艾芙隆海灣社區公司 (AVB) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities' fourth quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Following the 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, Director of Investor Relations and Research. Mr. Christie, you may begin your conference.

Shawn, thank you, and welcome to AvalonBay Communities' fourth quarter 2009 earnings conference call. Before we begin, please note 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's 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 refer to you encourage to this information during your review of our operating results and financial performance. With that I will turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities for his remarks. Bryce?

Thank you, John. And with me on the call today are Tim Naughton, our President, Leo Horey, our EVP of Operations, and Tom Sargeant, our Chief Financial Officer. In my comments, I will first be discussing our fourth quarter results, then provide some comments on lessons from the past few years and some summary comments on our outlook for the next few years. Tim will be addressing our portfolio performance, investment activity, and our 2010 financial outlook, after which, all four of us will be available for any questions you may have.

Last evening we reported EPS of $0.40, and FFO per share of $0.64. For the full year our FFO was down approximately 11% after adjusting out non routine items from both periods. The year over year decline in operating FFO was driven primarily by declines in property NOI and the weaker performance of our lease-up communities. Our same-store portfolio performance continued to reflect the weak economic environment, with revenues down approximately 6% for the quarter, and approximately 4% for the full year.

Before turning to our outlook for 2010 I want to take a few minutes to reflect back on the lessons of the recent past. In a year-end publication by Green Street, they highlighted a number of lessons learned from the performance of REITs over the past few years. I thought a couple of the points from the article were especially worth emphasizing. First, they mentioned that companies with simple, stable, and transparent business models outperformed those of their more complex peers. And also that companies with strong balance sheets outperformed their more highly leveraged peers. Both of these have certainly been true for AvalonBay. While we have evolved over the years, our base business model and balance sheet approach remain largely unchanged.

Let me share a few examples. While others chased new markets both domestically and internationally, we remain commit to our high barrier to entry coastal strategy. While others pursued merchant building and condo development opportunities, we remained focused on acquiring and developing high quality apartments in our markets. While others grew disproportionately through debt, we continued to maintain the strongest balance sheet in the sector. Many of the more highly leveraged REITs were forced to issue equity last spring at cyclical lows in their stock price, causing long-term dilution. We avoided these dilutive and untimely equity raises, ultimately issuing new equity later in the year, when our stock price recovered over 70% from its March lows.

Now while our portfolio could not escape effects of the recession, our focused strategy, our consistent business model, and our strong balance sheet served us well during this period. And strength of our stock price performance would seem to confirm the soundness of our strategy. For 2009, our total shareholder return was 44%, versus 30% for both the RMS and the apartment sector. And the last 10 years show similar outperformance, where our 10-year average total shareholder return was approximately 14%, versus approximately 10% for both the RMS. and the apartment sector.

I think it's useful to look back over the last few years as I think many of the past lessons will continue to be true over the next few years. I think we can be pretty certain that the de-leveraging process that began last spring will be a long-term process for many. This process will be made even more difficult as proposed increased regulation of the financial firms will likely result in tighter credit overall. The de-leveraging process will likely favor public over private, as most public companies are less levered and have greater access to a variety of capital sources than their private peers. This is certainly true in the apartment sector, where the private developers are virtually shut down.

And among the public companies, those with the strongest balance sheets and the highest multiples will be less impacted by the dilutive effect of the de-levering process. So from a competitive point of view, I think AvalonBay is well positioned to respond to the emerging opportunities that will undoubtedly increase as the economy strengthens and fundamentals improve. So given that, we see 2010 as a transition year. A transition year for the economy, apartment fundamentals, and our investment activity. In terms of the economy, we've already seen a transition to positive GDP growth. And while job growth is still expected to be modestly negative this year, the expectation is for a transition from job losses to job growth in the second half.

The modest improvement in the job front, combined with continued weakness in the for sale market, and the steady decline in the supply of new apartments, will help fundamentals begin to transition from very weak for most of 2009, to modestly positive by the end of this year. Now to be clear, for the year overall, we expect same-store sales revenue to be down approximately the same as 2009. Yet as contrasted to 2009, where same-store revenue eroded at an increasing rate as the year progressed, this year, we expect the rate of same-store performance decline to be at a decreasing rate.

Finally, we expect this to be a year of transition in terms of our investment activity. During 2009, we dramatically scaled back our investment volume. The combination of the extraordinary weakness in the economy, coupled with the uncertainty created by the financial crisis argued for appropriate caution in terms of new investment activity last year. Given greater visibility now for both the economy and capital markets and our positive outlook regarding fundamentals in late 2011 and 2012, we'll be increasing our acquisition, redevelopment and development of volumes this year to position us for the project improvement in fundamentals.

Let me now pass it to Tim, who will provide some more detail on our portfolio performance, investment activity, as well as details regarding our 2010 financial outlook.

Thanks, Bryce. I'd like to focus my remarks on a review of operations and investment activity for the quarter and the past year as well as providing a little bit more color on the outlook for 2010.

Portfolio performance continued to decelerate in Q4, with same store revenues down by 6% from last year and sequential revenues down by 2% from last quarter. Full year performance was in line with our midyear outlook as same-store revenues were down 3.7% for the year and same-store NOI down by 7%. Operating expenses were up by 4% for the year, driven mostly by higher turnover related and bad debt expense resulting from weak economic and labor market conditions. This past year, total job losses were more than two times higher than originally forecasted. Many of the additional job losses occurred in the first half of the year, which placed greater pressure on portfolio performance in the second half.

While portfolio performance continued to decline in Q4, we are seeing signs that the rate of decline is moderating, and is currently bottoming on a year over year basis. For the same-store portfolio, economic occupancy is stable. Turnover has returned to levels more in line with historical patterns, after having been elevated for much of 2009, and concessions remain low. During last quarter and so far in Q1, we've seen a reduction in the rate of decline for both new move-in and renewal rents.

Year-over-year revenue declines bottomed in October, and have fallen at a lesser rate in each subsequent month since then. As a result, the rate of decline and sequential quarterly revenues appears to have bottomed in Q4. Regionally, the west coast continues to underperform, with Seattle experiencing the greatest deterioration over the last quarter, followed by northern California. On the East Coast, DC and Boston are holding up best in the current environment, driven in part by the strength of the government and educational sectors.

Shifting to investment activity on the transaction front, we bought one asset in Q4 and another so far this quarter. Both of these acquisitions occurred in the DC market and totaled about $100 million. Just under $150,000 per unit and a cap rate in the mid 6% range. Both communities were purchased for the acquisition fund.

We sold three communities in Q4, totaling a little over $100 million. These communities sold at an average cap rate of 6.3%. For the full year, we sold five assets totaling $190 million at an average cap rate of 6.5% and unlevered IRR of 13%. So far in Q1 we sold one asset for $45 million and have two others in the contract totaling another $145 million. Cap rates have been falling over the last three months, as buyers are becoming increasingly confident and more aggressive in their underwriting and target returns. The greater near-term visibility in operating environment, combined with a very positive outlook for fundamentals in 2011 and beyond, has translated into lower cap rates and higher asset value. After cap rates had risen by 150 to 200 basis points last year from their lows, they have since fallen by as much as 75 basis points. And now range from the mid fives to the low sixes across our portfolio.

Combined with declining NOIs, we estimate that asset values are up by around 5 to 10% over last quarter, but still about 25% off their cyclical highs. With a shortage of product to meet investor demand, bidding is becoming increasingly intense with plenty of support at market clearing prices. Clearly, improved liquidity and the capital markets are supporting the multifamily transaction market. As we begin 2010, buyers far outnumber sellers, which will continue to put positive pressure on asset values. In terms of new development, our pipeline continues to decline after having completed almost $0.5 billion in Q4 and over $800 million for the full year. Combined with modest starts of $65 million in 2009, current development underway is now around $800 million, down almost two-thirds from peak volume with only about $0.25 billion remaining to invest.

We did start two deals in Q4 both of these were wood frame communities in suburban northeast markets where rental market conditions have generally been more stable, the projected returns are more compelling and construction costs have declined by over 20% since the peak. In fact, one of the communities recently started is a second phase located in Northborough, Mass, which is budgeted to be built for around 15% less than Phase I on a per square foot basis for just the vertical construction or for the bricks and sticks. This represents only a portion of the cumulative decline that's occurred as we started Phase I just a year earlier.

Yields on current lease-up and recently completed communities remain under pressure. As we've had to use significant concessions and lower effective rents to maintain absorption, particularly at communities at higher price points and with elevated levels of new supply. This is most evident at Avalon Fort Green in Brooklyn, where effective rents are down significantly from initial pro forma. New move-in rents have fallen throughout the New York City market, but Brooklyn is weak given the new supply being delivered there.

Turning now to next year and our 2010 outlook, starting with operations, as Bryce mentioned, fundamentals should begin to improve with modest job growth projected to occur in the second half of the year. Combined with dwindling supply from a reduction in new deliveries of both purpose-built rentals as well as potential shadow supply from new condominiums. While our full-year outlook for same-store performance isn't much different than what we experienced in 2009, the changes by quarter figure to be the reverse of what we saw last year. In 2009, quarterly performance was progressively worse during the year, and in 2010, we expect quarterly performance to get progressively better on a year-over-year basis. On a sequential quarter basis we expect the decline in same-store revenues to continue to moderate and be flat by year end.

Regionally, we expect that Seattle and northern California will continue to underperform the average. The job picture should begin to improve in Seattle faster than most other west coast markets but supply will remain elevated, particularly on the east side. Northern California is expected to continue to lose jobs in the first part of the year and be impacted by the weight of the cumulative employment loss in that region. DC and Boston should outperform again in 2010. Job growth is already begun to turn positive in DC, and the combination of private sector employment stabilizing and falling supply should help Boston outpace other markets.

The outlook for New York and southern California is a bit less clear as both of these regions appear to be in transition. Given the rebound in the capital markets, New York should stabilize quicker than we originally anticipated, as job losses are almost 100,000 less than initially projected. In southern California, the sequential rate of decline has already begun to moderate. San Diego should be the first to recover the southern California markets, while LA should recover roughly in line with national average. Orange County with its dependence on the housing and mortgage industries figures to lag in its recovery.

In terms of investment activity, as Bryce mentioned, 2010 should be a more active year for us. Last year, the focus was on restoring and improving liquidity. As we start to bottom out during the correction portion of this cycle, 2010 could prove to be a good year to put capital to work in the form of acquisitions and new development in certain markets. We are currently active on the acquisition front, and have purchased around $100 million other the last 90 days. Other than the dispositions already closed or under contract, we don't anticipate further asset sales this year. With the broader capital markets continuing to recover, dispositions are a relatively less attractive source of capital, and over the past couple years. When asset sales offered a balance sheet neutral way to tap the cost effective GSE debt market.

We do intend to start some new development in 2010, although the amount should be modest by historical standards, on the order of $400 million. Most of the activity is like toll occur in northeastern suburban markets where conditions are more stable and wood frame communities offer better projected returns. In addition, we're beginning to look at new land opportunities as some landowners and lenders are starting to consider disposing of their holdings, and many of our competitors remain on the sidelines. Our financial outlook includes a rang of for FFO of $3.60 to $3.85 per share, 16% below 2009 adjusting, for non routine items. Driven in part by a projected decline in same-store NOI of 5% to 7%. Projected FFO declines are also being driven by stabilizing development activity from 2009 and 2010, much of which is leasing up at initial effective yields below pro forma.

Our balance sheet is well positioned as debt to total market cap is currently under 40%. Liquidity is strong as we raised over $1.5 billion in 2009 and approximately $3 billion over the last two years. We currently have $300 million of cash on the balance sheet and all of our $1 billion facility available. Finally, the capital markets are largely open, which continues to support our growth plans. Since the fall, we've raised capital through the issuance of common shares, secured and unsecured debt, and asset sales. With most forms of capital readily available at reasonable pricing to the best of credits, our competitive position continues to strengthen as we move towards the expansion phase of the next cycle.

With that, I will now turn it back over to Bryce for some summary remarks.

Thanks, Tim. I just wanted to provide a few additional comments regarding our outlook for the next couple years. As you know, jobs, while not the only factor, the principal driver of apartment demands. Also as we know from historical experiences, actual job numbers can be very different than initial projections. One only needs to look at last year as a remainder of how far off job forecasts can be. In January of 2009, the consensus forecast were for national job losses of about two million, actual losses about 2.5 times as great. We look to a number of third parties, and for 2010, the forecast generally range from about 0.5% positive job growth to about 1.5% negative. We're using a baseline forecast of about 0.5% negative.

And embedded in this estimate is the assumption of positive job growth in the second half of the year. The timing of the forecast is similar to past recoveries as job growth generally trails a turn in GDP growth by three to four quarters. In any event, expected job growth is only one factor in how we assess expected revenue growth. It's primarily a bottom up process where he we look at each submarket, each property's competitive position in building up our own revenue forecast. So as I stated earlier, we see 2010 as a transition year, one where the economy transitions from job losses to job gains or apartment fundamentals transition from weak to modestly positive, and where revenue transitions from sequentially negative to flat later in the second half of the year. But ultimately sustained strength in all three of these, being the economy, fundamentals, and our portfolio will not come until 2011 and 2012, a period where we expect to see very strong fundamentals, and this has guided our decision to increase our investment activity as Tim outlined in anticipation of expected stronger recovery.

So with that operator, we'd be glad to take any questions. Any questions, please, operator?

(Operator Instructions). One moment for the first question. Your first question comes from the line of Karin Ford of KeyBanc. You line is open.

Good afternoon. Could you just talk about your expected returns on the new development starts for 2010 and what the funding plans would be for that capital spend as well?

Karin, this is Tim Naughton. I will take the first part of the question and let Tom take the second part as it relates to the capital. In terms of expected return for new development, particularly for new deals that we may be out in the marketplace looking for, would be north of 7% on an initial yield basis, but just as importantly, in terms of the unlevered returns, particularly given the transition going on and the cycle, we would look for unlevered returns somewhere on the order of 10 to 11%, which compares to core unlevered returns right now on the acquisition market that are in the 8 to 8.5% range.

That's helpful.

Karin, this is Tom. We provided in our outlook a sources and uses of capital schedule, but I can just give you a kind of a thumbnail sketch of this. Basically in 2010, we'll have net cash flow from dispositions after paying the related debt of about $150 million. Capital markets activity of $200 million, then cash on hand and juice the line of about $300 million to $400 million. Then the uses would be investment activity, which would be development, redevelopment, and then our portion of contributions to the acquisition fund, and that would total about $600 million. Then we plan to redeem debt, most of it as scheduled, but some of it earlier than scheduled at about $150 million. And that's basically a thumbnail sketch of our sources and uses.

Thank you, that's helpful. Just a question on Washington, DC market. Any concerns that the government spending freeze that may be coming could have an impact on the positive fundamentals you've seen there?

Karin, this is Leo. We don't see any evidence of that. In fact what we've seen over he the last couple quarters, as Tim has talked about, we've seen job growth, and that is occurring both in the public and the private sectors. So we do feel pretty good about how Washington, DC is positioned and the opportunity moving forward.

That's helpful. Final question is on bad debt levels. Where were they in the quarter and how did the trend look there?

For the quarter, bad debt was about 1.3%, which is down slightly from the previous quarter, and through the quarter, bad debt actually declined. So it came down through the quarter.

Thank you very much.

Your next question comes from the line of David Toti from Citi.

Hello, Michael Bilerman is here with me as well. Just to go back, just to go back on the development issue, did you drop the redevelopment yields from the supplemental this quarter? I wasn't sure if I missed that.

Attachment 10 lists the redevelopment communities.

I said the yield.

Oh, the yields. I think, David, we, did and frankly, think the reason for that is we were finding it was confusing as much as it was helping analysts and investors because the yields that we were quoting were based upon historical costs, which in some cases some of these communities were 10 or 15 years old, that we've held for more than 10 years. So oftentimes an ordinarily community would have a higher yield even if the economics on the incremental capital wasn't really any different than another community which we may have just acquired.

Then just going back to a development again, and a sort of more strategic level, you guys were fairly alone in your peer set in still pursuing development. Internally, how do you weigh choosing to allocate dollars to construction when many of your peers are buying theoretically below replacement cost and really to cushion on acquisitions. How do you weigh those two?

Well, this is Bryce. I will touch on it, and Tim may want to add a bit, but I think actually Tim touched a bit on this when he was quoting our expectations for both initial returns but total returns of development, and the 10 to 11 range versus acquisition as it would be in the 8 to 8.5 range on a total return basis. So we continue to see development as an accretive use of capital. Clearly there are some communities that we began a couple years ago that are leased up in difficult time periods, which Tim addressed, which is causing a drag on our near-term earnings.

But the decision to start now for communities that will be completed roughly two years from now in what we do expect to be strong fundamentals, we think is a pretty compelling opportunity, and one that we have a significant competitive advantage in. Tim commented, and just to put a little meat on the bones, some of the assets we've marketed, there have been 30 to 40 bids object. It's hard to believe that you are getting a terrific opportunity when the competitive market for acquisitions is so hot versus on the development side, if we are one of the only ones building, I can assure we are getting tremendous buys, and we still after pipeline of development opportunities that we can bring to mark in the coming period. Tim?

I think way just add to that that they're not necessarily mutually exclusive strategies from may perspective, David, in some markets it's going to make a lot more sense to acquire, particularly where you are buying below replacement costs, just given the underlaying dynamics in that market and other markets, and I spoke to this, particularly in some of the northeastern suburban market there's an opportunity to be able to develop today and add a value in an accretive manner. So again, I think it' going to be a little bit different solution for each market and opportunity that we see out there.

Maybe if I can -- this is Michael Bilerman speaking, if you think about the $400 million development that you want to start in 2010 you are obviously thinking about what the forward rents are going to be in 2011 and 2012 as you get comfortable with starting that development. What sort of trajectory are you assuming in terms of rents from the current basis, as you compare that to comparable acquisition in your market that you may have more confidence in?

Well, maybe two embedded questions there. In terms of general trajectory, as we've said, for 2010 we still see the trend as down, just at an improving rate, if you will as Tim mentioned. And the 2011, as a flatter year, and for 20 12, certainly not here to give revenue guidance, but if you look to third-party forecast, whether it be Ron Witten or IC Metrics, within our markets is calling for revenue growth in the 6% range in the 2012 time period which we don't think Sun reasonable. In terms of acquisitions, acquisitions are going to experience the same revenue trends during that market period. You say where we may be more confident. I think we're pretty confident that we understand all the market we're buying or developing in and would give an equal probability in terms of our forecast of how those markets are going to perform.

I guess when you're comparing if your acquisitions are at a 6 cap, if that's sort of where an acquisition yield would be, and you are talking about a development at a 7 yield, the 6 is current, that will eventually grow potentially into a 7 versus the 7 being on a risk adjusted basis, you are taking a certain amount of -- you are taking a certain amount of risk in getting to that 7 at that point in time, aren't you?

Michael, just to be clear, in terms of when we're quoting a projected development yield as 7, it's not intended to be a projection into the future. It's based upon how we're underwriting rents in today's market. So the 7 and to use your numbers, the 7 and 6, to use our numbers would be poor like 150 basis points delta, are based upon an assessment of today's market, in both cases clearly on an acquisition, it's a little bit easier to assess the risk just because there's an income profile in place, but by way of example, both these deals started last quarter, Northborough and the deal in New Jersey, we just finished Phase I on the Northborough deal, the deal in New Jersey, we just finished a deal a few miles away in the last year. I think in both cases we felt pretty good about -- pretty confident. It is on an apples to apples basis both in terms of current yield as well as the trajectory of rents that we're projecting in the pro forma.

Last one just on the land, are you assuming your historical land basis, impaired land basis, or market land basis in quoting a 7% or north type of yield?

It's based upon what is on the book. So it is based upon costs. Neither one of those deals are impaired land. Typically they get to the point where land is impaired, it's been an abandoned deal. So I suspect it would be -- you are not going to see many deals that are started, particularly in 2010, that was just impaired in 2009. So I think it is based upon our costs, not based upon new markets.

Okay, thank you.

Your next question comes from the line of Alexander Goldfarb from Sandler O'Neill.

Just want to continue on the yield conversation. Thinking more about specifically in New York where ground leases have have been a way that you guys have pursued development, what would you think that the current yields or the required yields for you guys to start a new deals, whether it's fee simple, then if it's a ground lease deal in New York?

Well, generally, we would look to try to get a higher yield on a ground lease, just given it's not as attractive as owning the property fee simple, generally. Depends on the terms of the lease. But today, it just doesn't make sense to start a deal in New York based upon the economics. We're generally looking for, as I mentioned before, around 7% on a going-in basis, maybe a little bit less in a market that we think has got a better growth profile over the next four or five years and some where in the 10 to 11% on an unlevered return. So we'd have to convince ourselves based upon a reasonable set of underwriting that that's what the economics look like on a go forward basis.

And what about the return on if it's ground lease? So if the it's 7% on fee simple on a ground lease you'd be looking for what?

I don't want to parse it too much but a little bit of a raodmap. Typically we've looked for 40 to 50 basis points premium on a ground lease. It depends on whether there's buyout rights, whether there's reappraisal rights, it's just a function in terms of what the economic impact of that ground lease is to the deal.

Okay. And then the second question is just given your guys proximity to DC and how important financial services are to your tenant base, have you guys stepped up your government relations program?

Alex this is Leo. Do you mean are we targeting more the marketing to --

Just sharing with some of the politicians down there trying to balance out the populist versus the economic drivers of your markets, specifically New York, Boston, San Francisco, where there's a lot of financial services that drive those economies. The comments that come out are certainly not helpful.

Andrew, I think that the honest answer is, no, that's not something we're personally taking on as a challenge. Obviously there a number of industry groups we participating in lobbying efforts that are intended to help our industry and help the markets we're in. But AvalonBay is an individual. We're not out pounding the pavement, trying to affect public policy to help our individual markets.

Okay, thank you.

Your next question comes from the line of Michelle Ko from Banc of America. Your line is open.

I believe you mentioned earlier that over the last 90 days you have closed on $100 million in acquisitions. Can you comment a little more on the details around that and also I believe you mentioned that you were interested in some land opportunities. Can you tell us what markets you're interested in?

Sure. This is Tim again. In terms of the two deals, as I mentioned in my prepared remarks, they both were in the DC area. One was in Fairfax County, the other Montgomery County. Both wood frame communities. The one in Montgomery County, four years old. The one Fairfax was in the Fair Oaks submarket. 20-year-old community that had been renovated a number of years ago, those were priced in a different market. As I mentioned, cap rates have moved. They wouldn't trade in the mid-6s today, they'd trade at something 50 basis points south of that would be my guess. But that's anything else that you were interested in hearing specifically on those two deals?

I guess if could you comment on, are you seeing more assets for sale today versus over the last month or two also, and --

A few more. Sort of going back to 2009, the first half of the year was dead. Nothing happened, and it wasn't until the fourth quarter that you started to sea some activity go to closing. Some deals were brought to market in Q3, then some closed in Q4, but looking back at the multifamily transaction market in 2009 to give you a little bit of perspective, peak volume was in 2007, about $90 billion. We closed just a little over $10 billion, in 2009. Most projections are that 2010 to 2011 will be more in the 20 to $30 billion or $40 billion range, below long-term average, still 60 or 70% below the peak, but relatively consistent with what we saw back in 2002, 2003, or the last correction time period.

Where are you looking for land opportunities?

We're looking at really most of our markets right now, most of our markets. Now, it's not every submarket within that market. Most high-rise or concrete construction simply doesn't underwrite. It's tending to be wood frame, garden, or wood frame with some structured parking element to it, but tends to be a little bit more of suburban or suburban infill type of location that are underwriting the best right now. That's a function of the wood frame as we've seen, the construction costs come off more than we've seen that happen in the concrete and in addition, land values traditionally have been a bigger percentage of your total development costs, so as land values have started to correct, you're starting to see more improvement in the economics of those deals.

One thing I would adjust to clarify when we say we're looking for land, please remember that even if we found a piece of land that had been permitted, we'd likely be replanning it which would take a year to two process. If it's unentitled, it would take, average in our markets is three or four years, so we're talking about delivering product that's five years out.

Lastly, one of your peers recently purchased some properties in New York City at a 5.5 cap rate. I was just wondering what you thought about the pricing of the deal and if you could give us a general sense for what replacement costs are today in your mind.

I'm not really going to comment on the valuation. But in terms of replacement costs -- I will say in terms of cap rates, that's what you're seeing in the market. Mid-5s. In terms of replacement costs, I think that was below replacement cost, a little over $500 per rentable foot, which I would think replacement cost would be north of $600 in that market today.

Thanks very much. Next question comes from the line of Jay Habermann from Goldman Sachs.

Good afternoon, everyone. Can you talk about which of your markets you think rents have effectively bottomed at this point, or actually you might see an increase by the end of the year?

Jay this is Leo, I'll give you generally a sense of the markets -- the markets we feel the best about are the major markets that we're in, and we kind of group the markets into three buckets, the ones where we could see more positive results are basically Boston and D.C. Moving to stuff that's more average to the outlook that we gave would be in New York metro area, and then the marks that are more challenged would be the western coast markets.

Can you comment on renewals by market? Is the trend similar in terms of flat to modestly higher renewals rates in Boston and DC and obviously continued pressure in northern California, Seattle?

I'd say generally that's the way it works, Jay. When we have more pressure and with the new move-in rents are under more pressure than it puts more pressure on the renewal rents. But we continue to see a situation where the renewal rents are more favorable than a new move-in situation on a year-over-year change basis, and bringing information current in January renewal rents across the portfolio are almost flat.

How does that compare versus new leases?

New leases are down about 6% which speaks to the same balance I talked about last quarter which is historically, the difference between a new move-in and renewal historically has averaged about 6%. But in the most difficult market conditions, it was much higher than that, and in the strongest part of the market, they were one on top of another.

And you see that closing by the end of the year?

Don't know for sure. Certainly we see the markets improving in the back half of the year that toward the end of the year we move to flat sequentially, and we'll continue to push both new move-ins and renewals as appropriate.

Just a question on the value-add fund, can you talk about the cap rates for the transactions, you mentioned 6.5% dropping to 6. Can you speak to the dollar investments today in terms of are you investing in these assets in terms of enhancing yields on a go-forward basis?

Well, about the assets we purchased, in one case it's only four years old so it really doesn't require any capital. In the other case, it was renovated about six or seven years ago. Just a modest amount of capital just in terms of remerchandising some of the common area spaces.

I guess I was thinking about your investments going forward. Do you see that as a better use of capital versus paying what we're seeing now, mid-size for some of the higher quality assets?

It's hard to say, because most of what's being marketed today has really been poor, it hasn't really been in the need of capital. I think there's a general sense in the marketplace by sellers that in the marketplace by sellers that buyers aren't as interested in that kind of investments. I think that could change in 2010 as there's more demand for product that people will be more aggressive in terms of looking at more value added opportunities, and it's really going to be a case-by-case basis in terms of what we think is the better use of capital.

Maybe to add one thing to that, Jay, Tim, you may just want to comment generally, that our redevelopment activity overall has definitely ramped up in 2009 and is expected to continued to grow in 2010, because in general whether it's in the fund or just our own portfolio, we do see that as a good use of capital, particularly given our outlook over the next couple years. So our volume of redevelopment activities from 2009 to 2010, could you just summarize?

Well, we anticipate redevelopment about doubling in our owned portfolio in 2010 relative to 2009. So where the focus in 2009 was largely in defensive investment, given where we are on the cycle rate now, we're looking to do invest in more offensive opportunities even within our own portfolio. So that's largely what's driving the doubling of redevelopment activity in 2010.

Final question. You mentioned turnover rate higher last year. What specifically was that rate, sorry if I missed that.

The turnover rate for this quarter was 46%. For the year was 57%. So it was down quarter over quarter about 6%. But for the full year, it was up about 4%, so first half of the year, and I think I talked about this on the last call, for about a year period, it was up 5 plus or minus percent. Starting tin third quarter it started to return to more historic levels, and in the fourth quarter we see it that way also. And taking it even a step further, the reasons for move-out have returned to historic norms, which bodes well for the earlier discussion about what's going on with renewal rents and potentially new move-in rents as well.

Very helpful, thank you.

Your next question comes from the line of Michael Levy from Macquarie. Your line is open.

Thank you very much. Let me get the numbers for turnover straight. Did you say 46% for the fourth quarter of 2009, and 57% for the full year 2009?

That's true, Michael.

May I ask --

Just to be clear, that is typical patterns because we structure our lease expirations in almost a bell curve pattern where there are more lease expirations in the second and third quarter, and when I give you a number like the fourth quarter number it's just the number of move-outs annualized. So typically it's down much less in the first and fourth quarters, and it's typically higher in the second and third quarters.

Of course. And what is the fourth quarter 2008 number?

52%.

52%. Okay, great. If I understand correct whale you said earlier, it sounds like a big reason why expenses moved higher for the year was the increase in the turnover. And that expenses are also projected to be flat in 2010. So if turnovers are now closer to historical levels, why is Avalon not more bullish on its abilities to reduce expenses? Is there something else going on, or am I missing something there?

Well, Michael, for 2010, the outlook that we gave I believe was minus 1 to plus 1, the midpoint at 0, so flat. I can tell you the factors that are driving those expectations are one that we expect, bad debt, which was up during 2009 to decline as the job market improves, secondly, we expect maintenance and turnover costs to come down, and that's going to be offset by some concerns that properties taxes are working against us. The other categories are plus or minus.

Okay, so the turnover in the taxes sort of negate one another, it sounds like. So regarding the assets you have in the pipeline to be sold, was location of those assets mentioned earlier in the call? And can you mention them now if they are not?

No, they were not, and we typically don't disclose specific assets.

Thank you.

Your next question comes from the line of Michael Abramsky from RBC Capital. Your line is open, please proceed.

Good afternoon, guys. Just a quick question as you're putting together the guidance for 2010. How sensitive is your NOI forecast to fluctuations in employment growth or lack thereof?

It's actually not as sensitive as one might think. We've run it -- I gave you the range of forecast from mildly positive, 0.5% or so positive to 1.5% or so negative. That certainly moves it, but not as much as you might think in that A, a lot of the rent stream for 2010 is baked in. It's leases that were signed in 2009 Secondly, as our experiences have proven out, similar to a lag between GDP and job growth there's a lag between job growth and revenue growth. So if jobs were to start to to turn immediately now versus in the second half of the year, greater growth in the second half of the year is really going to be felt in 2011, not 2010. It might affect the revenue number by 50 basis points, 75 basis points. It's not going to make the range that we gave of negative 3 to 4.5%, it's not going to make that positive if the numbers moved by a percent or so.

That's helpful. Second of all, the $380 million of development starts, are those pretty well evenly weighted throughout the year, and in terms of mix, is there any particular market that you're bullish on at this point starting a development, versus you're going to shy away from, or is it pretty much across the board?

Well, I think as Tim mentioned, the developments that make most sense now have typically been the suburban wood frame communities, and in the markets that are currently feeling the least pressure. That typically is the northeast. So that's where a disproportionate number of our starts would be, and they're more back-ended than front-ended, both just trying to not get too ahead of ourselves in terms of the recovery as well as just the timing of the getting the deals ready to start.

Okay, that's great. And then just a final question. In terms of the excise taxes, is that an issue in the past if there's no excise tax issue potential for 2010?

Mike this is Tom. Correct. We don't anticipate an excise tax in 2010.

Okay, thank you.

Your next question comes from the line of Dustin Pizzo from UBS. Your line is open.

My question has been answered, thank you.

We like those.

Your next question comes from the line of Paula Poskon from Robert W. Baird. Your line is open.

Thanks very much. Good afternoon. I might have misheard this. I thought I heard Tim say in his prepared remarks that you contemplate no further asset sales this year.

That's correct other than the $145 million that's currently under contract that has not yet closed.

In the attachment 15 where it says 180 to to 200, is that contemplating something else?

We have already closed $45 million.

That's incremental.

190, and that's midpoint.

Great, thank you very much.

Sure.

And what are your expectations for acquisition volume getting done in 2010?

We didn't give formal guidance. Part of it is a little bit of -- it's going to be a function of how much product comes to market. As I mentioned in an earlier question, volume is down by almost 90% in 2009 from 2007. So while we expect to the go up, it's hard to say by how much. But try to give you a sense in that we were able to close $100 in the last quarter, whether that's going to be an appropriate run rate is really going to be a function of market opportunity and total volume.

Given your view on the DC metro area, how are you thinking these days about your parcel in Tyson's West given the metro expansion activity is well underway?

Well, it's an attractive site relative to where one of the new metro stations will be. As you probably know Metro's -- it's three years away. Frankly, that say it is probably not three years away from delivering, so from a timing perspective, we feel pretty good about it. And for now we're just continuing to run it and lease it as a improved property.

Okay, thanks. And just curious, being here in the same backyard, what is impact is in your first quarter guidance for snow removal and the obvious spike we've had in severe weather?

This is Leo. While my kids celebrate every a snowstorm comes, I am not thrilled about it. It is one of the markets that we do not have a contract, that we do time and materials. To give you some perspective, in the fourth quarter, we were in excess of budget by about $135,000, based on that big storm that we had. Obviously if this weekend produces a similar type storm we're likely to have similar type results.

That's helpful. I appreciate that clarity. And then just lastly, on this call last year, Leo, you indicated expectations for CapEx for home to be in the range of 600. But attachment seven came in probably about half that, so what do you expect for 2010?

Well, that's a great question. In 2009, we focused our efforts and made sure that we took care of all the deferred maintenance that was out there, but there was certain asset enhancement that we didn't do. We did the planning on but we didn't accomplish in 2009. You had also, if you look at the expenses, I mean, the expenses for the year were up 4%, and that was driven a lot by maintenance related costs, which were higher on a year-over-year basis. So when you take both of those things, we did a good job of taking care of the communities. In 2010, we expect the CapEx number to be around $700 per apartment home. And when you combine 2009 and 2010, you get back to that run rate of around $500 that we've talked about it I believe that 2007 was around $400. 2008 was around $500. In that general area.

So just, Paula this is Tom Sargeant. Just parsing this a little bit, we were behind a little last year. We're going to catch up in 2010. Long-term average has been in the $500 per unit range. We are reinvesting in our assets, expecting that we will recover, our revenues will begin to grow in 2011. And so in terms of looking at long-term averages, that $500 has been a pretty good number if you just balance out the years over time.

Great, that's very helpful. That's all I have. Thank.

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

I guess, is it okay if I said my questions have already been answered? They have, thank you.

Thank you, Rich.

That's my question.

Your next question comes from the line of Dave Bragg from ISI Group. Your line is open.

Good afternoon. Could you help me reconcile a couple of things on development spending? First on page 18. You have total capital costs invested during 2010 of about $228 million. I'm just trying to reconcile that with on page 22, your $450 million to $550 million cash disbursed for development communities and land. Is the difference potential land purchases or am I missing something else?

Dave, I'm sorry, page 18, 228?

Yes.

I think that that's just really capturing what's already been started and committed, where as the guidance for the full year would also include the deals that we anticipate starting in 2010, along with land purchases.

Okay. And just trying to get a sense of the magnitude of potential land purchases. Could you talk about that and also your view on discounts to peak lands pricing?

Sure. In terms of the land purchases I would have in the budget, really just be for deals, really twofold for deals that we have under option that we intend to start this year, along with remaining land that we have under a -- an agreement, really a lease agreement in Brooklyn where it converts to fee at the seller's option. So I think in total, we're talking about maybe $100 million, including the Brooklyn land, and in terms of new land, relative to peak pricing, it depends on the market, we've seen land correct by well over 50% in some markets. In other markets, it's held its value, maybe 20, 30% off.

Okay, thank you.

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

Thank you. You guys touched on some of the drivers to your expense growth for AvalonBay, but I was just curious, if 2009 expense growth, it was higher than most of your public peers, and I was just curious if you had stepped back and looked at how you all performed on that front relative to them and had any sense as to what the difference was.

Tony this is Leo. With respect to looking at our peers, absolutely, we do. Expenses for the year were 4%. That's going to be above the industry average. But if you go back five years, I think what you would see is that our expenses have run in the low 2% range, whereas our peers have run on average at 3% plus. So for 2009, ours were higher.

They were higher due to a couple of issues. One was bad debt, the other was the maintenance related expenses. Then frankly, some one-time issues that occurred in 2008 that elevated our 2009 results, to give you an example there were two big tax appeals that were successful in the fourth quarter of last year, which depressed the 2008 and forced 2009 up. Then I think if you look forward, assuming we perform consistent or relatively consistent with our outlook and you take 2009 and 2010 together, we would still be that in low 2% range, and over a seven-year period, I would say those results are as good as anyone has produced.

Okay. And then my other question was just in the press release, you made a comment about the potential for future impairment charges resulting from the fact that you guys were in the development and value creation business. And I'm just curious, hadn't seen that before, what compelled to you put in that there considering you've been in those businesses for awhile now.

Well, Tom, you may want to add something, but just as a general com men, yes, we have been in that business for a long time. We expect to remain in the business. It's just really a reminder that nobody in our sector has as large a development pipeline as we do. And while there are, including this quarter, other companies who are announcing additional impairments, it's just a reminder that it is a nature of the business that we're in, and when you've got another couple billion dollars of potential development rights, we know of nothing today or would have to be impaired and announced, but as we work through these deals over the coming years, it's just part of the business we're in. So we just -- disclosure is our friend and we thought that was an appropriate reminder.

I have nothing to add. That's spot on.

Okay, thank you.

(Operator Instructions). Your next question comes from the line of Paul Morgan from Morgan Stanley. Your line is open.

Hello, this is Saroop with Paul. Most of our questions have been answered already. One quick question. Some of your peers reported increase in move-out due to home purchases in the fourth quarter. Just wanted to see what trends you have been seeing and any specific markets.

I had some difficulty hearing your whole question. That I believe what you have asked, and this is Leo is what percentage of our move-outs were attributable to home purchase, and in the fourth quarter, that was the number one reason for move-out. It was slightly over 18%, and just to give you a perspective, historically, it's run between 20 and 25%. So it's on the low end of the range right now. Is there some other question that I need to answer?

No, that's it. Thank you so much.

Your next question comes from the line of David Toti from Citi.

It's Michael Bilerman. Just in terms of same-store pool, I know that's going to be reset for 2010. What percentage of, I guess if we looked at the fourth quarter NOI of $135 million what percent of that is now considered same-store for 2010?

I'm not understanding the question.

You reset the same store pal once a year.

This is Tom Sargeant. Why don't you call me off-line, and we'll get that you number. We don't have it in front of us, but I understand the question. Be happy to answer it. We just don't have that information in front of us.

Tom, it's Michael Bilerman. I think you talked about in prior quarters about evaluating whether, just given how large the non same-store pool has been about providing some additional disclosure. Where are you in terms of that thinking today?

We're considering expanding our disclosure in 2010 for the first quarter to give more color on that, and so I'd just say stay tuned for additional disclosure in 2010.

Is there a way to think about, to put the down 5 to down 7 to context, I assume now it's the assets that stabilized in 2008 that are now going to be part of 2010 pool, that all the assets that stabilized in 2009 are still not part of it yet, because they wouldn't have been there as of January 1st.

Right.

is there something in that the 2008 stabilizations or the size of the amount that stabilized in 2008 that is having a depressing or to the other effect, maybe because of those leases you'd have to induce people to get in at that point, is actually helping same-store?

Based on the 2010 -- based on the 2010 buckets, if you were to quote Q4 2009, and our results for revenue, for instance, the minus 6.1, when you go to restate it under Q4 under 2010 buckets, it is slightly improved. So it's improved on a year-over-year basis slightly.

So that the 2008 stabilizations are not showing as big of a decline than the other part of the same-store pool. Part of the 2009 same-store pool.

It's a variety of markets. It's hard to make that generalization.

It's a very marginal difference. Just to clarify, it's not just the communities that haven't been -- the lease-up communities that haven't been stabilized. It's communities undergoing redevelopment, therefore we don't feel as a fair comparison we don't want to have any, quote, bought revenue in that same-store basket. So as our redevelopment activity increases, as Tim mentioned, it also prevents that same-store bucket from increasing because it's not an apples to apples comparison.

Right. The development piece, you had almost $800 million complete in 2008, that the redevelopment. As we're trying to think about the negative 5 to negative 7 for 2010, we're just trying to understand the dynamics of total portfolio versus same-store portfolio. But I guess, Tom, we can follow up off-line on that. Thanks.

We have no further questions in queue. I turn our call back over to Mr. Blair for closing remarks.

Well, as always, we appreciate your interest and attendance during the busy earnings time, and we know we will see many of you at upcoming investor conferences, so thank you.

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