艾芙隆海灣社區公司 (AVB) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to AvalonBay Communities second quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks by the Company, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this 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, Lisa, and welcome to AvalonBay Communities second 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'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 attachments with definitions and reconciliations of non-GAAP financial measures and other terms which may be used in today's discussion. The attachment is available on our website at www.avalonBay.com/earnings and we encourage you to refer to this information during your review of our operating results and financial performance.

With that, I would like to turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities for his remarks. Bryce?

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. Tom and I will share some prepared remarks and then all four of us will be available to answer any questions you may have today. In our remarks I will be highlighting our results for the quarter and will be discussing our outlook for the second half of the year as well as some thoughts on 2011 and 2012. Tim will be addressing both our portfolio performance and our investment activity.

For the quarter we reported EPS of $0.61, and FFO per share of $1.04. Both the EPS and FFO were above the updated financial outlook that we provided in early June due primarily to better than expected performance on the expense side, most of which is timing related. Our revenue performance both on a year over year and sequential basis continued to show significant improvement. Our same-store sales portfolio showed sequential revenue growth of 1.3% for the quarter with four of our six regions showing positive growth. This is our first quarterly sequential growth in over a year and a half and is consistent with our recently updated financial outlook. In January, when we gave our original guidance, we stated that we expected 2010 to be a year of transition. One where we would see improvements in jobs, department fundamentals and same-store sales performance. In June we released an updated outlook raising our estimate of 2010 revenue, NOI, and FFO performance in response to the significant improvement we're seeing in our portfolio.

Our second quarter results and early third quarter metrics continue to substantiate the improving fundamentals and allow us to reaffirm the financial outlook that we provided in early June. So what's driving this improvement? There's a number of factors which can be grouped into four broad categories. First, an improving, albeit bumpy, economic recovery. Second, a weak for-sale housing market which is resulting in a declining home ownership rate. Third, demographics that will continue to benefit renter demand. And finally, a significant reduction in the delivery of new apartments. And I want to touch on a few of these factors.

First on the economy, the economy continues to grow yet the pace of growth slowed during the second quarter. It's not unusual for an economic recovery to be bumpy during the first few quarters past an inflection point, and this recovery is no exception. This uneven recovery is likely to continue through the rest of the year with moderate growth in both GDP and job gains. Job gains both year to date and for the full year are expected to average about 100,000 a month, which is a welcome change to the average of over 400,000 jobs per month lost last year but still not strong enough to bring the unemployment rate down. It will likely be into 2011 before we begin to see the positive effect of the current trends of rising corporate profits, low interest rates and improved access to credit, as these hopefully begin to translate into rising business and consumer confidence and ultimately stronger private sector hiring.

Turning to the housing market, I think it is hard to over-emphasize the positive impact that weak for-sale housing market has and will likely continue to have on the rental market. The home ownership rate fell again during the second quarter and is now just below 67%, the lowest rate in over 10 years. This decline is in spite of the positive effect of the federal home buying tax credit which was still available during the second quarter. Except for this tax credit, the ownership rate would have undoubtedly fallen further. Many would be buyers remain on the sidelines because of tighter lending requirements, fears that home prices may continue to fall and continued uncertainty over the strength of the economic recovery. A recent articles in Barron's provided a forecast that the home ownership rate would likely drop to 64% by 2015, a level similar to what we experienced over the 35-year period from the early 1960s to the mid 1990s.

Another article earlier this week suggested the home ownership rate could fall to as low as 62%. Assuming the rate falls to just 64% would create an additional 3.5 million renter households during the next five years or about 700,000 per year from this catalyst alone. While jobs have been and will continue to be an important driver for apartment demand, it's likely the changes in the for-sale market may have an even larger impact than job growth on the strength of the apartment market in the coming years.

Finally, let me touch on new supply. Multi-family rental starts so far for 2010 are running at an annualized rate of about 70,000 for the year. This level of production is only about a third of the historical average and is approximately equal to the annual loss due to obsolescence. Given that there was a similarly modest level of apartment starts in the second half of '09, it will be the equivalent of net zero deliveries of new multi-family product in '11 and '12. While we're beginning to see the benefit of reduction in supply this year the real benefit will be over the next few years. So whether it's a modestly improving economy, a falling home ownership rate, positive demographics, or an anemic level of new product, it's hard not to feel positive about the impact on rental fundamentals, both this year but increasingly so for 2011 and 2012.

Before I pass it to Tim I wanted to touch briefly on our activity under our CEP, or Continuous Equity Program. As we outlined in last evening's we lease we raised approximately $210 million during the quarter at an average price of just over $100 a share. The program has been in place since August of last year, and we now have raised the full $400 million authorized under the program. Our selection of capital market options over the last several years underscores the financial flexibility afforded by a strong balance sheet. Flexibility that we used during the financial crisis of late '08 and early '09. During that period we issued over $2 billion of debt at an average rate of 5.2%. We avoided issuing equity at cyclically low prices. The last time we raised equity was in early 2007. The $400 million of equity raised since the fall of '09 helps to further strengthen what is arguably the strongest balance sheet in the sector and positions us well to take advantage of emerging growth opportunities.

With that I will pass it to Tim who provide some additional color on our operating and investment activity.

Thanks, Bryce. I'll focus my remarks on a couple of areas, as you mentioned. First, I'll provide some additional color on portfolio performance and apartment market conditions. And second, I'll discuss investment activity, highlighting what we're seeing in the transaction market and our outlook on new development.

Starting with operations, through July we're tracking with the mid year guidance we issued in early June. As Bryce mentioned, second quarter sequential same-store revenue growth was 1.3%. The increase was driven by improvement on the East Coast as sequential same-store revenues were around 2% higher in the East and roughly flat in the West. The improving performance was largely the result of rental rate growth as same-store rental rates were up 0.9% from the previous quarter. Rental rate growth has been an area of focus for us over the last several months as demand supply fundamentals have turned in favor of the landlord. Certain second quarter changes in year-over-year rents for those units with expiring leases, which includes renewals and new move-ins, accelerated from just under 1% in April to around 4.5% in June. This trend is positive for both renewals and new move-ins as renewals were up around 4% and new move-ins increased by over 5% in June. This trend continued into July as renewals and new move-ins were up around 5.5% year-over-year.

So overall we've seen dramatic improvement in renewal and new move-in rent growth in our portfolio, with the blended growth rate having increased almost 500 basis points since March alone. The trend of rents turning positive is broad-based across the portfolio. In June and July all 16 of our markets experienced year-over-year growth in rollover rents which we define as the blended average of renewals and new move-ins.. As of July the strongest growth occurred in the metro New York-New Jersey region where rollover rents were up by more than 7%, and where new move-in rents increased by more than 10% in some of our communities. This region has experienced the most dramatic turnaround in our portfolio as the New York metro area is beginning to benefit from job growth that began to materialize in the first half of the year.

The Mid-Atlantic, New England, and northern California regions all posted solid gains as well, with rollover rents increasing by more than 5% in each of these regions in July. The DC market, which has been the most stable during the downturn, has recovered at a steadier pace, while northern California and New England have accelerated more sharply. The last regions to recover, Seattle and southern California, are currently experiencing rollover rent increases of around 3.5% and 2%, respectively.

While we're continuing to focus on growing the top line through rental rate growth, we are keeping an eye on occupancy and availability trends as well. As we've tested rents across our marks, we've been willing to tolerate some additional vacancy and, in fact, economic occupancy has drifted lower since April into the mid to high 95% range. Given seasonal traffic patterns, though, we believe that mid year is the optimal time to push rents in the portfolio. Often to the point of refusal in our markets. If we experience some loss in occupancy mid year, we still have the opportunity to adjust our pricing strategies before the lower traffic season sets in. We'll continue to actively manage the portfolio, seeking to find the pricing strategy that optimizes the relationship between rent and inventory levels. While fundamentals have shifted decidedly in favor of rental housing, we understand that they are still impacted by broader economic trends, which as we've seen can be uneven and choppy. So maintaining a flexible posture with respect to our operating strategies and response to shifts in the environment will be critical to optimize performance.

I want to shift now to investment activity, starting with an overview of the transaction market and our outlook for acquisitions and dispositions. As asset values have increased, we have started to see a pickup in market activity. For transactions currently being priced, cap rates appear to be around 5%, ranging from mid 4% to 5% on the West Coast, and low to mid 5% on the East Coast. Combined with the more positive outlook for NOI growth, asset values are up around 20% from the trough but still around 15% off the peak. Although many owners are still reluctant to sell at current pricing levels, there's a growing number willing to sell some assets in an effort to either diversify their holdings or resolve a pending issue with near-term maturing debt.

Pricing support is solid, and bid activity remains robust as the demand for institutional product is outstripping supply. Given these market conditions, sellers are beginning to take larger, more complex offers to market, sensing that buyers' appetite and tolerance for risk is growing. Recently there have been a number of $100 million plus transactions marketed by sellers, including a 2,500-unit portfolio in the DC area.

This past quarter we sold one asset, Avalon on the Sound in New Rochelle for $108 million. This is the first phase of a 1,000-unit community where we still had approximately 600 apartments in the second phase and continue to manage the first phase for the buyer. This transaction was initiated late last year and completed in April, and was done in part to trim our exposure to this one submarket. We've completed $190 million of dispositions for the second quarter and don't anticipate selling any more assets in 2010.

In terms of acquisitions, we didn't close on any communities this past quarter. However, we currently have around $200 million under contract and in due diligence, all which would be acquired for a second investment management fund. While the investment market is competitive, we continue to look for deals that we believe provide unique opportunities for growth, either due to their competitive position in the market or our ability to reposition them through our redevelopment and asset management capabilities.

Lastly, I would like to touch on new development. This past quarter we didn't start or complete any new development. However, in July we did start three new deals totaling around $100 million, and for the year have now started over $200 million in new development. As outlined in our revised outlook, we expect to start around $600 million by year end which represents a $200 million increase over our original outlook. The projected yield for the current development portfolio is down this past quarter and is now projected at 5.7%. This is the result of the beginning of lease-ups for three communities that originally started in 2008, where opening rents are off by almost 10% from initial pro forma. As you recall, we do not adjust projected rents until the beginning of lease up. For these three communities declines in the opening lease-up rents are consistent with portfolio-wide trends in these markets since the start of construction. Importantly, these three lease-up communities are the last of the 2008 starts, where those deals started before the rental market correction of 2009. In other words, each of the communities in the current development portfolio reflects rents that have essentially been marked to market. With market conditions now improving across the board, we expect the performance of this portfolio to improve.

In addition, the remaining 2010 starts represent some of the more attractive deals in our development pipeline with projected yields in the 7% plus range which will further enhance the economics of this portfolio. With cap rates now in the 5% range new development in general is accretive on an NAV and earnings basis. And when you combine improving market fundamentals with cyclically low construction and capital costs new development is particularly compelling at this point in the cycle.

In addition to starting new deals, we are aggressively working to replenish the pipeline. Many owners and lenders are just starting the process of resolving some of their land position. In addition, some land developers are beginning to market new opportunities. For example, we recently signed an LOI with Federal Realty to develop the multi-family component of their mixed use assembly row project in Boston. We believe that we are uniquely positioned to secure market opportunities like these. We have a long track record that provides comfort to landowners in our ability to perform, with current liquidity and balance sheet to fund new opportunities, and finally the existing development and construction platform to execute them. Building the pipeline will continue to be an area of heightened focus for the balance of the year as we ramp up this important part of our business.

With that I'll turn it back to Bryce for some closing comments.

Thanks, Tim. Certainly we're pleased to see the expected improvement in fundamentals translate to the tangible improvement in our portfolio. With positive sequential revenue growth and new move-in rents and renewal rents both now exceeding 5%, it's clear that we've reached an inflection point in terms of our portfolio performance which positions us well for stronger performance in '11. Across a number of dimensions I feel we're positioned well to take advantage of emerging growth opportunities. First, our portfolio with strong occupancies and accelerating rental rate. Secondly, in terms of our investment activity. On the acquisition side to our second investment management fund we have an additional $600 million of buying capacity. On the development side we have a $3 billion pipeline of communities either in planning or under construction. Finally, our balance sheet, which is arguably the strongest in the sector with low leverage and excellent liquidity. So we're very optimistic regarding the next few years, both as to the attractiveness of rental fundamentals but equally importantly our ability to capitalize on those opportunities.

Lisa, that concludes our prepared remarks. We'd be glad to open up for questions.

(Operator Instructions). The first question comes from Eric Wolfe with Citi.

Thanks. Michael is also on the line with me. I was just wondering if you could comment on your Hunter's Point affordable housing project that you're bidding on? I know you're still in the process there but I'm just wondering how many bidders there are and what type of investment the project would require.

Eric, this is Tim Naughton. I think it's too preliminary to comment in too much detail about that project. Obviously we've got a position in that market, given our investment in both phases of Riverview. We like that submarket but just given where we are in the process, I think it's too preliminary to comment on much detail.

Can we take this as a signal that you are potentially looking to develop or even acquire assets at lower price points within your market, or is this just a one-off opportunity that you are pursuing?

I don't know that I would interpret it that way. For those of you who aren't familiar with the Hunter's Point project, there is an affordable component but it's a sliding scale. It's a fairly complicated formula in terms of the rent levels that we'd be needing. Many of the units would actually be at market even though they would meet some level of affordable requirements. So I don't know that I would take that as we're looking to acquire or developed, quote/unquote, affordable deals.

And I think you mentioned in your remarks that you've issued the $400 million of equity through your ATM program. Just wondering how much investment activity you think you could finance right now before you needed to return to the equity market.

This is Tom Sargeant speaking. The CEP program, we did conclude the program at $400 million. I think you have to really look at over time how much new investment activity we're going to have and how much of that needs to be financed with equity. If you assume a 40% debt, 60% equity load, I think it's fair to say that, over time, that's how we will raise capital pro rata. Obviously after raising over $2 billion of debt in '08 and '09, it's time to restore the balance sheet partially and add the equity, which is what we did. So I think, as you're trying to project out our sources and uses of capital and how we might source that capital between debt and equity, I think you have to look at a 35% to 40% leverage ratio and triangulate on that.

Okay. And then just one last question on expenses. Based on your current guidance, it looks like you are expecting a 2.5% decline in the back half of the year. I know you had some favorable comps the last year but just wondering whether that's still your expectation and what's driving that decline.

Eric, this is Leo. We do still expect to fall within the original range that we offered. In the beginning of the year we said the range would be from plus 1 to minus 1. We will be toward the upper end of that range. What's driving us there, toward the upper end of the range, is largely the storm related expenses that we talked about in previous calls, because of the challenges that we had on the East Coast.

Okay. Thank you.

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

Good afternoon. You guys mentioned obviously a little bit of slippage in occupancy as you've been pushing rents for the last few months. Can you talk about the markets where you're seeing a little bit greater push back, as you push rates, and perhaps even those markets where occupancy has sustained with the increases?

Jay, this is Leo. In general, the occupancy is in a fairly tight range across all of our markets. I think as you saw in one of the attachments we provide, through June, the second quarter was pretty consistent. It remains pretty consistent. I would tell you we're receiving push-back in virtually all of our markets, and if we weren't receiving push-back in any market right now I'd be concerned. I talked last quarter in my prepared remarks about the fact that we would expect occupancy to temper or to come off, but it was the right time to do it, as Tim said. So we're getting push-back everywhere.

If I was to give you some comfort, my comfort would be that even looking to August, that occupancy seems to be sustained. So I feel pretty good about the push that we've made. If you go specifically to new move-in rents, we've held our conversion ratio in that low to mid 30% range, which we always look for. And then our turnover, as you saw for the second quarter, was substantially below the same period the previous year, and in July that turnover is remaining in the high single digits, lower than the previous year. So occupancy seems to be stabilizing in that mid to upper 95% range with turnover remaining favorable and conversion ratios that are pretty solid.

Okay. And then just specifically on Boston, you had 100 basis point increase sequentially, but then LA was down 100 basis points. Is that just further affirmation to your point about East Coast versus West Coast, that West Coast is still lagging?

I'd say that Boston has been one of the stronger markets, and we've pushed occupancy up, and you should expect us to push rents even more aggressively there. As you know, southern California has been an area that's more challenged, LA more challenged than other southern California markets in the quarter. And there's a little supply in LA, and that supply is in the Woodland Hills, Warner Center area. I think that's consistent with what we've been seeing in the markets.

Okay. And then you mentioned the $200 million of acquisitions under contract. Can you give us some sense of the yields you're seeing today and what sort of IRRs you're penciling out for the value funds? Maybe comparing class A versus class B.

Sure, David. This is Tim again. It depends again whether you're on the East Coast or the West Coast, and within that $200 million it's a mix. But in terms of initial cap rates, those deals were priced awhile ago, about two months ago, and they happen to both be class -- the large ones happen to be class B assets, and those were priced on the West Coast close to around, call it 5% cap rate. And in the low to mid 5% on the East Coast.

In terms of where things are pricing from an unlevered IR standpoint, obviously it's a function of what your assumptions are for growth rates and exit cap rates, but we're pricing where we think is somewhere in the low to mid 8% today for a deal. That generally reflects growth rates in the mid to high 3% range, which, when you take a trough trend line growth rate, that's consistent with a longer growth rate of around 3% for a particular market. Then exit cap rates, somewhere around 100 basis points above entry cap rates, roughly the mid 6% range.

Okay. And then on Assembly Row, was that a high-rise development? And just a broader question, are you looking to get back into high-rise construction as you think about that 2012 and beyond time frame?

Jay, this is Bryce. Specifically, Assembly Row, it's a mixed use development, so it is wood frame above retail, so think of it as really four-story above structured parking. But the second part of your question, you say get back into high-rise, we've never left high-rise. The largest developments we have underway today are high-rise developments. So it has and continues to be a large part of what we're doing.

Okay, thanks, guys.

Your next question is from David Harris of Gleacher & Company.

Hi, good afternoon. Tom, could you just walk me through the third quarter guidance in terms of this $0.05 on operating expenses? Do we see it as a one-off, and then for the third quarter, that's a reasonable run rate into fourth quarter?

The last part of your question, we haven't given fourth quarter outlook, so what I tried to do is give you this road map of the items that are impacting the decline in FFO per share between the second and third quarter. Just a little more color on the expense overhead and other non routine items, it really is primarily other non routine items. If you look at what's happening during the quarter, we have some severance accruals that we reversed in the second quarter, and that won't be present in the third quarter. We had some legal and settlement recoveries in the second quarter that will not occur in the third quarter. And then we had some timing of G&A items where we had savings in the second quarter that will revert in the third quarter. So those are the major components of that line item, and we're just trying to revise some path to the $0.95 that you can understand some of the nonroutine items that are flowing through the numbers this quarter and next quarter.

Without getting too much into detail on this, I'm hearing that we should be really thinking about G&A as well as the property operating expense lines.

I'm not sure I understand the question.

If I'm modeling this thing out, I shouldn't just be taking the $0.05 out of the property operating expense line, but the severance would be something that I'd need to look apt terms of the G&A.

Tom, correct me if I'm wrong, but the $0.05, David, is all in the G&A line item, not in the property operating. The legal settlement and the severance are at the corporate level, not at the property level.

Great, thank you for that clarity. Final point was on the redevelopment, which you detail on attachment 10. I had a chance to look through this a little bit. That's all the stuff that's on balance sheet. Are you doing any redevelopments within the funds?

David, this is Tim. Currently we are not. We have effectively invested the first fund and the second fund to date, the assets that we've acquired are primarily core assets or have not yet begun redevelopment.

In the past when we talked about this, the returns on redevelopment are actually above those for development. Would that still be true today?

It depends whether you're talking about total return on total invested capital on the incremental invested capital. Are you talking about latter, David?

Yes.

I'd say that's still generally true. It's always a little complicated with redevelopment, given how much of the capital is actually enhancement versus maybe correcting some items that are either at the end of their useful life or deferred maintenance. But generally when you are looking at returns on the pure enhancement things that are revenue enhancing, they are generally north of 10%.

Okay. And just to get a better handle on this thing, and we may have discussed this many years ago, and I'm revisiting it, are we talking here on your redevelopment projects of buildings that are perhaps older and in great locations that just need bringing up to class A standards, or are we talking about B assets in a B location that you're trying to improve?

It's a bit of a mix. I would say for the basket that you're looking at on attachment 10, generally they are probably B assets in A-minus type locations where we're investing both in bringing the asset up to date in terms of the working components of the property, as well as repositioning them to perhaps a higher level within the existing market. For example, Avalon Burbank, in Burbank, California, it's an outstanding location right downtown. That's an asset that was 20 plus years old that we invested a significant amount of capital to bring it up to a B-plus if not an A-minus standard from previously what I would probably call a B-minus.

Okay. And would you tend to think of these properties as being more likely to be earmarked for sale once you've renovated them, or would it just be on an individual property by property basis that you'd make that assessment?

I would say for those that are being redeveloped on balance sheet, those generally represent longer term holds. We oftentimes do an assessment before we start redevelopment, whether, one, is it a long-term hold, or is it something that is likely to be disposed of in the next two or three years. If it's likely to be disposed of we ask ourselves whether we're going to get an incremental return by having redeveloped it. More times than not we're redeveloping assets that we intend to hold long term, and we're trying to reposition them to, we think, a better spot within a particular submarket.

Okay, great, thanks.

Your next question is from Alex Goldfarb of Sandler O'Neill.

Just want to follow up from David Harris's question on the guidance. Can you just speak a little bit about what the tax-exempt bonds are? And as far as it looks like there may be a change in what you are capitalizing versus expensing on the developments. Just want to know if some projects you may be putting off and therefore expensing, or if there's been a change to that policy.

First, there's been no change to the policy. It's really the fact that we have deferred development activity on certain parcels that we now can no longer capitalize interest on those because we're not actively pursuing them for development. That's the principle explanation for that.

In terms of the overall $0.05 that's in the road map on page three of the press release, it consists of a number of things. Let's start with the tax-exempt bonds. That increase of about $0.02 is, about $0.02 of the $0.05 is related to increased credit enhancement fees for a couple of tax-exempt bond deals. These are liquidity facilities that expired and then were repriced. In that repricing I think it reflects what we're seeing in the market in general. And that is, when credit facilities come up for renewal they're being priced at a higher rate than the legacy liquidity facilities.

Secondly, this is a market that's probably further away from recovery than other credit markets. So the tax-exempt bond market, and specifically the credit enhancement mark has been a little slower to recover than some of the other markets. Some of the other components of that interest include an anticipated increase in the low floater rate which may or may not occur. That's about $0.01 a share. If short-term interest rates remain where they are, today at roughly 20 basis points, you can see that maybe $0.01 of that not increase as we're anticipating. Some of the other aspects of the $0.05 or the decrease in the (inaudible) interest that we already discussed of $0.02, an anomaly in the quarter in that we actually have an extra day in the quarter which is throwing off about $0.01 a share in terms of additional interest cost for the quarter. So there's the $0.05 that's included in the road map.

Okay,Tom, that's helpful. Just continuing along that line, as far as you can tell from your bankers and advisors, is there any impact so far from the Fin Reg as for as cost of hedging and what that means going forward? You spoke about the credit enhancement market, that's still recovering, but as far as the cost to hedging, just wondering what the fall-out from the Fin Reg is.

That's a great question. I don't think there's enough passage of time to really fully evaluate all the ramifications of the revised legislation. So we don't have an answer for you there. We don't use a lot of hedges. So to the extent there are changes there, it's not likely to impact us as much as it may others, but we don't really have an answer. I think it's too early. And we haven't priced any hedges since that financial reform has been put in place.

Okay. So it looks like something that we'll see going forward, the impact. Thank you.

Your next question is from Michelle Ko of Bank of America, your line is now open.

At the beginning of the call Bryce mentioned the benefit of lower home ownership, and I just wanted to confirm that he thought that home ownership, the lower home ownership could be more important than job growth going forward, and just maybe elaborate on that a little bit.

Sure, Michelle. This is Bryce. There's no question that jobs are critically important. So don't misinterpret my comments on that. My point is that they're just a bit less important than at other times because we have a number of unusual factors. Certainly first time that we've seen them in this magnitude, and I've been doing this for 26 years. To see the home ownership rate fall at this rate, and to see the positive benefits of demographics, both of which are creating demand at the expense of for-sale markets. So those are pretty unusual conditions.

And those are happening at a time when there's an unprecedented reduction in the supply, which therefore would say less demand is going to be required to generate an equal amount of revenue growth, because you have less supply. So the point of my comments is just really to try to focus us that for so many years we've all been singularly focused on job growth creates demand for rental housing, end of discussion. It's a little bit more complicated and positive this time around because of those other factors. And if you just try to quantify it, if the (inaudible) rate does go to the, call it 64, that's 3.5 million additional renters, about 700,000 a year, typically. And that's total. A big chunk of those do rent single-family homes, but a component of them, 40% or so, are renting apartments. So that can be as much as a couple hundred thousand a year. That's real demand. That's the amount of demand we typically see in a good year from significant job growth.

So it's just a number of factors happening at the same time, which are causing reliance on jobs to be a little less important than in prior times.

Okay, thank you, that's helpful. And just to build on that question, I was just wondering if you could tell me how far off are each of your markets from the prior peak rents, and do you think you could get back to those prior peaks without that much job growth?

Michelle, this is Leo. Just to give you some perspective, the entire portfolio is possibly 5% off our prior peak. That can range as high as the low double digits in places like the West Coast, northern California, Seattle. So I believe we can get back to those prior peaks. I believe that directionally we're moving there.

I'll give you some perspective. In the fourth quarter we had basically a gain to lease in our portfolio. In the first quarter of this year we basically went flat, and in the second quarter, we got to a loss to lease, approaching about 7%. When you couple that with what Tim explained, which is that in July our rollover rates, which again are blending of the new move-in and renewals at 5.5%, plus our occupancy being stable, there's some running room. And I'll give you even a little more insight. When we look out to the offers that we've put out for renewals in August and September, those went out in the 6%, 6.5%. Now, those aren't secured, and there could be some erosion, but I will tell that you while we're getting push-back, we are making a lot of progress, turnovers staying in line. we're converting is leases, and we feel pretty good about the direction of our revenue.

Okay, great. And then just lastly are there any markets where you have reached the peak or you are close to peak or maybe even above the peak?

In the Mid-Atlantic area we are around the peak, maybe slightly above it, but we're still making progress there.

And what about New York?

New York, we're not quite at the peak, but clearly we're getting close. As Tim discussed, the acceleration in the second quarter was very positive. So it would be below the average. To give you a perspective, in the New York metropolitan area, we're still carrying a loss to lease that is near the average. In fact, it's slightly above the average that I just quoted for the second quarter.

Okay, thank you.

Your next question is from Dave Bragg of IFI. Your line is now open.

Good afternoon. A follow-up to that last answer. You said the renewals for August and September are up 6% to 6.5%. I believe that's for the portfolio, and if that's correct, how does California compare to that average?

David, unfortunately I don't have a breakdown of it. I was just trying to get some forward-looking so I can't break it down. My expectation would be that northern California, as we discussed, northern California in July was roughly in the 4.5%, as was southern California in July. So I'd expect that they're moving up more towards that average. I would expect them to be less than the 6.5%, but certainly making positive trends.

Okay. And during our NAREIT meeting two months ago, you did suggest that the West Coast could post better same-store revenue growth on a year-over-year basis than the portfolio as a whole within the next six to 12 months. Do you feel as though that's still the case, or has that been pushed back out given the strength in the East and relative weakness out West?

I would tell you that the West is a big area. I'd be most positive about northern California, and if we were to look into 2011, I would probably feel the best about the New York metropolitan area where we've seen already some pretty positive trends, and I'd feel pretty good about northern California. I think next I would say that Seattle will come along, although, as you are aware, we've got to absorb some supply there, but it is getting absorbed. Then I think southern California will follow.

That helps. Last question is a follow-up to Eric's, on the equity issuance activity. We understand your greater needs for investment activity, but historically, at least in my view, you've been more of an asset recycler than equity issuer. So what's different today? Is it simply a function of your implied cap rate premium to the transaction market given your issuance activity this year versus your statement that you are not expecting more dispositions?

This is Bryce. I'll start in and Tom may want to add a bit. I think you should look at it less as a statement of current valuation and more just a statement about balance sheet management, then yes, we have been and we will continue to be an active asset recycler, but that's not at the exclusion of external capital. And we raised $210 million, $100 plus per share at a time when most people have are in the 80s, so we feel pretty good about that. Applied cap rate of high 4s to low 5s, depending on who is calculating it. We feel pretty good about. But overall if we're going to continue to grow as a Company, it is going to be both with recycling of capital but accessing external capital as we did over the last couple years where raised almost $2.5 billion of debt. You can't do that forever.

We did see our debt to EBITDA grow to the high 7s. It's something we watch very carefully, and the strength of our balance sheet has been and we believe will continue to be one of the key attributes of the Company, something that is important to fuel our future growth, particularly as an active developer. So it's going to be a combination of asset sales and external capital, and external capital is going to be a combination of both debt and equity. We just think that's prudent business. The question would be, if a company is going to grow, how are you going to do it without exercising prudence in terms of the balance sheet management. Tom, I don't know if you want to --

Okay, thank you.

Your next question is from Paul Morgan from Morgan Stanley. Your line is now open.

Hi, good afternoon. We've talked about how competitive the market is for stabilized assets now. Can you talk about what you are seeing in terms of pricing and availability of attractive development land as you look to grow the pipeline, and as you're looking at sites what the mix of competitors is between the large private developers, REITs, and maybe smaller local people?

Sure, Paul. This is Tim again. I touched on just briefly in my remarks about it. We are starting to see lenders and owners starting to deal with some of their inventory of land. So it's still a pretty thin market right now, I would say. We are seeing some deals break loose, and we actually have a few hundred LOI, including the Assembly Road deal which I mentioned in the last month or two.

In terms of the competitive environment right now, there aren't a lot of people out there chasing deals. That was one of my points in terms of what I do believe at this particular point in time we are pretty uniquely positioned. The market for construction loans is still pretty non-existent for the private merchant guys. I think a number of them that are trying to get back in the game are looking to figure out how to recapitalize themselves, frankly, or attaching themselves to a platform that gives them that kind of flexibility. And right now we're obviously not seeing a lot of public competition either, to be honest. So right now, it tends to be some local well-capitalized families that may be looking at this as an opportunity as well, but it's turned out to be a very crowded playing field.

Thanks. And then as you are pushing rents sequentially and the market dynamic has changed, are you seeing any kind of other shifts in reasons for move-out? I'd have to guess that pricing is going to be on the increase as a reason, but could you quantify that? And maybe have there been any other deltas versus the past quarters?

Sure, Paul. This is Leo. The reasons for move-out related to financial has historically run about 8% to 10%. In the second quarter it got up around 10.5%. That's something that I do watch carefully as I'm thinking about strategies, or with planning strategies for renewals, but with turnovers staying in check, it hasn't stopped us from pushing those renewal increases. Other changes that might be notable are home purchases moved up to about 17%. That's still below the historical norms, which is 20% to 25%, and probably was aided a little bit by what Bryce discussed in his remarks which was the expiration of the tax credit. Another area that changed, which might be of interest, is we have had some more relocations, so on a year-over-year basis that has jumped up to almost 22%, which was up just under 4% from the previous year. So those are areas that we're watching, but overall, as I said, turnover is in a good place for the quarter and for July.

Okay, great, thank you.

Your next question from Karin Ford of Keybanc, your line is now open.

Good afternoon. I wanted to go back to the home ownership discussion and the delta between the performance on the East Coast versus the West Coast. One of your competitors earlier today talked about, or posted a theory that the home ownership rate is not going to have as big an impact, it hasn't had and isn't going to have as big an impact on the West Coast because it hasn't changed as much there. Do you agree with that? And if so, do you expect that the West Coast, so long as home ownership is the primary driver, will continue to lag the East Coast?

Karen, this is Bryce. And I may ask John Christie if he wants to chime in on that. I think that's not an illogical conclusion. Maybe just as a couple of asides, implicit in your question is a statement, which is true, that the home ownership rate varies by market. As an aside, nationally we've talked the home ownership rate was just below 67%. In AvalonBay's market, if you just sum up the markets we operate in, it's about 58%. So fundamentally we operate in markets where home prices are higher, and therefore affordability is more difficult, and therefore home ownership rate is lower.

John, in terms of the East Coast versus West Coast?

Karin, I agree with some of the comments on the call earlier about the fact, when you look at the historic trend in home ownership rates in California, there hasn't been as much volatility as in some of the other markets on the East Coast where, frankly, in the suburban markets it's a little bit more affordable. Again, when you track reasons for move-out for a home purchased, they're far lower in the West Coast markets and New York than they are in the suburban markets. To your point, in some markets it will have much more of an impact than a lot of West Coast markets.

Two-thirds of our NOI remain East East, so it's still a significant factor and one that we're tracking very carefully and are definitely seeing the benefits of.

Thanks. That's helpful. Just final question, I think you said you completed your current authorization on the CEP. Do you plan to re-up a new authorization on that?

Karin, this is Tom. I should note that the establishment of Continuous Equity Program, or issuance of common stock are subject to various securities regulations so we can't really comment on a possible new filing or activity. What we can say is that the CEP has many benefits, and we like the ability to match fund sources with investment activity. It's also become widely accepted in corporate America. It's not just for REITs. A lot of corporations use it that are not REITs. So I think that we certainly like the program that we had in place, but in terms of whether or not we would put another one in place, we can't speak to that because of security regulations.

Okay, thank you.

Your next question comes from Michael Salinsky of RBC Capital Markets. Your line is now open.

Good afternoon. First bookkeeping question, then two bigger picture questions. First, as we look to the third quarter, there's no non routine items in the numbers there, correct?

There are no non routine items in the third quarter, that is correct.

Are there any in the fourth quarter then?

Are there any non routine items in the fourth quarter? Not that I can think of, no. Non routine items are not the kind of thing that you can anticipate two quarters out either so, no, I cannot recall anything in the fourth quarter that would be considered non routine.

Just want to make sure we're comparing apples to apples. Second of all, if you look at your development pipeline, obviously $600 million in starts this year, you talked about maybe getting a little overextended on prior calls when you got above $2 billion. As you look out over the next couple years here what's the right amount of development in process?

This is Bryce. I'm not sure there's a right number, but to help you think through how we think about it, we've got $800 million or so underway now. At year end we think that number will be about $1 billion when you add in the additional starts we've talked about, and then you take off some of the completions. That basically is starting to be about 10% of total equity capitalization, rough numbers. In '07, that number got as high as 20%, and that's when we made the comment recently that we probably were a little out over our skis at that level. The number that we've commented on before and the number that we use as a guide post is around mid teens that if we grew it from the 10s into around 15% of equity capitalization in terms of dollars underway, that wouldn't cause us much concern. If we got higher than that it would for some of the reasons that we've previously commented on in terms of just starting to put some strain on balance sheet metrics, whether it be debt to EBITDA, service coverage, but also just organizational stress, as well. There's only so fast that you can grow an organization. Long story short, we're about 10%, we get as high as 20%, and we could see us returning into the mid teens.

Fair enough. The final question. Obviously the strategy long-term has been to focus on the supply-constrained markets. Thinking about your fund model that you are using right now, looking out and not seeing a lot of supply in some of the traditionally non supply-constrained markets and the finite nature of the fund, is there any thoughts to potentially diversifying through the fund into some of the non supply-constrained markets, harvesting some opportunities there, just given that it's a finite fund?

No, there's not. We remain committed to our high barrier strategy. It is not that we haven't looked at other markets. We have. But we don't see compelling fundamentals that would pull us there, and to enter those markets, at least initially, we'd be at a competitive disadvantage not having the experience base that some of our competitors have in those markets. So we remain focused on our market.

Fair enough, thanks, guys.

Your next question, from Rich Anderson from BMO Capital Markets. Your line is now open.

Thanks, good afternoon, everyone. Do you need equity now without committing yourself to any additional investments, just in terms of your balance sheet, in your opinion?

We do not. I think we have one of the least levered balance sheets in the industry, so I would say we don't need any capital right now. We have $500 million of cash from the balance sheet. We do have some debt maturities in the fourth quarter, but we have the liquidity to fund that, either off the line or cash on hand.

Curious, just a question on cap rates. You talked about some of the strengths you're seeing in the East Coast and some of the weakness you see in the West Coast and yet cap rates are lower on acquisitions in the West Coast. Is that purely a function of just lower rents and occupancy and what-not, or is there something else that's invading the math of cap rates on the West Coast versus the East Coast?

Rich, this is Tim. I think it's simply people are projecting stronger growth rates and cash flows on the West Coast over some of their investment time horizons. The question was asked to Leo earlier, might the West outpace the East at some point over the next six to 12 months. Not really sure about that but it's pretty clear that the investment market is anticipating that over a longer term horizon, say a seven to ten-year investment horizon, obviously West Coast had a bigger fall, and I just think there's the anticipation that it's going to have a bigger run, and it's historically been much more volatile. So I think the lower cap rate just reflects that, and I think people are generally underwriting to what they believe are similar unlevered IRRs on the East Coast and West Coast.

Okay. Very early in the conference call you mentioned sellers that are entertaining larger deals, $100 million plus. Do you get a cap rate premium on larger deals? I assume you do. Could you almost quantify it for me?

I think it's probably easier to answer the first part of that question than the second. I think you probably do as well, with respect to the larger deals. They tend to be less competitively bid. Having said that, it only takes two to make an auction if two buyers really want the same asset. But it's our sense that as you get into the nine-figure deals, that oftentimes you can buy them on better terms. And I really would hesitate to try to quantify what the premium might be.

Last question. How do you juice returns in the fund for acquisitions if you're starting at a 5, let's say? What does the fund bring you in terms of incremental cap rate as it being off balance sheet and managing and all that sort of stuff?

I think you're asking about how do we get more returns (inaudible) and to sponsor the fund - is that the question?

Yes, like if it's a 5, if the acquisition is a 5 cap what is it to your shareholders including it into the fund?

Tom, maybe you want to speak to that.

Sure. Rich, as you know, the fund provides a number of benefits to AvalonBay. It gives us a look into the market, it keeps us active on the acquisition and disposition front, but it also gives us asset management fees north of 1%. It gives us redevelopment fees and it gives us property management fees. It also gives us promoted interest if we're successful in meeting certain hurdle rates. I think broadly you can think of the fund, if we're getting a levered return in the low teens, AvalonBay ends up getting a levered return on its capital, because we participate in the capital there, in the high teens. And that's generally how it works.

And you get there higher because of the promote at the end.

Because of the promote and the asset management, redevelopment fees and property management fees.

Thank you.

Your next question, from Paula Poskon from Robert W. Baird. Your line is now open.

Thank you very much. Good afternoon. I notice that two of the three new developments that you started this quarter are on the smaller side. Is that a strategic prioritization on your part, or just coincidence?

Paula, it's Tim. I think we've talked in recent quarters that some of the more compelling opportunities in our development portfolio were some of the northeastern suburban markets which oftentimes end up being smaller deals in terms of capitalization. They're cheaper to build, wood frame, then they also tend to be smaller number, less number of units. For instance, Northborough is a couple hundred units as was West Longbranch in New Jersey. I wouldn't say it's intentional that we're starting smaller deals and just incrementalizing our way into new development. It's really more a function of the markets that they're end. They oftentimes tend to be the kind of deals that get done.

In some cases, just to add, like in the Plymouth communities, which is one of the three you're mentioning, starting in July, it's the second phase of an existing community, so that's another reason why it's smaller. Just like Northborough is the second phase in an existing community. So those carry less risk obviously and tend to be smaller.

Fair enough, thanks. One other question. Is there much opportunity in the portfolio right now to ramp up redevelopment investment if you wanted to?

Paula, Tim again. I think there is. In fact, this year, our business plan is to start around -- I think around 13 redevelopments, something like that, over $100 million of incremental capital, $125 million of incremental capital. We think that's a pretty reasonable run rate over the next two to three years, based upon the portfolio in the East and what the opportunity is along with our capacity to execute the business.

That's all I have. Thanks much.

Your next question, from Tayo Okusanya from Jefferies & Co. Your line is now open.

One quick question. Hoping you could give an update on your expected yields for the $600 million of new development.

It's Tim Naughton here. I think generally what we've said is the deals that we're anticipating starting in 2010 are in the 7% plus range, which is based upon today's rent and what we think we could build it for as the denominator. So 7% plus for the deals that we're (inaudible) in 2010, not necessarily through every development deal out there.

Sounds good. Thank you very much.

Your next question, from Dustin Pizzo from UBS, your line is now open.

Hi, guys, it's Ross Nussbaum here with Dustin. One small question, and a couple of big picture ones. I might have missed. On the acquisitions I thought you said you have either under contract or you are pursuing in the short term, what are the cap rates on those deals?

Low to mid 5s.

So consistent with the market. And then more broadly, I think, as evidenced by what the stock is doing today, it would seem to me the market isn't taking an issue, necessarily with the fundamental performance, but I think the ATM equity issuance, and potentially viewing your decision to issue equity with low leverage as a signal that you might think the stock price is working more in your favor. I'm curious as you think about bigger picture from a capital structure, we're sitting here with an AFFO earnings yield on 2011 earnings, at least on our numbers, of 3.7%. If I look out even to 2012 or 2013, it's 5% earnings yield. So you could effectively, and you just did, I think rightly so, issue equity at a lower cost than where you can issue debt. Why not just continue to issue equity as long as your stock is here, given that it's a cheaper alternative than debt, and delever the company for good?

One, you're speculating on why there are more sellers than buyers in our stock today, and I can't agree or disagree because I don't know what each investor is doing with their capital. I think it's a stretch to say it's because of ATM, or as we call it, the CEP. In terms of cost of capital, that's a long debate, and I think you are using some short-term measures, but when we sell an asset, and we're raising equity to be selling an asset, we don't think of losing the initial yield. We think of what's the unlevered IRR if we (inaudible) that asset Similarly, when you issue equity, you have to think of the long-term cost of that equity capital. So there are short-term costs of capital and long-term costs of capital. We're not necessarily focused on next year's earnings but creating value over a long period of time.

So I think in terms of the rationale that you point to, I think it's pretty challenging to say that you can never permanently delever the balance sheet because this is a living, breathing, open-ended perpetual life vehicle, and we're always going to be making capital choices depending on what the sources of that capital is and how we're going to allocate the capital. In terms of additional equity issuance, that's not the kind of thing we can speak to. All we can say is that CEP program was authorized at $400 million, and we've completed that and we can't give you any indication about further programs.

Okay, that's helpful, I appreciate that. And then lastly, just with respect to the home ownership rate declining, I clearly get and understand, I think, the market does, the impact that could have on pushing market rents higher. I'm wondering to what extent you think that if the home ownership rate declined, that's an indication that discretionary consumer spending will remain constrained and corporate America might have a tough time raising prices in that environment? Do you believe that multi-family industry, not just Avalon, but the multi-family industry, will be able to have pricing power in potentially an environment where most of corporate America does not?

It's a great and a fair question, and it just highlights that with almost any factor impacting our business, there's a positive and a negative impact on that. Example, low interest rates that we're enjoying today are partly because the economy is in such weak condition. Home ownership rate, yes, it benefits us, but it's a sign of weakness in the housing market, and to the extent the housing market gets even weaker, it's a drag on the economy. So there's clearly another side to each action of the coin. But on balance, the weakness in the for-sale market does have a positive impact on our market, where it does not in other elements of the economy. That's one of the things we're just trying to highlight, is that for years they were stealing share, and now we're able to steal some share. But fundamentally, improving economy and job growth is going to be key to income growth, which is going to be key, not just certainly for corporate America to expand, as you pointed out, but just for consumer willingness to spend.

Thanks, that's helpful. I think obviously we're all trying to deal with uncharted waters and figure out an economic landscape that's certainly not happened in awhile.

Just one final thought. We all, as I commented earlier in a lot of the questions, we're all focused on the economy and jobs, and appropriately so. We're not trying to minimize that at all but just to point out that there was no job growth in the early part of this decade when single family home prices were rising. So why is it such a hard thing for us to manage? Rental rates can rise in the face of no job growth. Is it long-term sustainable? No. I don't think we or anyone on this call is thinking the economy is not going to generate jobs forever. It's a question of the benefits we're seeing today and the momentum that's giving to carry us and to bridge us into a period from which job growth will be more substantial.

Thank you.

Your next question comes from Andrew McCulloch of Green Street Advisors. Your line is now open.

Most of my questions have been answered. I just had one follow-up on relative market performance and specifically relating to Seattle. Can you compare and contrast what you are seeing between the different sub markets up there, between downtown Seattle, Bellevue, and Redmond, and then maybe farther north?

Sure, Andrew, this is Leo. I would tell you the most challenged is on the east side, as you've identified, which is basically Bellevue and Redmond. That's where the majority of the supply is coming. On the north side, the real issue is that some of the demand is getting pulled out because there's a ship pulling out, it's just taking some (inaudible) out of there. And then lastly, downtown is probably the most stable area. And as you know, we just started a deal there, Queen Ann, and that market is in the best balance and performing the best.

That's all I had. Thanks.

And lastly, your question is from Steve Swett from Morgan Keegan, your line is now open.

Good afternoon. Couple follow-ups. I think for you, Tim. On the redevelopment projects, as you ramp up, are those projects you can add to the pipeline incrementally, or are they projects where they're a little lumpier, you're taking groups of units off-line and there may be a little bit of a drag as that program increases?

Steve, as I mentioned earlier, we're looking to start around $125 million this year. That's probably a good run rate number over the next couple years. We have been focused on trying to do that on turns as opposed to taking units off-line and so we have gotten quite a bit better in terms of maintaining occupancy. It's not going to be stable occupancy at 95%, 96%, but a lot of these deals we are able to redevelop it at 90%, 91%, 92%. So you do have some inventory coming off-line that is being somewhat dilutive, if you will. But I would expect that to level off as we get through towards the back half of the year and we get to more of a steady state level.

As I think you're well aware, but others may not, just to clarify, when Tim talks about that, those communities are removed from the same-store sales bucket so they don't impact positively or negatively the results that we refer to on same-store sales basis.

Okay. And then my final question, Tim, I assume the higher yields on the development starts you are looking at from here are due to lower costs as opposed to higher rents. So could you just break down where you see the lower costs between land, hard costs, and soft costs?

Sure, Steve. It's a real mix. Probably hard costs is the easiest to look at, particularly on the wood frame, and we are seeing construction costs we believe bottom right now. They probably bottomed around somewhere between 20% to 25% from peak levels. Peak levels would have been in 2008 sometime, so with construction typically about 60%, 65% of your capitalization, and those are down 20%, 25%, you can do the math. 12% to 15% of the improvement in economics is coming from construction.

In terms of land, it's really a case-by-case basis. Some deals were option that we were able to renegotiate with the landowner. Others are deals that are more recent and have been repriced. And I'd say the deals that we've repriced at year, year and a half, those are probably down on the order of 30% to 50% in terms of land basis. But it makes up a lot less of your total economics, obviously, roughly 15% to 20% of total capitalization. And then we're saving some on soft costs, as well. As you get into capitalized interest, given interest rates, architecture and engineering fees, given the slowdown in the broader markets. We're benefiting there also.

Thanks very much.

And there are no further questions.

Thank you. Thank you all for your time, and we look forward to chatting with many of you in the months ahead. Thank you.

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