艾芙隆海灣社區公司 (AVB) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities second-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 may begin your conference.

Thank you and welcome to AvalonBay Communities second quarter 2008 earnings conference call. About ever we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks associated with forward-looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the Company's Form 10-K and 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 used in today's discussion. The attachment is available on our web site at www.avalonbay.com/earnings, and we encourage you to refer to this information during your review of our operating results and financial performance. And with that, I will turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities for his remarks.

Well, thank you, John. With me on the call today are Tim Naughton, our President, Leo Horey, our EVP of Operations, and Tom Sargeant, our Chief Financial Officer. On the call, Tom and I will have some initial prepared remarks and then all four of us will be available to answer any questions you may have. Last evening, we reported EPS of $1.61 and FFO per share of $1.26. The EPS of $1.61 represents an increase of over 160% from the same period last year, driven largely from gains from our disposition activity during the quarter. The FFO per share of $1.26 represents a year-over-year increase or approximately 8%, driven primarily from solid property performance. Our same-store portfolio performed better than expected with revenue growth of 3.7% and a 0.5% decrease in operating expenses resulting in NOI growth for the growth of 5.6%. Overall, the portfolio remains well positioned with solid occupancy averaging 96.5 for the quarter. In terms of regional performance, Northern California and Seattle continue to show the strongest performance. Although similar to our overall portfolio, their rate of revenue growth, as expected, continues to moderate from prior quarters.

Now I would like to turn to a discussion regarding the economy and the capital markets and the impact of these factors on certain aspects of our business plan. Approximately one year has passed since the beginning of the credit crunch and revised forecasts for the U.S. economy point to a longer period of economic weakness. Capital remains tight, with many financial institutions continuing to report losses, fueled in part by large loan write-offs. Compounding the effects of tighter credit is a consumer faced with declining household wealth from reductions in home and stock values, high food costs, $4-a-gallon gasoline, and concerns about job security. As a result, consumer confidence remains weak, hitting a 16-year low in June. Tight credit and a cautious consumer are reflected in business pessimism. Businesses have shed almost 0.5 million jobs and the outlook for the second half of the year is for continued weakness. While overall, the economic and capital market outlook remains weak, for the multi-family sector the picture is a bit more positive. Tighter mortgage credit and a soft housing markets has helped overall apartment demand.

We can see the benefits of the weak housing market in the performance of our own portfolio, and I want to share a few data points with you. Turnover for the first half of the year was 51%, down from 53% for the same period last year. And at 51%, this is the lowest level of turnover in over eight years. Reasons for move out due to home purchases for the quarter fell to 20% and this is a reduction of a about a third from a few years ago. And finally, the 3.7% growth in revenue for the quarter despite no job growth in our markets. So given our current assessment of the economy, the capital markets and the investment fundamentals, I wanted to provide an update regarding key aspects of our '08 business plan and I'll compare our current outlook at mid-year to our original outlook given in February addressing four topics. First portfolio performance, then investment activity, then capital markets activity, and finally FFO growth. In February, we gave outlook for full-year NOI growth ranging from 3 to 4.5%. With our results to date and updated estimates for the balance of the year, we expect NOI to be in the upper end of that original range. The expected performance of the upper end of the range is driven by lower-than-expected expenses, as revenues will likely come in around the midpoint of our original projection.

Turning to investment activity, let me start with an update on dispositions and then I'll discuss our development activity. Our January outlook gave a range of $700 million to $1 billion of sales for the year. And through the end of July, we've closed on almost $400 million of sales. Despite a very choppy sales environment, we are very pleased with the volume and pricing that we've been able to achieve, which we think speaks to the quality of our assets and of our markets. We have an additional $300 million currently being marketed, and for the year, expect our total disposition volume to be at the lower end of our original guidance. Shifting to development. Originally we expected to start between $900 million and $1.1 billion of new developments. And our current estimate is for about $700 million of starts. Given the weakening economic environment and volatile capital markets, we felt it prudent to reduce our planned 2008 starts, electing to push some out to 2009. In terms of capital markets activity, we originally expected to range between $700 million and $1 billion of debt either secured or unsecured. And through the second quarter, we've already raised over $850 million in new debt, which Tom will comment on further in his remarks.

In terms of FFO, our original guidance was for a range of $4.90 to $5.20 with a midpoint of $5.05. In last evening's release, we revised our guidance narrowing the range and raising the midpoint by $0.03 to $5.08 per share. So in summary, despite a weakening economy and very volatile capital markets environment, we had a strong quarter and remain on track with the key components of our 2008 business plan. Our portfolio is performing well and we expect NOI growth to come in at the upper end of our original outlook. Disposition activity is on track and our projected volume and pricing within our original expectations. Development starts have been reduced to '08 in response to weaker economic and continued capital markets volatility. Our balance sheet and liquidity are in good shape, having already raised over $850 million of cost-effective debt. And we have been able to raise the midpoint of both EPS and FFO outlook, revising our FFO outlook by $0.03, which represents an approximate 10% growth rate over last year's result. So with that, I will turn the call over to Tom to provide an update on capital markets activity and our outlook.

Thanks, Bryce. I will focus my comments this afternoon on liquidity, capital and investment activity and I will conclude with comments on the mid-year financial outlook provided last evening. There is a number drivers behind our liquidity, and these include new financings, debt repayments, asset sales and development activity and I will speak to each of these key drivers. Bryce noted the challenges from the stress of the capital markets and we responded by tapping a variety of capital sources that total $1.2 billion year-to-date through July. This capital includes $525 million of secured debt through Fanny Mae and Freddy Mac, with average rate of 5.25, 5.2% and average term of six years. We closed on unsecured -- an unsecured term loan with an existing -- with our existing bank group members and as well as some new lenders that totaled $330 million. This matures over three years and priced at LIBOR plus 125 basis points. Proceeds were used to reduce our credit facility balance as well as to redeem debt. Year-to-date through the end of July, we have repaid $206 million of unsecured senior notes and $28 million of secured debt that combined had an effective interest rate of 7.5%. A portion of this debt, approximately $40 million, was repaid early. So it is noteworthy that, even in a challenged capital market, we are able to be opportunistic, repaying and prepaying 7.5% debt with new debt at 5.2% for 230 basis point savings. We did incur some charges to earnings related to these repayments and that totaled about $800,000 for the quarter. About $568,000 of that was noncash and the balanced of that was a cash charge.

Asset sales provide another source of liquidity and provide an opportunity to harvest value created from our development and investment activity. Through end of July, we sold seven assets for gross proceeds of $380 million. These assets do include one fund asset that was sold for $81 million. As Bryce noted, another $300 million under contract or in marketing. Transaction market reflects current overall capital market stress, but our financial flexibility does allow us to sell assets that achieve strong pricing and substitute or even withdraw assets that are not receiving a strong response from the market. And to that end, we recently pulled two assets and retained a deposit forfeited by a prospective buyer. Through all of this, our balance sheet remains strong and provides important financial flexibility to respond to the uncertainty that still exists in the capital markets. Just to summarize, we have no balance outstanding on our $1 billion credit facility at the end of the quarter. We have cash on the balance sheet of $114 million. Our interest coverage remains strong. Our unencumbered NOI stands at about 78% and our debt-to-market cap is only 33%. So recapping, liquidity in capital markets activity and asset sales combined with new debt provided $1.2 billion of new capital through July, allowing us to redeem relatively high interest rate debt and to reduce our credit facility balance while retaining over $100 million of cash on the balance sheet.

Moving on to investment activity, development is our single largest use of capital, and we have responded to a weaker economic and capital market environment by reducing planned development activity. This was accomplished through a combination of disciplined actions which I'll -- I'll summarize for you. First, we have reduced our new construction starts for 2008 as Bryce mentioned by about 30%. We now expect to start $700 million, which is down from the $900 million to $1.1 billion range we provided in our February outlook. Through June, we have only started $100 million of new development. We have also slowed the addition of development rights to our pipeline of future business and dropped several development rights. This was effected through increased return requirements, as well as adjusting the risk we are willing to take to undertake a new development. The four development rights that we did drop during the quarter resulted in higher abandoned pursuit cost, which total about $1.8 million for the quarter, which did impact our earnings growth for the quarter. These actions are reflected in our development schedules at attachment seven, where you will note that total development underway and planned declined over $600 million from the first quarter. As we have reduced our planned development activity in this capital constrained environment, it does improve our financial flexibility and, along with continued earnings growth, supports dividend increases. And you recall our board approved an increase in the dividend in April of 5%.

For the second quarter, our FFO payout ratio was 71%, which is the lowest in the sector and one of the lowest in the industry. So increasing our dividend while retaining capital for business needs is another important indicator of our overall financial flexibility and financial strength. Turning to our mid-year outlook, the updated financial outlook we provided last evening was adjusted for the year by narrowing our range of expected FFO and EPS and increasing the midpoint of the FFO range by $0.03 per share. We expect earnings per share, not FFO but earnings per share, will total $8 per share for the year. This is driven by the gains on our disposition activity. Year to date, we have outperformed the original outlook by about $0.01 and expect the second half of the year will be lifted by better-than-expected results from our portfolio. We expect revenue growth will continue to moderate for the remainder of the year and be in line with our February outlook. Operating expenses will come in better than our original outlook, and overall we will see NOI growth of 4 to 4.5%, which is at the top end of the 3 to 4.5% range we provided in February. These modestly positive expectations are tempered by rising bad debt expense, which is consistent with a weakening economic climate, as well as signs of increased exposure to occupancy levels. So to recap, we have been actively improving liquidity, reducing our development activity and lowering our financing costs, despite the strong headwinds presented by the capital and transaction markets. With $1.2 billion sourced to date, our $1 billion credit facility fully available at the end of the quarter and cash on the balance sheet and adjusted levels of development activity that reflect current economic and capital markets uncertainty, we're well positioned to execute our business plan for the remainder of 2008 and into 2009. Bryce, those are my comments.

Well, thank you, Tom. And operator, we'd be glad to take any questions we may have.

Thank you. (OPERATOR INSTRUCTIONS) One moment for the first question. Your first question comes from the line of Lou Taylor of Deutsche Bank.

Thanks, good morning, guys. Two questions. One -- maybe Bryce or if maybe Tim is on the line, can you talk about the cap rates on the sales so far 4.9 in Q2 and then the 5.6 in July. Is that indicative of a trend and maybe talk about your expectations on -- for cap rates in the second half of the year.

Lou, this is Tim Naughton. I think I will address that. Just starting backwards, is it indicative of a trend? Not on that order of 70 basis points. It is really more of a mix of the assets. I think last quarter at -- I had talked about -- that we thought cap rates were backed up but around 50 basis points on average across -- across our markets and portfolio. This past quarter, I would say that probably backed up another 10 to 25 basis points, so certainly not on the order of 70 basis points. It is really more of a function of the mix. A lot of the assets in the first half of the year were really focused on the West Coast markets of San Jose and Seattle, which obviously have been stronger transaction markets and here in the third quarter was mostly an asset in New Haven county. I think, as I have mentioned in the past, the northeast suburban assets have really been the highest cap rate markets.

Okay. And then second question is maybe for Bryce or whoever wants it. In terms of the reduced development starts, can you maybe just shed a little bit of color what drove it, is it just the higher costs, the rents weren't there, you didn't think the job or demand growth was there. Maybe just a little bit of the rationale for dropping the various projects.

Well, I think there's two things. One, in terms of the reductions in starts in 2008, that was not dropping of deals, Lou, just to be clear. That was deferral of deals that we will start in 2009. What Tom spoke about in his comments was in terms of development rights. Those communities in planning that we did drop three was it, Tim -- four this past quarter, which are deals that were just in the ordinary course of the development process, deals that didn't make either from an approval point of view or just because the yield wasn't there. So I just want to distinguish between $700 million which is a delay, pushing things out, and what caused us to make that determination I think really Tim addressed that a bit on last quarter's call, which was in a weak economic environment, one, where we are a bit concerned about liquidity and wanted to make sure that the dispositions were happening but also, two, an environment on the wood frame construction, we have been seeing construction cost declines. There is really little incentive to pull the trigger early if you think you may actually have a better buyout a little bit later in the year. So that was really the assessments. And I would say finally, if you look at -- in terms of the assessment for what the market conditions may be like in 2009, which are likely going to continue to be weak versus into 2010 and 2011 which early forecasts by many, including our assessment, will be stronger conditions, it would suggest pushing things out a bit as well.

Great, thank you.

Your next question comes from the line of Michael Bilerman of Citi.

If there is a question, we are not hearing it.

Can you guys hear me?

Now we can Michael.

Just a quick question about the climate of buyers for assets currently. If you can just talk a little bit about the types of buyers, the kind of financing they are looking at, their appetite for which types of assets. That will be helpful.

Sure, Michael. Tim Naughton here. Yes, last quarter I think talked about really it seemed to be the investments funds that were prevailing in terms of transactions. Oftentimes the REITs and other institutional buyers were falling short from a valuation perspective. More recently we have seen a few more local buyers. In fact the asset that we sold in Connecticut was to a local player there, sometimes with 1031 money, sometimes just looking to expand their presence in the market. But in terms of the types of assets and locations, again, it is still the stronger markets, stronger locations where it seems to be the -- where the investor demand is. Where previously we have seen more demand in the area of value add. I think there is still interest in value add. I'm not sure it is getting priced into the deal as much as it had been in the past. So that's a little bit of summary of what we are seeing in the transaction market.

Tim, can you comment a little bit on -- I think Tom talked about two deals falling out and how you sort of switched in assets that you weren't planning on selling and I guess some that you thought you were going to sell, you are not selling anymore. So what in your opinion is sort of driving those changes on the buyer front? And then maybe talk a little bit about how the buyers are financing and whether at all you have considered providing any seller financing.

Starting with the last question, have we considered providing seller financing? We have. It haven't made a difference honestly in terms of whether -- either in terms of valuation or whether a transaction moves forward or not. With respect to the deals we have pulled, we really just try to be -- we really try to listen to the market to some extent and we knew that going in at the beginning of year to some extent. We had to let the market tell us where the demand was, and typically we want to see five to ten good credible offers in the -- in the transaction process. To the extent we are seeing a trickle of offers, two or three, we are just not confident we are getting full valuation for the assets. So that is oftentimes when we are pulling the asset. And then there has just been times when the buyer hasn't been willing to go forward and -- at least at the price they contracted with -- and the demand's been sent underneath and we decided to pull the asset and substitute it with one we felt like the invested demand was deeper.

Great, thanks. This is actually David again, and forgive me if I missed this. Can you provide a little bit of granularity on the expense savings that you are estimating for the second half of the year?

David, we didn't provide any -- any detail on the expected savings for the second half of the year. Just to give you some perspective, in the most recent quarter, you know the pressure was coming from utilities, bad debt as Tom mentioned and property taxes you would expect. That was offset by good work in the insurance front ,in our maintenance-related categories, and in marketing, and I would expect that the areas that we have seen pressures through the first half are likely to be the areas that we are going to see pressure in the back half. And where we have been making gains are areas that we have been focusing on for multiple years and these things are just helping us as the economy gets more difficult.

Okay, great. Thank you very much.

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

Good afternoon. Just want to go to the trends in New York and actually just sort of in general. Are you seeing any of your tenants, when they come up for renewal, deciding to leave your properties to trade down to a cheaper apartment?

Alex, this is Leo. We really haven't seen any of that. As Bryce mentioned in his opening comments, turnover is actually down year-over-year and the reality is for the quarter turnover was 59%, down 3%. We watch it pretty carefully to see if there is any specific movement, if people are moving out, for instance, for financial reasons. As we have talked about in previous calls, we have historically run that people move out for financial reasons in the 8% to 10% range. On this quarter it was again at the high level, just like last quarter at around 10%, but there has been no mass movement that we have identified that is occurring there. You mentioned New York, is there something specific you would like me to comment on there?

It may not be the most cheeriest places to be these days. Just curious if you were seeing any impact from -- from renters, especially this time of year would be when sort of the incoming classes to the -- to you know Wall Street and law firms, et cetera, sign new leases. Just want to see if you are noticing any different trends this year than previous years.

With respect to New York, to comment more on the city and the surrounding boroughs, what I would tell you is that our portfolio in Manhattan and the surrounding boroughs remains highly occupied. By that I mean greater than 98% occupied. So that has been a positive. We haven't seen a tremendous number of move-outs related to job loss or to the financial services sector. So that has been a positive, but being frank, what we have seen more generally from other owners is more use of concessions recently. And I guess the second thing that -- that causes me to watch carefully is where historically owners -- or recently owners have pushed the renter to pay for broker fees. We are seeing some cases where owners are starting to pay that broker free. So there is nothing, specifically, in our portfolio in Manhattan or the surrounding boroughs that gives us significant concern. However, many of the renters who maybe have been -- who lost jobs may be still living on a severance package while they look for another job. So we haven't had significant move-outs, but we are respectful with the concerns of the financial sector and what may be coming in the back half of the year, and we are just watching carefully for what materializes. What I can tell you is at 98% occupied, we are well positioned to respond and to weather what happens during the second half of the year.

Okay. And then as far as bad debt and delinquencies, I didn't hear -- maybe I missed it. What are the statistics for those two items?

This is Leo again, Alex. For the quarter, we ran at about 0.7% of revenues. That's up from a year earlier where it was at about 0.5. Something that we are watching but it had peaked a few years ago, I think, in 2003 at about 1.1%. So that's the rise that Tom alluded to in his prepared remarks.

Okay and delinquencies.

We just focus -- we just focus on bad debt.

Okay. And then final question is for Tom. Just looking at where your interest coverage is this year versus last year, it has come down, and then also the unencumbered NOI has also declined. Just want to get a sense of your thoughts. Are there certain thresholds that you look at where you probably would want to do more unsecured debt or -- or have -- potentially raise equity or do more asset sales to keep those items in check?

Alex, both correct observations. I would say that these numbers are coming down, but they are coming down from very high levels to start from. They were at peak levels a year ago. They are well within manageable ranges, especially considering our ratings and the other covenants we abide by, both on unsecured debt and our facility. So we have plenty of room on those ratios. I think the fact that they have dropped is true, but they were also at historically strong levels a year ago.

Thank you.

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

A couple questions for you, but first of all, on the decision to reduce development, obviously you have continued asset sales. I am curious about use of proceeds. Do you still anticipate buying back debt at 7.5%. Do you look at buying back your shares obviously with an implied cap rate at about 6%?

This is Bryce. In terms of -- I think addressed earlier the thought processes in terms of cutting back development. It wasn't simply a liquidity, capital preservation action, it was a variety of different factors that were a business judgement in terms of the timing of the start of them. And so again just to clarify, we are not dropping planned starts. It was a delay. In terms of the capital, we have always maintained a very strong balance sheet to be utilized for a variety of opportunities. We have been a buyer of our stock in the past. As you will note, we did not repurchase any stock during the second quarter, but in the fourth quarter of the second half of last year and early this year we had purchased a total of $300 million. So we are continuing to evaluate the stock repurchase. You are right, it is an implicit cap rate of about 6%. Obviously the stock's had a good run in the last couple of weeks, and we hope that continues. But should the stock come under pressure and we view it as an attractive use of capital, we certainly have the liquidity to do that.

Okay. And just switching gears. Focusing on the West Coast a bit. It looks like, having pushed rates a bit, your occupancy did decline. Are you starting to lose some pricing power in those markets, particularly Northern California and Pacific Northwest?

Jay, this is Leo. Both Northern California and the Pacific Northwest in general, remain healthy for us. Are they -- is the Pacific Northwest as strong as it has been? We are still getting good job growth there but we are seeing some supply come in, and that supply coupled with the job growth we're getting the supply absorbed but that is getting the market more into balance. So the rate of increase that we get is tempering. Similarly, Northern California -- Northern California is really three markets, it is San Jose, it is San Francisco, and it's the East Bay or Oakland area. San Jose and San Francisco are still doing very well. San Jose is seeing some supply. Supply is still pretty modest still in San Francisco. If there is an area I am keeping my eye on more closely, it would be the East Bay. If you look at the more recent statistics, there have been job losses in the East Bay and the supply is coming up. And in truth, from when I lived there, the East Bay is also the more affordable of the markets. So are they tempering or moderating, as we said they would at the beginning part of year, absolutely, but those markets in general remain very healthy.

And could you also provide similar detail on Manhattan or New York in general? What are you seeing sort of Manhattan versus Long Island, Connecticut and New Jersey?

Okay, I will try to run through each of the markets. With respect -- and I will start -- I will start just with our New York results. In general, the New York same-store results you receive are not Manhattan results, because the properties in Manhattan are not in the same-store sale pool. So when you look at the New York results, it is really largely Rockland and Westchester County and then one asset that's in Long Island City. Those results that you see were somewhat dampened by the fact that two of the assets, and they are large assets in the same-store sale pool, are first phases of deals where we had a second phase leasing up. That created some pressure on those assets, but in general the New York, the Rockland and Westchester areas are doing okay. In Connecticut, there are two markets that we focus on, which is basically northern Fairfield and southern Fairfield or Stamford area. In the Stamford market, we had some pressure from furnished apartment homes that moved out. We absorbed those but that put some downward pressure on rate as we had to fill those up. There was one employer, Nestle I believe, that reduced force and we are deeping a close eye on the Royal Bank of Scotland. There's also been some information there. The New Jersey area, central New Jersey and northern New Jersey, both of the fundamentals for those markets, when you look at them, are not as strong, but really northern New Jersey trades off of New York City. We are watching that carefully. Central New Jersey also the fundamentals aren't as strong and that is a slightly more price-sensitive market.

Okay. Thank you.

Your next question from the line Rob Stevenson with Fox-Pitt Kelton.

Good afternoon. In terms of the cut in development start expectations, was it fairly evenly spread across the markets or were there certain markets where you've just not -- decided not to start anything else right now because of what you are seeing on the ground.

This is Tim. In terms of the deals that -- that we're deferring, they tend to be in markets where the fundamentals aren't quite as strong. In fact if you look at what remember anticipating starting in Q3, we have a deal in Northern California, a deal in Seattle, and a deal in Boston, all of which are exhibiting probably the strongest fundamentals among our portfolio both on a year-over-year and sequential basis. So generally it's been the markets where the fundamentals have been stronger and also where you don't necessarily anticipate as much relief on the construction cost over the next, call it, six to nine months. And so in markets that are experiencing some distress like the Southern California right now, where we think the buy opportunities from a construction buyout standpoint may be more compelling the next six, nine, twelve months, those are the types of deals we are more than likely to defer.

Okay. And then what about redevelopment in this type of environment? Does it make sense to do -- to start any new on balance sheet developments from a return standpoint in some of those softer markets?

I am not sure about the softer markets, but I think it makes sense to be reinvesting in assets and we did start three new redevelopments on balance sheet this past quarter and we anticipate starting at least a couple more next quarter as well. So it's an area that we have been talking a lot about over the last couple of years just in terms of ramping up as the portfolio ages particularly in the West Coast, and we need to develop that expertise internally. So that is an area that we'll continue to focus on here over the next couple of quarters.

Okay. And then last question. You mentioned you started seeing some relief on some of the wood frame construction. Of the three -- the $3.6 billion or so of development rights you guys have, what is the current thinking of mix on that rough estimate in terms of wood frame versus steel?

I wish I had that at my fingertips, Rob. The average cost of that. I am going through it right now, if you can just give me a second. The average cost is about $300,000 a unit. I would tell you that is probably on average more infill than the stabilized buckets. You know if I had a guess, it is either in terms of steel versus wood frame. It is probably 30/70 something like that, one third, two thirds.

Okay.

But in terms of high density, it is probably at least two thirds high density, we are talking podium product, wood frame, densities of 70, 80 an acre or more.

Thanks guys.

Your next question comes from the line of Anthony Paolone of JPMorgan.

Hi. This is Mike Lewis on Tony's line. First off, it sounded like, if I recall correctly, concessions were up just a little bit the first quarter. And I was wondering how concessions are trending as you move into the peak leasing season and if that's just confined to softer markets or to development lease-ups.

This is Leo, concessions to move in were up a little bit, not much, still remaining about one week on the stabilized portfolio. Where were concessions up? They were up in Orange County. We also saw an increase in Oakland as well. But we have to remember with concessions on a stabilized portfolio, it is frequently used as a marketing tool and in certain cases, that's what we have been doing. But there hasn't been a significant movement. It was up -- I think it was in the high 400s last quarter, and now it is in the low 500s this quarter on a per move-in basis.

Okay. Shifting to development a little bit. Any comments on the -- on the private value of land right now? And how do you think the market value of the land would compare to the book for the future developments?

Mike, you are talking about our land, the land that we have on our balance sheet?

Right, right, just trying to get a sense of some value.

I think of the stuff that we own, it is just over $50,000 a unit. That would be the book on it. And at this point, I would tell that you we feel pretty good about the -- about that value relative to the current market value. The -- the development portfolio has an average projected yield that's in the -- it is in the low to mid 6s, which is still around market today. So we don't feel like there is a lot of exposure with respect to the land that is on the balance sheet today.

Okay. And then lastly, do you foresee having to cease capitalizing any overhead or interest costs if the development pipeline were to shrink a little bit in the next few quarters?

This is Tom. If we were to -- if we were to --

To scale back development.

Well, if we were to stop a development activity all together, we would stop capitalizing interest. If we were -- and that would include stop capitalizing overhead as well. We continue to process developments for construction and therefore would continue to capitalize interest. Just because they are deferred, doesn't mean we are still not working on them. As long as we are actively working on them, we would capitalize interest, property taxes, insurance and overhead.

All right, thanks.

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

Good morning. Just to expand on Alex's question about your 70% of unencumbered NOI. Can you give us a magnitude of just how much more secured debt you can add or you can layer on before rubbing up against your unsecured covenants?

Well, it's 78%. I don't mean -- I mean I am a little protective of that number. So I apologize. It is 78%. We have two different covenants related to this, both secured debt related to the credit facility, as well as the unsecured debt that -- the term debt. I don't have the exact number in front of me, but -- and so I don't want to guess at a number. And I can get back to you, but we have a lot of of room. I think the answer is, in terms of would we use all that room, I don't think we would. I think we are an unsecured borrower. Actually, I know we are an unsecured borrower and that is the way we have conducted business now for 50 years and we like the flexibility that we get from it. The unsecured markets today are challenging. The secured markets are better, but spreads have increased since the first quarter when we talked about this. So we still believe in the unsecured markets. Right now a ten-year deal on the unsecured side would probably cost 125 basis points more than an unsecured deal. Five years it's more like 80 basis points. Those are still high spreads between the two types of products which will lead us, if we needed to do more financing, especially if it was longer term, to move toward more secured financing just because that differential is what it is.

Okay. Thanks for that. Moving on to your asset sales. You have a blended 4.9% market cap rate. Can you break that down between the different markets?

Sure. This is Tim again. Generally West Coast, lower cap rates, high 4s to low 5s. Bay Area still in the high 4s. Seattle, Southern Cal, plus or minus 5%, right around there. In terms of the East Coast, generally more in the mid 5% range. D.C. would be at the low end of the range, probably more in the low 5% whereas New England more in the mid 5% range.

Great. And then just one housekeeping item . The $102 million you have as held-for-sales does that relate entirely to the two properties you sold

No, we have other assets under contract other than those two that are for sale. So we would have more -- the answer is, no, there are mores assets in that held for sale.

Okay. Great, thank you.

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

Good morning. Looking at traffic patterns during the quarter, can you talk specifically as it relates to patterns in May and June and also what you have seen in July. One of your competitors had noted they expect significant moderation in the second half and I was kind of wondering what you are seeing.

This is Leo. Traffic on a year-over-year basis in the second quarter was flat, so same as the previous year. As you might expect, Southern California traffic was down. In the Midwest, we saw it up. In other markets, it was down some, in the Pacific Northwest as well. And then the other markets it was roughly the same as the previous year, but overall, it has been flat.

That held through entire quarter?

Yes.

Okay. And then through July so far?

July -- I haven't seen it versus the previous year. I just have been watching it, but I would expect the same as the previous year. There has been no significant pattern that has come to our attention that is a deviation from previous.

Okay. Secondly, with the $300 million of assets sales you are expecting to close -- you are out in the market with right now, how does pricing look at this point compared to the -- to the sales you have had thus far this year.

Tim Naughton here. Somewhat consistent, but as I mentioned in my -- to the first question on the call, in the last quarter, we've probably seen a backup. Best we can tell maybe 10 to 25 basis points from the first quarter, but we still anticipate sales kind in the range as I have been talking about 5 to 5.5%, average in the low 5s for the balance of the disposition pool.

And then finally, you had mentioned you raised your hurdle rates in the first quarter on new developments. Were there any further adjustments during the second quarter?

We haven't had to, because we haven't gotten any new business under contract or started anything. But, no, essentially the targets will be equivalent. Part of what we try to do with the targets is to anticipate movements in the real estate and capital markets, and so it's -- they are not something that changes -- change every few weeks. But today -- and I think I quoted last quarter, new development targets are in the high 6s to 7%, acquisitions more in the mid 5%. We are starting to get closer in terms of what the market is throwing out and then redevelopment more in the low 6s.

And finally with the assets that you had from fund one in the quarter. Do you intend to backfill that and also any updates on prospects for fund two at this point?

This is Tom. The concept of backfilling in a closed-end fund doesn't really work. That fund is closed. The investment period is closed. So no backfilling under the structure of that fund. In terms of what we do going forward now that we have completed the investment of this first fund. We are -- we continue to be in discussions with investors and we continue to pursue sources of capital to support our acquisition activity going forward, but right now it is really too early to give you any details or plans. We just ask you to stay tuned for further developments.

Great, thanks.

Your next question comes from the line of Todd Thomas of KeyBanc Capital Markets.

Hi. It's Karin Ford here. Just a quick question on capitalized overhead. It looked like it went up sequentially from Q1 to Q2 despite the drop in volume of assets under construction. Could you just talk about why that number went up?

Sequentially, yes, Karen, a couple of things. One in the first quarter we adjust bonus accruals, and we actually reduced some of the bonus accruals in the first quarter, which made that number unusually low. The second aspect is -- it is a very technical basic thing and this is you have -- people catch up on their payroll taxes early in the year, and then you -- you don't pay those later in the year, so that affects the relative range of capitalized interest -- capitalized overhead.

Okay. And am I correct to assume from your comments earlier that the fact that you just delayed some of the starts from '08, that you won't need to be putting any of your capitalized overhead onto the income statement this year?

That's correct. The deferring of starts doesn't mean that we've stop development activity. We continue development activity, but we have flexibility in terms of when we can start and how fast we process those entitlements.

Okay. Next question is can you tell us what markets the two assets that were pulled from sale were located in?

Yes, Karin, Tim Naughton here. They actually both were in Seattle in the northern suburbs of Seattle.

Okay. Finally, are you guys finished with doing secured financings with Fannie and Freddie for the year?

Karin, we don't talk about capital market activity in the future. I gave you an indication of the relative spreads between secured and unsecured, but in terms of talking about capital market activity, we don't -- we don't -- we don't talk about that.

Fair enough. Thanks.

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

Sorry, thought I got out of the queue saving you guys a little time. But I will ask now that I am still here. Tim, you had mentioned the markets that you are still proceeding with development, and you called them your stronger markets. But I guess when I think of it, is that really where you want to be developing today? Isn't that two years from now when you do deliver product. Can things be very different? Wouldn't you want to be more inclined to develop in core markets that maybe are a little bit weak today?

That's a fair point, Rich. I think it really depends on the market. In the case of Boston, I think that actually fits the description you just gave. I think we have been talking about Boston for the last few quarters, that we were starting to see early signs of recovery, even though it wasn't showing up in the performance. And I think this past quarter you are probably starting to see that with good, decent sequential revenue growth about 2% on the same-store basket and over 4% on a year-over-year basis. So I think that is probably a good idea of what -- what you describe. And then in the case of a deal, say in the -- in the Bay Area, we do think that is a market that still has some legs. So fundamentals are -- are still, we think, are decent and likely to be prolonged relative to a lot of other markets and the underlying economics are fine right now. And then lastly, I think we talked about a deal in Seattle, which we are targeting an asset there in Bellevue which is also a strong market. It's -- employment growth continues to be quite strong in Seattle, particularly -- particularly in that -- in that submarket.

Okay. Fair enough. Tom, about an hour and a half ago, you talked about the higher returns that you are applying that gave away to some -- taking some -- some development rights off the schedule. Can you quantify what your higher return requirements are in development today?

That is really a Tim question. I'm going to turn it over to Tim.

Okay.

Yes, Rich, as I -- I think we talked about this last quarter too. For new development, new commitments, we are looking for something more in the high 6s to approaching 7% as a target yield. I think as we talked about in the past, every deal has an unique target yield based upon the underlying inherent fundamentals, both risk and market and asset quality aspects of the deal. A deal that comes entitled, which we have picked up a number of those deals in the last year, would obviously have a lower return threshold because it just has lower risks.

Last question for whoever. What do you think your -- your equity cost of capital is today?

Rich, this is Tom. I think you can ask ten people that question and get ten different answers, so --

What is your answer.

What's my answer? Well, you know --

How's that changed more --

It has certainly gone up. I think you can correlate that to a lot of different things, including what are the unlevered expected returns from core assets if you were to go out and buy one today, which has some relevance to our business. My guess is that number is in the mid to high 8s if I had to guess. And that probably would be my guess?

Okay. Good enough. Thanks.

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

Hi, two questions. To follow up on Rich's about the higher development yields and your comments about kind of shooting for 6.75 to 7. How much I guess of the 42 projects on the development rights page, how many of those projects would kind of fit into that return bucket and do these need to then season a bit more or do rents need to move higher to kind of move these into service?

Steve, I don't know the percentage, but the economics overall I think I mentioned previously are kind of in the mid 6s for that development right bucket. Best we can estimate today, given the current rent and the construction cost environment. Deals that fall well short of that, as you said, might need the season. On the other hand, construction costs are a big part of the equation as well and we are seeing just runaway construction cost escalation of the last several years and we are starting to see some moderation there. And so we anticipate some of the seasoning of yield, if you will, is going to come not just from the market side but also from -- not just from the market rent but also from the construction cost side as well.

Steve, this is Bryce. Just to emphasize something Tim said earlier to make sure it wasn't misheard. We are not saying that is a hurdle rate that all deals must cross. That was the average that Tim was talking about looking at things as a portfolio. And he mentioned earlier that every deal is priced individually and there's going to be some deals that are going to be -- going to pass the gate, if you will, at lower yields because they carry lower risks or they have greater expectations for growth and there's some that are going to require higher yields. So we are talking about a basket of properties.

I understand. Maybe I missed it, on the I think four projects sell off the development rights page or were maybe were abandoned, you talked about the cost. Did you -- maybe I missed it. Did you talk about why they were -- were those not making your returns, are the submarkets changing. What were the characteristics?

A combination of -- Steve, it's a combination of both economics as well as our perceived view of entitlement mix relative to the return opportunity. So it's really a function of both the risk of entitlements as well as our view of the economics of the deals.

Okay. Then maybe the last question maybe for Leo. I just want to go to the operating expenses. I realize it bounces around quarter-to-quarter and second quarter was aberrationally at minus 0.5%. The year-to-date number is low as well at 1.8%. Your expectation for 2008 was what?

Steve, my expectation for 2008 is somewhere just below 2. So as Tom had said, just slightly below the low end of the range we gave at the beginning of the year. And I would say that, if you look back at our history for the past four years, we have been running in between 2 and 2.5. So this a continuation of actions that we put in place and have been focusing on for some time now.

And I guess with municipalities looking for higher taxes, we heard from one of your competitors earlier that the Seattle market was starting to be put through more aggressive tax increases. I realize California you're a bit protective. What about some of your other markets and some of the drivers like insurance, which are going down year-over-year. I mean did those things become more difficult as you anniversary against them in '09 and might we see that number kind of spike up a little bit?

I think in the property tax side, we expected significant pressure this year. We are getting pressure as you mentioned in California. We are somewhat insulated from it. But, yes, property taxes is an area of significant concern. What's really helping us in general is the focus we put on procurement, both nationally and regionally, that has helped us to keep things under control. And for the past couple of years put technology in place that gives us better visibility, which has helped to keep expenses down and what gives us the confidence to say that we are going to stay in that 2% area even for a fifth year straight this year, and then lastly, we have just changed the way we operate. In certain respects, we have centralized administrative functions to allow us to work positively on the payroll side. With respect to the direction on insurance which is a question you asked. I am going to let Tom speak to that one specifically but, overall, we are not immune from the inflationary pressures that are ongoing and the sales and the effect on property taxes. So, Tom, if you want to comment.

Yes, the -- Steve, the insurance markets continue to be soft, which is good for us. If we are to reprice our insurance today, I am certain we will see lower premiums than even what we were able to effect last year. We reset pricing. So that -- there is opportunity if you reset them today. That number will go down. Where it would be six to nine months from now where we look at this, I am not sure. But the market continues to move in our favor, which would perhaps mute some of the expense increases we would see on other line items. While I've got the mic, I did want to go back to answer a question that someone raised about our total debt. And there is a range of debt we can take on before we trip covenants. We could issue another $1.8 billion of secured debt before we trip any of our covenants. And then under another set of covenants, that number will be $2.6 billion. I would re-emphasize we would never want to go there, but someone did ask the question and we want to be responsive.

Your next question comes from the line of Paul Morgan of Friedman Billings Ramsey.

Hi, good afternoon. My only question left is just about the gas prices and if you look at maybe -- whether you've looked at traffic patterns and reasons for move-in and move-out and have you seen anything you can discern about people's preferences for outer suburban versus inner suburban or transit-oriented projects and whether that may be having an impact on performance within submarkets and markets?

Paul, this is Leo. With respect to the gas prices, as you know most of our properties are generally in infill locations, and for years now, we have been focused on transit-oriented destinations, et cetera. The only specific evidence I can give you is -- I have recently been to an asset in West Covina and they are clearly -- in talking to the community manager there, when you are in a tertiary location, people are -- and especially a price sensitive tertiary location, which is more of what West Covina will be, people are considering it and are thinking about moving inward. But as I said starting out, people relocating closer to transit-oriented and infill locations is likely to be a benefit to us because that is where the majority of our portfolio is.

Thanks.

Your next question comes from the line of Steve Radanovic of BB&T.

Yes, hi. I am sorry if I missed this. Can you comment on what led to the pick-up of G&A in the quarter?

Yes. This is Tom. Primarily the pick-up in G&A relates to a couple of things. First it relates to additional accruals for FAS 123R, which relates to our retirement programs as well as a noncash true-up of board comp based on some of the stock-based compensation programs we have for board members. Those are the two big reasons for the change.

So those more or less one-timers or is that a reasonable run rate?

There was one one-time item in there that was about $500,000. The other item in terms of the increased year-over-year related to 123R, that was kind of a continuing -- that will continue for next couple of years as we continue to accrue retirement benefits for certain executive officers.

Okay. And lastly, can we infer from your EPS guidance that the timing of the dispositions will be more heavily weighted in the back half of the year towards the third quarter versus the fourth? Or is that more a function of the actual imbedded gains.

Could you repeat the question?

Sure. I was just trying to figure out if you had any guidance on where you thought the dispositions in the back half of the year would be more heavily weighted towards, the third quarter or the fourth quarter.

You know a little bit more in the third than the fourth, but as Tim said, the market is very volatile and I would just say our estimate was for the second half of the year.

Okay. Thank you.

You have a follow-up question from the line of Michael Bilerman of Citi.

Just a follow-up on the development. Just taking your comments on the deferral of some projects, both from the side of potential better construction cost but also trying to deliver in a better market in 2010, '11 versus '09. You went through the active $2.2 billion projects, a number of which deliver later this year and into 2009 and 2010, how did you think about the conditions upon which they will deliver and your rental levels and sort of relooking at the forecast on those projects.

Michael, this is Bryce. As I think most all know, our underwriting is based on current rents, current expenses, we don't trend forward. So embedded in those yields for communities that are delivering into '09 or '10, they weren't based upon expected rental rate growth. We are still seeing rental rate growth albeit at a moderating level. So we are very -- still comfortable with the yields -- the underwritten yields of those deals and of the overall portfolio.

So if things were to get much worse into 2009, if we start decelerating the back half and for whatever reason may maybe rent growth turns negatives, the yields would just be lower at that point, but 6.3 represents today?

Correct. Yes. Obviously, rents can go up, rents can go down. We underwrite based upon current rents and then as we get into the actual lease-up process, they are trued up to reflect our actual experience.

Okay. And then just on the tax implications of the significant dispositions. Does that trigger at all any potential special dividend or do you have acquisitions potentially lined up to take care of that?

Yes, this is Tom. If we were to continue to sell assets as we expect, it could -- it could trigger the need for a special dividend. It is certainly speculative at this time, so we wouldn't want to comment further on that, but we hope to continue to process these developments, get great gains and if it results in having to distribute more, that is a good thing for investors.

Is there any -- do you have any acquisitions targeted right now within the guidance?

We -- on our balance sheet, the answer is, no. We generally are not in favor of using 1031 exchanges to defer gains. We would rather use the 858 election, which allows us more flexibility. So the answer is no, we have no acquisitions targeted on our balance sheets to defer these sales.

I know you don't want to comment too much, but is there a certain magnitude of potential distribution? Are we talking $100 million or $300 million in terms of potential?

Really can't comment at this time. It would be speculative.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) You have a follow-up question from the line of Anthony Palaone of JPMorgan.

My question was answered, thanks.

Operator, I think we will just cut off the call now with respect to everyone's time. We thank you for your time. We know it is a busy, busy week for earnings calls and a busy day. So we appreciate your time and thank you for participating.

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