艾芙隆海灣社區公司 (AVB) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to AvalonBay Communities first 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.

Thank you and welcome to AvalonBay Communities first quarter 2010 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There'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 encourage you to refer to this information during the review of our operating results and financial performance. And with that, I will turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities, for his remarks.

Thanks, John. With me on the call today are Tim Naughton, our President, Leo Horey, our EVP of Operations and Tom Sargeant, our Chief Financial Officer. Leo and I will share some prepared remarks, and then all four of us will be available to answer any questions you may have Last evening we reported operating results that were stronger than our prior guidance. The stronger results are primarily attributable to improved portfolio performance. In our comments today, we'll be focusing on what is driving the improving fundamentals, and the implications to our portfolio and investment activity.

For the quarter, we reported EPS of $0.88, which is up almost 50% from the same period last year, an increase that was driven primarily by the gains on two asset sales during the first quarter. FSO per share for the quarter was $0.96 which is down approximately 20% from the prior period after adjusting for non-return items, yet was above the previous guidance that we provided. Now of the out performance during the quarter, the majority came from stronger portfolio performance with the balance coming from timing of various overhead expenses, some of which will reverse themselves in the coming quarters.

In my comments last quarter, I said we expected 2010 to be a year of transition; transition in the economy, from job losses to job gains, and transition in both department fundamentals and portfolio performance. In our prior guidance, we had expected this transition to begin around mid year. However, recent economic data, corporate profits and our first quarter results suggest that this transition is already underway. The transition we anticipated is happening a quarter or two earlier than expected.

Turning to the economy and the positive GDP growth that began in the second half of last year, is now favorably impacting the employment picture. The job market began to stabilize late last year with essentially flat job growth from November through February, and with the March jobs report, is now beginning to show positive growth. The current projections for job growth while still modest, are ahead of prior forecasts used in our outlook at the beginning of the year. And the current forecast of about 800,000 jobs for the year is about double the original projection.

Now the job growth in March will help though, but certainly not by itself sufficient to explain the recent improvement in apartment fundamentals. The improvement is likely due to a combination of factors. First, the household surveys of job growth suggest that actual job growth may be stronger than what has recently been reported. This is likely true, particularly in the younger age segment which disproportionately benefits for under demand. Secondly, the improvement in fundamentals is undoubtedly driven in part by generally rising consumer confidence.

The recent released consumer confidence index rose in April to its highest level since the beginning of the financial crisis in September of '08. I think it's fair to say that most feel the worst is behind them and probably feel their job situation is likely stable. Many have delayed making a major housing decision over the last year or two because of the prior uncertainty regarding the economy and the security of the job market. Historically, this is particularly true in the younger age segments where household formation took a decline disproportionately during the recession.

Now with the generally greater outlook and the likely stream of patients or the parents or roommates, the unbundling is likely to be getting as a typical 25-year-old recent college grad is deciding to finally leave mom and dad's home or his friend's couch and get his or her own apartment. This factor is hard to quantify, but is consistent with what we've experienced coming out of prior recessions and is even more likely now, given the size of the Gen Y age cohort. Another reason for the increase in renter households is the continued weakness in the for-sale market, which is continuing to reduce home ownership rates and increasing renter households. As additional evidence of the weakness in the housing market, home prices remain flat to down and inventory levels remain historically high, and all of this is despite unprecedented government support for the for-sale market.

Our results for the first quarter provide additional evidence that apartment fundamentals are improving and are doing so earlier than anticipated. And I want to share a few data points with you, many of which Leo will elaborate on during his comments. Year-over-year revenue declines in our portfolio peaked in October of last year and the rate of decline has continued to moderate each month since. One-third of our market showed positive sequential revenue growth this quarter, despite a seasonally slow period. For the portfolio as a whole, renewal rates turned positive during the quarter, and overall most of our leading portfolio metrics have or are returning to pre-recession levels. While the tough economic recovery this year will likely still be modest, at least in terms of job growth, it is a recovery and is taking hold earlier than originally anticipated. While our year-over-year revenue numbers will likely continue to be negative for most of the year, we expect to see sequential positive growth during the second quarter.

Overall, as we indicated in last evening's release, we now expect that revenue and NOI for the full year will be better than our prior guidance and will fall outside of the original ranges. We also expect that FFO for the year will likely be at the high end of the prior range. As has been our practice, we'll be providing specific updated ranges during our mid-year update in conjunction with our second quarter release. The earlier than expected recovery affirms our decision to restart our development activity late last year. In anticipation of the recovery, cap rates on existing assets have continued to decline, and are now in the low to mid fives, with some of the West Coast even lower. We believe that beginning developments now while we can lock in attractive construction pricing and delivering into stronger fundamentals in 2011 and 2012, is an attractive use of capital particularly when compared to current cap rates.

Now during the quarter, we began construction on one community in Long Island. This is a 350-apartment home community with a total cost of about $110 million. Given the improving fundamentals in the current soft construction market, we elected to build this community as a single phase versus a two-phase community as previously planned. The combination of attractive construction pricing and the added scale efficiencies of a single phase allowed us to reduce our total budgeted costs for this job alone by about $20 million or about 15% from our prior budget.

We currently have seven community under construction, which included the two communities which we started late last year. You'll notice on attachment eight of the press release that we recorded additional savings of about $3 million this quarter, which brings our total savings from our original budgeted costs to approximately $50 million on the communities under construction. We have and are clearly benefiting from a soft construction market.

During the quarter, we completed the sale of two communities with proceeds of about $83 million, and during April we sold the first phase of a large two-phase community in New Rochelle, New York. The proceeds from this sale totaled about $107 million, bringing the total sales for the year to about $190 million. For the second quarter, we provided FSO guidance of $0.93 to $0.97, which reflects the positive effect of the improving fundamentals, offset in part by the dilutive effects of the recent sales. And with that, I'll pass it to Leo, who will provide more color on our portfolio performance. Leo?

Thanks, Bryce. I will focus my comments on three areas; first, reviewing the financial performance of the portfolio during Q1, second, highlighting the operating trends of certain West and East Coast markets, and third, providing some general comments on the expanded disclosure in our earnings release. During Q1, portfolio performance exceeded our expectations, driven primarily by better than expected revenue performance. Year-over-year revenues declined less than expected, and sequential revenue improved from the minus 2% reported in Q4 to minus 0.3% for Q1. Importantly, sequential revenue turned positive in March, and early indications are that this pattern is continuing into April. This is the first sequential revenue increase since Q4 2008 and is occurring a couple quarters ahead of our original expectations.

Occupancy averaged 96.2% for the quarter, which was slightly better than the previous quarter and 1% greater than the same period of the previous year. These results were ahead of our expectations and allowed us to push rents more aggressively than anticipated. Occupancy increased through the quarter and in April, this figure is trending to approximately 96.5%. The change in new move-in rent improved from approximately minus 6% in Q4 last year to approximately minus 4% in Q1, and was just over minus 2% in March. This pattern was consistent in varying degrees across all AvalonBay regions.

Turning to renewal rents, the portfolio average increased approximately 0.5 of 1% for the quarter. Turnover was 42%, the lowest level in the last four years. These results are encouraging when you consider that renewal offers are extended to residents approximately 90 days prior to the expiration of their lease and as a result, the improvement in renewal rents often lagged the improvement in market conditions by a couple of months. Our expectation is that these renewal rent increases will continue to accelerate in the second quarter.

Given the upward momentum we are seeing in both the economy and the apartment market, our current operating strategy in most regions is to push rents more aggressively. So don't be surprised if you see us come off of these high occupancy levels as we find the optimal pricing points. This is important as we enter the seasonally stronger spring and summer leasing periods when 60% of all expirations occur. Occupancy comparisons during the second half of 2010 will be more challenging so continued improvement in the year-over-year results is dependent on continued growth in rental rates.

Looking more specifically at individual regions, the West Coast continues to lag the East Coast from a performance perspective, but all regions show signs of improvement. In Northern California, Internet and technology companies are hiring. Occupancies are solid at approximately 96.5% in the San Francisco and San Jose markets, and new move-in and renewal rents are stable or beginning to increase. Similar patterns are evident in Southern California and Seattle, although from a more modest occupancy platform that increased substantially from the same period last year to approximately 95.5% for the first quarter.

Moving to the East Coast, average rental rates are flat to up slightly on a sequential basis and occupancies are almost uniformly in the low to mid 96% range. This is generally being driven by job markets that are stabilizing sooner than on the West Coast, coupled with declining new supply. On the job front, the cutbacks in the financial services sector are not as significant as originally anticipated. In addition, employment trends in the education and healthcare sectors have remained stable through this economic downturn, and most of our East Coast markets have a higher share of that employment pool than the US average.

Looking at individual markets, the New York Metropolitan area has experienced some job gains over the last several months, and this has helped drive improvement in new move-ins and renewal rent change. In Boston, recent job growth and limited new supply led occupancy to increase to almost 96% by the end of the quarter with few concessions being offered. New move-in rent change improved throughout the quarter and renewal rent change was positive in each of the three months, averaging approximately 2.5%. The DC metropolitan area continued to perform well. Continued job growth produced positive rent change on leases that expired, but this was tempered by pockets of new supply.

Before concluding, I want to highlight the two new schedules in our earnings release. Attachment four provides visibility into the contributions of the different operating components from assets not included in the same store sales portfolio. Attachment seven provides additional detail on the components of operating expenses for the same store sales portfolio. Expanding on the information provided in the new attachment seven, severe winter weather on the East Coast contributed disproportionately to the increase in repairs and maintenance. For example, approximately $550,000 of the $1 million increase in this category is attributable to snow removal in the mid Atlantic alone, and we expect some residual costs related to the winter weather will extend into Q2. Office operations is driven by bad debt, which was higher than the same period last year, but continued to trend down to more normal levels.

In summary, we expect four factors to continue to support the more favorable revenue trends that we experienced during the quarter. First, improving job growth will boost household formations. Second, demographics will continue to increase rental demand. Third, home buying will remain out of the reach for many renters in our markets. And finally, new supply is being absorbed and future supply is very limited. As a result, we are actively increasing rental rates in virtually all AvalonBay markets to ensure that we capitalize on the improving demand supply conditions and secure the highest rates possible as we enter the peak leasing season. With that, I will turn the call back over to Bryce.

Thanks, Leo. Given the recovery in apartment fundamentals that appears to be taking hold a bit earlier than anticipated, it has impacted some of our investment and operational activities. First, it makes us feel even more confident regarding our decision to restart our development activity, and it will likely result in our beginning a bit more than we originally planned. Secondly, while the recovery should and does make us increasingly interested in acquisitions, unfortunately we're not alone.

As the economic outlook has improved, so too has the buyer interest which in turn has pushed both cap rates and total return expectations down. While we continue to focus on acquisitions we do expect that volume purchases to be relatively modest. And finally as Leo mentioned, we will continue to push our rental rates given the improving outlook and our high occupancies. That concludes our remarks and we will be glad to answer any questions that anyone may have.

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

Good afternoon. You mentioned your -- did I get this right -- that your new revenue guidance is based on 800,000 jobs?

We have not given revenue guidance. We'll be giving updated revenue guidance mid year.

Right.

We believe, based upon the portfolio of performance and our expectations of the year that we will fall outside of the original range that we gave.

Right. Okay. To put it another way, the statement that you would be above your range, is that based on -- because you gave that 800,000 number, it's based on that type of view? My point there is that's still relatively modest if you look at what you did in the first quarter, basically flat job growth. How are you thinking -- as you're rolling over some of the leases that were signed during a very tough period, say, in the second quarter -- maybe another way of asking this is, what spreads on renewal activity do you think you can start to push for as we look at the second quarter?

Paul, this is Bryce. Let me make a comment, and I'll let Leo pick up on the second part of it. The job numbers, to clarify, the 800,000 is looking at the amount of gain throughout the year -- would be comparing in essence, the fourth quarter of 2010 to the fourth quarter of 2009. But as my earlier comments mentioned, what we are seeing in terms of portfolio performance is driven by a lot of factors, more than job growth and that is different than in past times, where we've always talked, and the industry has seen such a very strong linkage between job growth and portfolio performance. This time there's lots of other factors acting it, some would say more so than jobs. To the second part of your question, in terms of strategy on renewals, I'll let Leo address that.

Paul, as we've discussed in the past, we push renewals as aggressively as we can and monitor our turnover, and our reasons for move-out as a gauge to whether we're pushing too hard or -- to ensure we're pushing hard enough. As I mentioned, our turnover for the quarter was 42%. It was down about 5% from the previous year. We are testing much more aggressive rates on our renewals.

Maybe equally as important, our reasons for move-outs in many cases are returning to historical norms, and we haven't seen that reason for move-out related to financial. In other words, that we're pushing too hard is coming forward. To try to give you some perspective on the future, if you look back to 2004, when sequential revenues turned positive -- the first quarter of 2004, they were slightly negative and then they went positive. For the next four quarter, the sequential revenues were roughly between 1% and 0.5%. Does that answer your question?

That's helpful. Thanks. My other question is on development. Obviously the acquisition environment is very competitive right now. As you look at opportunities from the development side for actually new land rather than what you have in your inventory right now, how competitive is the market for for land deals? Have you seen a significant move -- residential land in some markets is up, but how about for multifamily?

Tim Naughton here. On multifamily, we just haven't seen a lot of activity to date. I think you were mentioning with what we're seeing on the single-family home lot side, where it has been quite competitive I believe. A lot of land just hasn't come to market on the multifamily side. We did put three new development rights under contract over the last 90 days. It represents about $180 million in projected total investment; but we're not seeing a lot of competition. There's some competition, but clearly, as Bryce mentioned, a lot less than we're seeing on the improved asset side.

Great. Thanks.

Your next question comes from the line of [Alex Sander from Sandler O'Neill]. Your line is open.

Hi. Good afternoon. Just want to go to the two-part on the development side. First, the increase in the development yield, it's about 6% this quarter in the supplemental packet. Last quarter, it was about 5.5%. Is that solely attributable to the new Long Island deal coming on board, or have the NOI assumptions changed separately? Because rents for those projects looks to be the same. I'm wondering what accounts for the difference in yield.

Alex, Tim Naughton again. It's just a function of mix. Actually, rents and NOI, relatively flat from last quarter. It's a combination of the Long Island deal that you mentioned coming into the bucket, but then also several communities leaving the bucket that had been completed last quarter.

Going forward, is the 6% reasonable, or should we expect that number to bounce around as projects come into the Q?

We would expect that number to move around a little bit, and gravitate probably upwards over time. Most of the deals that we're looking to start in 2010 are more on the order of 7% plus in terms of initial projected returns. Assuming that rents at existing lease ups stay stable as they did this last quarter, we would expect that to gravitate up a bit.

And how close do you guys think you are on restarting high rise development?

Alex, this is Bryce. Tim mentioned last time the deals that underwrite best right now are wood frame Northeast deals. That doesn't mean they're the only ones that underwrite. We do expect during 2010, there will be at least one, maybe two high rises that we will start, but we haven't given specific guidance on which ones those are yet.

No. That's fine, Bryce. It was the color given the apartment recovery starting sooner than anticipated. Just wanted to get a sense of how that filtered into your high rise so that comment is helpful. Final question is just going the supplemental packet, I appreciate the two new pages, but we missed the JV page with the pro rata debt. One, can we see that page come back to a supplemental? And two, can you update us on your pro rata share of JV debt?

Alex, this is Tom. We're going to put that schedule in the Q, so you won't miss it for long. If you can stay tuned for another week, you'll have it in your Q.

I look forward to seeing it. Thanks.

You're welcome.

Your next question comes from the line of [Michelle Coe] from the Bank of America. Your line is open.

Good morning. Good quarter. I was wondering if you could help give us a sense for how much rents are offered at historical peaks. I realize that this cycle is a little bit different from last cycle, but just to give us a sense of this by market would be helpful.

Off of historical peeks, I can tell you that the rent levels right now -- and it's a little bit challenging to do this, because the bucket moves every year. But the rent levels that we're seeing right now are back in the 2000 -- the market rent levels are in the 2006, 2007 timeframe. And the actual percentage, Michelle, I don't have in front of me. I'm sorry.

Just asked another way, we're just trying to figure out how much upside you could see from your current rent levels now. Given probably the effective rent levels of your -- of some your private peers, maybe they've cut back on some concessions so you've seen some growth just from taking back that one month of free rent, which would be about 8%. And then maybe once you eliminate all concessions, you get that 8% and then you have growth on top of that from job growth. It may be up in the mid to high single digits. Just trying to get a sense for what the growth potential is over the next year or two.

Michelle, maybe a way to look at it is I had mentioned, the next four quarters based on our experience previously, the sequentials ran at about 0.5% to 1%. I will take four quarters out last time -- it was running sequentially more like between 1% and 2%. A year out, we could certainly be in the 5% range.

And Michelle, this is Bryce, maybe to add a little bit more color. We appreciate where the question is coming from. We are hesitant to offer much in the way of guidance a year or two out. I would though -- as we pointed to before, [Ron Whiten] is pretty well regarded in the apartment space and does have projections nationally that shows the rental rate growth in excess of 6% in 2012. If you just look at our performance coming out of the last downturn, within a year and one-half to two years of turnaround, we were seeing revenue growth in excess of 7%. That may give you, at least directionally, orders of magnitude.

Okay. Great. Thank you.

Your next question comes from the line of [Eric Wolf] from Citigroup.

Good afternoon, guys. Michael Bilerman is on the line with me as well. Just looking at expectations now versus when you gave guidance in early February, what has surprised you the most, relative to your initial estimates that has led to this better than expected sequential improvement. Is it lower turnover due to job losses, home purchases, increased traffic , less price increases from renewing

It's all of that -- this is Bryce, as I mentioned in my comments. I would emphasize again just the improvement in consumer confidence that while the job numbers for the year are projected to improve, they're still pretty modest. None of that has really yet translated into increased renter demand. Having said that, the household survey of job data which I alluded to, has suggested there has been some job growth happening since December.

We wouldn't be surprised to see the employment data get revised upwards to show that there has been more job growth happening. But the simple fact of seeing such a spike in consumer confidence, I don't think we can underestimate how that impacts people's decision to make bigger decisions. And the rental decision, while it's a big decision, it's not like deciding to buy a home. A little bit of improving consumer confidence, particularly in that young ager cohort which are 75% renters, does a lot to boost demand for rental apartments.

Right.

If I had to pick one factor, it's -- for all of us [analytical] cycles, you like to look for exactly where is the job growth. I think in this case, it's a lot more driven by improving sentiment and people's willingness to feel good about their condition in order to make that rental decision which is not a huge decision, but is an important one for so many people.

Right. You're thinking -- given this -- the better environment that we're in right now, the sequential improvement that you're seeing, as well as the soft construction market, can you give us a sense for how much development you can feasibly start later this year? You mentioned one or two potential high rises as well as some other wood frames. Just trying to think about the overall level, relative to your initial expectation of $400 million.

As you mentioned we did give guidance of about $400 million initially. That number might be $100 million to $200 million higher than that, to give you a ballpark. It's not going to be double that. There's still a pretty significant process to get a deal ready to go in our markets. While we have a large pipeline, there is probably another $100 million to $200 million above that $400 million that we may start this year.

Okay. That's helpful. And just as far as the disposition guidance of $180 million to $200 million, you already sold $140 million to date. Given the strong demand that we're seeing from institutional buyers, do you think you might increase that a bit, or are you comfortable with that $180 million to $200 million.

To clarify, we actually have completed all of that with the sale of New Rochelle, as I mentioned. The $190 million has all been closed. That was our original guidance. We have not made a decision to increase that, although we might. Our level of sales activity, we have varied quite significantly from the past just responding to market conditions. For right now, we have completed all that is planned. And I would say, wait for the second quarter in terms of any additional guidance on that.

Okay. Thank you.

Your next question comes from the line of Jay Habermann with Goldman Sachs. Your line is open.

Thanks. Good afternoon. Bryce, just a question -- sticking with the development theme. Given that the Company has very low leverage today and rents are at trough levels, you mentioned the cost -- how costs have come down, labor costs are down as well. What level of development do you think makes sense in this cycle, given that many of the apartment executives are talking about two to three years of sustained positive NOI growth?

When you say, level, you mean in terms of --

A percentage of enterprise value. Do you think that the Company will increase development as a percentage of total earned price value similar to where you were in past cycles?

Certainly you should expect that it will increase from its current levels. We have said previously, and I still feel that we will probably not get back to the same level that we were a couple years ago, where we were at $2 billion. That, in hindsight, was probably a bit much. And yet we do certainly -- are looking at development optimistically and do expect that we will have a big year in 2011, as well in terms of starts. I don't know if, Tim, you want to add anything to that.

Just that it's still opportunity-driven as well. Obviously you've got the balance sheet and capacity to do more to the extent that it makes sense. But even the deals I mentioned earlier that we're starting this year that are projected to have initial yields to get north of 7%, that's not true that entire development pipeline and not necessarily true of any deal that's being marked today, new land. So much of it's going to be opportunity-driven at the end of the day, Jay.

And just following up on the question on dispositions. You mentioned the cap -- looking at possibly selling in California and perhaps Silicon Valley. You mentioned cap rates in the low fives and possibly even below that. Is this a good time to start thinking about increasing dispositions there?

We've actually -- it's Tim again. We actually have sold a fair bit, particularly in San Jose, over the last few years. We don't feel as strong of a need, just from a portfolio allocation standpoint, to sell as many assets there. Having said that, there's -- interestingly, in northern California in particular, there is nothing on the market. The things that we have seen sold on the West Coast for the most part have been in Seattle and southern California.

At least right now, the market sentiment would seem to say no, it's not a good time. That just may be owners looking at -- the fundamentals doing more bullish about the fundamentals in that market than such that would justify selling today. I think most -- many owners -- volumes are still well down from both long-term averages and peak. And I think most owners are looking at the same fundamentals that we're all looking at from 2012 to 2015 (inaudible), they are pretty positive and are taking advantage of the refinance market and have chosen to refinance instead of taking the asset to market.

Okay. Just lastly from me, when do you expect to see more supply come back to the market, i.e., the private market either from the recovery in credit markets or just optimism about rent growth going forward?

We certainly haven't seen it yet. And the ability to attract construction financing for apartment development today is very, very difficult. Projections, as I'm sure you know, first starts this year to be less than $100,000 which are around a 40-year low. We don't see it picking up in the near term, but we also have learned to never underestimate the entrepreneurial spirit of the private developer and their ability to overbuild. We think right now it will be quite some time, but it's not going to stay there forever.

Okay. Thank you.

Your next question comes from the line of [David Bragg with HiFi Group]. Your line is open.

Good afternoon. On renewal rates, can you tell us what you're asking for today across the portfolio and then break it down by region?

By what we're asking for, what is it that you mean?

What increases you're asking for as people renew.

Rental rate increases are going to vary from market to market. Frankly it's done by individual REIT. As far as what type of renewal increases -- have we been seeing. In the New England area, I told you it's been averaging about 2.5%. In the New York metro area, it's been more or less flat. When you go to the mid Atlantic, it's looking more like 4% to 5%. The Pacific Northwest is still down on a year-over-year basis, but improving. In the most current month, it was just below 3% or minus 3%. And then northern and southern California also have been improving throughout the quarter. And in the most recent months was down about 1.5%.

Got it. Thanks. I was just trying to get a sense for how things are trending versus the first quarter. Just moving on to targeted return hurdles, Tim, could you just discuss if those have moved since the last call for both acquisitions and development on an IRR basis?

Yes. I'm glad you qualified that on an IRR basis. That's increasingly how we're looking at it. On the acquisition side, I would say target returns are in 8% to 8.5% range on an unlevered basis. I think that's pretty consistent with the market. The market may be a little less. On the development side, similar to what we talked about last quarter, I would say target unlevered IRRs in the 10% to 11% range, which would generally back into an initial yield, call it of 7%. But that's going to vary by market based upon the growth outlook for a particular market. For instance on the West Coast, we would expect initial yields to be lower, because we expect higher growth over time on the West Coast over the East Coast.

Right. You mentioned the 7% number a couple of times, but it's fair to say that you're willing to go below that for certain markets where cap rates are lower and you see better growth toward the mid sixes or so?

Yes. I think that's fair where, again, we think we can get an unlevered IRR in the 10% to 11% range, which would equate into our view, about a 200 to 250 basis point premium over acquisition and our cast of capital.

Last question is can you just talk about the New Rochelle sale and the decision there to sell that asset, given the fact that you own or have built one pretty close to it. And second, any idea on pricing there would be helpful. Thank you.

Okay. Yes, we did sell Avalon, The Sound that was developed ten years ago or so. And we still own Avalon Sound, as you mentioned, which represents about 60% of the number of units. We built about a total of 1000 units in that market. A relatively thin market for that number of units. The decision to sell was somewhat strategic in the sense of trimming our position in that particular submarket.

In terms of pricing, I'll just say it's low fives. And I would tell you that that transaction was actually negotiated around the third -- end of the third quarter, early fourth quarter last year. Obviously cap rates have moved since then. But that gives you a sence of pricing and the reason as to exiting that first phase there.

Tim, just one other thing to add is -- because it may not have been clear, but we do continue to manage the first phase that's been sold. While there are different phases, by us managing both, it gives us the ability to ensure that we're acting smartly in the interest of both assets. Got it. Thank you.

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

Thanks. Good afternoon. Can you hear me?

Yes.

Okay. The development yield, again to David's line of question a little bit, at the 7%. Is that on today's rent, or are you projecting rents when those will be coming online?

Rich, Tim Naughton here. Those aren't today's rents. We're quoting yields of 7% and cap rates of 5.5%. It's based upon today's numbers.

Today's numbers?

Current rents.

Okay. And when you address those IRRs, what are you assuming as a terminal cap rate?

Obviously IRRs are sensitive to both growth rates and cash flows and terminal cap rates. We typically use terminal cap rate, a long-term average cap rates over the last nine or 10 years (inaudible). In most of our markets, it will be -- call it 6.25% 6.5% range roughly or about 7500 basis points above where cap rates appear to be trading today.

That's good. Just a question or two on the overall movement in the space. And a lot of you and your peers are saying a lot of the same things about improving fundamentals and what not. But would you argue for or against class A at this juncture? I'm going to guess class A. But the thought being, when people make this decision, they may not leave the couch, as you put it and go and spend $2,500 a month, but may spend $1,200 or $1,300 a month as a stepping-stone into the multifamily. Is that a fair way of looking at it? Do you think you guys can lag at it a little bit from the standpoint of your class B peers? Where do you stand on that issue?

I'll start in and Tim or Leo may want to add anything. Certainly the conventional wisdom has been that Bs are going to outperform in a contracting economy and As are going outperform in an expanding economy. And the flexion point, there's a little built of static there. You've got it potentially -- going in different directions when you're turning, which is about where we are right now. I will say, while that's conventional wisdom, our own experience in our portfolio is that may be less true than many think and that we should never forget that everything trades on a relative basis.

If that guy comes off the couch and he helps out the Bs and the Bs get fuller and start to push up rents, what does that do with the relative difference between Bs and As? It narrows it, and As get stronger and it pushes up. The so-called rising tide lifts all boats, and when the tide goes out, it affects all boats. I don't think there's necessarily just a winner and a loser. I think there will be differences, relatively minor differences at different parts of the cycle. And that's been our experience, as you know.

Within our portfolio, while we are primarily As, we are not exclusively As. We are increasingly tracking the relative performance of what you would consider Bs versus As, and we see a narrow difference between those appetites. Tim, do you want to --

Yes. Maybe to add to that is also what's happening on the homeownership side. Conventionally, as you come out of a correction, homeownership rates expand and that's not necessarily what we're seeing this time around. Nearly 2,000 (inaudible) coming out of correction as homeownership rates were expanding quite dramatically. If anything, we're seeing them contracting on the margin. That marginal renter may be more affluent than we've seen in past corrections, which may explain what Bryce was talking about.

Thank you. That's all I have.

Your next question comes from the line of Jeffrey Donnelly from Wells Fargo. Your line is open.

Good afternoon. Building on that last question, in your respective markets, where would you estimate the gap is between A and B asking rents?

Leo, you want to --

I'd say, it a varies anywhere between 10% and 15%, I would tell you, the gap between As and Bs.

Do you feel that's widened in the last two, three years or has it remained constant?

I think it's beginning to widen more now. I think -- and it depends on the market, but if you were to follow what Bryce has said earlier, it will start widening the market in a stronger position. The deeper into the recovery; it's widening faster. In a market like northern California or Oakland, it's probably still somewhat compressed because it doesn't have the same strength.

Maybe just to add to that, I think it also depends on what you call an A and what you call a B. If you looked at our average portfolio rents, relative to the average rent in the marketplace we're about -- we trade about 20% premium. The average community out there is roughly a B, call it 25, 30 years old, and our average community is somewhere between an A minus, B plus, call it 13, 14 years old, we're trading at a 20% premium, our average rent to the market.

That's helpful. A few of the projects in your development pipeline have seen average rents ratchet up from the fourth quarter, not much, but a little bit. Where are those pro forma effective rents as they compare to market rents today? Should we expect continued growth there as we roll through the year as market rents continue to turn and maybe even concessions burn off?

Jeff, you're speaking to the rents on the list of development communities?

Correct.

Let me just make sure we're all on the same page as to what that is, and Leo may provide some color. Those are not projections. When a community has started, those are the current expected rents. As Tim mentioned, for (inaudible) years, we underwrite on current rates.

Right.

When we started, that's current rent. That rent remains unchanged until we are materially into the lease-up, which we define is nominally about 30% . At the time it gets to 30% or better leased, we update that number to reflect the actual leasing performance that's been in place. As an example, take Fort Green, the community as started, whatever, 18 months ago.

We carry the number until we're about 30% leased. Then a couple quarters ago, you saw the number go down, because that reflected the initial leasing experience at Fort Green, given that the market had turned down for the past 18 months. Now we moved it up this month because our actual leasing performance, not our expectations for the future, but our actual leasing performance demonstrated we're getting those higher rents. I want to make sure we're all on the same page of how using that -- how that number is calculated. It is not a projection of where we think leases will be when the community is

And this is Leo. Just speaking to where things are at and what's expected, and to highlight three things. Number one, rents have been basically flat, and we have been absorbing apartments and that's been going pretty well. In general, the lease-ups will follow how our same store markets are performing. And obviously those are improving so our expectation is that rents will start to improve over time. I will want to point out one fact, though, which is that when you're leasing up a community, all of the leases are new move-ins. You don't have the benefit of the existing residents so that can put some downward pressure.

Ultimately, what we do is we set absorption expectations for each community. When absorption exceeds the expectation that we set, then we start moving rents up. In the first quarter, we averaged about 17 net leases per month per community that was basically consistent with our expectations. As we see more strength and that absorption accelerates, then what we'll do is we will raise rents accordingly.

Just one last question, do you think a lackluster recovery in home prices helps not only demand for rental product on the margin, but could give you guys an edge -- on land deals because single family developers can underwrite better margins in that environment?

I'm not sure. I think -- this is Tim. Think what may be going on on the single family side, the land you're seeing in trading is just going to swap for the most part which has not been -- right now, is a lot of raw land where infrastructure dollars are required.

In fact, I'm pretty sure a lot of the builders are carrying a fair bit of raw land that they just can't justify putting new improvements into the ground. I think what we're seeing first on the single-family side is that really has finished lot inventory clear the market first. As a result on the multifamily, for the most part, is raw land. We're not seeing much in the way of competition that comes to market in single family for those kind of sites. It's going to be your typical apartment developers at least for the time being.

Your next question comes from the line of Michael Salinsky with RBC Capital Markets.

Tom, a quick question for you. Can you talk about where -- if you guys were to go to the market today where you're looking at unsecured and what you are hearing from the agencies?

Sure. In terms of unsecured today, on a 10-year deal it would be right at 5.25%. A similar deal from the GFCs would be 5.5%. That is a big reversal from this time last year when we're talking about the spread being -- it was 350 basis points this time last year. The markets have not recovered. Now we're seeing unsecured 235 basis points inside the GSC secured. It's a good indication of how robust in terms the capital markets for well capitalized companies has been.

Just in light of that and given the prepayments you had during the quarter there, is there a thought, given what we're in terms of pushing -- the ability to push rents in the area that you're seeing inflation and interest rates rise? Is there a thought to start to either swap or term out some of the variable rate debt if you can?

Mike, as you may know, we are a big believer in having a certain leave of floating rate debt during all times in the cycle. There are certain parts of the cycle, you want more floating rate debt, and parts of the cycle where you want less. Right now we're 25% floating rate debt to all debt. That feels about right. Having said that, these are remarkably good times in terms of long-term unsecured debt and you could see us trend that number down. I'm not sure it would be as much by strategy, as the fact that it's very hard to introduce floating rate debt in the capital structure. But if it went down, it wouldn't be a bad thing at this part of the cycle.

In particular, Tom, we have nothing out on the line so it's not like you can term out the line.

Exactly. And it's very difficult. With nothing on the line, it's hard to regulate that number because you're having to do it pretty much with permanent debt. Floating rate bond debt is generally not available today.

You could use swaps, so --

You have to use swaps.

And on the final, just to the rights to redevelopment, given what you're seeing, is there a thought to increase redevelopment more at this point with the ability to potentially push along those rent increases or do you feel comfortable with where you're at?

Mike, this is Tim. I think we talked to this last quarter. As you mentioned, we are increasing it. And we're actually looking to actually double it this year relative to where it's been. There's only so much the organization can take on as well. All things being equal, we could see it maybe increase at the margin, but probably not dramatically higher than what we've indicated previously.

Thank you.

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

Thank you, and good afternoon. Have you continued to utilize yield management software through the cycle and if so, how has it performed particularly during the quicker than expected recovery?

This is Leo. At the end of the year, we had about a third of our portfolio on revenue management software. Today we have about half. We've gone from about 50 communities to about 75 communities, and we found that the software works well in some of the benefits that we anticipated, which is that it reacts more quickly -- are occurring.

All that being said, there is still a lot of interaction between the centralized management revenue groups that sits here in Alexandria and the people on the ground who can provide color and perspective. But I would tell you that the revenue management software has worked well throughout the cycle.

How how much would you say you've overwritten its recommendations?

I would tell you most times we don't override the recommendations. We typically go with the recommendations, but we do take it into consideration. I would tell you, 10% of the time those recommendations get either altered a little or discussed. But in general, they don't get overwritten very frequently.

Thanks very much. Just a house keeping question, any expenses associated with your corporate headquarter move that might have impacted G&A?

Paula, this is Tom. No. That is not happening in the first quarter.

Okay. Thanks. That's all I have.

Your next comes from the line of [David Harris with Gleecher]. Your line is open.

Good afternoon, guys. I have a couple questions for Tim on development if I may. Tim, on the front page of your supplemental disclosures, you made reference to lead certification on the Mission Bay III. Can you tell how much additional costs are associated with construction after you achieve lead certification?

Sure, David. First of all, welcome back. And with respect to Mission Bay, that is our first lead certified deal that we've built. It's really going to be -- any incremental cost is going to depend on the jurisdiction in which you're building. In the case of San Francisco, Seattle, Montgomery County, Arlington County in Virginia, the incremental cost is actually quite negligible. Bryce, you may have some thoughts on this. But I think in those two cases -- in those four cases, I'm sorry, would be somewhere on the order of 1% to 1.5%.

To clarify the reason -- maybe it's clear in Tim's comments is because those municipalities require such a high level of energy efficiency to begin with. They require in some cases, an approval may even require you to be lead certified. Therefore, there's no incremental cost because you have to do it any way. What we do, David, we like many, many companies today have a sustainability initiative within the Company. On each and every development we look at what we are required to do and then what do we want to do collectively.

In some cases, we do only what's required because to do more electively is very punitive, and it can be upwards of 10% of costs. In other cases, we elect to go the extra mile because it's only lay few additional percents. We and others in the industry have done some research on this with residents, and unfortunately today residents are just not willing to pay -- this is a general statement. But it's born out by a survey of 50,000 renters, are generally not willing to pay the additional premium.

That impacts our willingness to invest. It isn't just driven on that metric, but it is an important metric. Our focus in the area of sustainability is looking first and foremost at what's going to reduce utility expenses for us and our residents. A lot of premium initiatives go beyond that to other areas of sustainability which are harder to quantify, and in some cases are costly.

I know this is a relatively new space. Do you have any sense that investment pricing is firmer for lead certification buildings in your apartment area than others?

At this point, no, but it is something that impacts us. You start to think, how might that be five or ten years from now. In other spaces, I understand it is, in terms of class A office. But in terms of apartments, not in any measurable sense at this point.

And again, may be a difficult question to answer, but do you get a sense that municipalities are getting more aggressive, in terms of asking you to achieve a lead certification or is it static as to your status as you see it today?

More aggressive. More municipalities are getting on that bandwagon. And unfortunately, it's a very politically in vogue thing to require and sometimes without a clear understanding of what the costs are.

My final question relates to your underwriting interest rate related to development activity. It's heartening to hear obviously that construction costs are working in your favor, but one thing that's likely to go up over the next couple of years is cost of debt associated with construction. Can maybe Tom talk about that or Tim?

In terms of the cost of construction, I think there is a general view that you seem to share that interest rates are moving up, and it's hard to argue that when you're at -- LIBOR is at 25 basis points. There's not much room for it to go down and to an extent most construction financing is going to be (inaudible) , the rates are likely to go up. In terms of our position, we have a line at prices at LIBOR plus 40, and that rate will be reset some time next year. Clearly our floating rate debt costs will go up as well. The other point to make though is long-term. What we capitalize as a cost of development is based on a weighed average interest rate of all of our debt outstanding, unless there's specific debt to a property. I wouldn't expect that you would see a big increase in capitalized interest. It's just a big base to move over time and you're not likely to see it, but our true costs -- and it would be hard to argue they're not going up in the next couple of years.

Okay. Great. Thanks, guys.

Your final comes from [Anchor McCollough from Greenstreet Advisors]. Your line is open.

Good afternoon. Bryce, on the cap rates you talked about in the low to mid 5% range. Are those for average quality assets or for higher quality stuff in better submarkets?

I'll pass that to Tim.

I think that really represents an average transaction that's occurring in the market today. Having said that, most of the transactions have occurred in the last three quarters have been core deals. Haven't seen a lot of value add or what you might think of as opportunistic deals done, but there's plenty of 15, 20-year-old core that's been included in that.

Great. And underdevelopment rights pipeline, you guys have 29 deals with a total capital cost of $2.3 billion, I think. How many of those could you hypothetically start within the next 12 months if you concluded the deals that didn't make sense?

Half.

Okay. And one more question. you were active on the formal program in 1Q. I think the weighed average price was in the mid 80s. How do you think about additional equity issuance with your share price above a hundred, and can you also share how active you were in similar programs subsequent to the end of 1Q?

The second question first, we were largely inactive. We may have issued a small amount in the beginning. Most of that was issued in the first quarter in March. The whole purpose behind the CEP program, as we call it, is really to match -- fund our investment needs -- our investment allocations with our sources of capital.

Over time, I think you can expect that we're going to be more closely aligned with the expenditures as they go out as opposed to the past where we had -- we generally did both debt and equity offers in large discrete formats. I think over time you can expect as we're developing new assets, we're going to blend the cost of capital and match it at the time that the development is starting or sometime during the development activity based on capital market conditions.

In terms of what we've programmed for the year, we've said overall that we would have about $200 million of capital market activity for the year and we would give an update at the end of the second quarter, in terms of additional capital market activity that we might expect. That could be debt. It could be equity, just depends on what the current market conditions are at the time.

Great. Thank you.

There are no further questions at this time. Turn the call back over to Mr. Blair for closing remarks.

Thank you, Andrea. And thank you all for your time today, and we look forward to seeing many of you in Chicago in early June. Thank you.

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