艾芙隆海灣社區公司 (AVB) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Avalonbay Communities first quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks by the Company, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference call, Mr. John Christie, Direct of Investor Relations and Research. Mr. Christie, you may begin your conference.

Thank you, Leslie. Welcome to Avalonbay Communities first quarter 2009 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 yesterday afternoon'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 of reconciliations of non-GAAP financial measures and other terms which may be used in today's discussions. The attachment is available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance.

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 are Tim Naughton, our President, Leo Horey, our EVP of Operations and Tom Sargeant, our Chief Financial Officer. Leo 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 of $0.59 and an FFO per share of $1.27 which represented an increase of 2.4% versus the same period last year. The FFO per share was above the range we had begin last quarter, largely due to the expense of non-routine items. Adjusting for the non-routine items, this quarter's results were largely as expected. In terms of portfolio performance, the recession is continuing to negatively impact renter household demand.

For the quarter, revenue declined by about a 0.5% with three regions holding on to modest year-over-year revenue increases and three showing year-over-year declines. Overall, NOI for the quarter was down just over 2% which was in line with expectations. Leo will be providing additional color on the portfolio and market performance during his remarks. In balance of my comments, I want to touch on three topics; the economy, our development activity, and our recent capital market transactions.

Since the beginning of '08, the economy has lost about 5 million jobs, with 3 million lost in just the last five months. The weakness has spread across virtually every industry and every geographic market. According to Moody's economies.com, not one of the roughly 380 metropolitan areas in the US is experiencing meaningful job growth. With an average of almost 700,000 jobs lost per month, the first quarter will likely be the weakest in terms of jobs. However, for both the US and Avalonbay markets, job losses are expected to continue for the balance of '09 through mid 2010.

The speed and breadth of the job losses in recent months has resulted in sharp downward revisions to employment forecasts for both this year as well as next. Our financial outlook released in January incorporated expected job losses nationally of about 3 million jobs, based upon a forecast from Moody's economy.com,which was as of December of '08. Their most recent forecast reflects a baseline projection of national job losses for this year of just over 5 million jobs. This is almost 70% higher than their December forecast; obviously, a very significant change in just a few months. As I mentioned in my initial remarks, our first quarter property results came in largely as expected, yet the effect of the excellerated job losses of the past few months will negatively impact operating results during the balance of the year.

There are, however, a number of positives which have or will offset at least some of the negative impact of the job losses. First, the weak housing market continues to benefit rental fundamentals. While home price declines narrow the affordability gap and the shadow rental market presents some additional competition, the fact is that the home ownership rate, both nationally and even to a greater extent in our markets, continues to decline as an increasing number of households opt for rental over home ownership. As of 4Q '08, the home ownership rate in our markets declined to 58.5% which is down another percent from just the last quarter.

Second, one clear positive from the current difficult economic and capital market environment is the impact on future apartment supply. Nationwide, multifamily permits for the quarter are down 50% from year-ago levels. Adjustments in apartment deliveries in 2010 and 2011 will be very modest. Putting these factors together, we would expect to see continued revenue declines through '09 and into 2010 before leveling off and returning to positive growth. As has been our practice, we will be reviewing our outlook at mid-year and provide an updated guidance at that time.

Turning to development activity, we stated during last quarter's call that given the weak economic and capital market environment, we would not be starting any additional development communities during at least the first half of this year. During this quarter, we completed two communities, reducing the amount under development by about $175 million. In terms of development economics, construction costs do continue to decline which is a significant positive; and yet it's not enough to make up for actual and expected revenue declines and concerns over the fragile capital markets environment. You can expect that we will remain very cautious with regard to new starts for the balance of the year.

In my earlier comments, I highlighted the fact that $0.06 of our FFO is coming from non-routine items. $0.05 of this was a catch-up related to our Chrystie Place development in New York. This deal has been very successful from both the pure real estate perspective as well as a financing perspective, due to the attractive bond financing we placed on the property. The real estate is yielding about 9% on total costs, and it was financed with 80% floating rate tactics and bonds that are currently averaging less than 2%. Consequently, the cash flow after debt service is quite strong, and it has allowed us to move into the pre-mote for this joint venture on a current cash flow basis. Now I highlight this deal both to provide some additional details on the non-routine items, but also to stress the value that can be created from certain developments, particularly when we're able to benefit from low cost tax-exempt financing.

Lastly, I want to spend a few minutes on our recent capital markets activities. We've been very busy over the last few months working on both the secured debt facility as well as additional equity commitments for our second investment management funds. These transactions closed in April and provide both significant liquidity and committed capital to pursue future investment opportunities. The secured debt facility was a $740 million 10-year facility through Freddie Mac, a rate at 5.9% and secured by 14 communities. Also in April, we had the final closing on our second investment management fund, increasing the total commitment to $400 million. Assuming 65% leverage, this will provide for over $1billion in investment potential.

I think it's important to note that in spite of the difficult capital market conditions that began last year, that our access to capital at cost-effective rates has been very strong. During '08 and through the first quarter of '09, we have raised $1.9 billion of debt capital at an average rate of 4.9%. This is particularly attractive when compared to the 6.3% rate on the nearly $600 million of debt redemptions through mid '09. The 140 basis point savings on the $600 million translates into approximately $8 million in annual interest savings.

Overall, the capital markets activity provides the liquidity to meet funding commitments for all developments underway, to fund all debt maturities into 2011 and to opportunistically acquire existing apartments through our investment management fund. After considering the April secured facility, we have no balance outstanding under our billion-dollar credit facility, and almost $300 million in cash on hand available to satisfy debt maturities and development expenditures.

And even after the recent transaction, we have the capacity for approximately $1.5 billion of additional debt before we reach any of our debt covenants. With that, I'll turn it to Leo who is going to provide some additional color on our portfolio and market performance. Leo?

Thanks, Bryce. I will focus my comments on three areas. First, reviewing the financial performance of the portfolio during Q1. Second, highlighting markets that are either exceeding or lagging our expectations. And third, providing some general thoughts on the performance of our lease-up communities.

During Q1, portfolio performance was consistent with our expectations. Same-store revenues declined .07% on a year-over-year basis and 1.6% sequentially, while expenses grew 2.4% year-over-year. These revenue and expense results produced a year-over-year decline in same-store NOI of approximately 2%.

Occupancy averaged 95.4% for the quarter which was ahead of our projections, but this favorable variance was offset by greater reductions in rents than originally anticipated. Through the quarter, occupancy was fairly stable, but has now declined to the high 94% range in April, reflecting the increasing weakness from continuing job losses. New move-in rents remain negative across all of our regions, as rents were reduced in response to market conditions and to sustained closing ratios.

Renewal rents continue to remain positive in all of our markets, but we are carefully monitoring turnover and reasons for move-out to ensure that renewal offers secure as many existing residents as possible. We are closely monitoring our occupancy and rent levels as we enter the spring and summer leasing season to identify any new trends that emerge. As we have discussed previously, this is the period when prospect traffic typically increases and when approximately 60% of our leases expire.

Turning to expenses, the overall increase was driven by property taxes, bad debt and certain maintenance-related expenses, offset by declines in payroll and insurance costs. Throughout the quarter, our regional operations teams focused on renegotiating service agreements with vendors to continue to manage operating costs. For example, in Boston we reduced our common area cleaning services by over $225,000 by rebidding our existing agreements. These efforts will help to constrain expenses and improve NOI during a period of declining revenues.

Going down on a discussion of our markets, in general, renters are understandably price-sensitive as they focus on reducing their living expenses. Three facts regarding reasons for move-out are worth noting. First, moving within or to another community was the top reason for move-out at approximately 18%, and many residents are stating that the reason for this change is to reduce housing costs. Second, financial and loss of of employment accounted for approximately 15% of our move-outs.

These reasons typically account for about 10% of move-outs and provide further evidence of the impact that the weakening economy is having on our residents. And finally, home purchases fell to 15% of move-outs, well under the historical average of 20% to 25%. There is no sign yet that improving home affordability is boosting home purchases among our residents.

The specific Avalonbay markets on which we are most focused continue to include New York, Orange County and Los Angeles. While occupancy is stable in the 95% range in the New York metropolitan area, new move-in rents are being reduced to secure leases. Reduced rents in Manhattan are causing residents to move back into the city from the outer burrows and from the New Jersey waterfront, and a large number of condo deliveries in the city during 2009 may put additional pressure on the rental markets in both the city and the surrounding areas.

Orange County and Los Angeles remain the weakest of all Avalonbay markets with year-over-year rental revenue change of approximately negative 4% and negative 5% respectively. Both markets have been hard hit by the recession with job losses for 2009 projected to exceed 300,000 or greater than 5%. The Pacific Northwest and Northern California remain two of our strongest performing markets, but are transitioning due to eroding market conditions.

In Seattle, the global slowdown has impacted this export-driven local economy that is dominated by technology companies and Boeing. Microsoft is reducing its workforce after experiencing its first ever year-over-year revenue decline. And the reduction in contract workers throughout the region is further reducing the rental demand. In addition, new apartment supply is projected to be the highest of any Avalonbay market at greater than 2.5% of total inventory. In Northern California, while supply is relatively modest at 0.5% of inventory, layoffs in the technology sector are negatively impacting renter demand. Prospects are responding to lower rental rates as opposed to concessions, and new and existing residents are focusing on smaller, lower-priced apartments.

On the brighter side, the Washington, DC metropolitan area is performing ahead of expectations. The area has the lowest unemployment rate and the most favorable job outlook of any Avalonbay market. And while supply as a percentage of total inventory remains high at roughly 1.5%, apartment deliveries are being absorbed. In fact, occupancy averaged approximately 96.5% in Q1, year-over-year rental revenue growth remained positive, and the rate of decline in rental rates actually improved throughout the quarter.

Finally, while the lease-up communities are experiencing the same challenging conditions as the stabilized portfolio, the task of leasing a new community is more challenging because all of the leases are new move-ins. A new lease-up cannot rely on 45% of the existing residents to renew. So while we continue to make progress absorbing apartment homes as delivered, rental rates are under pressure at communities in sub-markets with difficult demand supply fundamentals and at communities where the rental rates are at the top end of the market. This creates some unevenness in the lease-up performance from community to community with some properties performing better than others. For example, at Avalon and Anaheim Stadium in southern California, rental rates decreased approximately $200 a month from Q4 to Q1 in order to produce an average of approximately 20 leases per month throughout the first quarter.

In contrast, at Avalon at Blue Hills in a suburb of Boston, rental rates remain stable while successfully leasing almost 30 apartments per month during the first two months of operation. In the case of Anaheim, we are dealing with an oversupplied market with significant job losses and high rents. In the case of Blue Hills, we are delivering more affordable product into a submarket with limited competition. In short, we will continue to adjust rents as necessary to maintain reasonable closing ratios and to absorb apartments consistent with expectations.

In summary, job losses are more pronounced than originally projected, but our portfolio performed largely as expected during the first quarter. We are focused on maximizing both performance at both our stabilized and our lease-up communities despite the difficult economic environment, and we will continue working to maximize NOI by constraining expenses wherever possible. With that, I'll turn the call back over to Bryce.

Thanks, Leo. And I just have a few additional comments before we open it up for questions. The past few quarters and the next year or so are likely going to be very difficult ones for the economy and for apartment fundamentals. There's little we can do about the economy, but there is a lot we can do to ensure that Avalonbay is well-positioned, not only to respond to the challenges, but also to be in a strong position to pursue emerging opportunities.

Let me highlight three specific steps we have or are taking. First, we've enhanced our liquidity while maintaining a strong balance sheet. Over the past five quarters, we've raised over $2.5 billion of capital to renew debt and asset sales. This capital has provided us with valuable liquidity while at the same time extending debt maturities and reducing our average interest rate. We continue to enjoy the strongest balance sheet in the sector, with the lowest leverage and the best dividend coverage of any apartment read and among the strongest of all reads.

Secondly, we're taking the necessary steps to slow our development activity. During '08, we reduced the volume of starts by 50%. At the end of '08, we reduced our future pipeline by 40%. We plan to start no additional communities during the first half of this year and may very well not start any at all this year. At the end of '07, we had about $2.2 billion under construction. And assuming no additional starts, our volume under construction will have been reduced by two-thirds by year-end '09.

And third, we've raised the capital to pursue attractive acquisitions. At the closing of our second investment management fund, we have over $1 billion of capacity to pursue acquisitions in our markets. So while others are struggling with the constraints of a weakened balance sheet, Avalonbay enjoys the financial flexibility afforded by a strong balance sheet. While others may not have the available capital to pursue acquisitions, Avalonbay has the committed capital and an experienced team to benefit from those opportunities.

I think we're being realistic about the current difficult economic conditions and their impact on our business. Yet, we're also confident about Avalonbay's ability to capitalize on some interesting opportunities that will undoubtedly emerge during this downturn. With that, Leslie, we'd be glad to take any questions.

Thank you. (Operator Instructions). One moment, please, for the first question. The first question comes from Karin Ford of KeyBanc Capital Markets. Please proceed with your question.

Hi and good afternoon. Can you just talk about the plans with the fund; when you would expect to start investing and what type of opportunities and what return expectations you'll have to make new investments with the fund?

Tom, why don't you talk about the time period in terms of the investment period, and then, Tim, maybe you can talk a little bit about what we're seeing in terms of acquisition opportunities.

Okay. This is Tom Sargeant. Karin, the investment period is a three-year period that began in August of '08 and to-date we've not made any investments. The return expectations are pretty much consistent with our first fund which is 13% to 15% net to investors. And the promote and fee structure, largely the same. There are some differences, but they're not really that meaningful. Timothy, you want to talk about --

Sure. Karin, we are actively looking at opportunities across our markets. While a lot hasn't traded yet, there is a fair bit of activity in terms of assets being brought to market, probably a little different than the last couple of years. We are seeing a lot of interesting core opportunities, really high quality assets that probably mid 90s vintage to recently constructed. As Tom mentioned in terms of returns, there's a sense that cap rates have moved into the mid 6s to 7% range. For those kinds of opportunities, probably need to be a little bit better for something that requires some repositioning, and that probably translates into an unlevered [IAR], probably in the low double-digits and mid-teens on a levered basis, assuming the 60% to 65% leverage.

Thanks. That's helpful. Just a question for Leo, you mentioned bad debt as one of the items, comprising in your expense growth. Can you just talk about trends you've seen on the bad debt side sequentially and year-over-year?

Sure, Karin. This is Leo. In the fourth quarter, our bad debt was about 0.8% of revenues. In the first quarter of '09, it was about 0.9% of revenues. And just to give you some perspective, during the last downturn, it peaked at about 1.1%.

Okay. Helpful. And just finally, just wanted to ask your thoughts about delevering and the re-equitization process that's been going on in the re-sector and what Avalonbay's thoughts are with respect to reducing leverage via equity, asset sales and the like?

Karin, this is Tom. At the end of your question, you addressed a couple of things that I would point out, and that is that there's a lot of was to introduce equity into your capital structure. It's not just issuing shares. We've introduced a lot of equity into the capital structure over the last couple of years, by selling assets and retaining that capital and making a special distribution of stock.

In terms of equity offerings, we have a long-standing policy against telegraphing capital markets activity, but it is interesting to note that there aren't any -- there are no multifamily companies that have issued equity in this recent wave of equity issuances. It is generally due to the fact that the multifamily companies do have access to alternative credit markets and their balance sheets are generally less levered. As Bryce mentioned, we arguably have the best positioned balance sheet in the sector and certainly have the financial flexibility to choose when and what type of capital markets offering we do.

Leverage today on an NAB basis, if you use third-party estimates is about 40%. We have great fixed charge coverage. We have 85 unencumbered assets that are available for secured financing, very manageable debts in maturity schedules, blah, blah, blah. We're in a good position to be very selective about what capital market option we select going forward.

Thanks very much.

Thank you. The next question comes from Michael Salinsky of RBC Capital Markets. Please proceed with your question.

Good morning. Starting on the operations side, can you talk a little bit about what kind of rates you're seeing on new leases versus what kind of rates you're trying to pull in for renewals right now?

Mike, this is Leo. Sure. Across the portfolio, new move-in rents are approximately down about 10% to 12%. We have been able to maintain positive renewal risk across the portfolio, roughly around 2%.

Okay. That's helpful. Tom, on the balance sheet, two questions. We've seen the pricing for the unsecured markets come in. What is the Delta right now between secured financing and unsecured financing. Secondly, as a follow-up to that, how much further -- secured borrows can you put on the balance sheet without jeopardizing the rating from the rating agency?

In terms of the current Delta, that's moved dramatically just overnight, actually, because there's been a lot of activity in the market. I would have said that that Delta is 300 basis points. It's probably closer to 225, maybe 250. It's moving quickly so that's good news is that source of capital reopens into the market.

In terms of the debt we could take on, it's important to note that we've met with both of the agencies recently that rate us. They were made aware of the large secured facility that we were about to undertake in connection with our annual review with them. The sense that we have is that they understand that the capital environment is difficult and understand the need for us to divert away from unsecured debt to secured debt. Neither has raised an issue about the recent transaction.

It's really hard to say what rating actions they might take if we did more secured debt. But clearly, reducing unsecured debt with secured debt certainly helps mitigate overall ratings issues and pressure. Because we're issuing secured debt to take out unsecured debt so there's less secured debt exposed to a more secured debt oriented balance sheet. While we have no plans to take any steps that would put our overall investment grade rating at risk, these are extraordinary times and everyone understands the need to diverge from our historical use of unsecured debt.

Okay. That's helpful. Then finally, just a bigger picture question. You were able to raise additional capital it looks like in March or April for the fund. What is the interest right now from private equity toward the multifamily space? Has that either changed for the better or changed for the worse in recently?

Again, this is Tom. My sense is that private equity is still on its heels right now. And I think that their -- the private equity sources are attracted to the best sponsors in the best markets with great business plans and the ability to meet their obligations and not just lean on the investment partner for capital. I think that's one of the reasons why we were able to attract additional capital for our fund. I think generally speaking though, it would be very difficult to go out in the market today and raise private equity capital or even joint venture capital. I think that's a very difficult market today.

Then finally in terms of the appetite from investors right now -- well, from buyers right now, what is the appetite out there? What are they looking for? Is it just a pure spread game? Are they looking for growth? Is it still a redevelopment plan? What's the focus right now among people looking to buy multifamily product?

Mike, this is Tim Naughton. Probably a year or two ago, the focus was probably almost entirely in value add, very little focus -- not as much focus in core. It seems to me today that folks are a little more interested in core just because of the absolute returns have moved up. Some of the quality assets being brought to the market are as good as anything we've seen really since the mid 90s.

Just in terms of overall appetite, as I mentioned before, while there has been a lot of transactions that have closed, there is activity and we're hearing that often there are 10, 12 bids on a deal. Whereas maybe four, five months ago, it may have been hard to generate five qualified bids on a deal. Definitely more folks are active out there in the market. The guys that had committed capital and maybe were sitting on the sidelines four or five months ago are starting to come onto the playing field.

Thank you. That's very helpful.

The next question comes from Jay Habermann of Goldman Sachs. Please proceed with your question.

Good afternoon. Bryce, comments on the development. For the last several quarter, you guys have obviously talked about just willingness to not pursue any starts at this point in the cycle and you talked about the existing supply in your market. But as that supply winds down, there could continue to be a amount of fair amount of availability, just given the continuing pressure on jobs. Is it your expectation that -- you mentioned costs haven't come down enough. Do you guys continue to think that you're just going to wait on the sidelines on the development front?

Jay, we'll be able to give more specific guidance on that at mid-year, but as I mentioned, certainly we're feeling continued caution in that regard. We decided to hold off anything in the first half of the year. Since then, the economy has only gotten worse. That gives us pause for caution.

However, there may be selected deals that we could choose to start just because their value proposition is compelling because of unique sub-market conditions, buyout conditions, et cetera. You shouldn't expect that we're going to open up the flood gates and start a lot of development. But on the same token, you shouldn't be surprised if we start one or two. It will be very selective with a very cautious outlook.

In terms of compelling returns, can you define that a little bit more?

In the 8s.

Okay. And just shifting a bit to the existing development, obviously the lease-up portfolio -- you mentioned obviously using -- adjusting rents as a lever there. Can you speak to what you're doing at this point? Is it really coming more from concessions or is it outright reducing of rents?

Jay, this is Leo. It's actually coming from outright reduction of rents. We used concessions late last year and what we found is we attract more traffic and we close more prospects by making the process simple and just moving to effective rents. If you've out shopping our properties, you may some places with concessions. The majority of them would be just moving toward using effective rents.

Okay. And you mentioned as well asset sales in the context of raising the additional -- the $740 million secured loan. Do you have anything on the market at this point? And if you think about -- as you move more toward secured, will that put some limitations on your sales, do you think moving forward?

Jay, Tim Naughton here. We have a couple of assets that were just -- we're in the very early phases of marketing. We really don't have any feedback yet in terms of value, but our plan this year was fairly modest in terms of asset sales.

Okay.

And in terms of the second part, Jay, whether the secured debt is helper or a hindrance, it depends at this part of the cycle. When things were red-hot and we were selling our apartment communities typically to condominium converters, they wanted them free and clear. They did not want any encumbrances and that was understandable. In today's market, having some debt on the property as long as it's sufficiently sized and the rate is reasonable, it can be a positive. We have and will market some with that and some without that.

This is [pooled] along with substitution rights? The debt doesn't transfer with the assets?

That's correct. Tom, do you have anything to add? Just what you said, Bryce. That is that as full facility that allows substitutions in and out. We could unencumber an asset and substitute another asset in if we wanted to sell something. Yes. I missed -- if your question was specific to the pool facility.

Okay. And then just lastly on the promote, is that just a one-time event? Or does that continue, just given where interest rates are? And if you expect interest rates to remain low for the balance of the year?

This is Tom again, Jay. The $3.8 million was a catch-up, but there is a continuing benefit of -- depending on what interest rates are, I think you could assume a couple of pennies this is year related to that.

Okay. Thanks. That's helpful.

The next question comes from Mark Stafford of Oppenheimer. Please proceed with your question.

Good afternoon. Tom, first question is for you. Related to the unsecure versus secured discussion that were explaining before, I'm just wondering what level would you guys look to do more unsecured versus secured, just given the flexibility that you could have with that?

That's a tough question. One, I know the answer. I'm not sure I want to give it just because I don't want to trigger the market in any way that we would be coming out with another offering. But I would say that historically, the difference between the two has been -- it's been down, basically right on top of each other to going up as much as 400 differential between the two. Right now, as I said, I think that's come in a little bit. It's probably 250 over what we could do with a Fannie or Freddie deal today. My guess is that needs to come in substantially before we would be triggered to come into the unsecured market. Really at this point with $0.5 billion on the balance sheet in cash, we're not anxious to come back out into the market anytime soon.

Okay. Leo, you had mentioned talking about the move-outs being -- reducing expenses being the number one and I think unemployment was number two. In terms of your reducing rent, how are you guys faring compared to class B type properties in your market? How much are they having to pull down their rents as well?

Mark, in general the way it works is in the early part of a downturn, the Bs do out perform the As and people tend to move in that direction. Understanding that from the last downturn, we've been spending a lot of time focusing on expanding the competitive set that we look at. In an existing market where we might have an A property, we are monitoring the Bs and making sure the historic differential between those two properties doesn't get out of whack. We also thought and have spent time looking at adjacent markets where people might be moving -- to try to move to in order to get at that deed product. We haven't seen -- because we've been making quick adjustments, we've been able to stabilize our occupancy. I believe our occupancy has been running fairly consistently with the B product in the various markets.

Lastly, added to that, have you seen any significant shift in population just because of major unemployment in certain markets, similar to -- like in the auto industry, you may have a mid-western community that might have a big shift of people out. Have you seen that on the coast in your market at all?

Certainly if you ire in New York and the adjacent sub-markets to New York, the financial service sector is having -- presenting some challenges. Stanford, Connecticut, southern Fairfield, the Jersey waterfront, that's been a challenge. When you move to the technology sector, as I mentioned in my earlier comments, certainly in northern California and Seattle, that's creating some pressures.

Okay. Thanks.

The next question comes from Rob Stevenson of Fox-Pitt Kelton. Please proceed with your question.

Good afternoon, guys. A quick question. In terms of the rent declines and/or the concessions on the development lease-ups, what's been the trend experience concerning the January to April period? Has it been accelerating into now? Or has it been relatively flat? What's been the trend there?

It's been relatively flat. Just to give you some perspective, in Q4 we averaged about 16 leases per month throughout the quarter. Moving into Q1, we were 17 or 18. And then in April, it actually -- we've actually increased to about 22. We've been able to do it, in most cases and as I mentioned in my comments, it's somewhat uneven. But we've been unable to do it with the rents as they've been described in Attachment 7.

Okay. And then a follow-up on that one. Looking at the portfolio as a whole, have you guys made any major tweaks to the underwriting methodology? What disqualifies people and what qualifies people et cetera, as the market softened?

No. We have experience from the last downturn. We don't change our underwriting criteria. In other words, if anything, when it gets really difficult and when we start utilizing more and more concessions if we have to, we will exclude the concessions from that consideration. We don't compromise our leasing standards in order to bring more residents into our properties. We never do that.

Okay. A question for Tim. Given the amount of REO assets these days, have you been seeing any decent land deals from the banks and from other holders that you would think about putting into your pipeline for 2011, 2012 starts?

Rob, Tim here. I think it's just too early for that, honestly. We have not seen much REO come to market at all, either for approved assets or land at this point.

Okay. And then, last question. Tom, the spreads that you were quoting for unsecured, if I'm doing my math right that means you guys could go the the market today and issue unsecured at somewhere in the 7.5%, 7.75% range?

Yes. Based on the activity in the market over the last 24 hours, that's correct. It's certainly below -- it's likely below 8%.

Okay. Thanks, guys.

Your next question comes from David [Potie] of Citigroup. Please proceed with your question.

Interesting pronunciation. Hey, guys. A couple of short questions. Are you seeing a lot of push-backs on renewals across the portfolio? Is that really just a metro New York phenomenon?

We're seeing some stats on renewals across the portfolio. As I mentioned in my earlier comments, over the entire portfolio, it's running about 2% across the region. That runs from a low of -- say, 1% positive to a high of 4% positive -- in a pretty narrow range, but we're getting the push-back everywhere as you might imagine.

Right. Just looking at the numbers on the regional specific data, you could infer from the numbers that there was perhaps giving up of occupancy in terms of capturing some rent growth. Is that true? Or are you generally still holding the occupancy line?

Let me tell you exactly how we're operating; the strategies we're using. We're using this general standard and we're applying it to all the markets as the markets require. What we try to do is understand what we believe the sub-market or market occupancy, and then we have a bias for being more occupant than that.

Let's say in a market, we believe the occupancy is 94%. We would target 94.5% or so, and then we would try to maximize our rental rates from that occupancy platform. The decline is really associated with just the weakening fundamentals and the fact that our various markets are seeing occupancy declines.

Okay. Just moving over to the development, are you comfortable giving any forecast for where these stabilized yields settle on an aggregate basis?

David, Tim here. We generally haven't -- try to forecast the future with respect to the development portfolio. And again just to remind everybody, these do reflect basically current market conditions as it relates to both the revenue and the expense side of the equation with the projected to completion capital cost as the denominator. But as a general rule, as Leo said, it's been more of a challenge with respect to new move-ins versus renewals. As to the extent that rents continue to decline or moderate, that's likely to have a bigger impact on the development portfolio.

This is Mike [Addonna] speaking. Sticking with the portfolio for a second, you talked about some of these projects that were in lease-up, some where the rents were down more significantly in the 9% range, but then the success that you were having in Boston where rents were effectively flat.

Overall, when you look at your development pipeline in terms of the active developments from last quarter, when you weigh it all together, the rents were down about 2.5%. Your weighted average yield only dropped 10 basis points which would imply almost the NOI margins getting better on the expense side. I'm just trying to get a better picture of what's actually going on in the expenses. I would have thought you would have spent a little more money marketing, or are you really able to rein in the awkward expense side to keep your NOI margins or NOI yield a little higher?

I don't know that your numbers are exactly accurate in the sense that -- I think the bucket is always changing a bit from quarter to quarter. The numbers -- you had mentioned around 2.5% on rent is probably right. Of those that we're actively leasing, the rents were down a bit more than that, more on the order of about 5%.

But the other thing affecting that is the denominator of the deals that were under construction, both last quarter and this quarter. We did recognize about $5 million in savings as well. That's helped the yield a little bit at the margin as well.

Is anything happening on the expense side in how you're looking at them? When you look at your NOI yield that you project, has there been changes -- ?

Not -- the operating expense is not what's driving it. It's the anticipated cost to completion -- to complete the deal and the revenue line.

And I know the good news, from quarter to quarter, the 14 deals, because you didn't add anything in the two yields that delivered, you were able to make the comparable analysis, so the weighted average rent was 20/25 last quarter, and effectively is 25 -- 25/10 this quarter.

Yes. You can make that on the rent, but the yield that you're looking at -- when you're complaining the 6 to the 5/9 in the fourth quarter, that included the three communities last quarter which aren't in the bucket this time. The bucket is different.

And I know, Bryce, you talk about your normal processes to wait until mid-year in terms of getting through a little bit more of the peak leasing season to have a better sense of where guidance is. I don't want to put -- I'm not going to try to put words in your mouth, but I just want to get a sense of your view as to where things sit today, based on what happened in the first quarter and where we are in the first months of the second quarter, how the revenue side of the equation is trending relative to where you thought it would be for the year.

We try -- I tried in my comments to be pretty clear and pretty straightforward that clearly the economy is weaker. The job losses are greater. We all know that there's a direct relationship between the magnitude of the job losses or job gains and changes in revenue. It shouldn't be a surprise that we're certainly more concerned about the second half of the year than we would have been in December, just given those facts.

When you're looking at job losses of about 5 million which is about 3.5% to 4% nationally, GDP falling greater than originally expected and unemployment likely peaking 10% -- a little above 10% into early 2010, it certainly does impact how we feel about things. The first quarter was in line with expectations, but that's not surprising. As we've said many times over the years, there's a six-month or so lag between major changes in the economy and changes in revenue.

That's why Leo mentioned in his comments that we're keenly focused on the portfolio and importantly, have taken the necessary actions, but also monitoring it so that we can be in a better position to forecast -- to provide updated guidance in the middle of the year. To do it every quarter I think is just not sufficient time in order to take a deep enough look.

I don't know if you had a chance to review any -- I don't know if you have time on the call, but another company was talking about how the pace of decline is holding steady from the beginning of the year, providing a little bit more of hope or optimism that while there will be declines throughout the year, the pace of decline has not accelerating.

I can tell you I did not listen to the call. I'm sure his comments were riveting, but I did not listen to the call. In terms of commenting, I think I'll defer from that.

Okay. Thank you.

Your next question comes from Jeff Donnelly from Wachovia. Please proceed with your question.

Good afternoon, guys. There are about a half a dozen projects in your pipeline that did see the average rent per home collectively decline. I'd say about 5% and most of these were in your weaker markets this quarter; Boston, New York, southern California. Does that average rent per home reduction shed some light on where you think market rents are going for the assets in your established communities at the margin over the next year?

I would say that -- this is Leo. I would tell you that the issue is we're doing twice the work in a year in a lease-up. If anything, the lease-up rents typically come under more pressure than does a stabilized rent. And that is what I was eluding to in my original comment which is that with a lease-up, it's all new move-ins. Obviously, as I've disclosed, our new move-in rents have been more impacted. On a stabilized community, you have renewals that help buffer that. I would suggest that the development communities typically come under more pressure than do the stabilized properties.

Okay.

And just to add to that, I think the average rent of these development communities is about $600 -- $550 to $600 higher than the stabilized buckets. I think generally we are seeing a little more pressure on the higher end, as Leo had mentioned earlier.

That's helpful. Maybe Leo, as a follow-up to that. I think Michael just touched on this. With respect to net effect of rents, particularly in your northeast cities, have you seen any -- I'll call it firming, as you roll into April? Meaning, has the year-over-year declines in new and renewal rents moderated at all? Or is the rate of decline still accelerating?

It's actually been flat. In my opening comments what I said was throughout the quarter, new move-in rents have been basically flat and also renewal rents have been basically flat. There is some stabilization there. And really, I did look before the call at January, February and March. In general, it's been pretty stable.

The deterioration in southern California for Avalon was a bit stronger than we've seen from some of your peers. I know you don't speak to their results. What is your perception on how Avalon has performed versus competitive set in the southern California market?

When you compare to -- first of all, do we watch our compared performance? Absolutely. It's something that we measure ourselves against. But when you're looking at those results, you have to consider the nature of the communities, the type of properties that we have on the market. You also have to consider the sub-markets in which those properties are located?

And frankly, you have to consider certain accounting conventions that occur. We watch our performance and we also watch our performance versus third parties and see how we do there. Over time, I think that our performance has fared pretty well. In any one quarter, it's difficult to draw any specific conclusion.

That's helpful. One last question for Tim as a follow-up to Rob's earlier question. Do you expect you'll see maybe more opportunities for multi-asset portfolios of improved assets REO or not in the coming year? Or do you think just access to capital and multifamily isn't a key -- in those leveraged (inaudible).

I'm not sure if I follow the whole question. In terms of pools of property, you're not really hearing it yet. We're at -- might likely come from -- you are seeing insurance companies. They are selling. They've got a desire to move a certain amount of capital. To the extent they think they can get a good execution off of a portfolio, I'm sure they'd look that way. It's based upon recent experience. Most folks have been able to optimize proceeds by breaking portfolios apart and -- particularly given the reluctance of buyers to fit -- be making real big bets now.

Thanks, guys.

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

Thanks, and good afternoon, everybody. Leo, are you using revenue management system, LRO or anything like that?

Rich, this is Leo. We have revenue management at a number of our communities. We have piloted it extensively over the last couple of years and the pilot included about 18 communities. We increased it to the mid 30s now. I expect by the end of the year, it will be 50, 55 communities up on it. There are other initiatives that we have going that are slowing it down somewhat. But we the believe in the science of revenue management and we have started deploying it into the portfolio.

I thought you were doing LRO, is that right?

Yes.

Bryce, if you felt it wasn't possible right now for you to make your current range of guidance, would you still as a company hold off from revising it down? I'm assuming you think it's still -- the guidance right now is still possible?

We issue guidance at the end of the year in January. Our practice has been to update guidance at mid-year. We don't have an obligation to update that between those periods. If we thought there was something material, you would expect, as has been our practice, that you would hear from us.

Okay. Fair enough. Now, do you guys have any statistics -- excuse me, statistics that relate job loss -- national job loss numbers or job loss numbers in your market and the sensitivity to same-store NOI growth? Have you done any work like that?

We sure have, Rich. We've actually had a revenue guidance model that you've probably heard us speak to for almost 10 years now, which works from changes in demand, driven largely by changes in jobs and changes in supply in our markets to project changes in revenue by sub-market as well as by portfolio. In the past couple of years, we've modified that further to take into account other factors that have become become increasingly significant, such as changes in home ownership rate and changes in demographics. We do have a regression analysis that does form -- give us good guidance which we then marry with the feedback we're getting at the property level and the regional level in order to make judgments about expected future revenue growth.

If you were to input a 70% increase in job loss, what does that spit out in terms of revenue growth?

Lower revenue than it would have otherwise?

Can't give me a number?

We've said a couple times, we're giving updated guidance in the second quarter.

Okay. I'm trying. Last --

Nice try, though, Rich.

Last question is big picture for anyone, really. Have you sensed any of the government stimulus packages have any -- have they been stimulating at all? Have you noticed anything in terms of activity or is it still too early?

I think it's clearly too early. No one has seen any improvement on the job side. There are certainly some positives lurking in terms of the economy. Tom talked about one of them already, and that's just tighter credit spreads.

We've also seen nationally modest increase in the volume of home sales. Those are some positive signs, and yet consumer confidence remains very low. Credit is still very tight in some sectors, just not available. Retail sales are dismal and the job market doesn't have much life in it. While there will always be I think conflicting signals out there, right now there's still, I think, more negatives than positives.

Okay. And just one quick follow-up. Would you -- given the state of the fundamentals and declining jobs and all that, would you be comfortable or have enough comfort as a company to go out and acquire assets? Let's just hypothetically say second half of the year, fourth quarter in the absence of fund two? Would you be able to do it on your own balance sheet? Or does fund two put you over the edge to really consider it? How important is fund two for you guys to really start to consider acquisitions?

Fund two is very important? It's strategically important to us in terms of giving us that committed capital to pursue acquisitions. But it does not limit us, in terms of acquiring things on our own balance sheet. It is our exclusive acquisition vehicle, but for exceptions which would be larger assets portfolios, 1031 exchanges, et cetera. I think the short answer to your question is, if we saw a compelling opportunity, we have the balance sheet capacity to take advantage of it.

Okay. We would still be talking about acquisitions in the conversations we have on the table even in the about sense of fund two?

Yes.

Okay. Great. Thank you.

Our next question comes from Alexander Goldfarb of Sandler O'Neill. Please proceed with your question.

Thank you. Good afternoon. Just two really quick questions, because I know we're pressed here for time. Tom, are there any other promotes from any other deals possible this year?

Alex, no. I think the Chrystie Place deal is the deal that you'll see most of the promote activity. The funds generally have back-ended promotes associated with this. Any other JVs are not likely to trigger a promote this year.

Okay. And then, on the buying back of debt, given that pricing of the near-term debt has really tightened up, does it -- from a capital management perspective, does it make sense to go longer out to medium or longer-term debt to buy back? Or capital allocations says keep whatever cash you have on on hand?

I think there's an argument to be made to do a waterfall type tender, where you would go out and scrape the bottom of a number of different ponds. That does put some pressure on liquidity if you're trying to manage your short-term maturities. I don't want to really get into a lot of market color on that, because honestly, we've been buying our bonds back. We don't want to effect the market for our bonds in any way by commenting on our willingness to either buy back or not buy back.

It's very similar to equity, where we don't really want to talk about equity. I'm not trying to dodge your question, but we do make a market on our own bonds, and everybody should know that. We want to be careful that we don't somehow change that market based on our comments.

Thanks a lot.

The next question comes from Paula Poskon of Robert W. Baird. Please proceed with your question .

In the rental rate performance for the assets that have LRO and those do not?

We missed the first part of your question. But I think, Leo, is there a difference in the rental rate performance between the LRO the properties and the non-LRO properties.

Correct.

Paula, this is Leo. We obviously piloted the revenue management projects over an extended period of time, as we've been discussing. Clearly, we determined over a period that there is a lift in general to those properties, which is why we're deploying it across the entire portfolio.

Is there any -- are you surprised by what it's telling you, given the severity of the economic downturn? Are you adjusting what it's telling you in any way?

We don't just take the recommendations that come out of LRO and just move without thinking about it? The process of revenue management still involves the executives at the local level. Yes, we use it as a guide post. But the local market knowledge has to be brought into play. And just so you know, the revenue management tools that are out there, they don't forecast out when there's been some big change that's occurred.

In other words, they don't look and say, there's going to be a lot more job losses. You have to bring in your own judgment. We use it as a guide. It's a very good guide. We obviously believe it's very useful, but it doesn't act on its own motion.

Thank you. And secondly, what percentage of your portfolio remains completely unencumbered?

Tom the percent of the portfolio that's unencumbered? Do you have that number handy?

On average -- yes, this is Tom. On average over the years, we expect the unencumbered percentage -- the NOI unencumbered would be about 67%.

Thank you. That's all I have.

The next question comes from Anthony Paolone of JPMorgan. Please proceed with your questions.

My questions have been answered. Thanks.

The next question comes from Scott [Hendrickson of Permian]. Please proceed with your question.

Hi, yes. You indicated a 10% to 12% decline in new rent rate. I actually live in one of your Manhattan properties that's offering about a 15% to what I paid back in August and all lean concessions, it's around 25%. Is this indicative of the magnitude of rent declines we should expect to see over the course of the year as leases roll off? And if so, is that considered material ?

Scott, this is Leo. I would tell you that in the New York properties, depending on which property you're at, we've seen declines of 15% to 20%. I don't know of your specific situation, so it's very difficult. But in general, we've discussed this in the past, it's been more in the 15% to 20% area.

Okay. Thanks.

(Operator Instructions). The next question comes from Scott [Kirk from T-Cap]. Please proceed with your question.

Just a couple of clarifications. Can you give us the dollar amounts for bad debt in December and in the March quarter? And also if you could quantify delinquencies so we could get a sense of the trend?

We don't talk about delinquencies. In the information that I've provided, 28% of revenues for the fourth quarter and 0.9% of revenues for the first quarter is the level of detail the we provide.

In terms of your -- I'm sure there's some seasonality also, just given that it's after the holidays. But is your sense that that number is fairly static, that you're not highly concerned about it ratcheting up going forward? Your numbers look a lot better than some of your peers.

As I mentioned through the call, one, we don't change in any way, our qualifications for residents. We always end up with people with similar qualifications. Do I have concerns about the number? Certainly, I have concerns about the number when the economy is deteriorating the way it has. Longer term, to try give perspective, during the last downturn, it maxed out a 1.1%.

Okay. You don't see this as necessarily being any worse than the last -- not even as bad as the last downturn?

We're not taking a position on that at this call in terms of -- when you say as bad, we'll be giving updated in the second quarter in terms of our overall outlook, and bad debt is just a component of that. This is Bryce. Leslie, why don't we take one more question?

I just had a couple follow-ons.

We'll give you one follow-on. We're just trying to respect other conference calls that are happening today.

Right. It's interesting that all of the south side folks get their queues in and I think this is the only [buy] side guy you've answered. I appreciate you taking the question in the first place.

Please go ahead. We're just --

Just on the occupancy front, what was the guidance that you had given for the year this year?

We did not give guidance on occupancy. We just gave guidance on revenue, expenses and NOI.

Revenue ranges.

There was no occupancy guidance?

No.

Okay. And then -- do you share what your unemployment assumption is for the year?

I mentioned in my remarks that we saw-- we would expect that unemployment -- again, these are not our forecasts. We survey a lot of different economic forecasts and are principally basing it on Moody's economy.com which would predict or project unemployment peaking at just over 10% in the beginning of 2010.

And lastly, and thanks for the time, you gave us some encouraging stats on new move-in rents being static for the first three months of the quarter. Would you care to help us understand how they look so far in April?

I haven't gotten that summary information yet.

Okay. Thank you.

Thank you.

Thank you. And this concludes today's question-and-answer session. I will turn it back to Mr. Blair for any closing remarks.

Thank you, Leslie, and thank you all for being on the call. We're just trying to respect your time and other conference calls that -- it's a busy week this week. Thank you for participating.

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