艾芙隆海灣社區公司 (AVB) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities first quarter 2008 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 are may begin your conference.

Thank you. Welcome to AvalonBay Communities first quarter 2008 conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There area variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There is a discussion of risks and uncertainties in yesterday afternoon's's press release, as well as in the Company's form 10-K and for 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 used in today's discussion. The attachment is available on our web site at www.avalonbay.com/earnings and we encourage to you refer to this information during your review of our 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 Executive Vice President of Operations and Tom Sargeant, our Chief Financial Officer. On the call, I will summarize our results for the quarter and provide some comments on the economy, the housing market and their impact on apartment fundamentals. I will then discuss our capital markets activity for the quarter and after that Tim will provide an update on our investment activity. After our comments, we will all be available to answer any questions that you may have. Last evening, we reported EPS of $0.60 and FFO per share of $1.24. The FFO per share of $1.24 represents approximately 12% year-over-year growth rate, which driven by solid portfolio performance, from contributions from new lease-up activity and from the benefits of our opportunistic share repurchases during the quarter. Our same-store portfolio performed largely as expected with revenue growth of 4.4, expense growth of 4.2, resulting in NOI growth of 4.4%.

Overall, the portfolio remains well positioned with solid occupancy averaging 96.4% for the quarter. The strongest regions continue to be Northern California and Seattle, both posting double digit NOI growth. n fact, if you look at the portfolio performance, it really is is a tale of two coasts, with the West Coast reporting average revenue growth at twice the rate of the East Coast, 6.5% on the West Coast, 3.3% for the East Coast and the Midwest. We expect Northern California and Seattle to continue to show strength, while we will not be surprised to see increased weakness in the New York metropolitan area. Overall, we expect the rate of revenue growth will continue to moderate during the year, which is consistent with the original financial outlook that we provided last quarter.

In terms of the economy, regardless of whether we call it a slowdown or a recession, the events of the last three months have certainly weakened the near-term economic outlook. With job losses of almost 250,000 for the quarter, with oil prices above $100 a barrel, with the ongoing financial stress on Wall Street, these have all contributed to business and consumer confidence falling to levels that haven't been seen since the last recession earlier in the decade. Although the nation experienced significant job losses during the first quarter, AvalonBay's markets overall posted modest job growth. Seattle, Northern California and Boston all added jobs at an annualized rate of 1.5% or better during the quarter on a year-over-year basis, suggesting the economic slowdown hasn't yet had a major impact in those markets. Significant exposure to high-tech industries which are enjoying healthy overseas demand and, in the case of Seattle, Boeing's backlog are the key reasons for this outperformance.

Negative job growth in Southern California markets is driven, in part, by a continued deterioration in the housing market and New York and surrounding tri-state area have continued to experience modest positive growth, but expectations are for weaker economic growth due to ongoing cutbacks in the financial services sector. In terms of housing, there is no sign yet that the housing market has hit an inflection point. Single-family home construction has dropped by two thirds from its peak in '05 and is now at the lowest level since 1991. With the high level of housing oversupply, the homeownership rate has and will likely continue to decline, which obviously benefits rental demand. As of the first quarter, the national home ownership rate has fallen by 150 basis points to just under 68% from its peak in mid '05. And given the high cost of housing in AvalonBay's markets, the homeownership rate in our markets are consistently lower than the nation overall and for the first quarter this year has fallen under 60%.

So while the economic outlook for '08 is likely to be weaker than projected in our financial outlook that we gave last quarter, AvalonBay's portfolio is holding up well. The weak housing market and limited supply of new apartments are helping to offset the impact of a slowing economy. At this point, we are still comfortable with the revenue and NOI ranges that we gave at that time. In terms of capital markets, the volatility on the debt and equity markets continues. It is times like this that AvalonBay is rewarded for the strength and flexibility of our balance sheet. While we have relatively large capital needs this year, we have multiple sources of liquidity and, given our financial strength, we have been able to avoid the more costly unsecured debt and equity markets in favor of more cost effective secured debt, a bank term loan and attractive dispositions.

We have closed on three secured loans totaling $375 million at an average interest rate of 5%. The capital from these financings will be used to pay down a portion of the outstanding balance on our credit facility. In addition, we are pursuing a bank term loan in the amount of $250 million or possibly higher that would be in addition to our $1 billion line of credit and we expect this term loan to close within the next 90 days. Finally during the quarter we purchased approximately 480,000 shares of common stock at an average price of just over $87 per share, which brings the total amount we have repurchased in the last two quarters to $300 million. And in February, we increased the repurchase program by an additional $200 million of capacity. So with that, I will turn it over to Tim to provide an update on our investment activity.

Thanks, Bryce. I would like to touch on three areas related to investment activity. First, the existing development community performance. Second, a status of the transaction markets and our disposition activity. And finally, our thinking regarding new commitments in terms of enough starts, acquisitions and adding new development rights to the pipeline. At the end of the first quarter we had $2.2 billion of development underway consisting of 22 communities and over 7,000 apartments. About one-half of the new developments are active leave in lease-up with the balance of the communities in earlier stages of construction. In addition, we had another $4 billion in development rights in the design and entitlement phase. Cost and schedule performance remain solid and in line with original pro forma. In fact current budgeted costs are within 0.1% of original budget on over $2 billion of activity.

For recent buyouts, we have started to see some relief on the cost escalation experienced over the last few years. Depending upon the market, total cost have either flattened or declined moderately over the past couple of quarters. As you'd expect, cost relief has been most pronounced in markets where for sale activity has fallen off the greatest such as Southern California and the D.C. area. Clearly, a slowing economy and housing market is resulting in greater availability of construction, labor and materials. Based upon our outlook for the economy and housing market for the balance of the year, we expect costs to remain flat or decline further. For those communities in lease-up, performance is generally in line with expectations. Absorption averaged over 30 net leases per month per community during quarter, ranging between 25 and 40 across ten communities that were in lease-up at some point. This pace is significantly higher than in the first quarter of the past three years when be a absorption averaged 15 to 20 net leases pre month per community.

Some of this was stimulated by greater use of concessions in Q1, particularly for communities with higher levels of inventory. We have recently found it more difficult to obtain phased occupancies in high density develops like Dublin Station in the Bay Area or Meydenbauer in Seattle. The net impact of this is that apartments are usually delivered in larger batches, which in turn can result in higher standing inventory where we need to -- we need the use of concessions to help manage within acceptable ranges. In addition, we have used more concessions in certain sub-markets that are experiencing some softness due to a slowing economy.

Shifting now to dispositions activity. Given the state of the capital markets, we are relying on the use of dispositions to finance a good portion of our capital needs in 2008. In fact, our outlook called for around $900 million in disposition activity this year. Currently, we are in a very -- we are in various stages of marketing on over $0.5 billion of assets. I thought I would spend a couple of minutes sharing some of our observations on the transaction market and potential impact on our disposition plan. Overall, we are seeing a mixed level of investor appetite for transactions. Generally, investors are gravitating toward stronger performing markets, higher quality markets and cleaner transaction.

We are seeing signs of an unwinding of the cap rate compression we experienced over the last few years over market and asset quality when capital was plentiful. For example, we have marketed three assets recently in the Bay Area that were priced by the market at cap rates by over 100 basis points based upon differences in the quality of the respective assets and sub-markets. There still is a preference for value-add over core opportunities, however, there is less tolerance of any structuring complexity. Underwriting assumptions by buyers and lenders are more conservative in terms of cash flow growth and debt service coverage ratios. The depth of the buyer pool varies dramatically from four to five to more than 20 depending on the opportunity. Performance has been less predictable, as some prospective buyers drop out during the qualification process and some terminate during due diligence, generally over financing-related issues. Investment funds remain the predominant buyer, aided by the cost advantage of agency issued debt issued from Fannie Mae and Freddy Mac. Given the reliance of many buyers on these agencies, we are seeing some delays in closing transactions as agencies are struggling to keep up with investor demand. Other buyers such as institutions, pension fund advisors and REITs are less predictable at the moment, as many of them are not competitive in terms of pricing or are choosing to wait on the sideline until asset values stabilize.

Based upon assets we have marketed and price so far, cap rates appear to have increased on the order of 25 to 75 basis points from the trough levels, ranging from the mid to high 4s to low to mid 5s on East Coast. Assets in the strike zone for investors, or those assets in the better performing markets with stronger locations, have experienced the least amount of cap rate diversion on the order of 25 basis points, while weaker markets and more marginal locations have seen cap rate reversion up to 75 basis points. Overall, we believe average cap rate are up around 50 basis points across the portfolio from the trough. Our current expectation is that we will sell around $200 million in the second quarter. We are staying flexible with respect to total level of sales, weighing dispositions against other forms of capital available to us, including secured and unsecured debt. And as Bryce mentioned earlier, so far this year, we have already financed $375 million in secured debt.

Lastly, I would like to touch on our mind set toward making new investment commitments. Overall I'd characterize our attitude towards any new commitments, whether they be new starts, acquisitions or land contracts as cautious. This is the a result of a number of factors, including the liquidity needs of the current pipeline, which are running around $75 million per month. Second, having increased our target returns to a level which, for the moment, is still out of the market. And finally, our belief that construction and land costs are still correcting and will likely continue to do so for some. All these factors cause us to ask ourselves, why hurry, when considering new investments. We are highly focused on liquidity and it is our sense that better opportunities will emerge in the back half of the year as other owners of land and apartments are faced fewer capital options and potentially some distress in funding their businesses. As a result, for now, we believe that caution is greater part of valor, which is reflected in our actions in the early part of '08.

In Q1, we began construction of just one community on Long Island totaling under $50 million. We expect to start one or two more communities in Q2 and the total starts will be less than $150 million in the first half of the year. Our original outlook called for around $1 billion of new starts in '08, but at this point, we expect starts for the year will be more in the $700 million to $800 million range, which is $0.5 billion less than last year. Most of these starts will occur in the second half of the year, when we believe we will be able to buy out new construction on more favorable terms. Similarly, we have been cautious and disciplined in adding new development rights, despite the increased field flow we are seeing. In our view, land prices have not yet adjusted to the higher return expectations of the marketplace. Undoubtedly, some landowners will continue to hold out for last year's values, but others will be forced to reprice in a changing return environment.

And finally we are beginning to approach acquisitions very selectively. We have not bought any community since September of last year and are focusing our transaction efforts largely in the area dispositions. So in summary, performance remained solid in our development portfolio, although we are utilizing greater levels of concessions to clear standing inventory. We are actively pursuing dispositions, while remaining flexible in terms of how much capital we raise through asset sales relative to other source of capital. And finally, we are carefully evaluating anything new commitments, considering both liquidity requirements and appropriate risk adjust returns in a changing and economic and capital environment. With that, I will now turn it back to Bryce for some additional remarks before opening it up for questions.

Thanks, Tim. While we are pleased with our performance for the quarter we remain concerned about the economy and volatility of the capital markets. And as these uncertainties play out, it may result in us adjusting our business plan to reflect the changing market environment. As an example, we may end up doing fewer dispositions if the sales market continues to weaken. We may end up with less development starts if the capital markets remain volatile. We may end up doing more secured debt if the spreads on unsecured bond remain historically wide. The period of uncertainty and volatility can be a competitive advantage for AvalonBay. Given the strength of our balance sheet and our multiple platforms of growth, we have many opportunities to adjust our business plan in order to capitalize on the changing business environment.

And finally, I think there's two key takeaways from our comments this afternoon. First, while we produced strong results for the quarter with revenue growth of 4.4 and FFO growth of 12%, the results were largely as we expected. As we stated last quarter, we do expect revenue growth to continue to moderate through the year and for the full year to be within the revenue guidance we gave last quarter. Secondly, while capital markets remain volatile, given the strength of our balance sheet, we feel that we'll comfortably meet our liquidity needs for the year and that capital markets activity to date is evidence of multiple liquidity options that we have. With that, we will take any questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Michael Bilerman with Citi.

Hi, Craig Belcher is on phone with me as well. You went over talking about some of the increased concessions on the active lease-up assets, which I guess took the average yield down about ten basis points to 6.3% overall. How do you feel right now about your targeted rents on the assets that you haven't entered lease-up yet, given your sort of backdrop of what you are seeing and could you see increased concession activity there as well when you enter the lease-up phase.

Michael, to date -- really this past quarter the average effective rents were down about $40 across the entire portfolio which is about 2%. But given that only about half the communities run to lease-up, I guess that probably equates more to the 4% -- closer to 4% for those that are leasing. Typically we are seeing concessions in the -- in the six-week range right now. That is higher than we had anticipated and we had budgeted, to the extent markets continue more or less as is, we may see some -- some additional concession pressure. We may see some concession on other communities as they start their lease-up as well. Having said that, I will say that the communities that started more recently have been -- the performance reflect more current market environments. So we would anticipate a little less pressure through overall.

Was there anything changed at least as you went through April leasing in terms of an increase or decrease in the amount of concessions to get some of the assets further leased up.

Not really. I think the quarterly trends are pretty indicative of what is happening today. Again, the velocity continues to be quite good. I think I mentioned, we are running over 30 net leases per month, which actually equates to over 40 gross leases per month, which is a historically high figure for us. So -- and on the order of 50 to 70% higher than we typically see. So as you might expect, as you moved into April, seasonal patterns emerge and the absorption is that level or stronger. Leo, anything else on that?

No.

In another one of your comments you talked about at least in the sales process and the sales market, that the agencies are having a hard time keeping up. Can you sort of expand on that a little bit? There's not having enough resources or is their process taking longer in terms of underwriting?

I think it is more of a function of volume, Michael. We are seeing closing schedules basically expand 30 to 60 days to accommodate financing related issues. It's not always the agencies. Generally I think the capital is moving a little bit slower to closing. But so it's on order of 30, 60 days.

Bryce, in your opening remarks, you talked about New York, you expect some increased weakness. Are you seeing that so far or are you expecting to see that as the year progresses.

We are not seeing that so far. The New York portfolio is performing quite well, but certainly with concerns about the financial services industry, job losses to date, and potentially accelerating job losses. It is just something we'll be very carefully - careful to watch. Obviously, the financial services sector is a pretty significant component, about 10% of the total job base in New York and does have a multiplier effect. So it is just something that we are watchful for and we will continue to monitor.

How would Manhattan fare, in your view, relative to some of the suburbs of New York?

Well, I will maybe touch a bit and Leo can jump in. Certainly the financial services industry is not -- is not singularly focused in Manhattan. There is a lot of back office jobs that spill over whether it be into Queens or whether it be into Jersey City and the surrounding. So a slowdown in the financial services sector will be broader hit than just Manhattan. In terms of what we are seeing so far in our portfolio, Leo, you might want to comment a bit.

I will touch on a couple of aspects. Just to make sure everyone is clear, when you look at our same-store results, the properties in same-store basket come from Westchester and Rockland counties. We do have properties in Manhattan and, just to give you some perspective, the Christie place and Valerie place assets, which are really multiple phases of one larger community have been performing quite well. Occupancies, 98% and higher. So those assets have done well. When you go outside the city to markets that might be impacted by New York City, you are talking about Stanford, and Stanford, while we have seen some occupancy pressure, it has really come more from local employers and some corporate housing and we really see it as a short-term issue. We don't see it as a structural. On the Jersey waterfront which will also be impacted by New York City, there is a little supply coming there that Roseland has delivered, but we are not seeing significant issues and we are seeing favorable traffic patterns. In other words, the number of people coming through the door is pretty positive. So while we are mindful that what happens in the financial sector in the second half of the year could provide some pressure, to date, we are not seeing it in any of the adjacent submarkets or Manhattan itself base on the performance of our portfolio.

Thank you.

Your next question comes from the line of Jonathan Habermann from Goldman Sachs.

Hi. How are you. Just -- obviously the decision to sort of reconsider investing in development, I am just curious where you are seeing yields today on new starts obviously for those type of projects?

Well, Jonathan, we haven't started much, but the stuff that we have started mid 6s.

Mid 6s.

Yes.

Okay. You talked sort of about opportunities in the second half of the year. You mentioned obviously cap rate is up 50 basis points from sort of the trough levels. Can you give us a sense of -- how much of an increase are you looking to see before you become opportunistic?

Well, in terms of -- in terms of hurdle rates. I would tell you development. We are 50 points basis off where we are today. I think we want to see yields closer to the 7% range. As it relates to acquisitions, if the average cap rates are closer to 5, we will would probably need to be in the mid to upper 5s in order to justify the investment.

Okay. Just last question on the share repurchase. Are you assuming any additional share repurchase in your full-year guidance? The additional $200 million?

We do not comment on capital markets activity and the share repurchase would be a capital markets activity.

Okay, Thank you.

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

Thanks. Sorry but this is on the capital market side and, Bryce, maybe you can provide a little bit of color. In terms of the term loan that you are contemplating, how wedded are you to that? I mean, if the corporate bond market, which is starting to show a little bit of life, shows further life in the next couple of weeks, would you still do the term loan? What's your rationale?

Lou, if you want to little more color, I will let Tom give the color.

Lou, this is Tom. Just the term loan that we are working on is pretty far down the runway. So it is really too far for us to pull back on that. It is pretty favorable financing. It is basically LIBOR plus 1.25. LIBOR today is about 270 or 272. So it's pretty attractive financing. We have room in our capital structure for more floating rate debt. And we think it is a pretty good piece of business. So we are going to proceed with that. That will close in the next couple of weeks.

Okay. Last question is for Tim in terms -- or Leo, in terms of the concessions on the development leasing, do you think you have got it priced right now or do you think the concessions will either dissipate because you are going into the strength of the leasing season or you've got -- you have more kind of bulk delivery units where you think the concessions might increase from here?

Lou, this is Leo. I would say there are two responses to that. One is in certain places where we have used more concessions or where rents have come under more pressure. It is really because we are trying to stimulate the absorption. For example, if you look at Avalon Sound in New Rochelle, we had slow leasing in November, December and January and we have made adjustments and accelerated that leasing to take some of the standing inventory off the market as Tim had suggested. With respect to going forward, we are catching up and getting into a place that we feel -- with which we feel comfortable, and if traffic continues to come, if things remain stable, then my hope would clearly be to be able to pull some of those concessions back. But I don't see a bulk of units coming that is going to put further pressure on those at this time.

Great, thank you.

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

Good morning -- good afternoon. If you could just comment on what you are seeing across our different floorplans, the studios, the ones and twos, including in the New York area?

Alex, this is Leo. In general, we obviously price our apartment homes across all different floorplans to keep our absorption stable and occupancy stable across the different types. There is no specific pattern that would suggest that ones or studios are more occupied than twos. It is really pretty balanced across the portfolio.

Okay. What is the message you are telling your field for this leasing season? Is it more focused on occupancy, more focused on rent?

Alex, again, there is Leo. The focus is to operate the portfolio between 96 and 96.5% and get tha maximum rent increase we can get from that occupancy platform. So the emphasis right now is making sure that the portfolio is well positioned. I believe that we came through the first quarter in a very good place. As you can see, in comparison to the previous year, our occupancy was up and was stable at 96.4. I will tell you, April is running at about the same rate if not slightly higher. So it is get the properties to that stable occupancy platform and then push rents as aggressively as we can from there.

Okay. And then just finally, it seems like there is a lot of people trying to sell properties in the market including from some of the -- some of your former brethren. How concerned are you that the market is going to be flooded with properties and that could depress values?

Alex, this is Tim. I think we actually anticipate volumes are going to be down pretty dramatically this year over the prior couple of years. The question is how many buyers are there on the other side. I think the sellers are actually -- I don't think there are as many sellers. The investment funds are generally buying right now. They are not selling. So in terms of the market being flooded, there is a lot more product on the market today than there was three or four months ago. But it hasn't risen to a level at which we think it is close to having been flood.

Thank you.

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

Thanks and hello, everybody. First couple just quick ones. Will, we have in our model, and maybe we shouldn't, a redemption of the series H -- wait this is a capital market event. You can't tell me, right? Bryce?

Rich, this is Tom. We have actually given outlook on that and we have said that our current plans are to redeem it.

Okay. So is there a charge associated with that?

Yes, that is also factored into our outlook for the year.

And that charge is what, did you give that?

A little over $3 million.

Thank you. I am sorry. I missed that. One thing that is not in the press release this time around are comments in the accounting revision. Can you give us the status of that?

What accounting revision?

The -- I guess it was having to book a land -- a land lease, revised accounting interpretation from previous quarters of about $0.13 in 2007.

Yes, that land lease stays out -- it is outstanding today. It continues to have the same terms and there are no resolution of the land lease in terms of the accounting for it. It is basically status quo at this point.

Okay, okay. In terms of your potentially being more cautious on development, might there be some pursuit cost issues in the future?

Rich, pursuit costs in terms of -- in terms of actually abandoning deals, is that your question?

Yes, yes.

Well, at this point, we certainly think everything we have got in the pipeline is something we are going to move forward with. Having said that, our target -- we are pushing our target hurdles up and we are looking to get some cost out of the construction side of the equation to bring those yields up more in line with what we think are appropriate risk adjusted returns. So for most part the land basis of the deals that we have, either that we own or under contract, we feel comfortable with. And I think on average we are -- Rich, it represents 16% to 17% of the total projected development budget. I don't sense a lot of risk in that side of the business.

Okay. You mentioned higher concessions. Would you be able to give like an absolute number in terms of how much higher your concessions that you are using to fill up development properties?

Well I think I mentioned earlier, they are running, I believe, around six weeks on average for the ones that are in lease-up currently. So I think they are running a little -- a little bit over 2,000 units. 2,500 units.

Yes.

On an average lease of a couple thousand.

Okay. In terms of the acquisition environment and the fact that the fund is now fully committed. Would you consider another fund?

Rich, this is Tom again. We are -- we are in discussions with investors about raising capital to continue with our acquisition program. What form that takes, we are not really ready to provide any information on that. I would say just stay tuned and hopefully we will be able to share more with you in the second quarter.

Okay. Then last question is sort of conceptual, but when you have home ownership going up, that is obviously good. Job loss going up is obviously bad. Comparing the two, the magnitude of the two, which one do you think has a bigger impact on the fundamentals, all else being equal for multifamily and your business.

Rich, this is Bryce. I think in the last quarter, I gave a little color on that, because I think it is an important point and a good question. Historically job growth accounted for more than 100% of the increase in rent or household demand, because over the past few years, the home ownership rate was working against us and demographics were working against us in the sense of the -- the baby boom bust, if you will. Today if we look at 2008, the job growth is essentially 0. All of renter household demand is coming from the change in the homeownership rate and the improved demographics that the sector is seeing with the benefit of the echo boomers. So we are blessed by two positives, not just one, two positives, being demographics and household formation which are offsetting -- not in total but are offsetting the impact of having a very weak economic environment and essentially no job growth.

Okay, thank you very much.

Your next question comes from the line much Richard Paoli with ABP Investments.

Questions. I don't know if you had mentioned this or not. The -- the $10 million of the unsecured debt that you bought back, I guess there was some language in there that there is going to be a -- I guess some recognition of the deferred financing charges on those and the, I guess, premium over par. What is the deferred amount? I guess the $287,500 is the amount over par that will be recognized?

Rich, this is Tom. In total, the charge that we will take in the second quarter for buying that back $300,000. So the deferred financing cost wasn't really material.

Okay. And then two other questions. One on the -- on the development pipeline and I guess maybe we will speak specifically to Long Island City assets. It looks like concessions bumped up a little bit and the stabilization date of the project moved up, I think, from the fourth to the second quarter. How -- you know in terms of trade-off, I mean, you look at that in terms of velocity. And so how much does the yield change from just maybe giving an extra two weeks and rather than having it stay out, leasing up a little longer. I don't know if you understand my question.

I think so, Rich. It's always a trade-off, rent for absorption. I think that is the crux of your question. And it is something we are managing all the way through lease-up. And at the end of the day, we really are looking to maximize IRR. So to have a lot of vacant, standing inventory particularly like the Long Island City asset that you mentioned, $2,900 a month of a wasting asset potentially sitting there empty, you need to factor that in. And if you can stimulate absorption by throwing another two or three weeks of concession, oftentimes you are maximizing cash flow and ultimately your IRR by doing that. But it's a trade-off we are constantly watching. It's a function of where you are in the season and sometimes, in a case like Long Island City, where you are finishing up lease-up, sometimes you are left at the end of the day with units that are just tougher to lease and, therefore, may not have had them priced right to begin with. So it's a function of a lot of different things, but it's something that we are totally focused on.

Okay. And then one last question and -- it is a bit of a minor point, but I noticed this quarter your cash -- your rent growth on a cash basis peaked over your rent growth on a GAAP basis. And at least, I waded through some of the supplementals and at least from my data, it hasn't been that way for quite a while. Do you take that as -- use that as any way of a leading indicator to say that things aren't rapidly decelerating?

Rich, this is Leo. In the middle part of last year, I actually indicated that I expect the flip-flop to occur in December which is when it did occur. I don't take it as specifically as a leading indicator. It is measured over such a long period of time, when you are amortizing the concessions in. I am looking more toward a situation -- some of the discussion we have had previously of where is portfolio occupancy, where is availability, how is traffic trending, things along those lines than I am the cash versus GAAP. Bryce, you have something to add?

Just one thing. Rich, you mentioned flip but you did say it's a minor point. We'd say it is essentially -- they are essentially equal. They are within a 1/10 of a basis point.

Oh, you got me. A trend starts somewhere, doesn't it.

A little too precise for our liking.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Steve Radanovic with BB&T Capital Markets.

Hi, good afternoon. I was wondering if you have the breakout of rent growth on renewals versus new move-ins.

We don't have that information. We don't typically parse it that way.

Okay. I was hoping you could clarify on the same-store portfolio, looked like there was a net, call it 3,000 units that fell out this quarter, is that held for sale or is that under contract? Those units?

Ah, yes. This is Tom. Same-store pool changes every year once a year. And there are two things going on there. One is redevelopment. When we redevelop an asset, we take that asset out of of the same-store pool. Just for -- leaving a redevelopment asset in the pool could distort operating results from the same-store pool and we generally want to pull that out. If you were to leave it in, it would distort things positively and that is when you apply new capital, you will get a rent spike and you will also get an expense decline solely related to the improvements and not related to the market. Sometimes this is referred to in the industry as buying NOI from capital investments. So when we do a redevelopment, we take it out of the same store pool until it is restabilized and it is comparable between periods. Second point would be, yes, we do have a large disposition program and those assets are taken out of the pool, the assets that we identify for sale at the beginning of the year are taken out of the pool for the year.

Okay, for the whole year. Can you comment if you have anything currently under contract?

Yeah, Steve. I can. Just to add on a little bit. Tom, I think -- we have around 10 assets that we are anticipated going into redevelopment this year. And though the disposition pool I think is around 14 to 15 assets, just to give you a sense, Steve. So that is 25 assets right there that, in a sense, would come out and then obviously the ones that had stabilized from the year prior would be coming in and that would explain the difference. And in terms of -- in terms of the disposition, current disposition, as I mentioned we have a little over $0.5 billion out in the markets. Roughly about $600 million. $150 million of that is actually through due diligence and subject to firm contract. About $100 million of that, the deals have actually been awarded, so they have been priced and awarded. The purchases would either be in due diligence or just starting due diligence. Another $100 million were in the pricing negotiation phase. And then there is about $200 million to $250 million that we're currently marketing that makes up the $600 million that are current stage of one form of marketing or another.

Okay, great, thanks

Your next question comes from the line of Michael Salinsky with RBC Capital Markets.

Good afternoon, guys. Quick question first on the operating side. You mentioned rental revenue came in higher than your forecast for the full year. Operating expenses also came in. Do you expect a similar moderation in operating expenses as the year goes?

Mike, I will take the first part on revenue and Leo can comment on the expenses. You know as I stated in my comments, our projections have always been based upon revenues continuing to decline throughout 2008 and this is just consistent with the economic environment that we plan for and we budgeted for. So just want to be clear that the revenue performance of 4.4, while it is higher than our range, that does not mean it is higher than we expected. If you look at it declining throughout the year, we still expect revenue for the full year to be within the revenue guidance that we gave. In terms of expenses, largely seasonal and Leo can touch base on a couple of things.

Yes, Mike. The 4.2 was higher than our plan, but the truth is that it is basically timing related. If you adjusted out the timing related issues, we would have been just slightly above 3% which would have been largely consistent with the plan. As Bryce has indicated, we still feel comfortable with the ranges we put out last quarter.

So just for clarification purposes, the timing differences, you could see it drop pretty significantly here in the second quarter going through the rest of year?

We expect those timing -- the expenses that we expected in future periods will go away now. So, yes, we should see benefits in future periods.

Okay. That's helpful. Secondly in terms -- given your conservative underwriting practices for development, if you look at the developments that are going to be completed in the second quarter, third quarter, how are those performing versus our initial underwriting expectations right now in terms of NOI growth?

Well, in terms of NOI growth, really -- I am sorry, you are talking about communities that started -- that completed a year ago or this year?

You don't trend rents beyond a certain point and over the past year we have had positive rent growth. So I am trying to understand. You show a 6.3 target yield there, but in theory, if you haven't trended rents there, you could have upsides beyond the 6.3 essentially.

Yes you could, you could. The reality is over the last couple of years we have seen very modest -- I think last year the deals that -- of the last couple of years the deals that stabilized, they were on the order of 20 basis points higher at stabilization than -- than original pro forma just to put in perspective.

That's helpful. Third, in terms of your development leads of 6.3 right now. How does that compare versus a spread of what you are looking at to comparable properties in the market right now?

I think I mentioned earlier, if we were out in the market today, pricing lends on this basket of communities, we would be looking at something probably in the higher 6s.

Okay. That's helpful. Finally just a clarification. With the rebalancing of the same-store portfolio there in the first quarter, are you guys exiting the Baltimore market?

No. We just classified Baltimore as part of the Washington D.C. market.

Thanks, guys.

Your next question comes from the line of Jeff Donnelly of Wachovia.

Bryce, most of my questions have been answered. I just have one outstanding that I would love your thoughts on. And that's just, with the GSEs our there tightening credit terms up that we have heard about. Can you talk about what impact you think we'll see there as a result, if it is going to be in the volume side initially or cap rate. And I guess drilling a little deeper, are there segments of the apartment market that you think we will see more of an impact? And I guess I am wondering is it more of the value-add deals or stabilized A quality assets in second tier markets that may be impacted by a tightening of credit?

Tom, you may want to talk a little bit about your -- about the GSEs and how you've seen changes in the underwriting given the amount of unsecured debt. Tom, why don't you address that.

Sure. First, I would say that the GSEs are -- the main area they are tightening up on is they are actually increasing their spreads or at least have been increasing their spreads. When we started out on our unsecured program, spreads were in a 175 range -- I'm sorry the secured program, the spreads were in the 175 range. The latest quotes are more in 2.25 range, so that would be one area where you've seen some tightening. The second would be terms. You are seeing it more difficult to get interest only. And there is a movement toward amortization, and I would say that the good news there is if you do an amortizing loan, you will see a better spread than if you were to do interest only. So those are the two main areas. There seems to be plenty of capacity left. It is taking a little longer to get things done, but that's only because volume as Tim mentioned. It is not their reluctance to do business. So I think those are the important points to make. Bryce , I don't know if you wanted to add

Given that spreads are up and debt service coverage ratios have moved up as well. That ultimately means there has got to be more equity in the deal. So that, for a leveraged buyer, puts them under greater pressure and ultimately, as Tim indicated, puts upward pressure on cap rates. So there has been this bifurcation in cap rates or decompression in cap rates, as Tim commented on in his opening comments, where those second tier assets, either by asset quality and or submarket location, are seeing a disproportionate lift in cap rates versus the better located assets or newer assets.

And, Jeff, one final thought of the GSEs is we have been using more secured debt because of the historically wide spread we saw in the first quarter between secured debt and unsecured debt. Those two spreads have come back in alignment somewhat. Current quotes that we are receiving from the investment banks suggest that we could get of an unsecured debt deal done at 275, 275 basis points over 5 or 10-year treasuries and that compares to our -- our little bit dated quote at 2.25 with the agencies. So that number was more like 150, 175 basis points. It is now down to 50. And that is only in 60 days. So I would say there is some -- probably some pressure building with the GSEs to abate their rate of spread expansion, because there is a market opening up on unsecured side?

That was actually my second question. They've -- generally speaking they are not obviously as dynamic at adjusting their rates as you will see on Wall Street. Do you think there is any sign at all though that we should expect additional tightening, I guess, in coming quarters at all?

We don't anticipate it any more than what we have described in terms that have changed to date.

Thanks, guys.

Your next question comes from the line of Ben Lentz with LaSalle Investments.

Hi, guys. Give me the sequential growth rate on your same-store NOI?

You mean projected through the year.

No, just what happened in the quarter. Since you changed the pool, it is hard to look back. I just want to match my estimates in my model to your guidance. It's hard to do without the sequential growth rate.

We don't have that recast in the former presentation style, Ben, I am sorry.

Okay. Thanks, that was my only question.

You have a follow-up question from Alex Goldfarb from UBS.

It has already been answered. Thank you.

You have a follow-up question from David Cohen with Morgan Stanley.

Hi, good afternoon. I just wanted to follow-up on the development starts this year. You talked about raising your hurdle rates, but I guess your growth assumptions, your rent assumptions have to come down because of the economy. So is it -- can you just talk about which markets are actually going to meet your IRR thresholds and maybe can you just talk about -- do you expect to see -- how much of the development starts would you expect to see through kind of broken deals in which you are able to step in as some type of equity partner and what you are seeing across these different markets.

David, this is Tim. Currently we are not anticipating that we would be picking up any broken deals that would start before the end of the year. The additional, $500 million to $600 million that we would anticipate starting the second half of the year would be coming from our development rights pipeline and would largely come from the development rights towards the top of the page on attachment 10. I think Bryce mentioned, we are going to continue to be flexible with respect to how much we start. It is the function of capital markets. It is a function of target yields at the time. It's a function of how much construction costs have corrected by the time we start. So at this point, it is really an estimate and recognize that we are going to continue to be flexible with respect to how we execute the business plan.

Thank you.

Your next question comes from the line of Andy McCulloch with Green Street Advisors.

Good afternoon. Most of my questions were answered. But on your three secured financings during the quarter, could you give the LTVs on those deals?

They are in the 60% range. 60, 65%.

Great. And then -- just one follow-up question on your expense growth. You touched on this a little bit. Can you give a little more color on why the expense growth varied so much across your different regions?

In -- I guess there were three regions where is it was the highest. And in two of those three regions, it was really driven by property taxes a little bit by some maintenance-related cost and in Southern California which would be the third region where it was up quite a bit. That was more in the maintenance related cost area.

What about Pacific Northwest and NorCal was lower because --

Pacific Northwest was down largely because -- it was -- because it was some administration and payroll costs that came in that were offset by insurance and some utility benefits that we didn't -- that were offsetting cost -- the other market you asked about?

NorCal -- or Pacific Northwest and NorCal.

That was Pacific Northwest. Northern California was favorable again because we had some benefits on the insurance side and the office administration side that was offset by property taxes a little bit, but the property tax growth, as you know, in California is constrained and that is kind of what caused those type of results.

Great, thanks.

As you know , just to be -- from market to market, expenses can be lumpy, but that is what caused the -- what was driving the

Great, that's all for me.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Michael Bilerman with Citi.

To come back to the same-store pool for a second, the difference between 4Q and 1Q, those 3,000 units that is what you now identified for sale?

This is Tom, Michael. It is either for sale or assets that were pulled out of the pool for redevelopment. Those assets wouldn't be sold, they just come back into the pool once we complete redevelopment.

And then there is some additions to the same store pool from one year to the next that come out of the other stabilized pools after they have been stabilized for a full year.

Redev is a pretty low number, I mean, we have 112 units that got pulled out in the first quarter.

You pull them all out though.

Michael, it is everything you anticipate selling or starting on the calendar year.

What you pulled out four sales, that $600 million even though you have $100 million (inaudible) on the balance sheet, you are pulling out everything that you are anticipating to sell?

Yes, we had more than $600 million. In this case $900 million in the case of dispositions.

Michael, this is Bryce, just because there have been a couple of questions on this. Just to be totally, perfectly clear. As Tom mentioned, we really try to be extraordinarily diligent to ensure that same-store basket changes only once, not each quarter, only once, and that there are no assets that same-store portfolio that positively or negatively could skew the performance of that portfolio. So there's three things. One -- two that would come out and one that would go in. The two that would go out would be redevelopments, not just what is on the redevelopment, it's everything that planned under redevelopment during the year. And that is a substantial number. I think Tim mentioned that's 16 properties --

Ten.

Sorry, ten properties and then it's everything that could plan to be sold which is -- how many properties?

Around 15.

Around 15. So that is a total of 25 properties. So those come out and then what goes in are the properties that stabilized -- were fully stabilized last year and so we have a full year of comparison. So you have 25 properties coming out. You have X properties going in. The net effect is the difference in the same-store portfolio. That's the same way we have always done it and we feel very comfortable and confident that that is the best way to present data on a -- without any biases built into it.

I was just trying to think from the perspective of dispositions. Generally, these are probably weaker growth assets and weaker performers?

Yes, I wouldn't characterize them that way, particularly in this market. As I mentioned in my -- my opening remarks, those are the assets that have suffered the greatest value diminution. So we are actually -- we are selling a basket of assets that are pretty representative across different markets and asset quality of the overall portfolio.

Would you say those have the same 4.4% revenue growth year-over-year?

I don't know. It is so dependent upon the -- if anything it's probably a little bit higher because a little bit more of it's in the Pacific Northwest and Northern California.

Okay. Thank you.

Sure.

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

Well, thank you. Thank you for your time and we look forward to seeing many of you in early June.

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