艾芙隆海灣社區公司 (AVB) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay third quarter 2009 earnings conference call.

(Operator Instructions)

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.

Thanks, Katina, and welcome to AvalonBay communities third quarter 2009 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 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 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 do this information during your review of our operating results and financial performance. And with that, here is Bryce Blair, chairman and CEO of AvalonBay community. Bryce.

Thanks, John. And with me on the call today are Tim Naughton, our President, and 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. In our comments I'll be discussing our third quarter results, and then shift to a discussion of operating fundamentals, investment activity and capital markets activity. Let me begin with a discussion of our third quarter results. Last evening, we reported EPS of $0.72, and FFO per share of $1.09. The FFO results reflect a year-over-year decline of approximately 15%, which is impacted by declines in portfolio performance, as well as increased interest expense driven by the quarter's capital markets activity Our same store portfolio performance continues to decline on both a year-over-year and on a sequential basis, as the impact of the job losses which have averaged over 500,000 jobs per month in the first half of the year, takes it's toll on renter demand and rental rates.

For the quarter same-store revenues declined by approximately 4.5%, and NOI declined by 8.5% on a year-over-year basis. The balance of our comments, Tom and I will focus on three key themes which are driving both our operating performance and investment and capital markets decisions. First, while we expect operating performance to remain weak near term, there are signs that the weaknesses in both the economy and in some of our operating metrics are beginning to moderate. Second, after a year of being very quiet on the investment front, we're planning to modestly increase our investment activity in order to deliver product into expected improving fundamentals two years out. And third, the capital markets continue to recover and we've been very active during the quarter, proving liquidity, extending debt maturities and adding equity to the debt structure, all of which enhances our overall financial flexibility.

We'll be commenting further on each of those topics but let me start first with a discussion of the economy and operating fundamentals. While fundamentals do remain weak and mixed signals persist. There are signs that things may be moderating a bit. In terms of the economy, there are some positive trends. Job losses, while still significant, average 250,000 jobs lost during the third quarter, just down significantly from the average of 500,000 jobs lost during the first half of the year. Conference boards index of leading economic indicators rose for the sixth straight month in September, a good sign that recovery is underway. While the Consumer Confidence index remains low at 48, it has rebounded from its trough of 25 during the first quarter of the year. GDP growth after falling by 3.5% in the first half of the year, turned positive during the third quarter. And though encouraging, employers are not yet hiring, and any significant increase in job growth will likely not come until the second half of next year.

In terms of our portfolio performance, while rental rates do continue to decline, the modest improvement in the economy is translating into improvement in some of our portfolio metrics. Let me highlight a few statistics. Occupancy and availability have improved sequentially and have returned historically to normal ranges. Concessions are down 50% from both last quarter and from the period last year. Turn over, which was higher than historic norms of the last four quarters has now returned to seasonally normal levels. And finally the rate of decline of new move in rents has improved from a 12% year-over-year decline in the first half of the year, to approximately 9% recently. So just to be very clear, we're not saying we've reached an inflection point in terms of our portfolio performance. We haven't. Rents on both new move in basis and on a renewal basis continue to decline, and are expected to continue to do so into 2010. While we are -- what we're saying is that we're beginning to see improvements in some leading indicators. Yet we still have a way to go before returning to positive revenue growth.

The second theme I mentioned was a plan to increase our investment activity. Job losses are beginning to moderate and consensus forecasts are projecting moderate job growth in the second half of next year. While the pace of job growth is likely to be quite modest, there is little doubt it will be met with a severe shortage of new apartment supply. Due to the weak economic and financing environment, new multifamily rental starts are expected to total about 130,000 units this year. Now by way of reference during the '04 to '07 time period multifamily rental starts averaging 215,000 per year, and for next year they're expected to total only about 70,000. This would be a reduction of about 70%.

With modest job growth supporting increased renter demand, an anemic level of new product being delivered, 2011 and '12 will be a year of strong apartment fundamentals. Also we've seen a significant reduction in construction costs, which will likely continue into 2010, will undoubtedly start to turn as the economy strengthens. So far through the first three quarters of this year we've started no new developments. It's a decision we think was prudent given the extraordinary weakness in the economy and in the capital markets. And now given some improved clarity in the economic front, reduction construction not and significant confirming of the capital markets some development communities are becoming attractive and we think a modest level of new development activity is warranted.

During the fourth quarter we expect to begin two modestly sized developments, one of which is a second phase of an existing development community. With these two starts, the amount of construction we'll have underway at year end '09 will be half of what was underway at year end '08. We're currently assessing what our development volume will be for next year. And we'll provide you with an update in late January when we issue our 2010 financial outlook. With that, I'll now turn to over to Tom who will discuss our capital markets activity, and comment on our financial outlook.

Thanks, Bryce. This afternoon I would like to focus on several topics that were covered in last evening's press release. The first is a review of the capital activity for the quarter including the tender that we completed just this month in October. I'd like to recap key balance sheet metrics. And finally add some additional comments on the revised financial outlook for the balance of 2009. As Bryce noted, we really did have an extraordinary quarter for capital activity. Issuing unsecured debt for the first time in three years, redeeming and tendering debt, launching a continuous equity program, and completing asset sales boosted liquidity and mitigated refinancing risk. Excluding the tender, this activity totals about $885 million. And this supports the view that credit and equity markets continue to recover.

So just to recap, we issued $500 million of unsecured notes, we issued 102 million of common stock, sold two existing communities for net proceeds of about $68 million. We then turned around and tendered for $300 million of our unsecured notes. We paid off $103 million unsecured notes at their scheduled maturity. And then finally, we redeemed about $112 million of our unsecured floating term notes. Just some additional color on this activity which centers around the new debt and the tender program. The blended rate and the maturity for the new debt issued is about 5.9% and has a nine-year term. Issuing $500 million of debt while tendering for $300 million of near term maturities allowed the company to enhance the overall new execution of the new issue, while expending duration and mitigating medium term maturity risk, and reducing our interest costs. The number shows this, as the average years to maturity on all of our fixed rate debt is now 9.5 years, this compares to 8.5 years just a year ago.

This quarter's activity and accumulative impact of all of our financing and redemptions over the past year, create interest savings. And to illustrate, note that the weighted average interest rate on all of our debt and preferred stock at 9-30-08 was about 5.8 -- 5.9%. At 9-30-2009, as if the tender was completed, the average rate was about 5.15%. Even while floating rate debt as a percentage of all of our debt is down from 29% in September to just 19% this September. The difference between secured and unsecured debt at the time of our recent unsecured debt issuance was around 50 basis points, well inside the recent 150 to 250 basis point spread that kept us out of the unsecured markets. This offering marked the return to the unsecured markets for the first time in three years and the scarcity of our offerings and remaining debt outstanding helped in the overall execution of the transaction.

Most importantly, this transaction allowed us to avoid additional secured debt and preserves our access to the unsecured markets. Equity issuances during the quarter under the CEP program netted proceeds of about $100 million, $102 million at an average price of approximately $70 a share. This program allows for more cost effective and efficient matching of investment and financing activity, and mitigates pricing risk by spreading the issuance over an extended period of time. This is specially important given the volatility of the equity markets.

Turning to key balance sheet metrics, our current liquidity position is strong, with cash on hand at the end of the quarter of about $777 million. And we have no balance out on our $1 billion credit facility. Our leverage remains modest by industry standards at around 40% of the average of the NAV ranges published for the Company. Fixed charge coverage stands at about 3.1 times. and our communities remain largely unincumbered, preserving our access to the unsecured markets. And our forward projection of liquid needs suggests we can meet our financing commitments well into 2012, based on development activity underway through the third quarter.

Just a couple of comments on our revised financial outlook. For the year we narrowed the range for our expected operating results and expect revenue decline between 3.5% and 3.75% for 2009, with an NOI decline of approximately 7%. It's important to note that fourth quarter will include a charge to earnings of $26 million for the premium paid to acquire the bonds before maturity, such that FFO per share at the mid point of the range is expected to about $3.88. Comparing our July outlook to our revised outlook, the principal changes include about $0.05 per share from operations, offset by about $0.05 from interest in equity sales, and a $0.01 from expense development cost. And of course the charge of $0.33 per share for the tender. And we do recap this reconciliation in our press release last evening.

So in summary, the variety of our capital transactions underscores the substantial improvement in the capital markets over the past year. Capital activity totaled about $885 million was completed, including new debt, other debt redemptions, new equity and asset sales. A stark contrast to the markets just one year ago today. All-in rates on new unsecured rates are at attractive levels. And once again competitive with the new secured debt market. In terms of capital, the visibility into our sources of capital has improved. And we now anticipate late development starts in late 2009, and into 2010 that we expect will deliver into a stronger economic climate. And finally our revised financial outlook considers the continued downward adjustment in rental rates, resulting in 2009 revenue declines of about 3.5% to 3.75% with NOI declining about 7%. FFO per share range of $3.86 to $3.90 includes charges of $26 million for the debt repurchases in the fourth quarter. And that concludes my comments and I turn the call back to Bryce.

Well thanks, Tom. So just to wrap up, as we sit here in the third quarter of '09, we do have considerably more visibility and confidence regarding the next couple of years than we did a year ago. Job losses are slowing, GDP has turned positive, capital markets are firming, and some of our portfolio metrics are moderating. And yet we're still likely a few quarters away from meaningful job growth, and a bit longer to positive revenue growth. However the stage is being set for strong recovery in '11 and '12 we believe. And we also believe we're well positioned to outperform during this period. Our supply constraint markets are objected to outperform follow during '11 and '12. Our investment fund provides us with a $1 billion dollars of acquisition for opportunities. Our development pipeline allows us to deliver new product at a time of little new supply. And we have the balance sheet and the organization to execute this business in a risk measured way. So yes, we're certainly focused on the near term challenges, but we're also focused on preparing for the next phase of growth. And with that, operator, we'd be glad to take any questions.

Thank you, ladies and gentlemen.

(Operator Instructions)

The first question comes from David Toti with Citigroup. Please go ahead with your question.

Good afternoon, everyone. Michael Bilerman is here with me as well. I just wanted to ask a few questions about the decision to embark on new developments. And I'm sure you've anticipated some questions. Given the option to acquire at discounts with upfront yields that may be relatively attractive, how do you weigh that against starting development two years out with probably a more modest initial return?

David, this is Tim Naughton. I would say that new development doesn't necessarily preclude doing acquisitions. I think in certain markets, certain opportunities, one investment strategy will make sense, while another might make more sense. In terms of development starts, I think I mentioned last quarter, we're focused on unlevered IRR. And typically we'd expect to get a premium or would demand a premium over what an unlevered IRR might be on a similar asset for an acquisition. Maybe on the order of 11% plus on an unlevered IRR for development, and perhaps 9% or so for an acquisition. Clearly in some markets, development doesn't underwrite. And in some markets there is a significant discount to replacement cost to buy assets. There are some markets however where yields are above cap rates, and the couple assets that Bryce had mentioned, that is the case.

Both of those deals, we're looking at initial yields somewhere around the 8% range where cap rates would trade in this market somewhere certainly sub 7. And in both of those cases West Long Branch in New Jersey and the Northborough, the second phase of our current Northborough deal, we obviously have pretty good experience with recently completed deals, Tinton Falls in the case of New Jersey, and Northborough one in the case of the Boston deal. And both of those were successful lease ups, all things considered in the 25 to 30 a month range at rents that were around pro forma. And today we're seeing construction costs at about 15% below what we actually built those communities for. And so from our standpoint, there are going to be opportunities,. It's not going to be everywhere where we think development will make sense and other acquisitions will be more attractive option.

Thanks. And then how do you underwrite the risk to your rent assumptions in those. I understand where it makes sense in specific markets, but I would assume you have to assume there is more risk to the top line assumption into that pro forma?

Certainly. It's one of the reasons why you demand a premium to new development over acquisitions. But in terms of the out years, the underwriting is very similar between an acquisition and a development. But in terms of the initial rents, you're right there is more risk in terms of what you're going to be able to achieve on a development than in an acquisition. In the two particular cases I mention, I think the risks are fairly nominal, given that we recently completed and leased up deals in each of those submarkets.

Okay. And then just moving over to the operating side, you guys saw somewhat positive growth on expenses in the quarter. Whereas many of your peers are lowering expenses overall on a comparable basis. Is there something that you -- that is specific to your Company that you're unable to trim? Are you already sort of at a minimum? What is driving some of the expense growth in terms of the components?

David, this is Leo. For the quarter, what drove the expense growth was bad debt, and maintenance related costs. Those were offset by utilities and insurance. Those are the main drivers. I would tell you, when you look at our expenses, I would ask that you look at it over an extended period of time, over the past five years, I believe, our expense growth has been pretty de minimus, more like in the 2.5% range and we're running just above that this time, this year. So I think that we've been very good managers of the expense side of the equation over an extended period of time.

Okay, thanks. And one last question, Bryce. In your opening remarks you mentioned that you're seeing some signs of stabilization, maybe some signs of improvement. Could you talk about some of the markets where you're seeing that, and do you think some of these improvements are sticky?

Well, David, when I said signs of moderation, I was talking about in our portfolio metrics, which are the metrics I was referring to in terms of turnover, in terms of availability, and in terms of occupancy, and then in terms of the new lease rent.

Are there any markets specific, though, that would be driving some of those improvements?

Leo, do you want to comment on specific markets?

Sure, David, I'll kind of group the market into three buckets. First, being New York and DC, those are the most favorable markets we have. And then in the middle bucket, which is more closer to average, it would be in the New York metropolitan area. And then finally, where we're more challenged is clearly on the west coast. So if you were to frame it, that's how I would frame it.

David, if that's you typing away it's coming through.

No, that's not us. But thank you for the detail.

Okay. Sorry about that.

Your next question comes from Rob Stevenson from Fox-Pitt Kelton. Please go ahead with your question.

Good afternoon, guys. Leo, you can talk about the weekly foot traffic and leases signed on a year-over-year basis? Are you seeing the same amount of activity or meaningfully less than you were a year ago through the last week or two?

I mean David, sorry, I mean Rob, for the quarter, I'm going to talk about the quarter first, traffic has -- is down on the order of about 10%. However, leases have remained flat on a year-over-year basis, so as you might imagine, conversion is up. I think importantly though, when I touch somewhat on what Bryce said, through the quarter occupancy went from 95.8 in July to 95.9 in August, to 96.2 in September. And early indications on October are staying in that 96% realm. And from the second quarter to the third quarter, availability, which is kind of a forward-looking measure, it measures the number of leases or existing leases that have given notice for which we have no future lease, or vacant apartments for which we have no future lease, that's come down 125 basis points from the second quarter to the third quarter. And on a year-over-year basis it's down about 50 basis points.

Okay. And then I think that you guys mentioned early in the call that you guys were down like 9% on your rate on new leases. What are you guys on renewals. And also what was -- you mentioned on David's question about bad debt being up in the quarter. Where is it today?

Rob, I'm going to handle the first question and then move on to the bad debt. For the quarter, for the third quarter, new move in rents were down on average 10%. But I'm going to walk you through the quarter. In July, they were down on a year-over-year basis about 11.5%. They went into the upper 9s in August and in September they were down 10% on a year-over-year basis. And just to reiterate, that was while occupancy was rising. On the renewal side, the renewals went from about 2.25 to just below 3%, so they grew throughout the quarter. The good news is that turnover on a year-over-year basis actually declined.

So the difference between new move-in rents and renewal rents, that gap closed. And that's one of the things we talked about on last call and it closed into the historical range, for us historically it's run about 6%, that difference. Moving to bad debt, bad debt ran about 1.3% for the quarter, and it was basically flat throughout the quarter. It was up higher in August. But in general that 1.3%, and that compares to last year at about 0.8%, and the previous quarter at about 1.25%

And then one quick one for Tim. Did you guys look at any significant amount of acquisitions for the fund in the third quarter? And if so, pricing cause you not to go forward, or was it something else?

Well, we are active on the transaction front, Rob, and on the disposition side, as well as the acquisition side. We are working transactions on both sides. In terms of pricing, I would say cap rates have -- are down a little bit, since mid last -- midyear, when really the first transactions were being closed this year, as there was very little done in the first couple of quarters as you know. And I think I mentioned on the last quarter call, that we saw cap rates in the 6.5% to 7% range. I would say today in our markets they're probably in the 6 to 6.75 range, 6 on the west coast, kind of mid 6s as you move east. And pretty similar to what we're -- obviously what we're under right on the acquisition side, since that represents what is going on in the market. We are working on a couple of deals. There is not a lot that's on the market. We anticipate a lot more will come to the market as more transactions close. and we're that much further into the price discovery process.

Okay. Thanks, guys.

Your next question comes from Jay Habermann with Goldman Sachs. Please go ahead with your question.

Hi. Good afternoon. Just switching back to development again. Can you give us a sense of dollar amount you're thinking about over the next -- whether it's 6 to 12 months of new investment? Do you anticipate staying at sort of the $1 billion dollar mark which you're anticipating, or $800 million mark which you're anticipated by year end?

Jay, we have not yet finalized our plan for 2010, and therefore aren't in a position to provide that guidance.

Okay. But I assume that you clearly see some opportunities to expand your development pipeline, but do you see that the spreads versus acquisitions will widen out significantly further? It doesn't sound like your expecting cap rates to rise all that much?

No, I don't think we would be expecting cap rates to rise all that much. As Tim mentioned though on the development side, it is -- it's certainly not uniform in terms of the opportunities by submarket, as well as within in our pipeline. So we are -- we've identified a few deals that we think make sense right now, two deals that we think make sense right now. Undoubtedly a number more in 2010. But the size of that will be decided by a closer look at those development opportunities and assessment of that versus acquisition opportunities. I will say, as Tim mentioned, one does not preclude the other. As you all know, the investment management fund is our exclusive acquisition vehicle with few carve outs, so we can be simultaneously deploying acquisition capital while we're deploying development capital. One doesn't come necessarily at the expense of the other. It is a relevant measure to look between the two, in terms of good investment decisions for sure. But in terms of capital allocation on AvalonBay's balance sheet, they are largely separate decisions.

And I know you touched on the markets briefly. Can you, I guess, dive in a bit deeper into northern and Southern California, I guess specifically the west coast. Perhaps the timing of the recovery in this circle comparing to past cycles, because it sounds like from your comments you're a little bit more optimistic on perhaps Boston, DC, and to some extent New York.

Well, I'll let Leo -- it's not necessarily optimism. But the results today are better in Boston and D.C. If terms of more color today and outlook, Leo, maybe you can provide some color on that.

Sure. Jay, this is Leo. I guess I'll start, and I'll just work down the west coast from Seattle. On the Seattle side, job losses over the last six months were pretty significant. But what we're seeing is that is abating, in other words there aren't a lot of job losses that we're seeing. The Seattle issue, is can we get the supply absorbed. By our estimate, supply in Seattle for '09 will be about 2.5% of inventory and in 2010 we'll still remain relatively high at about 1.7%. So in order for Seattle to come back, we're going to have to see some job growth to get all of that inventory absorbed. Compared to last quarter, some of the challenges that we had were more in the northern suburbs. This quarter it's more in the east side, and by the east side I mean Redmond and Bellevue, where we're seeing product being delivered.

Moving to northern California, in the northern California market, we basically break it into San Francisco, Oakland and San Jose. All three of those markets have had demand side challenges with fairly significant job losses in the high single-digits, as a percent of total employment. And the demand picture that we're receiving would suggest that the job losses are going to continue into 2010, which will be a challenge. On the supply side, we're not seeing a lot of supply coming into San Francisco or to Oakland, certainly below the average for AvalonBay markets. But at San Jose, we're at the AvalonBay average or a little bit more. So if you look at the three markets, San Francisco, demand side, Oakland, more demand side, San Jose has some supply problems but also some demand issues.

In order for this to turn around in San Francisco, we need to see some strengthening in the financial services sector, in the professional business support sector, which would be accountant and lawyers. And in internet where San Jose is more tech job related, particularly in the hardware, and Oakland is some tech but is also real estate. Overall, I would tell you Oakland is the most price sensitive of the markets we have and typically languishes more. San Jose can come back fairly quickly, as can San Francisco once the demand picture turned around.

Finally turning to southern Cal, southern Cal, Los Angeles and Orange County have been more challenged. San Diego has performed better, and that is which bears out in our results. Again, it's more of a demand picture in Los Angeles and San Diego, where the challenge is. In Orange County there is a supply issue. It's by our estimate 1.8% of standing inventory. And again, in order for Southern California to turn around from an industry perspective, we really need to see in Orange County, we need both the tech sector and global trade and then in LA, we need the global trade. So that would give you some perspective on the west coast markets.

Thanks. And then just final question, as you look out to 2010, I know you're not providing guidance at this time, but you can give us some sense of strategy I guess. Thus far you've certainly seen some increase in occupancy, but as you think about rate next year, balancing the tradeoff between the two, how do you think strategy might change next year versus this past year?

I would say that we're going to pursue the strategy we've been pursuing, which is that we are going to maintain a high occupancy platform or a relatively high occupancy platform. And just so you know, that high occupancy platform varies from market to market. We have a bias towards of being more highly occupied than the submarkets. For instance, in Seattle the submarket might be 93.5% to 94% occupied. But we may run our portfolio say 94% to 94.5% with a bias of maybe 50 to 75 basis points. And then we are going to maximize rents from what we consider to be that high occupancy platform.

Okay. Thank you.

Your next question comes from (inaudible) with Morgan Stanley. Please go ahead with your question.

Hello. Most of my questions have been answered. I just wanted to touch on the homeowner tax credit, the line that has been extended to next year. You can provide us some anecdotal evidence on where you're seeing that as an impact for renters moving out to purchase a home?

Sure. You could clearly -- the home buyer tax credit assisted in some of the improved statistics that have come out in terms of home sales, where the volume is up modestly on a year-over-year basis, inventory is down to about 8 months supply. And we have started to see a bit of that in our statistics. As I think you know, we track pretty closely the reasons for moveouts, and moveouts to homeownership was 16% this past quarter, which is up from last quarter, but it's still below historic norms which would be in the low 20s. So I think, certainly as people saw the GDP numbers this morning at 3.5%, one of the principal commentaries on the stronger GDP growth was home sales, as well as the stimulus in terms of the auto sector. So there is no question that the government support in those two industries is helping the economy overall. And with the extension of it, it's going to continue to support the housing industry for a bit.

Moving, as I think to sort of the -- I think posted in your question is what does that do in terms of competition, and also the issue of home affordability. Home affordability, we operate in the homeownership market and a household can choose to rent or to own. And as houses have become more affordable, depending upon the market, they're down 20% to 40%, nationally just versus a couple of years ago the median house price is down about 25%. And after tax home payments, they're down about a third. So clearly homeownership is a more affordable proposition today than it was a year ago, so that's no surprise. So we expect that we are going to continue to see some competition from homeownership, which will push it back to more levels. We just hope that the government doesn't do what they've done in the past and overdo things, and push it to unsustainable levels. We don't think that is going to happen, but stay tuned on that. So hopefully that's responsive.

Thank you so much for the color.

Your next question comes from Dustin Pizzo with UBS.

Hi, guys, it's Ross Nussbaum here with Dustin. Bryce, I think you has said we're a few quarters away from meaningful job growth which I agree with. But then I thought you said it might be a bit longer until we see positive revenue growth out of the Company. Does that suggest we might be still talking about negative same-store revenue growth all the way through each quarter of 2010?

Well, without giving specific guidance, let me talk, Ross, generally. We have said, and frankly this goes back really pall the way to '02 and '03, where we provided color between changes in jobs and changes in revenue for the department sector and for AvalonBay's portfolio. and just like it takes time between changes in GDP, before you see changes in jobs, it takes time between changes in jobs before you'll see that reflected in portfolio performance. So there is a lag of a couple of quarters. Sometime a little bit less and sometimes a little bit more, depending on the significance of the inflection point.

But just frankly as some measure, which many of you have asked in the past, the last downturn, '02 to '03, we saw ten quarters. Some company's a bit less than that, but a couple of years of year-over-year revenue declines before things turned positive. We're only in the third quarter of this today. So hopefully our comments are being heard correctly. We are not declaring victory on the economy, job growth or positive apartment fundamentals, we're simply saying that as a student of our portfolio, we are starting to see some positive signs of moderation. But we think 2010 will be another tough year for portfolio performance.

Okay. And then if I could follow-up on the bad debt expense. I just want to understand, from an accounting standpoint, I'm assuming you have normally have a bad debt reserve running through the numbers, such that this quarter you're saying that the actual amount of bad debt was in excess of the reserve, or was there a writeoff of something from the prior quarter?

Well it kind of works through a reserve, but -- I'm sorry, Ross, this is Tom Sargeant. It does work through a reserve, but the reserve is a short duration reserve. It's virtually one or two months. So you pretty much see bad debt reflected almost immediately in our numbers. So it's not a matter of, did we have to increase a reservoir did we provide a provision for bad debts. It's more almost a one-month lag between the time you would -- someone would go delinquent, and when you would write them off and that would flow-through as bad debt. As we've said bad debt has trended the same way over the last several quarters.

Thank you.

Your next question comes from Mark Biffert with Oppenheimer.

I just had Ross ask this question there, given that you could probably expect rents to decline for the next few quarters at least, does that imply that NOI would likely trough at some point next year, and that we could see a further decline in the NOI line as well?

I'm sorry, we're just getting a little background noise here and it's distracting. What we're trying to do is provide color on the impact on the inflection points that we're seeing in the economy into apartment fundamentals. We're not prepared to give guidance relative to 2010. But clearly if revenues are going to continue to decline, you're going to see NOI continue to decline. And when that peaks, what it peaks at, we're not prepared to provide that guidance.

Okay. And then Tom, quickly, in terms of asset sales, have you guys -- do you have a portfolio identified of noncore assets that you would look to sell, as well to monetize versus issuing debt?

This is Tim. I think I mentioned earlier, we are actually working on some transactions on the -- on the disposition side currently. And those decisions are really being driven more by portfolio management objectives, than necessarily capital needs. And so for the most part, they would represent sort of noncore assets or assets or markets where we just feel like we're over allocated and need to trim a bit.

Okay. Thanks.

Your next question comes from Alexander Goldfarb with Sandler O'Neil. Please go ahead with your question.

Yes, good afternoon. I just wanted to go back to development for a little bit. First, what are you guys seeing on the tax incentive and from the zoning authorities? Is that becoming more favorable to development or less so?

On the entitlement side, I'm sure it's becoming more favorable. The deals that we're talking about starting, they're deals that have been -- frankly been entitled for a while. So it's not really affecting us on those deals specifically. But there are a number of deals. And I think we spoke to this last quarter, that on land where we own where we are going back and replanning. And often time that's requires some relief from some existing entitlements. And generally you're getting very receptive audiences in the local planning staffs of these communities. In terms of tax relief, we'll take it anywhere we can get it from, whether it's on permits or on taxes, whether it be sales taxes or property taxes. It just kind of depends on the tools that the particular municipality has to play with. But generally, they're receptive if you can get some activity going in their local jurisdiction, they're receptive within the bounds of which they can operate.

So are you seeing more TIFF activity, or any of those incentives?

We haven't seen a lot of TIFF's necessarily in our markets.

Pilots.

We have seen more pilots, and tax abate -- I guess tax abatement, but not necessarily because they're public infrastructure. But we'll see some tax relief for some period of time that obviously does have value to the deal.

Okay. And then going to David Toti's question on sort of developing versus acquiring. Long Island seems to be a difficult market to get entitlements to as evidenced in some of prior deals. Is that a market that you would look to continue to try to develop in, or do you see that as more of an acquisition market.

I think we would be open to both on Long Island. I think to us historically, it's been development market because it's hard to acquire there. Assets tend to be pretty closely held in that market, and you just do not see a lot of trading activity. So we've committed a franchise to Long Island to develop assets there over time. We've had great success there.

Okay. And then final question is, Tom, I know you're not giving guidance for 2010, but just on the excise tax because you had it last year, and we have it this year, should we assume to have it in 2010 in our numbers or assume to not have it?

Well, as you said, we're not giving guidance on 2010. And I can remind you and everybody that we do have it in our outlook in 2009. It's something we're going address in the fourth quarter. Obviously, if there is a special dividend that would clears it out for 2009, that would settle it for 2010 as well. So I think you'll know something one way or the other by the end of December, whether or not to include it in your number.

Okay. Thank you.

Your next question comes from David Bragg with ISI. Please go ahead with your question.

Good afternoon. Could you talk about your ability to burn off concessions from lease-ups that stabilized last year.

Dave, this is Leo. In general we are not using concessions. So if a deal stabilized last year, got to 95% occupancy, we're not using concessions at all on those deals. If you look, on concessions for move-in and this is on the same-store portfolio. As Bryce indicated it was down about 50% quarter-to-quarter and year-over-year. And it's running about $200 per move in. And that's about what is going on with the other stabilized properties which would be the lease-ups that stabilized last year.

Okay. Got it. And then a question on this quarter. Was interested in getting some insight on sequential movements in new move-in rents from second quarter to third quarter and into October, and what markets did you see an upward tick?

Dave, the sequential number that we have are, I believe in attachment 5 that give you the sequential market-to market. And just on new move-ins.

Yes, just new move-ins.

We do not have new move-ins isolated. It's something that we are -- as you can appreciate, in smaller markets it would be very difficult to do that because it depends on mix of one bedroom versus two bedrooms and thing as long those lines. I am working to aggregate that for the entire portfolio, but I don't have specific information that I can offer you now.

And what we tried to do, Dave, is get some indication of the trend in that, which is not literally specific answer to the question you asked, but the fact that it went from new move-in rents down 12% year-over-year. As Leo mentioned the trend in the quarter going from 10 to high 9s. That gives you the direction of it, but it doesn't answer the literally sequential quarter-to-quarter.

Right. Thank you.

Your next question is from Michael Salinski from RBC Capital Markets. Please go ahead with your question.

The disposition thing for a little bit, you can talk about the interest for the property that you guy have been marketing out there, and how pricing has come in? We've heard some deals that have been priced in the high 5s, just giving your asset quality, I and just kind of interested in what demand that your seeing and if pricing is coming out at.

That's a good question. Demand is quite intense and I think part of that is a function that there is not a lot of assets in the market. But we've seen a number of offers ranging from low of -- low double digits, call it 12-15 offers, to as many as 40 offers on assets in the San Jose area. In terms of pricing support there is generally 5 or 6 guys there at the end, that are all right there on price. So which kind of tells you that if you had a couple more assets to sell, you could probably sell them at the same price, which is not always the case. So demand is quite deep right now. And then pricing, as I mentioned earlier, I think I would estimate roughly -- a rough range of 6 to 6.75. Some assets have gone below 6 -- even on some of the stuff that we're pricing, and some may be slightly above 6.75, but that's the rough range I would give you.

And with the October asset sale, you guys are done for the year, or is there additional things that could close before year end?

There are some additional things that could close before year end that are in due diligence now.

And switching to the pipeline, you talked about starting two projects in the fourth quarter. and looking at the order there, it looks like you had some -- a pretty sizable cost reduction in there. And I know you've been focusing on trying to cut off costs. Can you talk about where the predevelopment pipeline stands? I know you guys do not quote exact yields, but just kind of from an overall return standpoint, what kind of delta you would need right now to move forward on some of the other projects?

Well, as I mentioned on those two projects, the yields are around 8%. There are a handful of other projects, they tend to be suburban, northeastern, wood frame communities that are around that or approach that yield. There are some communities on the west coast that would be pretty far off that number. And probably aren't going to make sense for at least the next year or six quarters. But the range could be anywhere from 8 to low 5s, in terms of low to mid 5s in terms of current underwriting. Having said that, it's hard to really get a handle on estimated construction costs until your ready to go to market. Those two deals, as you noticed, came down pretty significantly in terms of estimated costs. And that's probably because they're designed, and we're taking them to the market. And we're getting real pricing, and the pricing is going to come down, and will come down significantly. So that's part of the equation as well.

That's helpful. Thank you.

Your next question comes from Michael Levy with Macquarie Research Equities. Please go ahead with your question.

Can you please tell us more specifically what turn over was during quarter compared with the June quarter, and last year's September quarter?

Turnover for the quarter -- for Q3 was 71%. And it was -- in September, it was down 5% on a year-over-year basis, but I don't have the exact number for that month.

No, I'm sorry, I meant -- I guess 3Q '09 versus Q2 09 and 3Q 08.

It was 71% for 3Q '09, 73% for 3Q 08. And just so you know, it's typically is higher in the second and third quarters because of the way expirations work and it's lower in the first and fourth quarters.

Yes. But is it usually higher in the September quarter than the June quarter? I was under the impression they were relatively the same?

Yes. In the second quarter, this is Tim, the second quarter tends to range in the 60% to 65% range, whereas in the third quarter it's more in the 70% to 73% range. So it's higher the third quarter than the second quarter, but those are the two peak quarters during the course of the year.

And on the concessions, I was wondering whether you could break that down for us a little bit more. Are there certain markets, and I know it's been a big push to move away from concession pricing, but are there certain markets where concessions aren't being used at all any longer while they remain prevalent in others? Or is it more a reduction in concessions across the board?

I would tell you the northeast and mid Atlantic concessions are de minimus. In the Pacific northwest and Southern California they would be higher. To give you a range, I'm talking in the $30 to $50 range in the northeast and mid Atlantic on new move ins. And in the $500 range for move-in in the Pacific northwest and Southern California.

Okay. Just switching -- so on that note, when there was talk earlier of lower rents, lower new rents in the high single-digits. Can you please let me know whether this was being quoted on an effective bases or asking rent basis.

Its on an effective basis.

So it includes those concessions?

Yes, it does.

And finally on moveouts to home purchases, it sounds like you're saying moveouts are low now, but you expect them to increase because of increased affordability for home purchases. If that is correct, is this a result more of timing? That is, a tenant decides to move into a new home today, and they can't obviously do that, because they have a signed contract with you guys, but its more as those lease expire, and tenants realize home affordability has increased, they make that switch?

Well, yes. Clearly people are generally not going to break their lease. But I guess my comments are more than -- and just by way of reference, as we've tracked this for a decade now, I guess, Leo, The move outs to home purchase have typically been in the low 20s and moved up to as high as 30%, during the go-go years and moved down to as low as 14% or so. So at 16% it's still at the low end of the range. So my comments were coming from two fold. Just from historical perspective, you would expect things to move back to more normalcy. And when you add to that, the unusual and peculiar time we are in right now, where you have a very weak housing market that is receiving some government stimulus which is impacting home affordability.

Okay. Thank you very much.

Your next question comes from Paula Poskon with Robert W. Baird. Please go ahead with your question.

Thank you and good afternoon. To come back for the dispositions for a moment. The things that you have under contract, now that are in due diligence that you mentioned, if those close by the end of the year, will that put you in the range of your guidance of $200 million to $300 million?

Paula, it will, and there may be -- there may be some assets that leak over into 2009, that could potentially take it just out of the that range. I'm sorry into 2010, or just over that range.

Okay. Great. And among the ones that you did complete the sales, have you noticed any change in the composition of the bidding pool?

It's pretty diverse. I would say it's still probably three quarters funds and private partnerships, if not more. On some recent assets we've had as many as three or four REIT's bidding on those assets. And start to see a little bit more of institutions coming back into the market. But the guys that tend to be the most competitive are the funds and the private partnerships.

That's helpful color, thanks. And on the development completions, in particular on Northborough. It looks like that came in ahead of schedule, it was initially scheduled for delivery in first quarter 2010. Then last quarter it was moved up and now it was early. What is driving your ability to deliver early?

Well, I would say on Northborough, it's a prototype product, and a market where we've built a lot of this product before. So some of that is just efficiencies, learning, some of its -- there's a lot of labor right now. Where they may have put 50 framers on it before, sometimes you're trying to scurry off a few of them. But we're not having trouble meeting schedules, pretty much anywhere right now.

That's helpful. Thanks. And then in terms of leasing traffic, are you seeing any change in the credit worthiness of the applicant pool?

Paula, no, we haven't and we generally do not. In fact, we never change our qualification procedures, regardless of what stage of the economy, and we're still closing at healthy rates in the mid 30%.

And any changes in the trends among reasons for move out other than the homeownership that we've already talked about?

The other trend that I would note, that I think is material, is that reasons for moveout related to rent increase or financial has dropped to 7%, whereas we've said in the past it's historically run from 8% to 10%. And even recently as in the last quarter, it was in that 10% realm.

That's all I have. Thank you very much.

Your next question comes from Chris Sommers with Greenlight Capital. Please go ahead with your question.

Hey, guys. Just a simple modeling question. I was wondering for the fourth quarter what you guys are expecting for interest expense, and then the non established NOI.

Chris, this is Tom Sargeant. We didn't give that level of detail on our outlook. We've given a lot of detail, but we didn't break it down and we never break it down by interest and nonstabilized. I'm sorry, we do not parse it in that format.

Okay. All of my other questions were answered. Thanks.

Your next question comes from Rich Anderson with BMO Capital Markets. Please go ahead with your question.

Thanks, I thought I got blackballed.

Rich, we would never blackball you.

I want to sort of look at the future a little bit differently, so I do not get an answer, we do not give 2010 guidance yet. And I think I can do it. And that is Bryce, you went through some of the positive metrics you were seeing at this juncture, say three or four quarters into the downturn in terms of rents of multifamily in your portfolio. How does that compare to previous cycles, in terms of these positive metrics starting to materialize? Is it happening sooner than it did in 2001 and 2003 time frame? Or is it sort of replicating what you've seen in past cycles?

I would say it's generally similar, but this downturn is different than anything we've seen in our business career. Certainly the last one, particularly for our markets was actually more of a precipitous drop. We were coming off really super-heated economic environment in the Bay area in many of our markets. And super-heated revenue growth, so the fall came very quickly in terms of rental rate declines. The fall has been more moderate this time because of that. But the trends remain the same which is economic growth, GDP. Then you have to get job growth, which we haven't seen yet and then it will translate into apartment fundamentals, and ultimately into collected rent. So that hasn't changed. But the ebb and flow of it, is different each time.

It feels like it might be a little bit shorter though, in duration, is that a fairway of looking at it?

Well it's certainly -- the pain has been spread more evenly this time than last time, where it was more concentrated. And as I mentioned, the fall was just so precipitous in '02 and '03 in some of the markets that we operated in. And we have not seen this -- we have not seen that this time. The second thing is we have -- we are enjoying the benefit of, notwithstanding my earlier comments, a very weak housing markets so we're seeing less cannibalization of our customers than we did last time, is another factor. So there is a number of different issues. But in terms of whether its going to be a little shorter or about the same, I'm just not prepared to get into that level of projection at this point.

Okay. I assume you guys are, or maybe you are not, in the camp of not expecting to see this massive flood of distressed acquisition opportunities. So I guess the first part of the question, a yes or no answer. And then the second is are your banking -- your banking relationships sort of keeping you informed about some of their situations, in terms of acquisition opportunities that might come up down the road?

I'll provide a comment and Tim may want to jump in. I think the first is yes, we are in the camp that we do not think there will be a flood of big distressed opportunities. I think that's just generally more true in apartments, than it is in other sectors, where it may be more true in other sectors and less true in apartments. Having said that, we absolutely are keeping in touch with all of our banking relationships, and looking at trying to pry loose anything that we think makes sense. But because of the continued debt availability in the apartment sector, which you do not have in other sectors, because of the nature of apartment fundamentals. The likelihood of having a flood, does not mean there won't be distressed assets, because there certainly will be, but in terms of a flood, that's now how wore putting together our acquisition plan.

This is Tim. I think you need to sort of differentiate between distressed sellers and distressed pricing. I think certainly there will be plenty of assets that change hands where they were just way overlevered. And the sponsors aren't in any position to recapitalize. And so therefore it's going to require a lender to sort of push it back out into the market, and be recapitalized. Butt there is plenty of liquidity lined up to buy these, so we think the pricing is likely to be more rational than in a quote, unquote, distressed.

Okay. Last question. When you look at the entire big picture between development and acquisitions and the lag affect of development and the risk you take on with development and all of that, what appears to be the bigger opportunity at this point? Development or acquisitions?

I would say it's -- the bigger opportunity is acquisitions. I would say for the most part, most deals still are not going to underwrite, whether they're land that we have options or deals out there in the marketplace. Having said that, as you get into 2010 and construction costs continue to bottom. And you start having more visibility towards recovery, I think new construction, new development, can be pretty compelling.

So it's sort of phasing into development, kind of?

I think so. But I think for the next two or three quarters, it's likely still it be acquisitions.

Okay. Thank you.

(Operator Instructions)

Your next question comes from Michelle Coe with Bank of America. Please go ahead with your question.

Hi, most of my questions had been asked, but I did have one question. It sounds like the improvement in the new move-in rents, I was just wondering do you think we're past the trough, and can you also tell us what the historical trough was?

Michelle, this is Leo. As Bryce said, we're not calling a bottom. We're just saying that certain metrics that we're looking at are suggesting that things are a little better. With respect to the trough, the historical trough, on a revenue basis, it occurred in '02 where we -- and I think it was about the third quarter, where we got to a less than -- just less than 8% was the trough in Q3 of '02. So that gives you some perspective on what occurred historically.

Okay. Great. Thank you very much.

There are no further questions at this time.

Okay, Well, thank you all for participating and I know we'll see many of you in a couple of weeks at NAREITs and thank you.

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