end professional, isn't it?

Oh, sure as it does in any market, any new supply being introduced to any market, you are always targeting the top end by definition.

Okay. Thank you.

Your next question comes from the line of Christine O'Connor with Morgan Stanley. Please proceed with your question.

Thanks, good morning. Can you update us on the fundamentals in San Diego and Orange County? It looks like the occupancy declined over 100 basis points there year-over-year.

Sure. Kristin, this is Leo. Orange County basically over the last six months and truth is for all of '07 job growth is none existent. Supply is coming in that market as a percent in terms of inventory, and we have had some occupancy challenges there. And we've increased concessions somewhat, but that market has some pressure on it due to the fundamentals. With respect to San Diego, I'll tell you in the last six months we've seen job growth start to improve, although for the year it is going to be modest. Supply has been relatively stead at just shy of a percent of total inventory. Just so you -- to remind you, our portfolio in San Diego is fairly small. We did see a high level of turnover that has been the historical turnover in that market for us. It actually was the highest market for us overall. And our occupancy is down around 95%. So Orange County and into San Diego are the challenge markets in Southern California, L.A. obviously performing somewhat better.

And is the supply you're seeing in Orange County, is that multi-family supply or single family supply.

It is multifamily supply that I'm referring to.

Okay. And also can you provide some color on the increase in property management expenses sequentially?

Yes. This is Tom. You're referring to property management and other indirect costs?

Yes.

Yes. A lot of that relates to an increase in some of our strategic initiatives. We opened a new customer care center in southern Virginia, and that's embedded in that category, as well as we do have some severance costs embedded in that category as well which are one-time costs.

So how much for the one-time costs this quarter, just so we can try to get at a run rate going forward?

I would say that -- well, I wouldn't use this quarter as a run rate. We're going to give you an outlook in the first quarter. I would say the -- it would be hard for me to parse how much of the start-up costs are one-time costs for the CCC. So I would like to avoid answering that question just because I think that you might get an answer that would not be good for the run rate.

Okay. Thank you.

Your next question comes from the line of Dustin Pizzo with Bank of America.

Thanks. I'll try and make this quick. Most of my questions have been answered. Leo, just looking at the operating expenses, I mean, what would you say is a good normalized growth rate there for the company? I know they've been pretty moderate over the last year or two.

In truth, Dustin, they've been running, you know, in the mid- to upper twos over the last four years. I think four years ago they were around 1.8% and then the last couple years they've been in the mid-twos, and clearly we're trending that way this year.

Okay.

As well.

And what -- can you just remind us of the past few quarters, I mean what's been the driver behind sort of -- especially in the third quarter the more moderate growth?

In the third quarter the more moderate growth has been really driven by the fact that we've had very good experience in utilities. We talked about that, or I talked about it a little last quarter. We also have had good experience in insurance. The things that are putting pressure on us are clearly property taxes, with all the sales and assessment information that's out there. Payroll continues to be an area of challenge. And then finally we've had some pressure from maintenance related expenses. So it is not that we're immune to cost increases, it's just that we've been looking for different and better ways to run our business. And those are kind of the categories that have been helping us and hurting us.

Okay. Thank you.

Your next question comes from the line of [Teevin] Kim with Credit Suisse.

Hi. Could you -- have you noticed any changing in demand for your New York apartments due to job losses on Wall Street?

This is Leo. We really haven't noticed any reduction in demand. In fact, you know, our lease-ups have gone incredibly well in Manhattan and surrounding areas so while we're watching for it because certainly it has gotten a lot of press we haven't seeing any evidence of it.

Okay. And one last question, given the uncertainty of the global macro environment and the U.S. have your future hurdle rate for your developments, have that changed at all? Have they gone up?

Teevin, Tim Naughton, yes, I think we talked about this last quarter as well, we're always suggesting hurdle rates on development based upon a number of factors, but a big driver of that is our view of the capital markets and cost of capital. I think as we indicated last quarter, we would expect to see hurdle rates probably start to move up here and have been in terms of how we've been evaluating business over the last I would say three to four to five months, you know in terms of how that might change over the next six months, you know, they -- that will play out. But we're also, we're always monitoring rates based upon -- hurdle rates based upon our view of the capital market based upon where we are in the cycle and how things are to be shifting.

Okay, thanks.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Jay Haberman with Goldman Sachs.

Hey, good morning. Question on supply in Boston, when do you see that improving and I guess of the existing supply, how how much of that is competitive with your more infilled development, sort of inside 495?

Jay, this is Bryce. I'll get a little echo here, Jay. The supply that we're seeing -- expecting to see in '08 is about the same level of '07, about 3,000 apartment homes which is a fair amount for Boston which historically has been probably half of that. The supply is pretty widespread both on the North Shore as well as on the western suburbs and some on the urban area, although we don't have any new development underway right now in -- actually in Boston proper. So in terms of when it will abate, we don't see it abating into '08 and then there's always a bit of a lag from the completions through to the stabilizations of those communities and so there is no doubt that it will drag a little bit into '09 and we did say last quarter, I said last quarter and just to clarify we do see Boston improving, we see some positive signs there but it is not going to the move of the -- to the top of the performance heap in '08, we expect it to be towards the bottom for our markets but still an improvement in '08 over '07.

Okay. And I guess in -- in general also looking at northern California, specifically San Francisco and San Jose, we're starting to see rents there move up to levels we probably have not seen in five or six years. Are you starting to get any pushback in those markets?

This is Leo. Certainly we're getting some push back in those markets but in truth we expect to get pushback. Those markets still remain very strong for us. We see that those markets are going to be among our strongest next year and going forward.

Okay. I think Mark has some questions as well.

Hey, Tom, you had spoken about -- earlier in your commentary about working to close out some of those joint venture relationships like you had up in Stamford. What level do you expect that to get to in terms of what you currently have in joint ventures right now?

Well, first, we don't have a lot of joint ventures so there's not a huge opportunity. The way that we've look the at these joint ventures is where we have embedded value that we're not getting cash flow from those joint ventures, we've looked to resolve those partnership interests and unlock that value and capital. That has been one of our strategies over the last year is we've resolved, over the last 18 months, I guess, we've resolved three partnership interests so we'll continue to look at our joint ventures, there are very few that we have but we'll continue to look towards those joint ventures with an eye towards unlocking the promoted interest that exists within them or the value that's embedded that we're not getting cash flow from.

Tom maybe just quantify the number of joint ventures that are still outstanding.

There may be, in total about five or six. It is a -- it is a very small number. I mean, we have 160 communities and we only have five or six joint ventures so there's really not a bunch of opportunity there.

Okay. And then lastly related to the assets that you sold during the quarter, I notice that two of those were in fairly good growth markets. What was the thinking behind selling those assets.

Mark, one of the things that we have said for three or four years now is our overall portfolio allocation goals which is a longer term view of where we want to see our asset concentration by market and we had identified one, Boston, a market where we want to manage our concentration. Stamford is a market where we want to reduce some concentration and San Jose is a market where we wanted to reduce some concentration, so those are longer term goals that we then look for the opportune time to execute on. Specifically example in San Jose while we made that statement a few years ago and we we're getting some pressure from the investment to lighten up there we didnt think it was an opportune time because NOI's were down and cap rates were up. And so we're going to look for good time times in the cycle in order to align our portfolio with our longer term goals.

Okay. Thanks.

Your next question comes from the line of Steve Swett with KBW.

Thanks a lot. My questions have been answered.

Well, thank you, Steve. That was great. We appreciate that. Always nice to have an easy one.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Richard Paoli from ABP Investments.

Hey, guys, I'll try to keep it quick, I hope I didn't miss this, but did you discuss on the transactions that you sold when those deals were struck because, obviously there's consternation in the market that cap rates are moving. Can you just give us a little story to what happened, did they try to retrade them, anything like that? And also what are you seeing today on deals that are coming across your desk on either the sell or the buy side.

Rich, this is Tim. In terms of the dispositions I think they really were negotiated through the course of the quarter so that's really kind of hard to parse which -- some of them certainly crossed over the point in time where we started to see some dislocation in the credit markets, you know in terms of retrading, not really. We didn't see it on the ones that we've sold. We've seen some of that in the market place, but not really on the transactions we've been directly involved in on the sell side. In terms of what we're seeing in the market place today, clearly equity institutional type buyers are feeling the gap that was left by the departure of many of the leveraged buyers, but -- and I've mentioned this earlier, we're still seeing the cap rates ranges from the low fours in west coast urban areas to probably the highest is 5%, say, in suburban northeast.

Thank you. I appreciate that.

And Mr. Bryce, you may proceed with any closing remarks.

Thank you. Well, we appreciate everyone taking the time today. And we'll see many of you in a -- in a few weeks at NAREIT in Las Vegas. So thank you for the time today.

Thank you, sir. Ladies and gentlemen this concludes today's conference call. You may now disconnect.