艾芙隆海灣社區公司 (AVB) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the AvalonBay Communities third 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 conference call is being recorded. I would now like to introduce your host for today's call, Mr. John Christie, Director of Investor Relations and Research. Mr. Christie, you may begin your conference.

Thank you, Sarah. And welcome to AvalonBay Communities' third quarter 2010 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion, and there are a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the Company's Form 10-K and Form 10-Q filed with the SEC. As usual the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion.

And the attachment is available on our website at www.AvalonBay.com/Earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. With that I'll turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities for his remarks. Bryce?

Thank you, John. On the call today are Tim Naughton, our President; Tom Sargeant , our Chief Financial Officer; and Leo Horey, our EVP of Operations. Tim and I will share the prepared remarks, and all four of us will be available for Q&A. I'll be addressing our quarterly results and then comment briefly on market fundamentals and trends in our portfolio, while Tim will provide some additional comments on our portfolio and then we'll be highlighting our investment activity during the quarter.

Despite concerns regarding the pace of the economic recovery, apartment fundamentals continue to improve in our markets. This continued strength led to stronger than expected results with regard to our portfolio performance, and an active quarter with regard to our level of investment activity. For the quarter, EPS was $0.29 and FFO was $0.98, both above the range we previously provided. These results were driven by better than expected revenue performance and savings and interest expense, which is partially offset by higher than expected property level expenses.

For our same store sales portfolio year-over-year revenues increased modestly, the first year-over-year increase since the fourth quarter of '08. And sequentially, revenues increased at a rate similar to what we saw in the second quarter. For the fourth quarter, we expect the rate of sequential revenue growth to be roughly similar to what we saw this quarter, and year-over-year revenue to continue with positive trends. And as a reminder, our year-over-year revenue trended from negative 4% in the first quarter to about negative 2% in the second. It was modestly positive this quarter and we expect it to be up around 3% in the fourth quarter.

Based upon the better than expected quarterly performance in our outlook for the fourth quarter, we have raised our full year outlook for FFO by $0.07 from the prior outlook in early June. While the drivers of the recovery in the apartment sector are fairly well understood by now, a few points are worth noting. First, with regard to jobs. While private sector job growth remains weak, it is positive and what job growth there is, is disproportionately skewed to the younger age cohorts. The pace of hiring among young adults, those under 30, is reportedly at its strongest pace since the mid- '80s. As this age group tends to be primarily renters, it does explain some of the unbundling the apartment sector is benefiting from; and why the absorption of apartments during the first half of this year is at its highest in over 15 years.

Second, a declining home ownership rate, which has been helping rental demand. Not surprisingly in our own portfolio we saw the percentage of move-outs due to home purchase drop -- due to a home purchase drop to about 14% during the quarter. Despite improved home affordability, this is at the very low end of the range of our historical experience and reflects continued weakness in the For Sale segment and the elimination of the Home Buyer Tax Credit, which artificially stimulated demand in the first half of the year.

Third is demographics. Our sector continues to benefit from improving demographics as a result of the influx of the echo boomer segment. Today, there are now more US residents aged 15 to 29 than 30 to 45-year-olds. This is a significant change in and the trend will become even more pronounced over the next five years.

Finally, and perhaps most importantly, is supply where we're just beginning to see the benefits of a sharp reduction. Over the last 10 years, the US has added an average of about 225,000 new multi-family units per year. This year that number will be less than half or about 100,000 units. And for 2011, the number of completions is expected to fall again to about 70,000 units. This will be the lowest level of multi-family completions in the last 50 years.

Based upon the strengthening demand combined with the sharp reductions in supply, we are projecting demand supply rates in our markets over the next two years to be similar to what we experienced in the 2005 and 2006 time period, which is a period of strong rental rate growth. With that I'll turn it over to Tim who will expand on the portfolio performance and highlight our investment activity for the quarter.

Thanks, Bryce. I'll focus my remarks in a couple of areas. First, I'll provide some additional color on the portfolio performance in Q3. And secondly, I'll discuss investment activity where new starts and acquisitions totaled around a $0.5 billion this past quarter.

Starting with operations, portfolio performance continued to show steady improvement in Q3 and is tracking above the revised outlook we issued in June. Second quarter sequential same store revenue growth was 1.1%, driven by an improvement in rental rates of 1.8%, which was twice the rate we experienced in Q2. The sequential improvement in rental rates was widespread as five of our six regions posted sequential rental rate growth of at least 1.7%. During the third quarter, increases in rents for those units with expiring leases, which includes renewals and new move-ins, averaged 5% to 5.5%. Renewals were up by almost 6%, while new move-ins increased by over 4% during the quarter.

As we discussed last quarter, our focus is on pushing rents, even at the expense of additional vacancy. While we did consciously trade some occupancy for rent growth during the peak leasing season, by September Economic Occupancy was back up over 96%. As a result, the portfolio is well-positioned headed into the slower winter leasing season. Looking at portfolio performance on a year-over-year basis, same store revenues increased 5.2%. The first year-over-year increase after six quarters of negative comps.

It's interesting to point out that this downturn has been about half the duration of that experienced earlier in the decade, despite having lost roughly three times the number of jobs during this past recession. The relative brevity of this correction is evidence of how housing demand has shifted in favor of rental housing over the last two to three years. The improved year-over-year performance was driven by the East Coast, which experienced same store revenue growth of 1.5% to 2%. We expect same store revenues to continue to improve next quarter, as Bryce mentioned, with year-over-year growth projected to be around 3% providing solid momentum heading into 2011.

I want to shift now to investment activity, starting with new development where we started five new communities this quarter. As we discussed last quarter, we believe it is a particularly attractive time to start new development. As apartment markets are recovering, at the same time we're seeing cyclically low construction and capital costs. The five deals started in Q3 totaled $232 million, and have an average projected initial yield of around 7.5%. Three are located in the Northeast, while the other two are located in the Seattle market and four of the five starts are second phases of existing communities. These starts are all wood frame construction where costs have fallen more than concrete construction over the last two years, given the slowdown in single family housing during this period.

Perhaps most notable is the start of Avalon Green II, the second phase of an existing community in Greenburgh, New York, where we just received building permits after 17 years of pursuit. A mainstay for many years on Attachment 12, which is the schedule of development rights, we're happy to see Avalon Green II finally move up to Attachment 9 of scheduled development communities. Perhaps most remarkable, though is that we were able to option this land for 17 years, not having to close before construction.

Avalon Green in many ways is a reminder of some of the unique requirements of developing in our markets including the value of staying power and outlasting regulatory roadblocks, legal challenges, and market downturns. In Q4, we expect to start approximately $300 million, which will bring our total level of starts to over $600 million for the year, which is in line with our revised mid year outlook. With the addition of five new communities this past quarter, the average projected yield for the current development portfolio now stands at 6%, which represents an increase of 30 basis points from last quarter.

The development portfolio currently contains 12 communities, four of which were started in 2007 and 2008, or prior to the economic downturn and ensuing apartment market correction. The projected yield of the overall development portfolio will continue to be burdened by these legacy deals until they are completed over the next two to three quarters. However, as these deals are completed and newer deals with initial projected yields of 6.5% to 7.5% are added to the pipeline, the average projected yield should continue to improve over the next few quarters. In addition to new development, we're getting more active in the area of redevelopment. In Q3, we started one redevelopment and expect to start three more next quarter.

Currently we have seven communities in redevelopment where we're investing on average of around $10 million per community to improve the competitive positioning of the assets in their respective submarkets. Capital programs generally include modernizing kitchens and baths as well as renovating many of the amenity spaces and common areas. The community we started this quarter, Avalon Decoverly, is a good example of this kind of redevelopment where we're upgrading the clubhouse and amenities as well as the apartments with apartment renovations being done on occupied units. As rental fundamentals improve in the early part of the expansion phase this cycle, we think it's a good time to invest in our portfolio through redevelopment. We're also investing capital in a number of other communities where the capital program is focussed on merchandising elements of the community such as the clubhouse, models, and landscaping. On average, we're spending around $0.5 million per community to freshen up the curb appeal of these assets. Lastly, I want to comment briefly on the transaction market and acquisition activity.

Transaction activity has picked up since earlier in the year with many of the trades in our markets concentrated in the DC metro and Southern California; and to a lesser extent, in New York. Northern California is relatively quiet as owners are reluctant to sell there, while the Northeast and Seattle are experiencing modest activity. National transaction volume is projected to be more than two times 2009 but still figures to be off longer term averages by 50% or so. Pricing continues to reflect the limited level of transactions coming to market as cap rates have dropped into the low to mid 4s in California, to below 5s in the East Coast. And asset pricing is now back to within around 10% of peak levels.

This past quarter we acquired three communities totaling $240 million. The communities are located in DC, Baltimore, and Orange County markets. Two of the three communities are large D, D+ quality assets costing around $100 million each and have been extensively renovated by the previous owner. We have found the relative market pricing for these larger repositioned assets to offer more compelling values than many of the smaller, newer core deals being marketed. These types of deals often don't fit neatly into strategies of core or value-add investors and they're usually too large for smaller, private owners who may be more value oriented. All three of these assets were brought for the investor management fund, where we have a 31% co-investment.

In summary, the third quarter was an active quarter for us on the investment front as we began to take advantage of the opportunities we've been positioning the Company for over the last couple of years. A period when we focussed on restoring liquidity, strengthening the balance sheet, free working and advancing and redevelopment pipelines; and lastly, positioning our investment platforms to be active in the early part of the cycle. We're optimistic about the near and intermediate term outlook for apartments fundamentals, a period of time in which we believe our markets are poised to significantly outperform long term trends, which should translate into strong portfolio performance. With that, I'll turn it back over to Bryce for some closing comments.

Well, thanks, Tim. So in my earlier comments, I addressed the current and expected continued strength of the apartment sector and then consistent with this outlook, Tim highlighted the increase in our investment activity. With respect to our balance sheet, we have nothing outstanding on our $1 billion line of credit. We recently raised $400 million of equity under our continuous equity program. We have an additional approximately $600 million of purchasing capacity through our investment management fund. We have about $400 million of cash on the balance sheet and our balance sheet metrics continue to be among the strongest in the REIT sector providing us with significant financial flexibility to fund future growth.

In short, we enjoy strong and improving fundamentals, attractive opportunities, and a balance sheet to prudently fund that growth. Finally, I wanted to remind you about our upcoming investor day on November 17th and 18th beginning with dinner on the 17th following NAREIT. On the morning of the 18th, Mark Zandy will be joining us to provide his view of the economic recovery, which I think will be particularly timely coming on the heels of next week's midterm elections. We'll also have a number of presentations by senior management, which will be focusing on the growth drivers in our business; and we'll be sharing with you some early thoughts regarding our expectations for 2011.

Many of you have already responded and we're expecting a great turnout. So for those of you who have not yet responded, we hope to hear from you soon. Well, that concludes our remarks and we'd be glad to answer any questions.

Thank you. (Operator Instructions) Your first question comes from the line of Michael Salinsky from RBC. Your line is open.

Good afternoon, guys. Quick question. First on operations. Just in terms of markets right now, clearly the Northeast and Mid-Atlantic are leading. Are you seeing any signs of strength in terms of the West Coast? And do you still feel that the West Coast next year could be among the strongest performing markets in your portfolio?

Mike, this is Leo. I think that what you've described is accurate, but I would tell you that the way I see it is kind of in three buckets. The New England area or Boston and the Mid-Atlantic have been strong and remain strong for us. The markets that seem to be showing more recently the most opportunity for us are the New York Metro area and then Northern California and that continues.

And then the markets -- it's still -- that are showing improvement but still have some challenge would be in Seattle and Southern California. When you specifically want to talk about the West Coast, I'd tell you that I feel pretty good about how Northern California is performing; and with respect to Seattle and Southern California, they're improving but just not in the same way.

Okay. As you look out your 60 day renewal rates right now, what kind of renewal increases are you guys targeting?

For the quarter, as Tim suggested, we were just below 6% for the third quarter and the offers that we have out for October, November, and December are in the 5.5% to 6% range. Just to be clear, those are the offers that we have out. People who get higher offers can choose not to take them, so there could be some erosion from those levels; but in general, they've been put out in the same level that we've been achieving in the third quarter.

Okay. And then you talked about the 7.5% yield on the projects you started there in the third quarter. A lot of those being kind of Phase IIs. If you look at the overall predevelopment pipeline right now, where are yields and are there any projects that you could have to start in the next 12 to 18 months, via land options or anything like that?

Mike, I'm sorry, I missed the last part of that question. Maybe you could repeat that last part.

Sure. Just as you look at your predevelopment pipeline there, are there any projects where you have deadlines to start or anything -- you face firm deadlines to start that were put in place several years ago or anything like that?

Why don't I start with the first one. Nothing -- I mean the last question there. Nothing comes to mind where we have a firm date in the next, say, 12 months. There are some -- sometimes there are some performance requirements on land lease deals, but those are far enough out that they're not really coming into play in the next 12 or 18 months.

And then oftentimes you might have permits or site plan approval that may be expiring that typically can get extended. But there's nothing where we feel like we have a gun to our head at this point over the next 12 or 18 months. In terms of -- by the way, this is Tim speaking. In terms of the pipeline, I would tell you, it's a pretty wide range. While the deals we anticipate starting probably are going to be more in the 6.5% to 7.5% range, the total pipeline probably varies from a low of mid 5s to as high as mid 8s. But the bulk of the deals I would tell you are probably in the 6.5% to low 7% range.

Thanks, guys.

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

Thank you. Good afternoon. Just want to go a little bit more into the fund one, the mortgage purchase. Just want to know, one, if there's any sort of -- what the P&L impact is and sort of what discount to face? And what drove this seller, the mortgage owner to auction it, and are there other opportunities for you guys to do this sort of thing?

Alex, this is Tom. First, in terms of the P&L impact, the P&L impact was pretty modest during the third quarter. We did have our proportionate share of the debt forgiveness, and I'll talk about that in a second, which was roughly $300,000. In terms of the discount to face, it was a $2 million discount. We purchased the note for $24 million, and it was a $26 million note.

The asset this note relates to is a fund asset that was impacted by the downturn. It's in the Inland Empire and it was not covering the debt service on the loan. So I can't really speak to why the lender marketed the loan, but I would imagine it was because the loan wasn't covering debt service, and they felt like it was a loan that they would rather not have on their book,s but I can't really speak to the lender.

In terms of other opportunities, this is the kind of thing that is sporadic. We were not formally notified that they were marketing the loan. We had to learn about it independently. So we're not aware of any other opportunities at this time.

Okay. And then I was reading in the paper about, I think, the name of the program is Hope For, or some sort of federal program to redevelop failed public housing projects; but clearly there are a lot of different public entities out there looking to help revive things. Do you see these opportunities as being meaningful in your overall portfolio, or should we view these sorts of things more as one-offs?

Alex, this is Bryce. I think more the latter, one-offs. In the program in some cases it involves the demolition of the existing units and reconstruction of new market rate units and some additional affordable units. In that case, that can fit to our strategy, particularly in the markets we're in. So it would be sort of one-off. We have looked at some of them, particularly in the New York area, where they tend to be larger deals where we can bring some unique skills to bear. But not -- we're not going after it programmatically, it's more of a one-off.

Okay. So as we think about local budgets being crimped, it's not like there's a whole new opportunity set for you guys?

No, because again, these are federal -- it's a federal program, so -- but no, I don't think you should assume it's a new strategy or a new program for us.

Okay. And then the final thing just goes to the recent decision here in New York. Looks like there were two rulings. One, which wasn't in your favor; and then another one the developer, I don't know, maybe they had a different judge. But when you're dealing with developments in cities, who has the final authority? Is it the city or is it the government -- or the Federal Government that has the say in these sorts of matters.

When you say, "these sorts of matters", you're saying zoning issues or what are you referring to, Alex?

Well, as far as the layout of the units, whether they comply with all the local -- the compliance stuff with accessibility and all that stuff.

Sure. Okay. It's a federal law, Federal Fair Housing, and handicap accessibility law. Just to clarify, you talk about a judge, we did not have a -- we did not lose a ruling. We did not go to court over it. What Alex is referring to just for background, we, along with a number of other real estate companies in the New York area were sued by the Department of Justice who felt that some of the buildings in New York City did not fully comply with federal accessibility requirements.

And rather that litigating it, we reached an agreement regarding our differences with the DOJ and we're making certain modifications to several of our properties. So we did not go to court and lose. We just -- oftentimes you have disputes with people and you seek to resolve them in the most prudent manner and that's what happened in our case. For others, I can't speak to their strategy.

But as far as other cities, is it -- so it's the government that I guess now, what, do you have to go back and make sure that the architects complied with the federal, or as long as you got the local approvals, should be fine?

No, no, you must comply with the federal. Complying just -- it is a confusing area, so -- but there are state accessibility requirements and there's federal accessibility requirements. Meeting the state does not absolve you of the responsibility to meet that federal. That's where some of the confusion happened in and around New York City. And the issue of just what is compliance with handicap accessibility requirements is also not a black and white issue. There's a lot of judgment involved.

Okay, that's helpful, thank you.

Your next question comes from the line of Rob Stevenson from Macquarie. Your line is open.

Thanks guys. Bryce or Tim, can you talk about what you feel comfortable with over the next few quarters in taking the size of the development pipeline up to? Because if I take a look at the development schedule, you have almost $500 million of developments that will be completed here in the fourth quarter; and so if you only start 300 in the fourth quarter, you're net-net going to be down a little bit. But you feel comfortable ramping that up to a $1.5 billion, $1.75 billion? Where's the sort of comfort level for you guys at this point given the sort of macro outlook?

Rob, this is Bryce. You're right. We have, obviously with the five starts that Tim mentioned and on our schedule, our development underway now is about a $1.1 billion, which is about 9% or 10% of our total market cap if you want to think of it that way. We've spoken in the past that in that '07 time period where we had over a couple billion underway, we were running close to 20%, which we felt was too much in hindsight.

So the number that we have -- there's no set number, but the range that we have given and discussed before is we're comfortable with it being around 15%; which under today's market cap would put you, whatever, $1.5 billion, $1.8 billion depending on how you want to calculate it. So we're running about $1.1 billion. You're right, there's some large communities we'll be completing in the first half of the year, but we certainly will be starting additional developments in 2011. You would have to stay tuned in terms of how much we'll start in '11. We have not decided that at this point. We'll certainly be providing that as we normally do in our outlook in the beginning of 2011.

Okay. And then Tim, what is -- for you to start a new redevelopment today, what type of yield does it have to be to be attractive to you?

Rob, couple things. Sometimes we -- good portions of redevelopment program, which has generally been true over the last year or two in a tougher economic climate have been more defensive in nature where you had maybe some communities that had excessive number of its components kind of coming to the end of its useful life. I would say, -- so those are just more out of necessity in terms of just being good stewards for the assets.

In terms of more offensive opportunities where you're actually enhancing, fundamentally changing the competitive positioning of an asset in the market, typically we're going to look for north of 10% return on enhancements in order for it to be compelling. The other thing I would say about it is you think about it in terms of total valuation, the fact that we're repositioning the asset would say that we would expect it to grow faster -- the underlying cash flows would grow faster, just meeting maybe a deeper niche in the market; and therefore, might affect the exit cap rate if you will. So we think there's both an initial return component as well as maybe a longer return in the form of higher cash flows and perhaps a lower residual cap rate.

Okay. And then one last question. The Willoughby parcels in Brooklyn, are you guys still planning on at this point building an almost 60 story building on that?

It is still in active development. The timing of it has not been determined.

Okay. Thanks.

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

Hi. Good afternoon. Bryce, you mentioned -- sort of referencing 2005, 2006, I guess based on supply demand trends you're seeing today. Can you just help us frame sort of the rent growth or perhaps NOI trends that you anticipate over the next couple of years, just making that comparison to that time frame?

Well, Jay, unfortunately I'm not going to be able to give you any guidance on rent growth for next year or two. And we'll be providing that in early part of '11. What I was attempting to do by using that reference is just, obviously there's a lot of focus on, appropriately so, on the demand drivers, particularly concern about are rents sustainable in the face of anemic job growth. What I was really trying to call attention to is that while that's important, it is, obviously as we all know, it's about demand and supply. And to be looking into 2011 at a time where we'll see the lowest deliveries in over 50 years, I just think is being missed by some. It's just being underestimated.

If you look at those ratios, we get back to those '05 and '06 ratios not because of stronger demand but because of a real anemic level of supply. And in that '05 and '06 time period, they were quite strong periods for rental housing. That's really the analogy I'm trying to make. We're not trying to give guidance for 2011. We'll do that later.

But I think there are some parallels that one can draw, and certainly we tried to also give insight by reflecting on what we're seeing in terms of new move-in rents, new lease rents, in that approximately 5% range; and the fact that we'll be seeing year-over-year growth in the fourth quarter of 3%. I think by triangulating between those, hopefully gives you some thoughts in terms of what 2011 will be, but we'll provide more formal guidance in a couple months.

Okay. No, that's helpful. Getting a little more market specific, I was hoping to get comments on San Jose. It seems like you're trading a little bit of rate for occupancy there. But you mentioned Northern California being one of the markets where you're more positive now, but could you expand a bit on San Jose?

Sure, Jay, this is Leo. We do feel very good about San Jose and we are pushing rents. I will tell you, I guess one of the best indicators that I can give you is that with our revenue management software, based on our most recent results, what we've been doing is we're actually going to a stronger bias where we expect rents to be pushed more aggressively, and San Jose is one of those markets that we have moved up recently. We feel it is pretty stable. Does that help?

That does. And for Tom, any thoughts on the Continuous Equity Program? Are you guys done here or is that something you look to re-up as you look into next year?

Rob, this is Tom. The first -- I'm sorry, Jay. We've got the first CEP program, our initial CEP program completed. We can't really speak to capital markets activity in the future, but we're pleased with the outcome of that program that we finished up in July.

Okay. And Bryce, any thoughts on the Filene's site in Boston? Is that something you're still considering and looking at?

It's something we have been and continue to look at. It's a complicated deal. It's a nice piece of real estate. But it's just one of many things we're looking at in the Boston area.

Okay. Thank you.

Your next question comes from the line of Michelle Ko from Bank of America-Merrill Lynch. Your line is open.

Hi. I was just wondering if you could tell me how far off your peak rents are for the total portfolio and by some of your major markets?

Sure, Michelle. We're off 2% to 5% in general. I would tell you the markets that we're furthest off are places like Seattle and where we're at or potentially slightly above would be the markets that have been most stable and performed the best like the Mid-Atlantic or Boston area.

Okay. Great. And I guess -- I was just wondering what gave you the confidence that you could push beyond these peak rents? Is it just from the low supply? Are you also anticipating some job growth?

Michelle, one thing I mentioned in my earlier comments that I think has been quite interesting and maybe not get as much coverage, but it's not just the level of jobs but it's where -- who's getting the jobs. And the fact that job growth has been really tremendously skewed towards the younger age cohort has been very important to support rental housing. If you're getting a lot of jobs but they're in the age cohorts that are primarily homeowners it doesn't help us that much.

But whatever jobs you're getting, if they're largely in that younger age cohort, that's quite significant. I think that's part of what we've been seeing in terms of this unbundling. It has been driven -- people don't generally unbundle unless they get a job. That's what moves them off mom and dad's couch is they got a job. I wouldn't underestimate that.

Michelle, this is Leo. Generally, it's the way our portfolio has been performing. I mean, Tim talked a little bit about what happened with occupancy. When you look at the third quarter, occupancy was lower than the previous quarter. But by the end of the quarter, we were over 96%. Our early indications for October are we will be over 96%.

Our conversion ratios remain solid. It's in the low 30s, a And then if you flip to the other side which is existing residents and renewals, as one of the attachments shows, our turnover was down 7% year-over-year. The only indication that might give you pause was the reasons for move-out related to financial is up on a year-over-year basis and it's above our historical averages. But in general, all of the critical metrics that we monitor for the portfolio are pretty positive, and it causes me to actually push harder and change revenue management parameters to be more aggressive rather than less aggressive.

And do you happen to have those percentages on the move-outs to -- move-outs because of financial reasons?

For the quarter, it ran around 14%. I think historically we've told you it runs between 8% and 10%. So it is higher than our historical experience. But frankly, the reason for home purchase, which we've typically given you a number of 20% to 25% and I believe last quarter was around 17% has dropped to just below 14%. So people are staying put and that's giving us the confidence to be more aggressive.

Great. Thank you. That's helpful. And also, just wondering, are you seeing narrower spread in cap rates between A, B and C assets?

Michelle, this is Tim. I can't really comment on C, per se, because I don't think that's anything we really pursue as part of our portfolio of assets we would have sold. But in terms of A versus B, I'm not sure it's gotten that wide. There just wasn't that many B assets being sold a year ago. Most of the assets that came to market initially were more trophy like A assets where people are looking -- if people were going to trade, for the most part they didn't want to be selling, they were selling because they had to.

If they were going to sell, they were trying to minimize the risk of the transaction. Typically that pointed them towards a high quality asset. So we just saw a lot more -- at least in our markets we just saw more trading of the A assets. I'd say right now the spreads aren't particularly wide between As and Bs. At least on the transactions that we're looking at.

Okay, and you mentioned on the call also that you thought some of the larger assets that were repositioning type of assets were more attractive. I was just wondering, I guess, what do you consider larger? Like what's kind of that breaking point?

Yes, good question. I probably would have said something over $60 million to $75 million in that range. The two assets I was referring to were both around $100 million; and to be clear, those assets had already been renovated and what you see out there in the market right now are either -- it seems like a lot of core buyers are looking for really clean newer deals or people looking for -- increasingly some folks looking for value add opportunities because they have a value add fund, and these deals are a little betweeners and we think as a result will provide a little bit more of a compelling value.

Okay. Great. Thanks so much.

Your next question comes from the line of Eric Wolfe from Citigroup. Your line is open.

Thanks. Just a follow-up on Rob's question on the development pipeline. You've talked in the past about getting the appropriate risk adjusted spread to where you can acquire assets. I guess now that cap rates have declined as low as 4% in some of your core markets, does that make you more inclined to start developments with a 5 or low 6 yield; or do you need to see cap rates kind of stay at around these low levels for a while before that makes sense?

This is Tim. I think it depends on which markets you're talking about. Some of the deals that are going off in the 4s are in California, typically, where I think the expectation is that growth is going to be a lot stronger. So that would factor into the kind of yield that we would expect to get or target to get on a new development, just as it would on an acquisition.

Generally we're going to be targeting unlevered IRRs at least right now in the market on a core acquisition in the low 8% range, and for new development it's going to need to be north of 10. That's generally going to translate into a target yield, call it around 7% for new development; and maybe as low as low 6s. It's been a market where we think the growth rate and the exit cap rate -- growth rate's likely to be stronger and the exit cap rate is likely to be lower and it may be in the mid-7s if the reverse is true.

All right. So I guess your underwriting standards haven't changed all that much over the last call it six months? Even though cap rates have continued to decline, you're still targeting the same unlevered IRRs in double digits?

That's right. Again, it's based upon where you are in the cycle. The initial yield may look a little different, but we think our long-term cost of capital hasn't changed that dramatically. It's down probably a little bit. But as a result, the total kind of unlevered IRRs you would be seeking to get shouldn't have changed much either.

All right. And just on the $2 billion redevelopment pipeline that you have today, what sort of yield would you get on current rents if you started all of that today? I'm just trying to get a sense for if you built everything today, what you think it would cost, where would the yield be on that cost?

The weighted average, I don't have a number in front of me, but where I quoted earlier, it's probably a range of low, mid-5s to as high as mid-8s. The bulk of the deals are going to be in the 6.5% to low 7% range.

So even in California you're still going to be getting a low 5% yield by starting today on current rent.

If you're in Southern California, you're probably going to be in the -- probably best case, you're going to be in the mid to high 5s today. Northern California, we do have a deal we're getting ready to start that's frankly north of 6%, closer to 7%. So it's going to depend upon the opportunity.

All right. And just one last question, and you touched upon this in your remarks. But I'm wondering whether the sequential revenue growth you're expecting in the fourth quarter of 1.1% will come primarily from rate growths or whether you think that occupancy number will come back up to the level you saw in the second quarter by maybe not pushing rate quite as much?

Eric, this is Leo. As I was saying earlier, we are really focused on pushing -- continuing to push rate. If occupancy were to decline a little bit, it wouldn't concern me at this point.

Eric, this is Bryce. Just to clarify, I said a rate roughly similar. That's not meant to take literally that we've given a projection of 1.1 in the fourth quarter.

Right. No, I was just wondering whether to call it about 1% growth was going to have the same composition in the third quarter where you push rent by 1.8 and let occupancy slide, or if you were just going to maybe hold off on pushing rate a bit just given where occupancy is. But I guess there's no magic number as far as the occupancy. Do you think we're going to see you continuing to operate between call it a 95% and 96% occupancy level? Is that about what you're targeting or is there no real magic number?

Eric, I think it's probably fair that it's going to be somewhere in that range. That tends to be a range which we find we can optimize revenues. I just want to clarify one thing, though. When you mention 1.8% sequential revenue growth, it is dependent upon the level of turnover, and you have a lot less turnover in Q4 than you do Q3. You can only increase rents on units the that have expiring leases.

I think you have roughly two-thirds the level of expiring leases in Q4 than you do in Q3. Again, it's a slower leasing season. Even if we were pushing rates at the same rate, you would only end up with one, two. Just to put some math to it. Just make sure people understand sort of how that math work, if you will.

Got you. Thank you.

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

Hi, it's Ross Nussbaum here with Dustin. Can you guys give me a sense of where rent growth is shaking out if I look at studios versus one bedrooms versus two bedrooms? Is there any notable differences?

Ross, this is Leo. It can vary by market. There are some markets where there seems to be more demand for one or studios than twos. But in general, there isn't a big difference. And I can tell you that I watch the occupancy across all of those - - studios, ones, twos, pretty carefully; and the occupancy is pretty consistent across all the different floor plans.

And same question in terms of looking at move-outs to home ownership. I guess one would theoretically think that you would have more of it in the two bedrooms than the studios, although I don't know if those trends shifted in this crazy world.

Unfortunately, I don't have that information. I don't have it parsed to that level.

Turning to the development side, if I look at your development right schedule in the supplemental, if my math is right here, a full two-thirds of the cost is in New York and New Jersey. And I'm wondering if that is accidental, intentional, a timing blip, or is it the intent to focus most of the capital growth of the Company in the next five years on the New York, New Jersey area?

Ross, this is Tim. I don't think it's intentional that that's where we tend to concentrate the capital growth. I think what we said in the past is the northeast typically provides a more compelling economics from a development investment perspective. And what we tried talk to in the past is the development decision is a little different than the capital allocation decision.

Obviously you can sell some -- you can sell assets out of the Northeast and redeploy that back into, say, the West Coast markets where you may be adding more to your portfolio through acquisition than new development. So I'd say it's really more a function of where the economics of development are more compelling. We probably have half our offices are in the Northeast. Development offices alone, I think six out of 11 of our development offices are out of the Northeast. It's a little bit just the math of it, if you will.

Okay. And then Bryce, finally, I'm just curious, do you have a formal opinion on the outlook for the single family housing market over the next year? And how do you think about that influencing positively or negatively multi-family trends?

Well, I'm not sure if I would define it as a formal opinion. I certainly, I guess have an opinion and that is that our expectation -- my expectation is it is going to remain weak, certainly into 2011 and likely beyond, which is going to cause the home ownership rate to likely continue to fall and shifting demands more towards rental. I think there's a number of factors going on that -- not the least of which is just the current state of the foreclosures and the impact that will have potentially on additional standing inventory, which potentially has impact on some additional modest, I don't think dramatic but modest price reductions, which will continue to chill buyers' interest and background of just the whole political debate about a balanced housing policy.

Certainly, I think if we learned nothing over the last few years, or the past few years has been that trying to artificially stimulate single-family demand is a losing cause. So I'd like to think that our policy makers won't do anything that is going to artificially stimulate the housing demand. And left to its own device, it's hard to be particularly optimistic about it, at least over the next year. I think that bodes well for rental. I don't know, Tim, if you want to add anything to that.

Do you guys feel as though the country can produce positive GDP growth and positive job momentum without housing prices moving forward?

I don't see any reason why not. Actually, I may have commented on a previous call that I -- a lot of discussion about what drives a strong economy, does a strong housing market drive a strong economy or does a strong economy drive a strong housing market. You could take different sides of that.

If our economy is singularly dependent upon having a strong housing market, I don't think that speaks very well to the strength of a robust economy. Yes, I do think you will see -- we are seeing some job growth, albeit not at the level any of us would like to see it; but we're seeing it in spite of a very weak housing market. I don't know if others want to add to it. I'm not a pessimist in that front, Ross, I guess is where I would conclude on that.

Thank you. Appreciate it.

Your next question comes from the line of David Harris from Gleacher & Company. Your line is open.

Yes, thanks. Hey, Bryce, just picking up on your comments with regard to foreclosure there, are you feeling any effect on the operational side from the current foreclosure mess?

Well, I might pass that to Leo.

David, there are certain markets that have obviously been more impacted by foreclosures. Southern California would be one. But I can tell you in general, we are not seeing a lot of impact on foreclosures With respect to residents that might come to us from a foreclosure situation, we don't disqualify them. So they can become part of the renter pool for us.

And then with respect to that creating more supply, really hasn't been a big issue. We tend to find that people that rent choose professional or nonprofessional, so that helps us. And frankly, a lot of the press recently about foreclosure has been boy, if you rent something that could go into foreclosure, you could be left in a very difficult situation; and if anything, we've seen is people coming through the door who are less likely to go to that gray market for fear that it could be foreclosed.

Would your working assumption be that it's resolved fairly soon, and that the market sort of goes back to what one might call a normal state?

I don't know how to answer that, David. I mean, as I was saying earlier, I think we are still in an adjustment period. I don't think we're in a normal state yet. Certainly that will come. But I think through 2011, we will continue to gain share at the expense of home ownership. Beyond that, I'll reserve forecasting.

Okay. I was struck again, looking at your capitalized cost, how low your maintenance CapEx numbers are compared to your peers. I think that partly reflects the age of the portfolio and when I think I last quizzed you about this I think you were inside seven. Is there a number you can throw out today in terms of the age of the portfolio?

Well, it depends on whether it's been renovated or not. I think the age of the portfolio is probably closer to 14 or 15 years when you consider the actual date of initial construction. But I think when you consider renovation, that number drops closer to -- in the eight year range, David.

And is it a strategic objective to keep that number perhaps in single digits?

I wouldn't necessarily say that. I think the objective is to try to optimize the portfolio performance, not because of -- not necessarily from a CapEx standpoint, but just in terms of how an asset is positioned within the marketplace. To the extent we think an asset is not optimized in its marketplace because it needs capital or needs repositioning, then we're going to invest capital to the extent we think it makes sense to let the asset age and season, just because of the nature of that sub-market, we're going to do that. I wouldn't say it's a metric that we have a close eye on from a -- in terms of trying to target and stay within.

We think about those CapEx numbers, would they be similar for the fund?

I suspect the fund assets are probably a bit more, just because it's a value add strategy. I think the average asset age of the fund assets is actually a little more than 20 years. I suspect -- I don't have it in front of me, David, but I would expect that the average CapEx number there is more than the average here.

Okay. Great. Thanks, guys.

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

Hey, guys. Tim, you walked through initial yield and expected unlevered returns that you're targeting on acquisitions. Can I assume that the three acquisitions for the fund mesh closely with those?

The three acquisitions for the fund, they closed in the quarter; and I think we actually talked about them in the second quarter, we were actually in due diligence at the time. They reflect market pricing that's probably about six months old now, Andy. To give you a sense, those are more mid 5s in terms of initial cap rate and in terms of projected unlevered IRRs, they're more in the mid 8s.

If those are being repriced today, those numbers would slide a bit I suspect, just based upon what's happened in the market over the last six months. But in terms of initial yields, cap rate, sort of mid-5s, in terms of getting between -- to the 8.5, there would be some above trend growth over the next few years, probably have compounded annual growth rates in the mid to high 3s, on the order of 100 to 125 basis points of reversion on cap rate on the exit to get to your mid 8s type unlevered IRR.

Thanks. Then on development, can you comment at all on kind of peak to trough change in construction costs, and whether you're seeing any upward pressure there?

Andy, this is Bryce. We are definitely still benefiting from very favorable construction markets. There are some that are still declining, the most specifically some in California and Seattle where most are flat, like DC and Boston. In no markets are they ramping up on a collective basis. Certainly, some trades or commodities are, but overall we're not seeing that yet.

And in fact, as you may have noticed on our development rights schedule -- on our development community schedule, we reflected another $3 million in savings this quarter just from cost savings of communities underway. In terms of peak to trough, peak was probably first beginning of '08, and since that time we've seen pricing on gardens -- garden communities or wood frame communities down 20% to 25% on hard costs and high rise, probably 15% to 20% because of the nature of the different trades there, union versus nonunion, principally.

I think one last question for Tom. Could you just update us on what rates you're seeing in the secured and unsecured markets today?

Yes, Andy. Generally speaking, if you look at the unsecured market today and recognizing that treasuries have backed up a good bit in the last week, probably seeing a 10 year unsecured debt deal in the 4% to 4.25% range. That's probably 25 to 50 basis points inside what the GSCs would offer. There would probably be on a 10 year deal somewhere in the 4.5% range. So there's still -- unsecured markets over the last three or four quarters have actually priced inside the secured markets as measured by the GSCs.

Thanks, guys.

Your next question comes from the line of Tayo Okusanya from Jeffries & Company. Your line is open.

Yes. Good afternoon, gentlemen. Just a quick clarification question. The 7.5% development yield that was mentioned earlier on, is that in regards to the five new developments that came on in third quarter or the $300 million of new developments that are coming on in fourth quarter?

It's related to the $232 million that we started in the third quarter.

Okay. That makes -- and then, I guess I'm kind of struggling to get to that number when I just kind of look at all the disclosure you give about -- is that all based on the current rents that are in the attachment or based on what future rents will be when the developments go online?

It's based upon the current rents that are in the attachment. So in the case of Avalon Queen Anne for instance, which is the eighth community listed on Attachment nine, the average rent per home there is $1,925. And that reflects our underwriting of current market, which would translate into the average 7.5% yield that we quoted.

So it's the $1,925 times 12 months times 203 homes divided by the $56.7 million total cost?

You have vacancy and operating expenses.

Right. And applying like a 65% operating margin or something to that number?

It's really going to vary. Oftentimes on these new developments the operating margins are quite a bit higher.

I think for the portfolio overall, it's about -- it's about 60% but oftentimes new developments could be 70% to 75%.

Okay. Maybe that's what I'm missing. Okay. That's helpful. And then a second question, just given the commentary in regards to Seattle, I was just curious why the decision was made to start the Queen Anne development?

Well, we are a long-term believer in Seattle. We're starting to see, as Leo mentioned, some turning in that market. We're beginning a community that won't be delivered for 18 months and stabilizing for 24 months. We think it's a particularly opportune time. That particular development just as an example to focus a bit on the prior question Andy had about construction costs, that market is a market where we are benefiting by continued reduction in construction costs.

We're buying it out right now at 8% below our most recent budget at the end of 2009. So we're able to lock in historically low construction costs and build into improving market. We think the timing is perfect.

Got it. Okay. Thank you very much.

Your next question comes from the line of Karin Ford from KeyBank. Your line is open.

Hi, good afternoon. Just wanted to ask for more detail on the rent increase trends through the quarter. You said it was 5.5% on average for the quarter. I think my notes from the last call for July was roughly the same. Was it basically 5.5% for all three months or was there any variation in August and September?

Karin, this is Leo. Expiration, it was 5.5% in July. And then it dropped to the low 5%s and then the upper 4%s through September. As you're aware, our occupancy increased pretty dramatically in that time frame to over 96% and that's what's caused us to push more aggressively again.

Got it. And just the last question, a clarification. Tom, I think you mentioned that the mortgage you purchased that property was not covering debt service. Was that mortgage actually in default?

It was not. It was not in default.

Okay. Thanks very much.

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

Thank you. Good afternoon. Just one question. How actively are you seeking to add to your land bank? And could you characterize the opportunity set you're seeing including what's gone on with pricing?

Paula, it's Tim Naughton. I would say we're very active in trying to replenish the development pipeline. We're not all that eager about bringing it into the land bank. For the most part, we are able to secure option contracts. In fact, I can't think of an instance where we haven't, at least on new development rights or deals that are in due diligence where it's not an option contract that gives us a fair bit of time to either get entitlements or to re-entitle the deal in the case where it needs to be re-entitled.

So we're actually pretty aggressive across all of our markets right now. I think I spoke to that last quarter. In terms of the type of opportunities, still more wood frame than concrete, certainly, just the -- those deals are underwriting better for, I think, for some obvious reasons, just a lot of it's the denominator effect where we're seeing larger decrease in construction costs and those tend to be lower cost type communities anyway, which are communities that tend to be performing better right now in this kind of macroeconomic environment.

Thank you.

(Operator Instructions) And your next question comes from the line of Anthony Paolone from JPMorgan. Your line is open.

Hi. Good afternoon. It's Ralph Davies with Tony. Just had a question in regards to that uptick in move-outs, I guess, for financial reasons. I'm wondering, are you seeing that grow right now or more recently? Do you think that's going to stabilize? And can you also talk about whether there are geographies where you're seeing that growth in particular?

This is Leo. With respect to the growth, it is up from the last quarter by about 4%, and I did go look at specific geographies. It's pretty interesting, across all of our 16 markets it's up pretty -- it's up consistently across all those markets. Some markets more than others. But we have been pushing renewal rents pretty aggressively, and our turnover is down pretty consistently across markets so we have not -- we're not backing off in any way. So it's pretty consistent.

Okay. Do you anticipate that that upward trend continuing?

Really, I don't know. I mean, I'm going to watch it pretty carefully. I watch turnover first. But I hope to accomplish this, I am going to continue to push rents aggressively. It's hard to know where they're going to go.

Thanks.

Your next question comes from the line of (inaudible) from KBW. Your line is open.

Yes, thanks. Good afternoon, guys. Just a couple quick ones here. Just thinking that -- well, giving emerging demand from the younger cohort, I was wondering if you had any thoughts or plans on revising the development product you guys deliver either by unit mix or amenity package?

We spend a lot of time -- this is Bryce -- working on our product, and we're always keeping it fresh and innovating around the edges, if you will, but we don't try to target a specific community or a product for a trend that we're seeing today. All right. Because we're building assets so we'll have a 50 to 100 year life. So we're looking really at longer term trends and we are spending a lot more time looking at our specific customer segments and designing products that meet the needs of those customer segments through more product differentiation.

Short answer is yes, we're doing it but we're not doing it because of a trend we're seeing today. We're doing it based upon our view of the long-term demand in the sector and what -- and where we see an opportunity that others aren't meeting.

Fair enough. One more quick one. You guys mentioned earlier that you're looking at some potential acquisition. I was curious how far along some of those talks were, probability to close timing, etc? Any additional color that you might be willing to provide.

Yes, Handle, this is Tim. What I was just talking a moment ago, was speaking about land opportunities, development opportunities. We're always in the market on the acquisition side. As I mentioned earlier, the market is more active right now, and we're bidding on several deals, have one or two deals that are under LOI and then due diligence currently.

You said you have some deals under LOI. Can you share -- quantify that?

Not in terms of dollars, no, I think it would be premature. It will be less than what we saw in Q3 in terms of where it closed. I wouldn't be thinking of that as a run rate, just to be clear. That was a pretty unusual quarter where we had two very large deals at $100 million a piece that had closed.

Okay. Fair enough. Thank you, guys.

There are no further questions in queue. Mr. Blair, do you have any closing remarks?

Well, just want to thank everyone for their participation today and look forward to seeing many of you in the next few weeks at both NAREIT and then at our Investor Day. So thank you.

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