艾芙隆海灣社區公司 (AVB) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the AvalonBay Communities fourth quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) This 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, Carmen. Welcome to AvalonBay Communities fourth quarter 2007 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There's a discussion of these risks and uncertainties in last 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 that may be used in today's discussion. The attachment is available on our web site at www.avalonbay.com/earnings, and we earn courage you to refer to this information during our review of operating results and financial performance. With that, I will turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities for his remarks. Bryce.

Thank you, John. 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 will summarize our results for the quarter and for the full year and then I will provide some comments regarding our outlook '08. Tom will then discuss the capital plan for the year, comment on the dividend increase we announced last even and provide some additional color on our 2008 financial outlook. After that, we will all be available to answer any questions you may have.

Last evening we reported EPS of $1.65 FFO per share of $1.14. The FFO per share of $1.14 includes an increase a pursuit write off of approximately $0.05 per share. Exclude this $0.05 adjustment, the FFO for the quarter would have been $1.19 which is slightly above the midpoint of the guidance that we gave last quarter. Overall for the year our performance was in line with the original guidance given last January. The year-over-year revenue growth of 5.5% was within the original range we gave. Moderate operating expense growth of 2.1% with the fourth straight year of expense growth at 3% or less, NOI of 7.2% was in the upper end of our original guidance. Overall for the quarter and the year, operating results were right in line with our original expectations.

The quarter also concluded a very active year on the investment front. During '07 we completed the development of eight communities for a total cost of 440 million and we began construction on 12 additional communities with the total cost of 1.3 billion. During the year, we acquired eight communities for a total price of about 325 million, seven of which were acquired on behalf of our invested management funds and with these acquisition the fund is now fully invested.

Now, it was also a busy year in the disposition front. We sold four communities and one partnership interest for a total proceed of approximately 275 million. These sales resulted in an economic gain of 150 million, which is a profit of about 120% over our initial investment of $125 million. So these communities, our total basis based upon what we acquired or developed them for was 125 million we sold them for 275 million. The average cap rate was about 4.6% and they generated an unlevered IRR of almost 18%. These are great numbers and even more impressive considering the average hold period was about nine years. The attractive gains from these sales clearly demonstrates the significant value created from our acquisition, development and our property operations activity.

Overall, I characterize those seven this year where the operating fundamentals played out essentially as we expected and we were very active in our development acquisition and disposition activities. Ultimately executing very well in a very difficult capital environment. As a result of our performance, we were able to deliver growth and operating FFO of over 13% which is the third straight year of double digit growth.

Shifting to '08, our outlook calls for the continuation of the moderating fundamentals that we experienced throughout 2007. Our assessment is driven by the impact of four primary factors, a slowing economy, a weak housing market, improving demographics and constrained new supply. I want to touch on each briefly. The weak fourth quarter GDP, the job losses in January, and the third party forecast for '08 all point to a continued slow down in the economy. As the economy continues to slow it is resulting in lower levels of job creation and thus reduced household growth.

Job growth nationally in '06 was 1.7%, it declined to 1.2% in '07 and is projected to be less than 1% in '08. With job growth in AvalonBay's markets expected to be moderately less than the nation as a whole. While consensus forecasts are still not projecting a recession, the likelihood of one appears more probable each day. Our baseline scenario does not assume a recession; however, we have modeled a modest recession and under the scenario we are still comfortable with our range of revenue and NOI guidance. The reason for this is that even in our baseline scenario we have assumed such a minimal level of job growth that eliminating all job growth doesn't impact rental household growth very significantly.

I commented in the past I think there are other factors that are increasingly important to rental demand in the coming years, specifically the weak housing market and changing demographics. Regarding the weak housing market, it is a mixed blessing for apartment fundamentals. Most recently released home sale data shows a market that continues to weaken. For the fourth quarter the volume of sales on a year-over-year basis declined by 20% for both single family and condominiums. Levels of unsold housing inventory are over 40% higher on a year-over-year basis for both existing single family and condominiums, pushing sales prices lower in most major markets. This weakness in the sale market has resulted in the continued decline in the home ownership rate which, in turn, results in additional rental demand. The home ownership rate declined by over 100 basis points to just under 68% in the fourth quarter from just one year ago. This is very significant as every 1% change in home ownership rate results in over an additional 1 million renter households.

The weak housing market is not an altogether positive as it does result in increased rental competition from the unsold condominiums and the single family homes, often called the shadow market. While this is an issue nationally, it is less of an issue in our market. Data is difficult to obtain, yet a report issued late last year by one analyst showed the level of unsold single family and condominiums was highest in the sunbelt market such as south Florida, Phoenix, Vegas, and was moderate to low in AvalonBay's markets.

Another positive for the rental market is the continued growth in the eco boomer population. This 20- to 34-year-old age group has a very high propensity of rent as approximately 60% of renters. Over the next five years this age group is expected to grow by about 2 million additional renter households which is a significant positive rental housing demand and we are just starting to see the benefits of this growth.

And finally, as a result of the slowing economy, the continued high construction cost and constrained credit, we expect the supply of new apartment homes in '08 nationally to remain at levels essentially in line with '07. Within AvalonBay's markets, however, we expect the level of new construction to decline by about 15% from last year's levels. Overall we expect moderating fundamentals to translate into revenue growth for the portfolio, averaging in the low to mid 3s with northern California and the Pacific Northwest being significantly above that range and the other markets at or slightly below the midpoint. Given this assessment of the economy, I wanted to outline our plans for the different components of our investment activity.

First, we expect to continue to be very active on the development front, although new starts will be about 300 million less than the starts last year. With average development yields in the low to mid 6s, we continue to create significant value through our development activities but we have become slightly more cautious given concerns about the economy and capital market considerations. Regarding acquisitions we have been cautious over the last quarter and we expect to remain so in the early part of '08. In terms of disposition activity, we expect to b be very aggressive and plan to sale up to a billion dollars in assets this year. Currently, the sales market remains very attractive for high quality assets in the strongest markets. The cap rates in the mid 4 to low 5s, we can sell assets about 150 basis points below the implied cap rate and our share price or as compared to initial yield on our development communities.

As long as pricing remains attractive, we are going to be an aggressive seller of assets and we will recycle that capital into our active development program or to additional share repurchases. So overall with our assessment for continued weakness in the economy, we do not expect fundamentals in '08 to be as robust as in '07. However, we do expect it to be a year where the operating fundamentals remain healthy by historical standards and where there will be potentially some very interesting investment opportunities on the development and the acquisition front, particularly for those a strong balance sheet and experienced track records. With that, I will pass it to Tom who will focus his comments on our capital plan and provide some additional color on our '08 outlook.

Thanks, Bryce. Let me start this afternoon with an overview of four topics I will cover. The first is our capital planning and liquidity. Second, the 2008 financial outlook that we provided last evening. Third, our share repurchase plan. Finally, our dividend increase that the board approved two days ago. On the capital front, our financial flexibility allows us to avoid current market volatility and positions us to respond to opportunities that is may emerge during the year. With about 30% leverage and floating rate debt that makes up just 10% of our capital structure and with over 80% of our net operating income unincumbered, we enjoy a full range of capital market options to meet our capital plan for the year.

In terms of liquidity and the related sources and uses of capital, our capital needs total about 1.5 billion for the year. That will be used for investment activity and securities redemptions. To some extent, these uses are flexible and will have the ability to first sum investment activity and security redemptions depending on overall capital market conditions. We expect to meet these needs through both secured and unsecured debt with fixed and floating rates as well as asset sales and retained cash. Just one note on the use of secured debt. As you know, we have historically favored the unsecured market over secured debt due to financial and operational flexibility we enjoy through the unsecured market. The relative use of secured versus unsecured debt will depend on market conditions; however, recent pricing indications suggest that secured debts 100 to 150 basis points lower in cost and unsecured fixed rate debt which really makes the use of secured debt today a compelling choice.

Turning to the financial outlook we provided last evening, you will find more detail on these sources and uses of capital as well as expected operating trends on attachment 15. Our overall outlook for NOI growth of about 3.75% at the midpoint reflects expected revenue trends and modest expense growth. Cost containment remains a key focus in 2008 with savings and insurance marketing and redecorating cost offset by higher property taxes, utilities and wages. We have a good track record in constraining expense growth and to sustain this success we have added an officer level position dedicated to centralized procurement as well as increased our tax staff to constrain growth and property taxes.

Just a few comments about our stock repurchase program. As we look to allocate and reallocate capital, we have adjusted our targets for overall returns. From this effort, we have determined that the risk adjusted returns for investing in our stock are compelling and the board voted to increase the stock repurchase authorization by another 200 million. We will use the expanded authorization as opportunities arise, balancing, pricing, NAV and available liquidity with other capital allocation choices. Note that as a part of our capital allocation discipline, certain developments and preplanning will not move forward and the cumulative cost today previously capitalized for these pursuits totaling 4.5 million were charged to expense in the fourth quarter.

Finally, the board raised our quarterly dividends for the upcoming year by 5% and this level of increase is supported by our earnings growth while allowing us to retain a cost effective source of liquidity where the cost of and the access to liquidity is less certain. This level of dividend suggests that retained capital from operations will be about 100 million in 2008, providing an FFO payout ratio of approximately 71%, and this is the lowest in the sector and really underscores the safety of our dividends at these levels.

So just to summarize, while the capital markets are volatile, we are well prepared with a balance sheet that offers great financial flexibility with access to secured and unsecured debt with both fixed and floating rates. We have good visibility into our sources and uses of capital for the year, balancing new debt with asset sales, development and stock repurchases and exercising our financial flexibility to optimize both earnings growth and value creation. And finally, our financial outlook provides strong earnings growth which supports our dividend increase of 5% while providing the lowest payout ratio in the sector and one of the lowest of all REITs. Bryce, that concludes my comments.

Well with, thanks, Tom. Despite the likely weak economic environment and the volatility in the capital markets that are expected this year, we are still able to project growth in operating FFO of over 13% for 2008 and the reason for the strong growth, it is not due to aggressive assumptions at the portfolio level, but rather it is a cumulative effect of the contributions from all aspects of our diversment activities. Certainly, same-store sort sales portfolio is contributing, also significant contributions from our development and redevelopment activity, the harvesting of value from our disposition and utilizing the strength of our balance sheet. '08 will likely be a year we will have to show flexibility in terms of our business plan in order to respond to the challenges and opportunities that the economy and capital markets will likely present. With a strong balance sheet, multiple investment options and a deep organization, we are well positioned to capitalize on opportunities that may arise. With that, Carmen, we will be pleased to take questions at this time.

(OPERATOR INSTRUCTIONS) Your first question is from Jonathan Litt with Citigroup.

Hey, it's John. On the dispositions you are planning for '08, is there, is this more of a focus on specific market or quality of assets or how are you looking about going and picking out what assets you are looking to sell?

This is Tim Naughton. In terms of the dispositions that we have got planned for 2008, it is not any one specific market. We are looking at selling across, across many markets, given the strength of the transaction market where there are opportunities to sell assets that we think are either outliers or don't fit our view of the long-term objective of the portfolio, we just think it is good opportunity to dispose of some of those assets in this environment. So it is really, not any one market, it is really across the board.

And the cap rates of the mid 4s to low 5s, is that an economic cap rate? If so, what type of assumptions would be needed to get to that economic cap rate?

Yes, I think when we usually quote cap rates, we are usually talking nominal cap rates as opposed to economic cap rates, but really not a big difference in our assets. Typically you are talking about 20 basis points maybe, just given the amount of capital expenditures we see in our portfolio. So, the 4.5 to low 5 as a price quota, that's still our best estimate. I would say there wasn't a lot of transaction activity in Q4 just given the backup in the capital market. We do anticipate a lot of product coming to market, including some assets that we have got currently in the marketing process. So I think, I think the next few weeks, the next 30 to 45 days we'll be telling just in terms of, in terms pricing patterns. But at this point, we are not seeing any evidence that leads us to believe there has been any kind of erosion in those kind of cap rates we have been talking about.

Last question is just on the pursuit cost in the quarter, can you give a little bit more color on that and the type of projects that were no longer being pursued?

Sure. It is Tim again. The amount of pursuit cost wrote off this quarter was larger than normal for AvalonBay but just something to keep in mind this is pretty small when you are talking about against a $6 billion development pipeline. Really, part of our annual planning process, we do as a, as, we do try to exercise and discipline in terms of looking holistically across our portfolio. Just given target yields have gone up, as Tom mentioned in his remarks, as well as some of the liquidity considerations in the marketplace combined with some deals where the entitlements we viewed were low probability, we just thought it was prudent to go ahead and abandon some of the deals that we had been pursuing. So it does, it is really a logical set of actions just given the environment when you are talking about reducing the level of starts, 20 to 25%, increasing the amount of asset sales, obviously the repurchased activity we are seeing combined with increasing abandonments, it is a very consistent set of actions that makes sense as we look at the current environment and look toward to 2008.

Your next question comes from Kristin O'Connor. Please proceed with your question.

Thank you. You said that you expect a northern California and the Pacific Northwest to be above your revenue guidance range while the other markets would be at or below the midpoint. Can you just give a little more detail on your expectations for those other markets, which ones are below the midpoint and where you see the most slowing?

At this point we are not prepared to give guidance or a submarket basis or market by market basis. I will add though that to a certain degree it does break east to west with west coast markets averaging about 5% and east coast markets averaging in the mid 2s. So it is to a certain degree a tale of two coasts that translates into the median, within the range of that we gave.

Excuse me. Thanks. Can you comment on the sequential weakness in the New York market? Excuse me. It looks like occupancy was down and rental rate growth was negative in the fourth quarter. Are you seeing any impact from financial services lay off?

This is Leo Horey. Our expectations for New York are very positive. We expect job growth that's solid. It has certainly been solid over the last six months in the New York metropolitan and it is expected to remain solid, although with some concerns based on how the capital markets shake out, and supply is fairly minimal. Looking directly at our portfolio, the three markets that you would be addressing would be Fairfield, New Haven, New York and northern New Jersey. Fairfield, the assets that are impacted there by New York, by the Stanford assets, those assets are doing well. If there's any drag from the Fairfield, it comes more out of northern Fairfield which is much less related to New York. On the New York assets, all of our assets are in Westchester County and [Rockland] County. Those assets have been doing well, we had to make some adjustments to keep can occupancy stable even at the reduced occupancy levels we are well into the 96% range, which is very solid. Finally, in northern New Jersey, which trades off the New York area, there's one asset we had a little more availability on that put some pressure but, in general, things are going well there. There is a lease up that's active in that Jersey City area that has some limited impact. We feel good about where the assets are positioned in New York as long as the financial market, the financial sector remains strong.

Okay. Thanks.

Your next question comes from Louis Taylor with Deutsche bank.

In terms of development starts for '08, just a rough sense of the geographic break down.

Lou, this is Tim. The first part of your question was cut out, but I think you were asking about the rough geographic breakdown of development starts for 2008? Is that correct?

Yes. Yes.

It is pretty, pretty dispersed, actually if you go back I am looking to attachment 12, the first ten or so are pretty, are the more likely deals to actually start in 2008, so you see a mix of West Coast, California, Seattle, both southern and northern California as well as some smaller deals in Boston and New York area.

Okay. And then second question just pertains to development and leasing, the projects that are leased up right now. Are there any projects where the pace of leasing or the rents are varying much from your pro forma?

Lou, this is Leo. Over the past three months basically from the last call to this call, we have averaged about 19 tor 20 leases a month, and that compares to a typical run rate for the entire year of about 25. So we are running at about seasonal patterns. To be more specific, during that period there it was a little slower in Avalon on the sound in New Rochelle, but we have seen more positive results lately; and to deal with the second part of your question with respect to rate, we are getting rents for the whole bucket that largely approximate the projections we had initially anticipated.

Okay. Last question for Tom, in terms of your 800 million of debt financing this year action can you give us a sense of timing within the year, and what would be your early read in terms of how much of that could be absorbed by Fannie or Freddie.

Lou, we expect we probably do about 300 million of secured debt in the first quarter following with 500 million later in the year on an unsecured basis. That may be bank term debt. It could be the unsecured market. Depends on what capital market conditions are offered us. The 300 million secured debt would probably be with Fannie and/or Freddy on several assets, although we also are talking with a few insurance companies that are also in the market for secured debt.

Great. Thank you.

Your next question is from Alex Goldfarb with UBS. Please proceed with your question.

On that question, how aggressive will you guys be in pursuing unsecured for the second batch before you go back to looking at secured debt?

Alex, gow aggressive? This is Tom. How aggressive will we be?

Yes, if traditionally you guys have used unsecured then if you start going to the secured route, just want to get a sense for how much you will pursue where unsecured is before saying okay, let's go, start using more and more secured debt.

First, the amount of secured at the time that we have in our capital structure right now, we have about 83% of our as assets or the NOI from our assets are unincumbered. So we have hardly used secured debt. We generally use it for tax exempt bonds or to get entitlements in Massachusetts. Our current plan is to obtain about $300 million of proceeds from securing a couple of three assets, probably two assets, and then go into the unsecured market it may not be a term loan. It could be a bank loan that is a floating rate structure or it can be the traditional unsecured market dependong on the condition of those markets at the time. I should emphasize, the unsecured term debt market is open today. We can go out today and get a deal done for, it is speculative because no one is willing to go do it today and fine out what the real price is, but probably somewhere a five year deal, 6.25 to 6.75 if you believe the buildup of cost over treasury. That's not competitive with an unsecured debt offering that is probably 100 to 150 basis points less. We are not abandoning our strategy. We like our unsecured strategy. It gives us a lot of financial flexibility. But until the unsecured markets settle down and offer a more competitive cost to us, we are going to use the unsecured -- the secured market selectively to finance our business.

And can you give us a sense of where the bank, the term loan market may be, the terms of that market?

Yes, that market floats over LIBOR. It would be a very competitive market. I don't want to go into exact spreads over LIBOR but it would be a very attractive source of capital.

Okay. The 5% dividend hike, was that the minimum necessary to meet the REIT requirements?

No, no it wasn't. It was an amount the board came to after considering earnings growth retaining liquidity, and frankly telegraphing the fact that over time we, if our, if our overall earnings growth has moderated, you want to kind of reflect that in your dividend. It is still a very big endorsement though in terms of the optimism we have for financial plan in 2008, and when, and when you only have 71% pay out ratio, retaining all of that capital is a very important part of our strategy for securing capital or obtaining capital in 2008.

Okay. And then final question, just going to the dispositions. Have you seen any change in the buyers ability of assets as you market assets for them to get financing or are they come to go you guys at all to help facilitate the arranging of financing as they buy asset?.

Alex, this is Tim. We really haven't seen a change in their ability, but frankly the leverage bars, the private leverage bars have been out of the market for a while now. It is really for the most part it is larger institutions often times who really finance at the balance sheet level, at the corporate level as opposed to the asset level. In terms of guys that are out there using Freddie and Fannie, just putting more equity in the deals. We haven't really seen a trend where they're looking to us to help solve any financing gap they may have.

Thank you.

Your next question is from Andy [McCulick] with Green Street Advisor. Please proceed with your question.

I have a question on your employment growth forecast. You have 0.5% employment growth for your core markets. What do you think a good long-term employment growth is for those markets?

Andy, a couple of comments and then invite you on Christie who, as you know, is our director of research, to add in on that. You are correct in the attachment 15 we indicated 0.5% job growth in our markets in '08. I would just add to that that, in a, that is not the modest recession scenario that I commented on in my comments under modest recession scenario, we are assuming that we go to zero. But in terms of long-term growth rate across our markets, John, would you have a comment on that?

Andy, I think it is somewhere just below 1%. I think it is about 0.9% and our markets traditionally grow a little more slowly just because they're bigger a little more mature than the U.S. The U.S. long-term, and I am talking ten years, probably about 1.1, 1.2%.

Okay. On development, you brought your yield down just slightly from 6.5 to 6.4. Is that a mix issue because you added two California and one New York asset, or is there other stuff going on there?

Andy, you're correct. This is Tim. It is simply a mix issue. We are completing two deals that are north of the 6.5 and started almost 600 million this past quarter that is in the low 6s. So it is strictly a mix issue.

Okay. One more question. Can you guys give any color on what you are seeing in relation to land prices across your various markets?

Sure. Tim again, obviously the condo bid is gone and left over the last three or four quarters. In terms of what apartment guys will want to pay for land. I think we are in the very early innings, maybe the first inning, in terms of adjustments to land values. I do expect land will adjust some what in 2008 as people are doing what we are doing which is increasing their target yields. That's not all going to come out construction costs. Some of it has to come out of land in order for deals to underwrite. As you know, that doesn't tend to happen overnight. There's generally a period of time which spreads are wide until, until they start to come together, but I suspect we will see some transition in the land markets through 2008.

Great. Thanks, guys.

Your next question comes from Anthony Paolone with JP Morgan. Please go ahead.

Thanks. Just following up on some of the land questions. The $125 to $175 million you outlined that you expect to spend on land in 2008, how much of that is going out there and finding new parcells of land for future development versus taking down land that's under option for projects say that in your attachment 12 listing.

Tony, that's all, it is all related to land we anticipate having to take down under existing option contracts. It doesn't reflect projection on our part. There's going to be speculative land buying opportunities at this point.

Okay. And then with respect to looking out and underwriting new development deals, can you quantify just roughly the types of yields that you would want at this point given a backdrop with maybe a little more economic risk?

Sure. And just to be clear, we always underwrite on current rent, current expenses and current construction costs. I just really want to emphasize that. In terms of what the future economic considerations might be. They don't necessarily factor into what your current underwriting may reflect, although they do factor into what the target yields would be. We probably moved our target yields up on the order of 50 basis points over the last three to four months, but a typical deal would need to underwrite in the mid 6s to 7% today versus that would have been kind of a low 6 number six months ago.

In what market, whether it is a New York highrise or west coast, would get the lowest, what's the lowest yield you would underwrite to would be?

That we would find acceptable? First of all we are being pretty darn selective. You would probably note this past quarter the pipeline was actually reduced. The shadow pipeline not increased. Generally that's our posture here at least for the first couple of quarters of the year as we think there will be some adjustment in the land markets, but general by yields range about 100 basis points, in total, 100, 150 basis points. From those numbers, we would, depending upon the unique characteristics of a deal or market, sort of 50 to 75 basis points on either side of that target that I mentioned earlier. Bryce, do you have any other comment on that?

The only other thing to add is to follow up on a question earlier that the mix of the asset that has started each quarter has a very big impact on it. So as we start more and more west coast assets, the west coast yields are generally lower and the more urban deals are generally lower. You shouldn't be surprised this year, the yield may, in fact, trend down for a couple quarters as the mix of assets change. What Tim is really referring to is underwriting of new deals, not necessarily what we are starting the next couple of quarters.

Okay. Last question, and also on development the Woburn and Bowery Place projects that appear to be fully leased at this point. Where did those yields come in. It seems like you don't trend rents and I would imagine from the point you started those to the point they got fully leased, the rents have probably moved to a dedescent amount?

Well, certainly in the case of Bowery Place they did. In the case of Woburn, I think we may have seen some modest improvement, but those deals roughly average around 7% upon stabilization with just annualizing the existing rent role upon completion.

Okay. Great. Thanks.

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

BMO Capital Markets. The issue of disposition, you mentioned 4.5 to 5% cap rates but are there any -- is that the average and are there markets where you are seeing mid 5s or are there no markets that you are testing a 5.5 type of number?

Well, Rich, like I mentioned before, we do have a number of assets in marketing right now. So, we may find out here in the next 30 days but, to date, we have not seen any markets that would be above the low 5 in our markets. Having said that, I think there is evidence in other markets that where cap rates have probably moved more. Generally, I think people are saying the higher quality locations and coastal markets have seemed to hold a cap rates more than the secondary or tertiary markest or, for that matter, some of the sunbelt markets. Bryce --

I think to add to that, Tim is talking that there is a growing despairty between the stronger markets and the weaker markets. There is also growing disparity between the higher qualities assets and the lower quality assets. This cap rate compression that we saw over the past few years that all markets are being treated the same and all assets are being treated the same has been unwinding. So we are hearing about some higher cap rates for some lower quality assets in some tertiary markets but we are not seeing that yet for our quality assets in our markets. But by evidence of our actions, we are concerned about that. That's why we are moving aggressively with the large disposition pool.

Like Boston, which has been pretty weak, maybe get weaker now that the Patriots lost, are you not worried about that? Sorry. I had to get that in there, Bryce.

That really hurts, Rich.

Chicago, just curious, will you look to exit that market, sort of hanging out there with about 800 units. Is that something that you would consider?

No, we have no plans to exit the Chicago market. In fact, we have been growing our concentration in that market through acquisition activity. It is a small market for us and we will remain a relatively small component of our overall portfolio, but we have to plans to exit.

Okay. Are there any loopholes where you can sell assets that you have owned for less than four years, a change in strategy that you can actually sell assets you have only owned for a couple of years or is that not the case?

No. It is the case. It is not that you are prohibited from selling them for four years, it is just that when you are outside of four your years you are in a safe harbor. If you are within that four-year period, it is a facts and circumstance test and depends upon your change in strategy.

That's what I thought. Okay. Thank you. And then on the G&A, you might have mentioned this, I got on a little late. Up on the midpoint 10% versus last year. What's driving the G&A increase?

Rich, this is Tom. Overall, G&A increases are due to compensation increases. Some of it relates to start-up costs for our new administrative processing center in Virginia Beach. Those would be the two main factors, compensation and start up costs.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question comes from Dustin Pizzo with Banc of America. Please proceed with your question.

My question has been answered. Thanks.

Your next question comes from Paula [Poskins] with Robert W. Baird. Please proceed.

A question, what are your expectations that are underlying your assumptions in guidance for '08?

I am sorry. The first part of that was cut off. Could you repeat the question?

Certainly. Just to follow up on the G&A expenses question, what are you assuming in your guidance for G&A in 2008?

The guidance on attachment 15. This is Tom, by the way. Guidance on attachment 15 shows 8 to 12% increase overall in G&A from 2007 level. That consists of three categories, corporate G&A, property management costs, and investment management. It is the combination of the three should go up 8 to 12%.

Just to elaborate on the cost of the new administrative center, do you expect that to moderate? In other words we are further along in the game than behind?

We expect that that is a non-recurring cost and over time we will actually see our cost go down because of that center, but they are kind of non-recurring start up costs that you would think of it as a new business.

Thank you. And then, as you look at the reasons for move out. I apologize if I missed this in your prepared comments, are you seeing any differences in the trends across your markets for the reasons for move out aside from home ownership?

Paula, this is Leo. With respect to homeownership, as we have been talking about, typically it trades between 20 and 25% for the most recent quarter. We are around 20%. As far as move outs overall and any changes across markets or even just the categories, there really hasn't been any change and the reasons for move. Other places we are watching carefully are are people moving out for financial reasons. That's 8 to 10%. We were at the lower end of that range this last quarter and we are not finding any major differences or major changes among our markets. So things are staying pretty well on course obviously the reason for move out related to home purchases down somewhat.

Thank you very much.

Thank you, Paula.

Your next question comes from Michael [Sulinski] with RBC Capital Markets. Please proceed with your question.

Hi. I may have missed this. I apologize because I jumped on late there. In your disposition guidance for the full year, are there any markets we should expect significant concentrations for those to come out of?

Mike, it is Tim Naughton. We do anticipate selling, selling in several market, we are not exiting on intending to exit any markets in 2008. It is a pretty diverse property.

Okay. We've heard some commentary lately that developer, that some development deals are having trouble finding financing right now. I know you guys use your line and everything else, but have you heard anything to that extent?

To some extent certainly on the debt side, not as much on the equity side. I think generally what I am hearing for good projects with good sponsors there's still equity out there. The debt tends to be more problematic sometimes the mini firm after the construction term has been tougher on folks, in terms of that really look into have some flexibility built into their, into the capital structure upon the start of construction. But not as much on the equity side. Really a debt issue as you might imagine.

Okay. Finally, as you continue to recycle capital here, your recurring CapEx over the past couple years has come down. What are you projecting for recurring CapEx for fiscal year '08?

Mike, this is Leo, expect the recurring CapEx for '08 to be in the low $500 range for apartment home.

Great. Thanks, guys.

Your next question comes from Michael [Dimler] with UBS. Please proceed with your question.

Good afternoon, guys. I just wanted to follow on my colleague, Alex's question on the secured debt. In terms of exactly what secured debt you were thinking would be considering issuing, is it Fannie or Freddie financing or are you talking about like private mortgage financing?

Yes. This is Tom. It would be Fannie and Freddie and well as insurance companies that are currently active in the secured markets. We would price all sources.

And in terms of Fannie/Freddie versus the insurance pricing, is there a major difference there or are they about the same?

I don't want to handicap too much our friends at the insurance companies. We want them to sharpen their pencil on the bids but Fannie and Freddie do have a competitive advantage because of their structure and Government sponsored entity, but having said that Fannie and Freddie are clearly providing more competitive bids out there. We are not giving up on our friends in the insurance business.

Thanks.

Your next question is from Chris Summers of Green Light Capital. You may proceed with your question. Mr. Summer, your line is open. Your next question comes from Richard [Paole] of ABC Investments.

Hi guys. Just a couple of quick questions. I see in the guidance, today, can you hear me?

Yes.

Okay. I hear some beeping in the background. On your guidance page on attachment 15, you have LIBOR expectations. Just remind us how much of your floating rate debt is LIBOR based. I know you have some tax exempt variable rate stuff that tends to move less, and then I have just another question on the operations.

Rich, this is Tom. If I could just spend a moment. We have gotten a few questions that have come in this morning about floating rate debt, and I just would like to reframe the question for a second on floating rate debt. Overall, our floating rate debt as compared to the total market cap is about 10%. That is fairly modest. We have very little debt to start with. We are, on average, our debt is less than the industry average. As you remember, floating rate debt allows us to create a natural business hedge when rates are declining we generally are in a contracting business environment. So we see that rates floating lower allow us to match moderating fundamentals and help preserve overall earnings levels. Said differently, interest rates changes are very correlated to revenue changes. Having more floating rate debt in our capital structure is a strategy we have been pursuing over the last five years. The other thing about floating rate debt is people frequently use the term let's match long-term debt with long-term assets. If you think about what our asset is, our asset provides revenues a lease. That lease resets every 18 months, on average. If you are try to go do asset liability duration management, it would really argue for shorter term debt. That's another practical maybe a more theoretical reason behind trying to have more floating rate debt in your capital structure. But the combination of this practical aspect of revenues being correlated with interest rates and the fact that we want to match up the lease terms with debt are two of the reasons we try to get more floating rate debt in our capital structure over time.

I apologize for the dial, the on floating rate debt, but I understand that people were asking questions about it and I wanted to at least address that. In terms of our overall debt, it is about 10% of our capital structure. I don't know if that's responsive to your question.

I was just curious say of that 10%, is half of that floating rate exposure LIBOR based? Because in the past, when people were nervous that rates were going up, part of the argument was that variable rate tax exempt tends to have less volatility and that would be obviously the LIBOR based kind of more market oriented and my, my question has a bit of a negative spin on it. Just curious because I appreciate the hedge comment with respect to slowing economy, lower rates.

Sure. The, at the end of the year we had about 250 million of floating rate debt that was not related to our line. Of that, about 125 million of it was tax exempt and another 125 million of it was conventional floating rate debt primarily for the Massachusetts assets that we have to use floating rate debt for. So about 500 million, then we had about 500 million out on the line. So it is about a billion dollars of floating rate debt, half of which is the line and half of which is other forms of floating rate debt. The, the --

Therefore, half of it is LIBOR based?

Well actually all of it, when you think about it, it all trades within LIBOR. If you look at the break out of the conventional floating rate debt, it trades with LIBOR as well. So really 75% of that debt, that billion is kind of directly, almost directly floats with LIBOR, the other 25% or 250 million floats and it kind of comes in with LIBOR but it actually is a little more sticky, it's the floating rate tax exempt debt.

That was the heart of my question there.

I am sorry it took me so long to get to the heart, but.

That's okay. Just another quick question. Maybe I missed it, but, Leo, did you speak to availability at all, in other words, what percent of do you have vacant and/or notice to vacate that is not yet leased in the portfolio?

I didn't speak to that. But to give you some, we typically don't quote availability, but to give you some perspective, in January our occupancy is running about 96.4% and it looks like it is going stay that way through February. You can contrast that with last year at the same time where we were at 96.2 and 96.2 between January and February. One of the things that I would tell you, Rich, is I believe we have come through this winter and really have the portfolio well positioned to gain whatever opportunity exists for us with respect to rent increases.

Great. Thank you.

Your next question comes from Karin Ford with Keybanc Capital. Please proceed with your question.

Hi. Just one quick question. Going back to the land price discussion. I know you carry most of your land for future development under options, but of the 200-odd million you have held directly in your balance sheet, do you anticipate having to take any type of impairment charges on that if land prices keep coming down?

This is Tom. No, we don't anticipate any, any impairment charges. I think that question probably arises because of the home builders and if you recall, we buy land for investment purposes and expect to develop it. As long as you can recover your costs through development over the estimated appreciable life on an undiscounted basis, you have no impairment charge. That's contrasted with home sellers or home builders that by their nature buying land to sell it almost immediately. They have to mark that to market. We are buying for investment, they're buying for sale. I think that's the primary different.

Okay. Just asking with relation to a function of you guys raising your underwriting returns if that meant that more land would end up needing to be sold instead of developed.

We don't anticipate that at this time.

Okay. Thanks.

Your next question comes from Chris Summers from Green Light Capital. Please proceed with your question.

Looking at the balance sheet, if I look at the growth in the construction in progress and the land held for development for the last quarters, it looks like it is about similar to the same increase in your debt which suggests maybe you are funding this development 100% with debt which maybe helps explain why the debt is up 40% from the beginning of '06 but the interest expense is actually down. Does this reflect a shift in how much debt you guys want to have on your balance sheet relative to your real estate value going forward? Are you looking to do a higher debt to cap ratio going forward?

This is Tom. No it doesn't. We are not trying to signal anything with those numbers. When you look at interest expense, there's a lot of things that go into that, including increased capitalized interest as well as interest we earned on the proceeds from our equity offering last year that stayed invested in short-term marketable securities for a period of time. So we are not trying to signal anything. I think you are trying to match things up that are probably not easily matched up, in terms of the strategy.

Okay. Thank you.

Your next question comes from Mark (inaudible) from Goldman Sachs. You may proceed with your question.

Hi, guys, just had a question. You had mentioned the release that you might like the option of doing joint ventures. How much of the disposition volumes that you are planning could you do through joint venture and what's your preference to using joint ventures?

This is Tom. The dispositions we have right now, we haven't specifically lined up any joint venture activity for any of those dispositions and it is just something we are exploring right now. We don't know what the terms would be. It may be better just to sell them outright as opposed to put them in a joint venture. It is hard to determine what terms might be on that. The, so I think you have to look at that disposition activity and expect that at this point most of it will end up being sold to third parties and we won't retain an interest; however, if we can get great terms we will put some of those in joint ventures and retain part interest.

Are you guys still looking at doing a fund or second fund to your current one?

We are exploring options to fund acquisition activity. We think that there will be some great opportunities during the year for acquisitions and we are exploring funds or sources of funds to pursue that but to say at this point in time that we have anything that we could speak to, that's not something we are prepared to announce at this time.

Okay. And last question, related to the new position that you guys created in the cost savings that a person is going to be in charge of procuring. Are a lot of those cost savings already built into your expectations for '08 or is that in addition to what you have projected?

That position is a strategic add. It is difficult to start attaching cost savings to that new position at this time. Although everyone will be tasked to perform and he will be tasked to perform and get us great cost savings. It is really a strategic shift in how we think about spend and it would be premature to start proforming cost savings based on that new position.

Okay. Thanks.

At this time, there are no further questions. Mr. Blair, do you have a closing remarks?

No, Carmen, just want to thank people for their time on the call today. And we will be chatting with you in the future. Thank you.

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