艾芙隆海灣社區公司 (AVB) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities fourth 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 instruction will follow at that time. (Operator Instructions). As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Mr. John Christie, Director of Investor Relations and Research. Mr. Christie, you may begin your conference.

Thank you, Lori, and welcome to AvalonBay Communities fourth quarter 2008 earnings conference call. Before we begin please note that forward-looking statements may be made during this discussion and 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 your review of our operating results and financial performance. And with that, I'll turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities for his remarks. Bryce?

Thank you, John. With me on the call today is 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 and then all four of us will be available to answer any questions you may have. Last evening we reported an EPS loss of $0.02 and FFO per share of $0.30.

Our number this quarter, our numbers this quarter reflected approximately $70 million of nonroutine items that we had previously disclosed in December. These nonroutine items were principally attributed to our decision to significantly reduce the pace of our future development activity, which resulted in the write-down or the abandonment of a number of development parcels and related severance costs. Additionally, there was approximately $3 million of excise taxes that were due largely as a result of our successful disposition program this past year.

Excluding nonroutine items, our FFO per share increased by approximately 7% for the quarter and approximately 9% for the full year. Overall, the growth in our same store sales portfolio continues to moderate from prior quarters. During the fourth quarter we saw rental revenue growth of 1.7%, which when combined with essentially flat expense growth resulted in an NOI increase of approximately 2.5%. During the quarter our occupancy moderated slightly, averaging just under 96%.

In terms of regional performance, northern California and Seattle continue to show the strongest performance, although similar to the overall portfolio the rate of revenue growth as expected continued to moderate from prior quarters. I'd like to take a few minutes to review our '08 activity, both to recap the year and to give some context to our 2009 outlook. I think 2008 was a year that was characterized by a few major themes, the first of which would be declining, yet in-line property performance.

Operations for the year performed largely as expected, with same store revenue, expense, and NOI performance each in-line with the guidance we provided this time last year. Operating fundamentals were stronger in the first half of '08 and weaker in the second half. In fact, the sequential revenue decline from the third to the fourth quarter was more pronounced than anticipated and reflects the accelerating declines in the economy, particularly the 1.5 million jobs that were lost in the fourth quarter alone. This accelerating weakness clearly impacts our outlook for 2009.

A second theme for '08 would be record sales, no buys. During '08 we moved quickly in our disposition activity to try to stay ahead of the continued deterioration in both the economy and in the capital markets. Despite these challenges, we were able to sell approximately $650 million of communities at an average cap rate of just over 5%.

This volume of sales was a record for AvalonBay and demonstrated the continued attractiveness of our markets and of our assets. The sale of the assets also demonstrated the value creation from our investment activities, generating almost $300 million in gains and an unlevered IRR of just over 14%. We were a very active seller, however, we chose to stay out of the acquisition market and purchased no assets during the year.

A third theme was reduction in development activity. During the year we took several steps to moderate our level of development. We completed 13 communities, while beginning only six, reducing the number of communities underway. Our original plan for '08 assumed we would begin ten communities. However, we elected to reduce our development starts by about 40% in response to the deteriorating market conditions.

Additionally, this past December we announced that we had written down a number of land parcels, written off a number of development rights and reduced our level of construction development staffing. As a result of these actions, the size of our future development pipeline was reduced by about 40% as well.

A final theme was demonstrated financial flexibility. During '08 we raised almost $2 billion from a variety of sources. Almost half of the capital raised last year was from new secured debt, which was a significant yet appropriate departure from a historical preference for unsecured debt and Tom will comment further on our capital raising activities during his remarks.

Now turning to our outlook for '09 performance, let me begin with some comments on the economy. The recession's impacts are spreading quickly across the economy and are eroding the outlook for both this year and 2010.

During the fourth quarter of last year alone, as I mentioned, we lost -- the nation lost over 1.5 million jobs. Vehicle sales plummeted to levels last seen in the early '80s. Consumer confidence reached record lows and housing starts dropped to the lowest level in 60 years. Approximately 3 million additional jobs are now forecast to be lost nationwide this year.

And even if the current downturn ends in the second half of the year, the recovery is likely to be slow. Business growth may be impacted by anticipated new regulations and increasingly risk averse investors and lenders are likely to demand higher required returns. This may lead to increased borrowing costs and potentially slower economic growth for some time. Whether it's the U.S. or China, high tech or manufacturing, no country or industry has been spared and real estate is no exception.

When just looking at the public real estate companies, REITs overall fell about 38% last year, which was in-line with the decline in the S&P 500. The decline in REIT evaluations exceeded that of private real estate evaluations, which suggest either the REITs have been over sold, or the private valuations have been slower to correct. Within real estate, department fundamentals have fared pretty well on a relative basis to other sectors. Yet given the shorter term nature of apartment leases, the weakness in apartment fundamentals has been seen earlier than in other sectors.

Overall we expect '09 and 2010 to be challenging years for the economy and apartment fundamentals, yet also a time of interesting opportunities for companies with a strong organization as well as a strong balance sheet. So given this assessment of the economy and capital markets, we've developed a business plan for '09 that we think balances the need for caution with regard to the short-term, while ensuring that we are well positioned to take advantage of opportunities.

In terms of the outlook, we've given detail in attachment 15 of last evening's press release and I'll keep my comments just to portfolio performance and our planned investment activity. In terms of portfolio performance, we are certainly expecting a tougher operating environment in '09, driven by weaker fundamentals. We expect heavy job losses, both nationally and in our markets, which will total between 2% to 3%, with AvalonBay's markets at the higher end of that range.

Despite increases in renter propensity, improving renter demographics and constrained supply, the weight of 2 million to 3 million job losses nationally in '09 will result in revenue declines across virtually all markets. For AvalonBay's portfolio we're expecting revenue declines of between 1.5% and 3.5%. The markets of most concern are New York and Southern California, both being driven by weakness on the job front.

Mid-Atlantic and Seattle are areas of concern given continued high levels of completions from deals begun in '07 and early '08. With expected revenue declines as discussed and expense growth of 3% to 4%, we are expecting NOI growth for the year to decline within a range of minus 4 to minus 6.

Turning to investment activity, our overall appetite will be a bit less strategic and a bit more opportunistic, as we respond to the challenging economic and capital market conditions during the year. Regarding acquisitions, we have not specified any target volumes, but would expect any acquisitions would offer compelling economics. Also as a reminder, essentially all acquisitions would be done through our second investment management fund.

Regarding dispositions, we have targeted $100 million to $200 million, but the actual amount could be significantly different in response to market conditions.

And in terms of development, we previously announced that we did not plan to start any additional communities during the first half of this year. With job losses accelerating, extremely volatile capital markets and declining construction costs, delaying additional starts for a period of time seemed prudent. How many, if any, new developments we begin in the second half of the year will depend upon our assessment of market conditions at that time. We would expect to provide updated guidance at midyear with regard to our development plans for the second half of the year. Overall, we expect operating FFO to decline about 5.5% at the midpoint, driven largely by NOI declines in our portfolio. With that I will turn it over to Tom, who will provide some additional color on our capital markets activity, as well as on our 2009 outlook.

Thanks, Bryce. I'd like to focus on three overall topics covered in last evening's press release. The first is a recap of our 2008 financial activity and performance. The second would be the 2009 financial outlook that was also included in last evening's press release. And then finally, the financial flexibility, capital planning and liquidity.

First point would be to note that our balance sheet and our business model were tested in 2008 and we were able to demonstrate the benefits of the flexibility, the financial flexibility that comes with a largely unencumbered capital structure. Last year we sourced $1.2 billion in new debt at attractive prices from a variety of sources, including the GSEs, but also tax-exempt debt, money center bank debt and even a local bank for a long-term secured debt on a New York based community. We used this capital to complete a significant volume of new development communities and refinance higher cost debt and preferred stock.

With record asset sales and a formation of a new investment management fund, we enter 2009 pretty well positioned with good visibility into liquidity for the year. Let me just illustrate for a second the impact of the financing activity on interest rates. If you look at the interest rate, the weighted-average interest rate on all of our debt at the end of 2007, the overall rate was 6.5%. At the end of 2008 the average interest rate was about 6%. Floating rate debt as a percentage of all debt is generally down slightly and it's about 30% today.

So you can see that during the year we were able to reduce our overall interest rates meaningfully on about $1 billion of this debt. As successful as we were, though, in accessing capital in '08, the credit crisis and investment climate forced us to adjust our return requirements and resize our development business and this resulted in a nonroutine charge in the fourth quarter that exceeded $70 million, of which about $60 million were noncash charges.

And this allowed to us reduce our development pipeline by about 40%. Bryce covered our operating results for 2008 and clearly the impact on our business from the general economic recession causes us to temper our operating outlook for 2009. We expect revenue to decline within a range of 1.5% to 3.5% for 2009 and much of the decline is caused by higher anticipated vacancy.

Expense growth estimates consistent, or consider the likely increase in vacancy and related costs thereto, and is expected to increase between 3% and 4%. FFO per share at the midpoint of the range is expected to be $4.65. Note that the increased shares from the stock dividend diluted growth by $0.16 per share.

Turning to capital planning and for capital planning purposes we've included attachment 16, which details sources and uses of capital for 2009. Let me just highlight a couple of things. First, we're planning on a $750 million debt raise, whether it's secured or unsecured will be seen.

We are expecting modest asset sales of between $100 million and $200 million. We are going to use retained cash and cash on hand of about $175 million and we will probably draw our line down by about $75 million. Planned uses include $775 million for development activity and redevelopment activity and debt redemptions of about $375 million.

We now know that we've been in a recession for over a year and the credit markets have been under stress for about two years. While the capital markets remain difficult, there are some signs of improvement. LIBOR, for example, and other short-term rates that were adversely impacted by the liquidity crisis last fall have now stabilized and are currently at historically low levels. The unsecured debt market has improved in early 2009 and this market may become a viable alternative to secured debt later this year.

And we will be watchful of opportunities to access that source of capital should market conditions continue to improve. So we are cautiously optimistic that the credit markets will continue to improve and optimistic enough that in January we solicited for $340 million of our unsecured notes of which just $100 million were tendered. And in the first quarter we will book a gain of about $1.1 million for the notes that were tendered.

Our leverage remains modest by industry standards at about 44% and we have about 100 unencumbered assets available to support our financing plans. We noted before that we could add over $2 billion of debt to our balance sheet before we would trip any debt covenant, so we feel pretty well positioned in terms of access to that liquidity. Overall we have liquidity arranged or identified to meet all of our capital needs through 2010, assuming no new development starts.

So in summary, earnings will be pressured on the operating side of the business from declining revenue and NOI, but supported on the capital side by selective debt redemptions and issuances, appropriate use of floating rate debt and fee income from our investment management platform. We have good visibility into our sources and uses of capital for the year and will meet liquidity needs from new debt, cash on hand and from operations, as well as some asset sales.

And while we are encouraged by signs that the credit markets are showing signs of recovery, capital markets remain challenging and we'll continue to conserve capital and use our balance sheet where appropriate to access secured and unsecured debt with both fixed and floating rates. Market conditions of 2008 could extend well into 2009 and it's times like these that the financial flexibility we enjoy over the largely unencumbered balance sheet can help preserve and enhance shareholder value. Bryce, that concludes my comments.

Well, thanks, Tom. I just want to offer a few summary comments before we open it up to questions. Downturns are never fun. They challenge a Company's business model, financial strength and management quality. This downturn is particularly challenging given the combination of a very weak economy and an extraordinarily difficult capital markets environment.

Our past experience, however, reminds us that from these downturns strong companies generally become stronger with an enhanced competitive position, while weak companies generally emerge weaker without the capacity to take advantage of opportunities.

We are working through this downturn with the benefit of a proven business model. One that has delivered total shareholder return and NAV growth near the top of the sector for over ten years with a strong balance sheet. Our leverage is the lowest of any apartment REIT and the second lowest of any REIT overall, and finally, with a proven and stable management team.

We are taking the necessary actions today to ensure that the organization and the balance sheet are well positioned to take advantage of the inevitable opportunities that will arise. Given the soundness of our business model, balance sheet and management team, I see no reason why we won't emerge from this downturn as an even stronger Company with an enhanced competitive position. With that, Lori, we would be glad to open it up for questions.

(Operator Instructions). Our first question today comes from Jay Habermann with Goldman Sachs.

Hi, guys, how are you? A question for you on the projects that have been delivered in 2008 and I guess the most recent quarter. Can you just give us a sense of where those yields are and I guess just generally how rents are trending now for development projects?

Jay, this is Tim. I think as Bryce and Tom had mentioned, we actually completed overall about $1 billion this year, total of 13 communities, the average yield for the communities are right around 6.5%. The deals that completed this quarter were a little bit south of that on average.

Are those the stabilized yields?

Those are the stabilized yields, Jay, yes.

Can you give a sense of just time to reach stabilization, how do you think that might have changed as a result of the changes broadly in the market?

Time to stabilization, generally, the times don't change dramatically. We often adjust pricing so that at least the periods don't become too extended. It's not unusual in this kind of environment to see the lease up period maybe extend a quarter, but typically you are not seeing it extend much more than that. It's really more of a function of pricing.

In terms of pricing in today's environment, there continues to be some stress on the development communities. We had two or three communities where we saw about 3% or 4% drop in effective interest rates. One in New York -- I'm sorry, rental rates, I think I said interest rates, one in New York City, the Morningside deal, a deal in Boston and a deal in Connecticut all experienced rental declines around $100 on effective rents. It continues to be a challenging environment for the lease ups, but typically we are not seeing lease up periods that extended.

Okay. And then just want to clarify something. You mentioned on the revenues for the year the minus 3.5, minus 1.5 to minus 3.5 largely as a result of higher vacancy. Can you just clarify there a bit, what are you assuming in terms of changes in rent specifically? Is it more occupancy driven or are you seeing it really coming from rate?

Jay, this is Leo. We are expecting occupancies to decline into the mid 94 range and just to give you perspective, we ended the year at about 95.5. So we expect, and in January is around 95.3. So in about the same range. So we expect for the year it to come down into the mid 94s. That would be a reduction of about 1.5%, 1.75%. So the rest would come from rate.

And you purchased some land in Brooklyn. Was this something you had had under contract for some time? I'm just curious how did the underwriting pencil out here?

Jay, this is Tim again. Essentially we had closed on that site over a year ago. It was, the way that the deal was structured to accommodate the seller's tax situation, essentially we had closed into a land lease and he had a, he had the right to convert that and to require us to essentially take title to the property and essentially that's what happened this past quarter. But that was a deal that was essentially closed a year ago.

Okay. And then just looking broadly at unsecured versus where you can raise capital today from the secured market, at what sort of spread does it make sense. Where do you think you would tap that market perhaps this year, if you could?

Yes, Jay this is Tom. We are anxious to return to the unsecured market and I think that you have to, you have to have the spread differential somewhere within 100 basis points before we'd take a serious look at it. I mean with the GSE debt and for ten-year debt in the 6.25 range compared to an unsecured offering that could be done maybe around 9 today, we are still, we are still a pretty fair piece away from where it would need to align for us to do unsecured debt.

Okay. Thank you.

Our next question comes from Rob Stevenson of Fox-Pitt, Kelton.

Good afternoon, guys. Can you talk a little bit about the same store growth expectations in your individual markets? I mean, what markets are you sort of thinking are going to hold up better relative and what's, what I assume New York and Southern Cal are going to be at the other end and are going to be the weakest and do you really expect anybody at this point, given what you are assuming, to have double-digit negative same store NOI growth in '09?

Rob, I will start in and Leo may want to add to it. The answer to the second part of your question is, no, we don't see any markets in double-digit decline next year. In terms of generally, I gave some comments in my opening comments about which markets we were maybe a little bit more concerned about.

In terms of just revenue performance, we see the better performing on a revenue side being Seattle and probably San Jose, putting two markets in that category. And towards the bottom of the heap would be some of the Southern California markets, LA, Orange County, and then northern New Jersey because of the New York effect, if you will. So beyond that we are not prepared to give any specific projections by market, but that hopefully gives you a flavor for how we see them shaping up.

Okay. And then could you give some color on what you guys have been seeing in the New York metro market in the last 60 days or so?

Rob, this is Leo. I will try to address that. I am going to address it in two parts, if it's okay, first kind of focusing on the Manhattan and then just talking about the broader New York metro area. As you are aware, we have four assets between Manhattan and Long Island City. In the last quarter I had reported that occupancy was about slightly over 97% and those assets we're running more like 95% now. So they have come under more pressure.

We are closing a reasonable portion of that traffic consistent with what we expect. I will tell you that rents are down probably 10% to 15% in those markets and it largely comes through a one-month concession, the fact that landlords or owners are now paying for locator broker fees where it used to be that the renter paid that and then some adjustments in rent.

So, are we seeing some pressure in New York specifically in the surrounding areas more than we had seen last quarter? Yes, we are. If you go out further, than we typically look at northern New Jersey and as you're aware our portfolio sits on the Jersey waterfront mainly and then Connecticut, really southern Fairfield and Stamford and we've seen some pressure there as well.

And when we look forward, obviously the last quarter, I think, I quoted that the statistics or the economists were projecting a loss of 100,000 jobs. This quarter that's been moved up to the loss of 170,000 jobs and because of how tightly northern New Jersey and Connecticut or southern Fairfield and Stamford area can trade with New York, we expect that to come under more pressure.

Okay, great. Last question, on the development pipeline is there an incentive at this point given the outlook for the rest of '09 to be extremely aggressive right now in terms of the concessions and do whatever you can to get somebody into the unit now, even over and above what the market is sort of doing, in anticipation that the market is going to continue to deteriorate the longer you go?

Rob, basically we look to have a pace that assumes reasonable absorption. We aren't going and cutting rents too disproportionately. We've seen it done in the past. We've actually done it in the past ourselves during the last downturn. What we found is we got into a renter profile which was not the renter profile that we want in our community. And we are looking at the long-term health of these assets.

So while we would prefer to have the communities absorb more quickly, we are measuring our absorption in the way that we normally do when we are adjusting our rents accordingly, with a bias towards getting them filled up sooner but not at all costs.

Okay, thanks, guys.

Our next question comes from Mark Biffert with Oppenheimer.

Good afternoon, guys. First question I have is related to the CapEx spend that you guys expect to spend next year. Is that an expectation that you will cut back in that area?

Mark, this is Leo again. Actually no, we expect our CapEx for apartment home to go up in the $600 range and just to give you some perspective on that number, last year at this time I had quoted a $500 to a $550 range, so $525, something like that. As I believe it's attachment seven indicates, we spent about $470 for apartment home, so what happened is we got a late start. Some of that, the amount between the $470 and the $525 is going into this year, but we expect for '09 our CapEx spending for apartment home to be around $600. Bryce, you have something to add?

Well, just add to that, as Leo mentioned, we not only do we not plan on cutting it back, we will be spend more, modestly more next year on CapEx and significantly more on redevelopment. We are in a position, thankfully, with a strong balance sheet and the ability to make what we think are prudent investments and to cut back on the maintenance of the properties would, at this time, we think would be exact wrong move.

Okay. And then, Tom, related to the fund, you guys had mentioned that if you did acquisitions it would be through the fund. I didn't see any allocation in your guidance in terms of how you'd planned to fund that. Would that be just off the line or would you look to raise equity or how would you go about doing that?

It would just come off the line, Mark. Our contribution to that would not be that significant in this year, so it's really rounded in these liquidity numbers we provided.

Okay. And then you gave a $3 million Federal excise tax in your guidance. What was that related to? Is that related to '08 or was that to the potential asset sales for '09?

It's really a cumulative excise tax. It really, until you distribute more it never really goes away, so we are watching the excise tax, recalculating it and making sure that we understand what our exposure is there. As we stand here today, though, we expect that like 2008 we may incur an excise tax in 2009. It's really a cost of capital consideration. Should we pay a special dividend to address it or should we use that capital for other purposes this year and pay the tax and that's what we are evaluating.

Okay. And then I guess sort of related to that, Bryce, if you can comment on your dividend and your thoughts related to the stock or cash split that seems to be the hot topic.

Well, Tom, why don't you, you want to address that, Tom.

Bryce always gives me the tough questions, so. Let me start by restating what we said earlier about our committed liquidity and that is that we've identified the liquidity we need to fund all of our development, our debt service payments, our debt maturities through 2010, and that includes cash to pay our recurring quarterly dividend in cash. Not all companies or all sectors have the same access to liquidity that we enjoy and some are moving toward this quarterly dividend paid largely in stock. Some are doing it out of necessity. They have a weak balance sheet or poor visibility into their future liquidity and some are very strong companies that are doing this as a really an abundance of caution.

So, as you know, we've combined, we issued this combined special dividend and quarterly dividend, last month we declared it and we paid it in just last week. And we were very careful to structure that dividend such that the amount of the cash paid in connection with that combined dividend equaled the normal quarterly dividend that we paid in cash. I think that helps telegraph our view about how we feel about the quarterly dividend. Certainly the world could change from how we view things today, but we have no current plans to pay our recurring quarterly dividend in stock.

Okay. Thanks.

Our next question today comes from Michelle Ko with UBS.

Hi, I was wondering if you could talk a little bit about renewals and if you are becoming more aggressive on that, offering any types of concessions to lock in occupancy versus in '08 when you might have been in a position where the loss to leases on renewals, where there were loss to leases on renewals, do you think that this year you might see a reversal where there might be gains to leases on renewals? And also are you trying to lengthen your leases on the renewals, maybe 14 to 16 months rather than 12?

Michelle, this is Leo. With respect to renewals, the key things that we watch are turnover, in other words, are we generating any disproportionate turnover over what we've seen in the past, as well as the reasons for move out. If the reasons for move out become financial or something along those lines then we become more concerned. So that really is what guides our renewal strategy. Now to be more specific, more recently we have seen our renewals trend down. So we are not getting the same level of renewal increases that we had been getting earlier in the year and I do expect that pattern to continue as we move into '09.

But what really guides it is how we are doing on a turnover basis and the reason why residents are leaving our communities. With respect to offering slightly longer lease terms, we would absolutely consider doing that, but what is more important to us is when our expirations occur. In other words, we know that prospect traffic follows seasonal patterns and we put great emphasis on making sure that our expirations occur when we expect prospect traffic to be the greatest and we adjust it for when periods when historically we haven't had as much prospect traffic. So while we would look to do longer lease terms, we would only do it while maintaining the integrity of our lease expiration matrix.

Okay. Just to follow up, if you are seeing renewals trend down, are you offering some type of concessions at that point and if so can you give us a sense of how much?

It's just whatever we do with the face rent. And the reality is that across the portfolio, when someone renews they are renewing at a higher rate right now. What I explained is that rate of increase is declining.

I see. Okay. And can you tell us what the cap rate was for the 4Q asset that was sold?

Michele, I don't think we normally quote individual cap rates, but I will say that was an asset where the, where it was priced earlier in the year and so the cap rate was more reflective of the cap rates we were seeing at the beginning of the year, certainly sub 6%.

Okay. And then do you think you could give us an idea of where you think cap rates are by asset type, an A versus a B asset, do you think the cap rates are getting steeper, getting steeper at a steeper pace for the suburban assets over urban assets?

Michele, right now there's not a whole lot of transactions to base any insight on cap rates. Just speaking more generally about cap rates, kind of going back to your early 2008, even going back to 2007 when there actually were still sub 5, say in the high 4s. In the first half of 2008 they probably had moved up by about 50 basis points, so call it low 5s. We sold $650 million at a 5.1 cap.

And then after September, when everything changed in the capital markets, that's essentially when transactions shut down. You are starting to see some activity out there, at least assets being priced and the best we can tell cap rates are probably up another 75 to maybe as high as 100 basis points over that. So call it low 6s.

We still haven't seen a lot of those go, any of those go to settlement. But I'd say cumulatively cap rates are probably up between 125 to 150 basis points off of, off their trough, if you will. As it relates to A and B, you are starting to here some discussion that there is starting to be some separation on cap rates based upon quality of the asset. Less A and B rather than sort of A, B versus C, where there had been some cap rate compression in the 2004 to 2007 time period, but I think it's too early to tell yet whether you will see it between A and B.

Okay, thank you.

Sure.

Our next question today comes from Michael Bilerman with Citigroup.

Hi, this is David Toti. A couple questions around some of the charges. The impairment came a little bit lower than original projections. Wondering if you can just talk us through how that 58 million was established and what kind of conditions you'd have to see to retest those values?

Those impairments we provided ranges so they came in actually pretty much where we thought they would. We provided ranges in our December release. We didn't give you actual numbers. And we've been through in great detail how these numbers are calculated, so I don't want to spend time on this call to go through how impairments and how accounting works for that. I think that's been vetted on other conference calls, as well, but we did not give a specific number in the press release that came out in December.

Okay, thanks. And then relative to the existing developments, many of the pro forma rents haven't really moved and I understand that you really only move those when lease up commences. What is your sense for some of those assumptions?

David, this is Tim. Again I think for, I think I mentioned on three of the deals we did see about 3% or 4% erosion in terms of the, in terms of the projected rents. I would think that they would be somewhat in-line with what we are seeing in the balance of the portfolio. Obviously, we are expecting rents to, rents to trend down in 2009 and I would expect the same would occur within the development portfolio.

And then just one last question for me, G&A jumped up considerably, I understand there are some charges in there. Can you just walk us through the delta from the 8 million level last year? We are having trouble reconciling some of those charges relative to that number?

Well, I think if you look at, if you look at the G&A most of that difference between years are these onetime items, a severance of $3.2 million, also excise tax of $3.2 million. That makes up most of the adjustment. Then there's minor other things, but the increase is primarily those two items, that's about $6.5 million of it, $6.5 million of the $7.5 million.

Tom, it is Michael Bilerman, I just wanted to go through as you think about the development that you delivered this year as sort of the $1 billion that was placed in service that you are leasing up, what sort of drag is there in your sort of '09 FFO on those assets?

You mean the lease up period deficits that arise from new development?

Yes, I'm trying to think about if you delivered 1 billion in '08, they're probably all not going to reach that 6, 6.5 stabilization in '09, especially given some of the decline in rents and potentially further declines in the market. And you are obviously -- you have already sucked in all the capital costs in terms of interest expense and so I'm just trying to think about you may have a bigger jump as you move into 2010, 2011 as markets stabilize and potentially turn positive you get a much bigger ramp-up.

Yes, Mark, this is Tim Naughton. On -- I don't know that we have the exact number you are looking for but on attachment nine we do try to call out the assets, the deals that have been completed but not yet stabilized and of that $1 billion roughly five communities totaling, well, five communities totaling $280 million are not yet stabilized and so those are, those had a economic occupancy, I guess, by the end of the period of around 90%. So not fully stabilized yet but pretty close.

And the balance reached your expected yields?

Right, right. The balance, the other $700 million or so would be roughly in-line with that 6.5% stabilized yield that I mentioned.

I think maybe, this is Bryce, just to clarify, stabilized yield for AvalonBay, those are the actual rents that are in place in lease up. Those aren't a projection of where we hope to get to. So to the extent the property is stabilized, which as Tim mentioned for all but those five that are on that page, they are at stabilization and at the rents that are calculated in that 6.5% yield.

Thanks, Tim, thanks.

Our next question today comes from Karin Ford with KeyBanc Capital.

Hi, good afternoon. It looks like you guys started two new developments in the fourth quarter. Can you just talk about those projects and what your return expectations are for them versus your current cost of capital today?

Sure, Karin. Well, those two deals, one was a smallish deal, a smaller deal in the Boston area in Northborough, $27 million. The other was a larger deal in downtown Bellevue in the Seattle market. Both of those deals were started right at the beginning of the quarter, just to be clear, early October. So a lot of the, a lot of what had happened in September hadn't yet unfolded at the time that we started and really our decision to stop new developments occurred really more in the middle of the quarter.

In terms of the economics of those deals, I would say they are pretty consistent with the deals that we talked about that had completed in 2008, sort of mid 6s in terms of yields. Certainly since then our target yields have moved up or our required returns have moved up, but I guess the way we looked at both of those markets, both the Seattle and Boston are two of the stronger markets we saw in 2008 and as of early October we still felt pretty good about those markets and relatively speaking we still -- those markets we believe are likely perform better in 2009 than many other markets.

Thanks, that's helpful. A question on the land parcels that were abandoned, do you plan to sell those or do you plan to hold them for awhile and wait and see if there is a recovery and a rebound?

Well, our intent is not to develop those. In essence they are abandoned pursuits where we just happen to own the land. Having said that, it doesn't mean that we are taking them to market today. It's not a good market to be selling land into and technically they are classified as held for investment as opposed to held for development or held for sale.

So I think it would be our intent as land markets firm in the future that we'd then start testing, testing the market with these fields and I guess there's a chance that in one market that conditions might change dramatically in a way that we had anticipated that might cause us to revisit our plans, but the intent is to sell it at a later date.

Last question is, do you know how many land parcels make up the $239 million book of land held for development today?

I do, actually. It's, it is 16, 16 different parcels.

Okay. Thank you very much.

Our next question comes from David Bragg with Banc of America.

Good afternoon. Tom, a question for you on the Community Bank mortgage that was mentioned. Could talk about that, the size and the terms as compared to where the GSEs and life companies are today?

Yes, the interest rate on that and terms were actually equal to or slightly better than the GSE financings. And it was about a $50 million financing.

Okay. And is that a route that, as you look at the $750 million for this year, is that an area that you continue to look into?

Yes, one of the -- yes. The answer is yes and I think that the reason we point out that relatively small financing is that while we are very thankful that the GSEs are there, they are not the only game in town and there are other alternatives to secured debt, including insurance company debt and we are going to pursue GSE debt, unsecured debt, Community Bank debt and insurance company debt in 2009 and really diversify our sources of secured and unsecured debt.

Okay. Thanks. And then Leo, just a couple of follow-up questions for you on your earlier comments. Could you, in case you did not mention this, could you walk us through the, any notable changes in the reasons for move outs in 4Q and into January?

Well, I'm going to hit the big ones and then I will tell you one other one that I've been focusing on. The two big ones that we've been talking about are move out due to home purchase, historically that's been 20% to 25%. Now most recently it's been below that 20%, in the mid 19% range. The second one is for financial reasons, that's historically run 8% to 10%. It was approximately 9% this quarter.

But the other one that I'm watching is, I've been questioned and I've been watching just for our portfolio'S sake is am I seeing people double up, is anything going on there? So I've been watching a number of categories that have to do with are people moving within our community, are people moving from one of our communities to another community, are people going to our competitors, or are there roommate status issues.

And in the most recent quarter I did see that go up somewhat and it's something, while we don't keep a specific metric or statistic on people doubling up, as we are going into a more difficult economy, as people are becoming more price sensitive, it's something that I am watching. And it went from about 24% a year ago to about 29% this year. And it's something that we are just monitoring as we create strategies for operating the portfolio,

That's interesting. And then finally, what is the quarterly expiration schedule that you mentioned before?

I'll give you rough numbers. We typically have about 20% of our apartment homes expire in the first quarter, about 28% expire in the second quarter, about 32% expire in the third quarter, and about 20% expire in the fourth quarter. And that's roughly the pattern that we've seen over multiple years of the way prospect traffic comes through the door. The rationale being we want to make sure that when we have more prospect traffic we have the, those people there and we have apartments, that's when we would have our expirations there as well.

Okay. Thank you.

Our next question comes from Alexander Goldfarb with Sandler O'Neill.

Yes, hi, good afternoon. Just wanted to take a look at the New York deals. It looks like one of the New York projects was abandoned and at the same time you went through with the purchase of the Brooklyn land. Can you just walk us through why the economics made sense for the Brooklyn one but no longer made sense for the other New York deal?

Yes, Alex. This is Tim again. Just to repeat something I mentioned earlier, the Brooklyn deal was a deal essentially we closed about a year ago. We had closed into a land lease and it was converted to fee this past quarter. And it's an entitled piece of property, very -- kind of -- it's in Brooklyn, first of all, the other deal was actually in Manhattan, unentitled, so part of it was looking on a risk adjusted basis.

We sense a pretty, a lengthy entitlement period ahead of us. It had a mix of some other uses as well that, just given the current environment, we weren't comfortable continuing to invest pursuit dollars.

Okay. That's helpful. And then the second question just goes to the new unsecured line of credit in the fund. The banks that make up that line of credit, are those existing relationships or are those new relationships and then if you can just give some color on the types of banks that participated.

Alex, that is an existing relationship and it's actually one bank.

Okay. Like a money center bank or.

A money center bank.

Okay. Thank you.

Yes.

Our next question today comes from Michael Salinsky with RBC Capital Markets.

Good afternoon. Tom, could you talk about the decision to state the stock dividend on a going forward basis instead of retroactively restating prior results?

I'm sorry, Mike, can you repeat the question because I want to make sure -- I know what the question is, but I want to make sure that you asked it in the way I am going answer it, so please repeat it.

Sure, the stock dividend that you guys did, one of your peers had chosen to retroactively restate all prior period results. Yet in your earnings release you announced that you are not going to retroactively restate results. I just kind of wonder the basis for the decision.

Yes. That's what I thought had you asked. In this area the accounting guidance over it is, it's very confusing. Some of the accounting literature literally regarding this was written in 1941. And it's not exactly on point with what the REIT industry is doing. So I think there is an opportunity and you will likely see some divergence of practice within the industry regarding this.

We've taken the position that it's better not to adjust prior periods, but we can easily see how others could come to a different conclusion. And I have to confess that over the last month I've gone both ways on this and this is where I landed with it and after talking with management and our audit committee and our accountants, this is how I felt that it was most appropriate to move forward.

That doesn't mean that we are right and they are wrong, but I do think that it does suggest there is going to be a divergence in practice and it's going to make your job a little harder in terms of comparing relative performance between the companies. Note that our earnings for 2009, and I mentioned this in the earnings release, they are going to be diluted by $0.16 per share or about 3.5% of our FFO per share growth is diluted by the fact that we are not restating the prior shares outstanding both for FFO and EPS per share.

Okay. That's helpful. Second, at what point does a single-family housing market, just given the over 2 million of vacant foreclosed homes and extensive efforts by the government right now, begin to impact the multi-family sector, in your view, and is any of that contemplated in your fiscal year '09 guidance?

This is Bryce. I will take a shot at that and John Christie may want to add some comments as well. Clearly the weakness in the housing market has a positive and a negative to the rental business and you are identifying a potential negative. Obviously, the positive is that, as Leo mentioned, we are seeing fewer people move out to home purchases and with the home ownership rate, including the data that just came out, I think it was yesterday, John, on home ownership rate showed an additional decline in home ownership rate nationally and even more so in our markets.

So we are certainly not seeing people flooding to buy homes. Certainly at a point, as prices continue to adjust down, you would expect to see the housing market strengthen. With inventory right now, I think, approaching ten months of standing inventory, it's got a ways to go for that market to get healthy. In terms of the shadow market, we are not seeing tremendous competition. We are seeing some, certainly, in certain markets. I think, Leo, probably maybe San Diego and DC maybe two of the markets we are seeing.

The markets that are most impacted by it, and this is Leo, are the markets where the housing is most affordable. So Chicago, central New Jersey, northern Fairfield in Connecticut, a little in southern Fairfield but more in northern Fairfield, and then two markets where the most recent quarter we've seen some spot impacts would be in downtown San Francisco, just because of condos, and our properties that are located close to downtown San Jose. But those are the markets that really have shown some impact and the two in northern California are just this most recent quarter and really just the condominium issue.

I think if you step back for a minute, while certainly if you think of the housing market and its components, the shadow market, as Leo mentioned, is an issue but not our biggest issue. People moving or the concern that people are going to start to purchase homes is an issue, but not the biggest issue. The biggest issue remains 1.5 million jobs lost last quarter, potential another 3 million this year. That overshadows, in our opinion, the impact we are seeing from any competition from the housing market and as the home ownership rate continues to fall, ultimately creates more customers for us not less. So it's something we watch pretty carefully, but it's the economy that keeps us up at night.

The basis of the question is just wondering if and when job growth does come back, do people -- does multi-family rebound as much with people essentially, with the affordability gap having closed significantly. Finally then just a bookkeeping question here. The gain on the term notes and the abandoned pursuit costs, where were those located on the P&L? And also in your guidance for 2009, what is the benefit from lower LIBOR rates you assumed?

The gain on the term notes, I believe, is an interest expense and what was the second part of your question.

The abandoned pursuit costs.

That's in the investment and other, investment and investment management cost.

And then the LIBOR benefit embedded in guidance.

We gave our range of LIBOR in the press release last evening. I would tell you that if you look at the forward LIBOR curve, it's probably at the low end of the curve. But the benefit there, there's not really a lot of floating rate -- there is not a lot of LIBOR based floating rate debt on our balance sheet in 2009, our line, we don't anticipate our line is going to be really drawn that much during 2009. It only benefits us, but it's not going to be that dramatic.

Okay. There's just a lot of moving pieces there, with that lower, with the lower land parcels and I was trying to make an apples-to-apples comparison. Thanks for the help. Appreciate it.

Yes.

Our next question comes from Andy McCulloch with Green Street Advisors.

Good morning. Tom, you had talked about construction costs coming down. Can you quantify that both in terms of materials and labor and then how much farther does it really have to fall before development starts to pencil again and assume, for argument's sake, flat rents and 7ish cap rates.

Andy, this is Tim. Actually, in terms of breaking it down between labor and materials, I'm not sure I am going to be able to do that for you. In terms of what we've seen so far in the market and deals that, in deals that we have been pricing we are not pricing much these days. Low-double digit declines from the peak.

We have benefited, though, from deals that we've already started, where in some cases we've actually been able to go back and re-bid a number of contracts, not necessarily all the contracts, but a number of the contracts. I think a good example of that is the deal in Brooklyn, Avalon Fort Green, which had an original budget closer to $320 million and we reflected a $14 million decrease in that this quarter, which was largely based upon re-bidding with a number of the major trades.

And then we continue to get very favorable buyouts that would suggest that we've been able to get another 3%, 4% out of many of these other budgets. I think, collectively, we are able to bring our estimated construction costs down by about $25 million for the 14 communities currently, currently under construction. In terms of what I'm seeing between labor and materials, I really don't have that at hand to give you a sense of how that breaks down. And then you had a second part of the question, if I could ask you to repeat it, I think it related to yield parameters but would you mind repeating that.

Yes, just how much further do these costs have to come down before you start taking a second look at some of these deals that you have on the back burner.

I think there's probably, I think there's probably more than just cost. I think that's part of it. First of all, I think we want to make sure we had the capital. But in terms of moderation construction costs, I think probably another 10% or so.

Okay.

Would be my sense before you start seeing yields in a range that would be worth taking a look at starting the deals.

And then with respect to redevelopment, it's interesting to hear you guys that you might actually ramp that up. What types of yields are you targeting there and how those yields changed over the last 12 months?

In terms of redevelopment, it's not that capital intensive, just something to remember. I think we've, we are planning on starting, typically it's $6 million to $8 million per project that, of new capital that you are putting in. And typically we look to see yields north of, a little north of 10% on the enhancement component of that capital.

Some of that capital does, does reflect deferred, deferred maintenance costs that you are going to spend one way or the other. We just collapse it into the capital budget at the time of the redevelopment. And we haven't really seen those numbers change dramatically. It's interesting, what we focus on is really the difference between the rehab units, if you will, and the non-rehab units and while in certain markets absolute rent levels may be coming down, the relative rent levels between a non-rehab and a rehab unit have stayed relatively constant over the last year.

That's helpful. Just one other question. What percent of your portfolio is currently on revenue management now.

Andy, this is Leo. Currently we have 18 communities that are on revenue management and I would expect by the end of 2009 we might have 50 plus or minus communities. We probably would deploy more quickly, but we just have other initiatives that would make it more complicated. So that's about where we are at and where we are going.

Do you notice any noticeable difference in the performance of those communities versus communities not on revenue management? I don't know if you have any, any communities in the same market with one being on and one being off that you can directly compare, but any color there?

I mean, I can give you just some general color? I mean, obviously, if we didn't think that we were getting a lift, we wouldn't be moving forward with it. We've been doing revenue management or testing it for basically two years. We believe in the science. We believe it makes sense. And we believe we've found the right product. So we do expect to get a lift. I don't want to get into the specifics of what that lift might be and that's why we are moving forward with deploying it to additional communities in '09 and I would expect in 2010 we would probably finish the deployment of our entire portfolio.

Right. Thank you very much.

Our next question today comes from [Connor Finerty] with Deutsche Bank.

Quick question, what is your expected retained cash flow in 2009?

That's about, this is Tom, it's about $75 million.

Okay. Thank you very much.

(Operator Instructions). We will go next to Paula Poskon with Robert W. Baird. One moment. Miss Poskon, please go ahead.

Thank you. What are you seeing in terms of existing tenants coming to you seeking to have a early lease termination or seeking to go to month to month. And tangential to that, what's happening with delinquencies.

Paula, this is Leo. With respect to month to months, our month to months have actually gone down. I think that last quarter I told you that a year ago, so the Q3 '07 it was about 5%. In Q3 '08 it was just under 4%. In Q4, '08, it dropped to approximately 3%. So they are definitely coming down. With respect to delinquencies, we really focus on bad debt. In the fourth quarter our bad debt ran approximately 0.8% of revenues and that's up from the previous two quarters where it was running approximately 0.7%.

I may have missed one piece of your question, so if I haven't answered, because there was multiple -- . Lease cancellation fees are up, I don't have the exact percentage, though, not much. And the reasons there haven't been a lot of cancellation. It's not a big percentage of our reasons for move out. It's something we watch and I don't have the exact number in front

That's fine, I was just looking for sort of an order of magnitude, if you will. And then just one other question, a housekeeping question actually. On the first page of the press release you have a very nice per share table there that outlines the non-recurring items. And then on attachment 17 you have the same line items not on a per share but just in whole dollars. But I can't make those two things tie. And in particular, it's the Federal excise tax. On the front page on the per share it's a $0.04 impact, but I can only get about $0.015.

Yes, there's some rounding issues on that, but you need to stick to the front page and I think that will give you a better guide. We have to include the dollars in the back just to make sure that we conform with GAAP and non-GAAP measure disclosure requirements.

Okay. Thanks very much. That's helpful.

You're welcome.

Our next question comes from Eric Anderson with Hartford Financial.

Hi, just a quick question. I wonder if you could put a perspective for me, what you would need to see either in terms of a pressure on occupancy or on rents themselves before there would be any kind of pressure on the dividend?

Well, this is Tom. We enjoy very low payout ratio relative to anybody else in our sector. It's the lowest in the sector and it's one of the lowest in the industry. So in terms of calculating the pressure, you can do the math but if we are retaining $75 million a year, which is a question I answered just a moment ago, that would give you a measure of how much NOI would fall before we would have an issue with our dividend, if nothing else changed.

Okay, so 75 on what would be the base number then?

NOI of, recurring NOI of 550 million or so.

550, okay, thanks very much.

You're welcome.

(Operator Instructions). We will take our next question from Gordon Watson with Ore Hill Partners.

Yes, hi. I'm just having a little trouble coming, maybe you could help me. I don't know if you said this, but could you basically walk through like a real quick sources and uses for '09 and '10, it's a little tough getting there?

If you would like to call us, the call is -- we are now kind of going over the hour. If you would like to call me, I would be happy to walk you through that. But we've given, I've given some detail on my comments as well as attachment 16 and I don't want to really consume too much time on this call going through that again. But if you would like to call me, I would be happy to address your questions.

Okay, no problem. One more quick question, though. Just being in the New York area we've heard a lot of anecdotal evidence about people going, if they hear someone in their building is getting a rent 10%,15% below the asking market price, that they are going back in and sort of threatening to break their lease if they don't get a discount. Have you guys seen anything like that or are you expecting to.

Gordon, this is Leo. With respect to someone coming in and saying they are going to break their lease, no, I haven't heard anything anecdotally in that regard. Sometimes it does come up during the renewal process and we deal with it accordingly.

Okay. Thank you.

Thank you very much. At this time, we have no further questions. I'll turn the conference back over to Bryce Blair.

Well, thank you, Lori, and we appreciate everyone's time on the call today. Thank you for participating.

Thank you very much, ladies and gentlemen, for joining today's conference. This does conclude your call. You may now disconnect.