艾芙隆海灣社區公司 (AVB) 2008 Q3 法說會逐字稿

Welcome, everyone, to the AvalonBay Communities third quarter 2008 earnings conference call. (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. Sir, you may begin your conference.

Thank you, and welcome to AvalonBay Communities' third-quarter 2008 earnings conference call. Before we begin please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in last evening's press release, as well as in the Company's Form 10-K and Form 10-Q filed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms which may be used in today's discussion. The attachment is available on our website at www.AvalonBay.com/earnings and we encourage you to refer to this information during our review of our operating results and financial performance.

Normally our calls run about an hour, but we are going to do a hard stop at 11:30 this morning to allow you access to other calls scheduled to begin at that time. Because of that, management comments will be a little shorter today in order to provide more time for your questions. And with that, I'll turn the call over to Bryce Blair, Chairman and CEO. Bryce?

Thanks, John. And with me on the call today are Tim Naughton, our President; Leo Horey, our EVP of Operations; and Tom Sargeant, our Chief Financial Officer. Tom and I will have some initial prepared remarks. Then all four of us will be able to answer any questions you may have.

By way of overview I think it's fair to say that the weakness in the capital markets and in the economy are impacting how we and others are approaching both current and future actions. In this operating environment, we're being very cautious regarding new investment commitments and are being very focused on maintaining a strong liquidity position. Over the longer term, I believe the current events are setting the stage for an improved competitive position for AvalonBay. An environment with fewer competitors, with less supply, and with stronger department fundamentals. I'll comment further on these issues, but I first want to review with you our quarterly performance.

Last evening, we reported EPS of $2.98, and FFO per share of $1.28. The growth in EPS represents an increase of approximately 90% from the same period last year, and this is driven largely from gains from our disposition activity during the quarter. The FFO per share of $1.28 represents a year-over-year increase or approximately 7.5%. Our same-store portfolio performed in line with expectations, and the portfolio remains well positioned with solid occupancy averaging over 96% for the quarter. In terms of regional performance, Northern California and Seattle showed the strongest performance, although similar to our overall portfolio, their rate of revenue growth as expected continued to moderate from prior quarters.

I'd like to now touch on three of the key factors affecting our business. The three being the economy, homeownership trend, and the supply of new product. I'll then highlight key actions that we have or are taking to respond to the current and expected operating environment.

First, in terms of the economy, it is weak and is expected to get weaker next year. So far this year, the nation as a whole has been losing jobs at a rate of almost 100,000 jobs per month. And forecasts project the number of job losses to accelerate to roughly twice that amount in the coming months. For Avalonbay, our strongest markets in terms of job growth this year have been Seattle, DC, and Boston, while our weakest market has been Southern California. So far New York has held steady, but it is a market that is expected to lose a fair amount of jobs as a result of the ongoing layoffs in the financial services industry.

In terms of homeownership rate, the trend continues to be favorable. Nationally, the homeownership rate for the third quarter continued its trend downward since its peak two years ago. This shift has resulted in approximately 800,000 additional renter household nationwide, about half of which are apartment renters. This decline has certainly helped apartment demand partially offsetting the effects of the weak economy. Within our markets, the level of home ownership is consistently less in the nation as a whole primarily due to the high cost of housing but also the more urban nature in many of our markets. For the third quarter, the home ownership rate for our markets dropped to 59.6%, from a peak of over 61% two years ago. And we can see the benefit of this weak housing market in our own data as the percent of moveouts due to home purchases dropped to below 20%, the lowest level in almost six years.

Finally, in terms of supply, multifamily permit activity continues to decline. Three-month data through September showed the pace of multifamily permits down 22% on a year-over-year basis. Given the weakening economy and extraordinarily difficult financing environment, many expect the level of permits and starts to fall further in the balance of '08 and into '09. Over the last nine months, the US has experienced a period of unprecedented volatility in the capital markets, and a continued deterioration in the economy. Despite these events, we expect to end the year very much in line with our original outlook for revenue and FFO growth.

Last January, we gave an outlook range for revenue with a mid-point in the low 3% range. That's still our expectation today. Last January, we gave an outlook range for FFO with the mid-point of $5.05 per share. That's still our expectation today. So we've been able to meet our original outlook despite greater than expected declines in the economy, and a virtual shutdown in the capital markets.

The timing and magnitude of these events, however, does cause us to be increasingly cautious regarding our outlook for '09. We expect department fundamentals to deteriorate primarily because of falloff in demand. We expect supply to be held in check by constrained capital, but with job losses accelerating, demand nationally for virtually all products including apartments will be affected. So given this assessment, I want to highlight four key action that's we've taken this year. Many of which we began very much at the beginning of the year, in taking these actions in order to respond to the changing environment and to position us for continued outperformance in the future. And I'll touch on four of them.

First, the slowing of our development expenditures. We have a large and valuable development pipeline for which we have considerable flexibility regarding the pace of our expenditures. Given the weakness in the economy and the capital markets, we have significantly reduced our level of 2008 starts. Originally our financial outlook for the year called for approximately $1 billion of starts. We now expect to begin only about half of that amount. This slowdown in the pace of our development activity was evident this past quarter as we completed seven communities totaling $450 million and began only two communities totaling $240 million, thus reducing our total level of development activity by approximately $200 million.

The second activity is we've been on hold regarding our acquisitions. Given our concerns regarding capital availability and cost as well as our concern regarding the increasing capital rate environment, we decided to take a wait-and-see attitude regarding acquisitions. So far this year, we have not purchased any new communities. However, we have closed in our second investment management fund, and are well positioned to capitalize on attractive opportunities that we expect to surface over the next few years.

Third is we've been aggressive with our sales activity. So far this year, we have sold $600 million of assets including $350 million just this quarter. As the year progressed, cap rates are moving up and the general sales environment got much more difficult. The fact that we're able to get this volume of sales done at a weighted average cap rate of approximately 5.1% is a reflection on the quality of our assets, the continued attractiveness of our markets, and the fact that we got started early in the year.

The fourth action has been to be aggressive in building liquidity. We've been very proactive in sourcing a variety of capital to meet both our current and future liquidity needs. So far this year, we've sourced $1.8 billion of capital through a variety of debt sources, as well as from our disposition activity. Tom will provide some further details in our capital markets activity during his comments. I believe each of these four actions reflects an appropriate response to the current, difficult operating environment, while not hampering our ability to act on future opportunities. A few examples. We're deferring many development deals, we're not shutting down our development program. We've held off on current acquisitions but have raised the second fund for future opportunities. And we've raised the significant amount of capital to fund our investment needs and to ensure our balance sheet remains one of the strongest in the sector. With that I'll turn it to -- the call over to Tom to provide additional comments on our capital markets activity.

Thanks, Bryce. My comments this morning focus on our financing activities for the year. A review of our liquidity and a discussion of the dividend. We've accomplished a lot during the year to build liquidity and to avoid market volatility and arranging about $1.8 billion in new capital. About $1.0 billion of this new capital is debt, another $500 million is from asset sales, and about $185 million is from -- is for our new investment management fund. Included in these numbers is a -- is a tax-exempt financing for $135 million which is attractively priced capital and a source of funding for future development. We used this liquidity to redeem higher cost debt and preferred stock totaling $360 million and to pay down our line and to fund development.

Bryce noted the steps we've taken to conserve liquidity through reduced development activity. And we have a very clear vision of our capital needs and how these needs will be met. I'd like to quickly go through this with you. Using construction started as of September 30, we would have $500 million of available capital at the end of 2009 after meeting our remaining 2008 commitments and all of our current 2009 commitments. Here's a quick recap of the sources and uses.

First, our available committed liquidity is about $1.6 billion, which is comprised of the line. Our cash on hand, our retained cash flow, sales that are already committed and with contracts that are hard, and committed new debt. We will use about $1.1 billion of this for construction underway, debt and preferred redemptions and the preferred redemption's already occurred, and the special dividend that we mentioned last night in our press release.

For 2010, debt maturities and remaining construction activity is fairly modest, and we can meet these needs with the $500 million that would be available at the end of 2009. While we're comfortable with our capital outlook today, we continue to actively source additional cost-effective capital. For example, we're engaged today with Fannie and Freddie to put a secured credit facility in place sized at between $300 million and $500 million. We're also considering joint ventures and tax-exempt bond financing for qualifying development rights.

Our balance sheet supports the 2008 activity and our outlook. Today, debt comprises just 38% of our total market cap. Our fixed charge coverage is strong at our current ratings level. NOI from unencumbered assets is high. In fact, we have 107 assets that are not encumbered with debt at all, and we estimate we could raise well over $2 billion from these secured debt before we hit any of our debt covenant limits.

Finally, the dividend. Quality and the durability of our dividend is supported by the quality of our balance sheet and reported earnings such that we've always covered our dividend from recurring cash flow. We have the best dividend coverage in the sector, and one of the best in the industry with an FFO payout ratio in the third quarter of about 69%. The success of our disposition program does put upward pressure on our dividend policy. And we noted in our earnings release the likely need for a special dividend of somewhere between $1.75 and $1.85 per share. To meet minimum distribution requirements. This dividend is approved by our Board, the distribution would occur sometime before September 15, 2009, and our liquidity analysis provides for this dividend.

To summarize, we've ranged -- we've arranged $1.0 billion of liquidity during 2008, obtaining higher cost debt and preferred stock, paying down our credit facility and recycling capital into our reduced volume of development. Lower development activity and identified liquidity sources prepare us for current economic conditions and for prolonged absence of capital. The success of our investment activity benefits shareholders as we return additional capital through the special dividend. And finally our balance sheet is well positioned to help insulate the Company from capital market and real estate market volatility. That concludes my comments. And Bryce, I'll turn the call back to you.

Well, thanks, Tom. Given the current outlook, 2009 looks to be a challenging year for the economy. And, therefore, a period of decreasing fundamentals for apartments. We also expect the current capital constraints to continue for some time. I believe the actions we have and are taking to reduce investment activity and to maintain a strong balance sheet are the appropriate actions both for the weaker expected fundamentals -- the weaker expected operating environment in '09, but also to ensure that we are well positioned to take advantage of opportunities as the cycle turns. And with that, operator, we'd be glad to take any questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question is from Craig Fraser with BB&T Capital Markets.

Good morning, it's Steve on for Craig. Can you give us a sense of the depth and composition of the buyers that are purchasing your assets?

Steve, it is Tim Naughton here. The market is not anywhere as deep as it's been over the past few years. The -- typically going back to 2007, 2006, we often get, 10 to 20 bids on an asset when we took it to market. What's more common today is one area of three to, maybe on the high end, eight or nine. So, the depth is quite a bit shallower than it's been in the past. In terms of buyer profiles, it's typically been mostly funds and local players for the most part. It's not been institutions. Maybe a smattering of REITs. Frankly, they kind of disappeared from the marketplace over the last, 45, 60 days I'd say.

Thanks. And then one other question. Kind of operationally speaking, what markets are you seeing the highest level of concessions that you're having to offer where you're just seeing kind of marketwide, and what level discretion are you giving your property managers to -- to offer concessions and/or lower rents?

Steve, this is Leo. For the quarter, our concessions per move-in over the whole portfolio stayed stable at about one week's rent or about $500. The markets that we are offering the deepest concessions in are Orange County, where it's running just over one month's rents, Baltimore, where, again, it's just over one month's rent, and Central New Jersey, which is just above about a half a month's rent. So those are the markets where, concessions are the most prevalent.

One thing I would like to point out, Steve, is -- we really look at effective rents, concessions are often used as a marketing tactic as much as they are used for any other purpose. And then with respect to the discretion that community managers have, community managers don't have any discretion, the pricing is handled by the offsite executives that are in those local markets. Clearly they work in conjunction with the community managers, and the community managers make recommendations. But the -- executives that aren't on the properties are setting those rents. They report up to VPs, and they have discretion to move through rents as necessary. When they're doing that, they're looking at things like what have our traffic levels been, what have our conversion ratios been, et cetera. And what we watch carefully is that our conversion ratios remain in the upper 20% to lower 30% range, which tells us that we have the rents set properly to attract and secure new leases.

Okay. Thanks.

Your next question is from Dustin Pizzo with Banc of America Securities.

Thanks, good morning, guys. Bryce, can you just talk on the development yields. I mean, how much of the decline there is due to the change in mix in the pipeline, new projects coming in and the ones that were completed versus the decline in rental rates? And also where -- I know it's tough in this environment, but where do you see those yields ultimately kind of stabilizing and potentially bottoming out?

Dustin, I'll have Tim answer that.

Okay.

Dustin, Tim here. Projected yield this quarter for that basket, again, on an untrended basis, based upon current rents in the marketplace is just over 6%, 6.1. And a change from last quarter is pretty much due entirely to the -- to the mix. Driven largely by the removal of Avalon Riverview North, which was a large deal in New York that had an outsized yield. So almost entirely driven by that. As you probably noticed from the schedule, a couple of communities' rents went down. And a couple communities' rents went up this past quarter. More or less canceling out one another. In terms of where they might bottom, I would tell you I think it depends where the market goes from here. As opposed to the prospective mix of development rights. Generally I would say the group of development rights we have and development right portfolio would be north of this number. Benefiting from reduced construction costs. So I would expect over time that the yield would go up as it relates to construction costs. However, it -- that depends on how that interplays obviously with net operating income, and rent levels, and I guess the last thing I'd say, Dustin, for the communities that have completed this year, which is just around $900 million, the average projected yield again on a current -- current yield basis with the current rents underwritten is right around 6.7. About 60 basis points north of the current development portfolio. It's under construction.

Okay. That's helpful. And then can you also just comment on -- what you've seen in the metro? I know you commented on Central Jersey. But what you've seen in the metro New York area recently. I mean, the results held up obviously pretty well during the quarter. But given that most of the dislocations occurred after September 30, I think, everyone's had quite a bit of focus on what's happening there given your exposure.

Dustin, this is Leo. With respect to the Metro New York area, things continue to hold off. Occupancy has remained fairly stable. I will tell you, though, in Manhattan, it's become very commonplace to be offering one month concession, and it's now the standard that owners are paying for broker fees. So I wouldn't want to suggest that things are completely stable. We've certainly had some pressure on rents. But we've been able to hold occupancy pretty well. In the properties and these properties don't show up in the same store numbers, but in the Manhattan properties and the surrounding boroughs our occupancies are still slightly north of 97%. We are mindful of the projections for next year, which is that New York is going to lose quite a few more financial services jobs, on the order of -- the most recent numbers I've seen is around 100,000 jobs in '09. Bryce, do you have something to add?

Just offer the perspective that we've mentioned some time -- a number of times that for our -- in our portfolio, it takes a number of quarters before you really see the result of changes in economic conditions really flowing through to the property performance. Clearly, some early signs you can look at in terms of traffic and conversion and things like that. But in terms of when you look at the revenue performance of the portfolio, by the time someone loses a job to the time that you have a downturn in rents to the time that it flows through, we're given roughly 60% turnover. It's really time, we look out about six months and really start to anticipate that's when you will really see it flowing through the numbers. But Leo was talking to some of the early indicators, which, is certainly what we're continuing to watch.

Okay. So at this point as you look out to 2009, I know you're not giving guidance. But I mean, are there any markets where you're concerned about growth potentially turning negative? Do you think that's a realistic scenario?

This is Bryce. We're not -- we're not prepared to give guidance, either overall or by market for 2009. By the answer to that, I think, is similar to the answer Tim gave earlier. It really depends upon, how deep the recessionary environment is. That -- clearly the fundamentals have continued to deteriorate in 2008. And it's likely to accelerate at a greater degree into 2009. But the depth of which, we'll be able to comment more on in our fourth-quarter call.

Okay. Thanks, guys.

Your next question is from Michael Bilerman with Citigroup.

This is David Toti here with Michael. Just a couple of questions around development. Can you talk about what's going on in your shadow pipeline? Is there a similar pullback has been reflected in the construction starts and is there any danger of writeoffs coming out of that?

David, Tim Naughton here. In terms of the development wide pipeline, for the most part we've been fairly selective over the last year or so. I think what we had talked about since the beginning of the year, we had anticipated we'd start to see. We thought better opportunities in the latter half of the year. We are seeing a lot of deal flow, very little bit, still makes sense. While we've seen some correction in land values, I would say we're still in the early adjustment phase. I would expect that except for a couple markets like a Boston, where we think the fundamentals are a little bit better and the opportunity's a little bit more attractive than the average market, we're going to continue to be pretty cautious with respect to bringing new deals on only because we think land markets will have a way to adjust. I think you'd asked something about, perspective -- about potential for writeoffs. I guess I'd say we're always assessing the development wide portfolio. We wrote off one deal this past quarter. I think in Q2 we actually wrote off four. It's just the normal course of business. We'll continue to be vigilant with respect to investing any new pursuit cost capital. And any of the development rights relative to what we believe the opportunity is.

Great. And then I'm just moving over to rents, are you seeing any difference in activity relative in -- and this includes concessions and pricing, relative to your sort of higher price point product versus the more moderate price points?

David, this is Leo. I would tell you that typically when we go into a downturn, the lower price point product does perform better. I can't give you any specific examples at this time. But, overall that's typically what happens when you head into the early part of the downturn. Then it equalizes as you get further into the downturn.

Okay. Lastly, I'm not sure if I missed this. Did you talk about the -- expected dispositions that your special dividend is based upon? In other words, what -- how you are going to stack up against your targets for the remainder of the year relative to the $700,000 to $1 billion projection of disposition?

David, Tim Naughton again, those dispositions on the order of $650 million, which is down a couple hundred million from the guidance that we'd given at the beginning of the year.

Great. Thank you.

Yes.

Your next question is from [Samir Ubidiar] from FBR Capital Markets.

Are you seeing any trends in people trading down to similar units, in light of the difficult economic times?

This is Leo. With respect to doubling up, we've heard -- I've heard some anecdotal stories from properties. It is something that I'm watching pretty carefully. What I mean by that is I'm watching reasons for move-out to see if people are moving within our communities or are even going to other communities. I haven't seen any evidence of that. Further, I have also been watching what our occupancy looks like between our studios, ones, twos, and threes. And there's no evidence that our larger apartments are more occupied. In fact, our larger apartments, the twos and threes, are slightly less occupied than our studios and ones. So while I've heard anecdotally from properties that in certain markets there is some doubling up, to give you specific evidence of that, it's just not coming through the numbers.

Okay. And what about the DC market? Looks like there was a bit of a deceleration. And I know DC sort of one of the markets that people are kind of positive toward. So can you provide some color into that?

Sure, David. With respect to DC, first thing I need to do is disaggregate that number because that includes the Baltimore market as well as DC. If you take out Baltimore, DC was actually up 2.3% for the quarter. So not as much of a deceleration. Let's talk specifically about DC -- there still is quite a bit of product coming through. It's coming through in suburban Maryland, it's coming through in northern Virginia. And as long as we continue to have job growth, that market will continue to be healthy. But the real issue with DC is getting all the supply absorbed.

Okay. And L.A. turned negative. What happened there?

L.A. is just a difficult market where there is job loss and there is some supply coming through. And my expectations are it could get more difficult because the projections for next year is for further job losses.

Okay. Thank you.

Your next question is from Karin Ford with KeyBanc Capital.

Good morning. I wanted to ask about the two new development starts this quarter. What your return expectations are on those two? How do you view the risk-weighted returns on capital allocation to those versus equity, debt, acquisitions?

Karin, Tim Naughton here. First, we don'ts disclose projected yields on individual deals or one or two collectively. But I think as I mentioned in my earlier remarks, that the -- know, that the -- the yields on newer deals, you can expect to generally be higher than the average basket today. Just based, largely based upon some construction costs relief that we're seeing in the markets. In terms of how we look at development relative to other opportunities, it's something -- it's a dynamic process now, just given the -- given the swiftness of movement and the capital markets. But it's something we ask ourselves all the time. The -- and look at all the time. We are seeing, we're weighing movements in the real estate markets against movements in the capital markets. We are starting to see as I mentioned before some relief on the construction costs. And land costs. But it's not enough yet to frankly be at, meet our target yields, which are moving into the mid-sevens and higher. We're maybe a third of the way there with respect to laying out the construction cost adjustments to date. And a decision to start a deal, is a function of a number of things. It's a function of the relative health of the market. Frankly, whether we're so -- in our view continuing to create NAV, and then lastly to your point, just the alternatives for capital. Whether it's the repurchased debt or otherwise. Tom, you want to comment on that a little bit further?

Well, I think, Tim, the only thing I would add, and Karin, it's a great question. Bryce has already outlined a lot of the steps we've taken to reallocate capital away from new development. We're still developing. But we've reduced our development activity. And we've allocated that capital toward redeeming debt. We redeemed the preferred in October and earlier in the year, we even bought back common stock. So certainly there are balance sheet-friendly ways to reallocate the capital, balancing our liquidity needs with secured debt, unsecured debt, leverage considerations, fixed charge considerations. Our goal is always to allocate capital to choose the highest risk adjusted returns. But we have a lot of stakeholders, and our goal is to achieve the highest risk-adjusted returns as we balance the needs of the various stakeholders.

Helpful. Another question related to development. You said in your comments that you were not shutting down the pipeline. Have you guys taken a look at what the impact would be on earnings if you were to shut down all the -- all future, or at least prospective new starts? And what carrying costs would be, what the overhead impact would be? Do you guys -- have you guys ever estimated that?

Karin, it's Bryce. I mean, it's a relatively simple -- we know what our capitalized overhead would be. So I mean, it's -- what you're asking is I think a pretty theoretical question. I do not see a scenario of us eliminating all development and eliminating the whole development group. But if you did that, you would eliminate all the capitalized overhead associated with it.

Okay.

What we've been doing is the same thing we did in 2002 and 2003. And that is to try to make prudent steps that deal with both the current situation, but do not undermine the going concern ability for Avalonbay to create value throughout all elements of the business cycle. And if we had overreacted in 2000 and -- in '02 and '03, we wouldn't have enjoyed the terrific value creation that we saw in '05 and '06 and into '07, and I think the same is true today. While this cycle is different than '02 and '03 doesn't necessarily make it better or worse. It's different. But the actions we're taking are similar in that we're allocating capital to the deals that are the most attractive. We're reducing the levels of development activity and, consequently, will be reducing the the levels of overhead associated with it. But it's a matter of degree. It's not an on or off switch. Acquisitions can very much be an on and off switch. Development is not. Not if you expect to be able to create value as the cycle turns.

Thanks. Last question. Tom, could you just talk about the $9 million potential excise tax payment that may be due?

Yes. Karin, yes. Let me take a step back first and review briefly what we're required to do as a REIT. We're required to distribute 90% of taxable income, but to avoid any tax on an ordinary taxable income basis, you have to distribute 100%. There are elections available for us to use future distributions to cover prior-year taxable income. And we've used those. There's also a very little-known test, cumulative test that requires all taxable income to be distributed to avoid an excise tax.

The success of our investment and disposition programs have -- and especially given this year's heavy disposition volume has created a situation where our cumulative income exceeds our cumulative distributions unless a special dividend is declared. We're reviewing the timing now, but depending on the declaration date, we may incur this excise tax which is equal to 4% of the excess earnings over the amounts distributed. I guess I would say that we haven't really been stingy with our dividend increases. We've increased our dividend 80% over the last 10 years compared to about 30% to the multifamily sector average. The compound annual growth rate of our dividend is about twice that of the multifamily sector. So we haven't been stingy on the dividends. We've just been very successful in our investment activity, and we view this excise tax if it's incurred as a part of our successful investment program. Some could argue that it's part of the disposition program. Therefore, it should be netted against gain on sales. I can see how that argument has merit. But it's not exactly the cleanest way to treat it. So we would treat it if it's paid as a -- as an expense and a reduction in FFO.

And that would hit in -- potentially in fourth quarter?

It would hit -- if it were incurred, it would probably be accrued in the fourth quarter.

Okay. Would you consider paying any of the special dividend in stock?

We would consider that. It depends on the stock price. It depends on available liquidity. We have liquidity available to pay the special dividend. That's included in our liquidity analysis I provided in my opening remarks.

Okay. Thank you.

Your next question is from Jay Habermann with Goldman Sachs.

Good morning. Looking to '09 and just trying to get a sense of the development pipeline, I guess, as it would stand toward the end of that year, can you give us a sense of your expected spend, say, versus what will be delivered. Would you expect the pipeline to decline in terms of nominal value?

Jay, this is Bryce. What Tom talked about was the level of development expenditures through 2009 for everything that is under construction today. We have not yet commented on and not prepared to give guidance on the volume of development starts for 2009.

Okay. Fair enough. But would you look to, therefore, would you think you would keep anything close to the existing level? You talked about $500 million this year.

It -- it's to be decided. But certainly we're going to continue as I said in my opening comments, be cautious in terms of the new starts. And there will be -- they best ones will get through the pipeline and start and the other ones will be dropped or delayed.

Okay. And then for the assets delivered in the most recent quarter, the roughly $450 million, is the yield on those roughly at 4.5%? I realize they're obviously in lease-up, but is that fair enough in terms of a range?

I'm sorry, you said 4.5%?

Yes. For the assets that were delivered in the most recent quarter. I mean, can you give us a sense of what the return is for those assets at hand?

It was consistent with the -- it was consistent with the rest of the bucket on a stabilized basis. Are you asking what the current return is based upon--?

Current return, yes. Just based on the 75% roughly sort of occupancy level. Economic occupancy.

Yes. I -- yes. I can't tell you that off the top of my head. I'm sorry.

Okay. And then in terms of the question on NOI growth, you know, in terms of expecting it to go negative in the near term, if roughly half of your markets are now about flat and you think unemployment moves up to 8% perhaps by year end next year, I mean, you would probably have to see some portion of your markets go negative. Is that fair?

We're just not prepared to comment on it, Jay. I mean, you're hypothesizing into 2009. As we've said it's been our practice for the last umpteen years to get into the guidance on the fourth-quarter call.

Okay. Then I had a question on Fund Two. It sounds like it has exclusive acquisition rights. And I'm just wondering why you would put the REIT in a position to perhaps not benefit if cap rates move up materially, say to 7%, 8% over the next two years. Am I misinterpreting that?

Yeah, I think you are, Jay. One, this is the same provision that we gave in the first fund. And we haven't -- we haven't taken ourselves out of play. We're a big investor in that fund. So we balanced the attractive source of capital with our ability to divest that capital and create value. And we took a big stake in fund, too. I think we participate pretty well. We're just taking a measured bet or a measured risk. But I think it's consistent with the risk that we've taken in our other investment management programs.

Okay. And then lastly, can you just give us an update on Freddie and Fannie. I know you talked about the loan that you're trying to secure, the 300 to 500. Where is pricing today? Where do you think pricing will ultimately be? When you -- when you secure that loan?

Well, pricing today, we've actually locked in on another $115 million of debt that will fund in the fourth quarter, and that was priced at around 605 roughly. So and so that's a seven-year term. So you can do the interpolation. That's basically where our debt pricing on a secured basis is. It's interesting to note that we did a debt deal at this time last year, and it was almost exactly the same price. So in terms of secured debt, certainly the -- the UST level was higher then, it's lower now. But overall, the pricing level we're achieving now on secured debts from Fannie and Freddie is the same as we achieved this time last year.

Okay. Great. Thank you very much.

Your next question is from Ee Lin Swee from Credit Suisse.

Two questions. First one, what was the worst NOI declines in some of your markets in the last recession? And number two, what cap rates and LTVs were you getting in your most recent mortgage financings? Thank you.

Why don't you take the second one first.

Sure. Yes, on the $115 million that we just locked, the loan to value was 65%. The debt service coverage was 1.2. And--.

What of the cap rate?

Cap rate?

Yes.

Cap rate for the debt? We really don't look at it that way. We look at the interest rate was 6.05. But we didn't sell these assets. We're just financing them. So.

Right. What I mean is the loan to value is 65%. But there was a cap rate that was used to capitalize NOI to get to the value. .

I'm sorry, I don't have that off the top of my head.

No problem.

This is Bryce. In terms of your first question, NOI for our portfolio, the low point was the third quarter of 2002, where we were just into the double-digit territory for NOI declines. One of the things I alluded to earlier is that, this decline is -- that we're experiencing today, while not -- while still painful is far different than what we saw in 2002 and 2003. And at least two notable cases.

One is that the economic downturn, the job losses, and -- in that environment of '02 and '03, were really -- epicenter was technology-based companies. Particularly northern California, in which we had a significantly -- significant portfolio. But also markets such as Boston, as well. They were dependent upon high tech and Seattle. The second factor that was happening in that time period was the housing market was quite strong. So we were not only seeing job losses, but we were also seeing renters become homeowners. This time around, the -- the economic downturn, the job losses, are much more widespread and are not technology based, primarily. They're financial services based. And secondly, the housing market is weak. And we're actually gaining share, not losing share. I think there's reasons to believe that this will not be a recurrence of '02 and '03. As I said earlier, it really will depend upon the depth of the job losses.

Okay. In your current markets, which markets are you seeing the most competition from shadow supply? From homeowners renting?

Just to give you some background, in general, we don't run into a lot of people that are renting homes. In other words, not typically choosing between us and renting a home. They go -- they're either going to choose professionally managed or they're going to go to the papers. But there are some markets, and I would point to market like Chicago, Central New Jersey, and Connecticut, where we might see some more home rentals. And where it may impact it. It's typically where we have some larger apartment homes, as well. But that's not -- the shadow market is not our greatest competitor. Our greatest competitor is when some of the condominiums that were being built are switched to rental and are run as rental properties.

Okay. Thank you very much.

If I can interrupt -- if I can interrupt before the next question. We -- as John mentioned we will do a hard stop at 11:30 Eastern time. And we have a number of people in the queue. So if your questions -- if you can limit it to one or two. Just minimize the follow-up questions in fairness to others, we'd appreciate it.

Your next question is from Mark Biffert from Oppenheimer and Company.

Tim maybe for you first. When you looked at the starts that you did during the quarter in Norwalk and Walnut Creek, what are you guys using in term of an assessment in terms of going into the market and doing a start, when you look at job growth and being able to achieve the rents that you expect to get on the properties?

Well, Mark, we look at -- we look at everything. We look at the underlying fundamentals of the marketplace. I think we've mentioned, that Northern California feels like it's got a little more legs than the average market. And in the instance of Pleasant Hill, we think that's still an attractive market, particularly at a Bart station location like -- like the Walnut Creek area. Certainly look at the underlying economics of the deal. The direction of NOI in the marketplace. Our view in terms of -- in terms of construction cost trends in the marketplace. For example, if we thought construction costs were going to correct by 20%, in the case of -- in the case of marketplace we might decide to defer that and to wait. So, there's a number of factors that go into it in terms of the specific marketplace both on the -- both the factors that affect NOI as well as capital costs.

Okay. And then Tom, on the fund that you guys did, part of it you took a much larger ownership stake in the fund. Was that partly due just for the partners that you -- you didn't attract as much capital as you thought? Or you just wanted a larger stake in it? Then also, when you look at acquisitions, are you looking to look to buy more distressed type acquisitions and in your targeted markets, or what's your focus for the fund?

Let me take the first part of that question. Then I'll turn it to Tim. But the -- I think one of the good news is we got a fund raise this year, and that was no small feat. We're very pleased that we were able to arrange that especially given the opportunities that we think can emerge over the next several years. We were not able to attract as much capital as we had targeted and ended up stepping up to the plate and contributing more to the fund than we, as a percentage than we originally thought we would. So, yes, it was a difficult market environment. Good news is we got it done. Frankly, we're happy to put more capital in because we think there's a great set of opportunities that will come out of all this over the next several years. Tim, in terms of acquisitions?

Yes, Mark. On the acquisitions side, the reality is we're not very active right now as Bryce had mentioned. We hadn't involved anything in 2008 yet despite having closed on the fund. To the extent we're underwriting, looking at deals that tend to be distress type situations. Generally where there's an upcoming maturity event. And you're having the conversation with the lender as much as you are the sponsor of the deal.

Okay. Thanks.

Your next question is from Michelle Ko with UBS.

Thank you. I was wondering given your success with asset sales this year, do you plan to sell more assets in '09 and can you give us a sense of how much, more or less than this year?

Michelle, that -- that is something we'll provide in our '09 guidance. Clearly the disposition market as I mentioned is very fragile today. And Tim commented on that. But as -- it will really depend upon the strength of the markets. And the ability for us to execute at what we think would be fair pricing. But we'll comment on that on our fourth-quarter call.

Okay. And also can you give us a sense of how cap rates have moved over the last three months? Between the A and B assets? It was impressive that you sold the five communities in 3Q at a 5.1 cap rate. But have things changed since then? And what do you think is a realistic cap rate to assume for 4Q?

Michelle, Tim Naughton here. In terms of the deals that we sold, frankly most of -- those were all priced really before Labor Day. So, you're looking at 60 days to go. And I would tell you cap rates have moved probably on average between -- my view, cap rates have moved on average between 50 and 100 basis points depending on the market. Maybe on average, 75 basis points across our markets. But really since Labor Day, there's been very little activity. And, it's -- similar to what's going on in the rest of the capital markets. It's mostly anecdotal. There just really hasn't been assets clear in the market in the last 45 days or so. But, before that point I'd say we've seen a rise around 75 basis points on average across the portfolio sort of from peak to trough -- I mean, peak to current, if you will.

Okay. Great. Thank you.

Your next question is from Michael Salinsky with RBC Capital.

Tom or Tim, can you talk to the hurdle rate or target rate IRR on the new fund? And also on development projects, where are the hurdle rates you guys are looking at now?

Yes, this is Tom. In terms of the hurdle rate on the new fund, we don't have a hard requirement. We do target certain returns, and that probably today is higher than when we originally raised the fund. But, I would say somewhere in the 12 to 14% range.

Okay. And for new developments?

For new development, I think I mentioned this earlier. On a cash-on-cash basis, generally looking for something in the mid-7s which would translate into unlevered IRRs be north of 10.

Okay. Then finally, looking at development starts, I know you're not giving guidance. But as you think out to 2000, the second half of 2010, 2011, 2012, looks like a better operating environment for multifamily. When would you expect to begin ramping back up the development pipeline?

Let me take the -- the first part of that. And Tim may jump in. Because we definitely -- I think the point you made is a good one and one that I tried to make in my comments, as well. We can all get very focused on the layoff today. We can all get focused on the capital markets today. But we are growing concerned, and we look forward in terms of an environment where supply will be less. The amount of the -- the amount of new developments that will be started in '09 will be a pittance of what people expected. Private companies are virtually unable to get anything started. Many of them have shut down their development operations totally. So you have a situation a few years out where you're going to have a real -- a real reduction in the supply. We continue to have the benefits of positive home ownership. And we've been talking about that, I've been talking about that for a couple of years now. And I think it's real, and it's showing up in our numbers, which I commented on earlier.

The -- and finally, certainly, you would expect that the economy will turn around. They do. Economies have cycles to them, and so as we think about development deals that we would begin, even deals we begin in '09 wouldn't be stabilizing for a three-year period. Basically you have a couple-year construction period, then the stabilization period. That's what we're trying to be prudent in terms of staying in the game. Albeit do it in a prudent way. By reducing our level of expenditures.

In terms of how much we start in 2009, will be a function of the economy. Also a function as Tim's alluded to, construction costs. We're seeing considerable savings right now in construction costs. And we think that will only get better into 2009 as the subcontracting community and the material costs, internationally as well as nationally, we start to see some relief on. And one of the things that we've said before is you only build it once. You lease it every year. So the timing of when we start deals, we're extraordinarily thoughtful about. In the sense of trying to lock in at an advantageous cost basis even if the market seems weak today because we're building into the -- into a future period. So that's -- there's a lot of judgment involved there. But it's not just a -- a function of what the job environment is today.

Thank you.

Your next question is come from Rich Anderson with BMO Capital Markets.

Good morning. With regard to the Fund Two at 45% Avalonbay equity, could that be reduced in the future if you go out and seek other investors? Are you locked in at 45 for now -- forever? Thanks.

No. It could be reduced if other investors come in. But we really aren't allowed to really talk about additional capital coming into that because of SEC rules. Yes, it could come down over time.

Second, quick question for Leo. You guys mentioned, you're on the lookout for things in New York City metro area and the rest. Sort of expecting deceleration, of course. But can you talk about what you're doing specifically in preparation for that? I mean, what steps are you taking in New York to sort of mitigate some of the downside?

Sure. Rich, this is Leo. I guess there's -- a few things that we do. One is we try to position the portfolio from a high-occupancy platform, as you know. It's in the 96% range. Secondly, we have reduced our corporate apartment home exposure dramatically. Our corporate apartment home exposure during the last downturn probably was in the high single digits. Right now it stands below 3%. So as businesses contract and furnished apartment homes are no longer taken, we're not exposed that way.

I'll tell you, also, we reduced our month to month leases. So that we have more leases in a term basis. A year ago, our month-to-month leases would have been approximately 5%. Right now, it's in the mid to upper 3% range. So again, we have people in place. Then lastly, and this is something we started years ago, we just have strict expense controls because the market's going to give us what the market gives us with respect to revenue to some extent. If there's job contraction and whatnot. And we can get very mindful and focused on making sure that we keep our expenses under control to deliver as high an NOI as we possibly can.

Great. Thank you very much.

Your next question is from Paula Poskon with Robert W. Baird.

In keeping with the expense discussion, the G&A dollars are up considerably year over year. And also as a percent of revenue. Can you talk about what's driving that and also what plans you may be considering in terms of reigning that back in particularly relative to some of your competitors that have already announced some layoffs?

Yes, this is Tom. Most of the -- almost all of the increase is due to fund formation costs for the second fund, which we have to run through the G&A line. So that's the increase for the third quarter. In terms of plans we're taking today, we're involved in our budgets. We're kind of in the middle of that now. We're planning for 2009. So we can't really speak to what our current plans are, but we're in the budgeting process. And we'll give you outlook for G&A in the -- in January whether we announced fourth-quarter earnings.

Thank you.

Your next question is from Alexander Goldfarb with the Goldfarb Family.

Yes, hi, good morning. Just a quick question on -- as the economy has worsened, are you guys noticing towns becoming more flexible in the approval process, or in their willingness to facilitate financing?

Alex, Tim Naughton here. In terms of the willingness to facilitate financing, it would probably be more relevant with respect to taxes and bond deals as capacity starts to open up with volume falling. So we do anticipate -- on certain deals where that kind of financing makes sense given the affordable housing requirements we have on that individual deal that that might make some sense. In terms of -- in terms of ease of the entitlement process, it's -- it's very much linked to cycle. And I would -- I would tell you we're probably just at the beginning stages of that, where we would expect to see towns and this probably is not be quite as onerous with respect to their conditions to approvals as maybe they've been in the last two to three years.

Okay. And then as far as development, this is going back to David Toti's development question. I believe last cycle you actually abandoned a site where you were already underway.

What would have to happen for that to occur this time around?

Alex, you're referring to a deal we had in Seattle, which -- we stopped construction just, -- versus calling it abandoned. We stopped construction. We were very concerned at that time about, this was immediately after 9/11. We were concerned about both the economy but in particularly the Seattle market because of the dependence on aerospace and obviously the events of 9/11 being linked to that. So we thought that was a prudent step there. We ultimately sold that site. And did not continue to develop it. In terms of what would it take for us, it would be a very unique situation like the situation in Seattle was. It's not something we're currently evaluating on any of our deals. But, we don't know what the future holds either.

Okay. Thank you.

I think with that to respect the commitment we've made to have a hard stop at 11:30, we're going to stop the call at this point. Want to thank everyone for the time. And also, we'll be seeing many of you at NAREIT later this month. Thank you for your time today.

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