艾芙隆海灣社區公司 (AVB) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities Second Quarter 2011 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 conference call, Mr. John Christie, Director of Investor Relations. Mr. Christie, you may begin your conference.

Thank you, Amanda, and welcome to AvalonBay Communities' second quarter 2011 earnings conference call.

Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the Company's Form 10-Q filed with the SEC.

As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms which may be used in today's discussion. The attachment is available on our website at www.AvalonBay.com/earnings and we encourage you to refer to this information during your review of our operating results and financial performance.

Now I'd like to turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities, for his remarks. Bryce?

Thanks, John, and welcome to our second quarter conference call. On the call with me today are Tim Naughton, Tom Sargeant and Leo Horey. Tim and I will each have some prepared remarks and then all four of us will be available to answer any questions you may have.

Last evening, we reported EPS of $0.49 and FFO per share of $1.13 which was $0.02 above the midpoint of our prior guidance. On a year-over-year basis, our FFO increased by about 9% and after adjusting for non-routine items, increased by about 13%. The higher than expected quarterly results were driven by slightly stronger than expected revenue growth, as well as by lower operating expenses, some of which are timing-related. On a year-over-year basis, NOI grew by 8% which is the strongest increase we've experienced since the first half of '07.

For the full year, we expect NOI growth of between 7% and 8.5% and FFO per share to be between $4.60 and $4.75. This range excludes the impact of the sale of a ground lease asset that was included in our previous guidance. As we mentioned last quarter, we intend to sell our leasehold interest at Avalon Rock Spring which, once sold, will result in a net annual non-cash pick-up in FFO of around $0.10 per share.

This addition to FFO was included in our initial outlook. However, currently we don't anticipate that Rock Spring will close prior to the end of the year. So, as a result this non-cash pickup in FFO will not be realized in 2011 and our outlook has been adjusted accordingly.

The midpoint of our FFO range would represent a year-over-year growth rate of about 17% and this would equal the highest rate of growth for AvalonBay in our Company's history and it's being primarily driven by the strong growth in our operating portfolio and the significant increase in our investment activity.

The multi-family sector is experiencing the strongest performance in years and yet, the uneven economic recovery and other concerns have raised questions regarding the strength and the duration of the apartment sector's outperformance. And I'd like to briefly address four of the most common questions that are often raised and offer some thoughts as to the impact on the apartment sector's outlook. And the most frequent question we often hear is whether the recent stall in job growth will undermine renter demand.

While it's certainly true that job growth is a key driver of rental demand, the nature and composition of the jobs being created is very important as well. Nationwide job growth for all age groups has averaged about 125,000 per month, or less than 0.5% through the first half of the year. This is not as strong as original expectations and not strong enough to bring down the stubbornly high nationwide unemployment rate, yet when you look at the components of job growth and the unemployment rate for the younger college educated workforce who make up a disproportionate share of our renter households, you get a different picture. Let me share some of those stats with you.

Job growth for young adults, that being the age cohort 20 to 34, during the first half of this year has been strong, running at a 1.6% growth rate, which is four times greater than the rate of job growth overall. Additionally, while the overall unemployment rate is over 9%, the unemployment rate for the college-educated workforce is roughly half of that or 4.5%. Finally, when we look at our own portfolio, we don't see any indications yet that the recent sluggishness in overall hiring is impacting apartment market conditions. Traffic is strong, turnover is low and both renewal and new move-in rates are in the 7%-plus range. So while overall job growth is modest and overall unemployment is high, job growth and employment is much stronger for the prime AvalonBay renter segments which are typically young, affluent college-educated households.

A second question we often hear is whether rental rate increases will ultimately be constrained given that income levels nationally have been pretty flat. It's a good question, yet when we look at the average income for our new residents, we actually have seen material growth over the past few years.

Incomes for new residents have risen from a recent low of about $101,000 per household in Q1 of last year to just over $112,000 per household as of the second quarter of this year. This represents an increase of about 12% and is due in part to some real wage growth, but also due to an upgrade in the profile of our residents. And when we look at the rent to income ratio, it's currently running at a 20% to 22%, which is modestly below our historical average, suggesting that there continues to be room for growth. Ultimately, however, continued growth in rent will be benefited by strong job growth and in turn, by rising household incomes.

A third question is related to the threat from improved home affordability -- home affordability has improved due to home price declines and low mortgage rates and yet we're continuing to see an historically low percentage of our residents move out to purchase a home. During the second quarter, this level was 14% and remains near historic lows. It's important to point out that despite the price decline, home prices in many of our markets remain quite unaffordable.

A ratio of home price to income for AvalonBay markets averages 5 to 1 versus just over 3 to 1 nationally and in some of our particularly expensive markets, such as New York and San Francisco, this ratio is 7 to 1 or greater. In addition to the continued high cost of ownership in many of our markets is the very real concern about the value and merits of homeownership, particularly among a young, mobile age cohort who puts a premium on flexibility and convenience. Rates have certainly favored renter housing.

A fourth question we often hear is related to the threat from an increase in the supply of apartments in the coming years -- now nationally multi-family starts are up, yet they're up relative to historically low levels and remain below long-term averages. So far this year, total multi-family starts are running at an annualized rate of about 150,000 units, which is still only about half of the 10-year average of about 300,000 units per year. These starts are likely to return to historic levels sometime next year, which means completions should return to normalized levels in late '13 and 2014.

So overall, while the long term strength of the apartment sector is dependent upon the health of the overall economy, there are a number of factors specific to AvalonBay's markets or relative to our primary customer segment that suggest that we're still in the early stages of what is shaping up as a strong recovery. So I'll now pass it to Tim who will be commenting on our portfolio operations and investment activity for the quarter. Tim?

Thanks, Bryce. As Bryce mentioned, I'll comment on a couple of areas, both portfolio operations and investment activity.

Starting with the portfolio, portfolio performance continues to improve and is in line with the revised outlook we issued early last month. Despite sluggish and uneven job growth, demand supply fundamentals remain strong. Traffic to move-out ratios are at cyclically high levels as prospect traffic was up over 10% while turnover declined on a year-over-year basis. In addition, as Bryce mentioned, the quality of prospect traffic continues to improve which we believe is a function of low levels of new apartment deliveries combined with the weak for sale housing market. While we've seen an increase in move-outs due to rent increases, we've been able to re-lease vacated apartments to higher income prospects, resulting in an overall higher resident income profile with the capacity to pay higher rent.

Rents have now generally recovered since the last peak and most of our markets have entered the expansion phase of the cycle.

In the second quarter, same store NOI grew by 8% on a year-over-year basis, driven by an increase in same-store revenues of 4.5% and a decline in same-store expenses of 2.5%. The decline in expenses was aided in part by lower turnover and lower bad debt, as well as some timing-related items that were reversed in the second half of the year.

The trend in revenue performance continues to improve as same-store revenue growth accelerated by 80 basis points from Q1 when same-store revenues were up by 3.7%. All regions are showing positive growth ranging from 3% to 6%. And the West Coast outperformed the East Coast for the first time in 10 quarters, reflecting the momentum in the West that we noted last quarter. Same-store revenues accelerated through the quarter as well and grew by almost 5% in June.

This momentum is continuing into the third quarter and July revenues are projected to be up by around 6% year-over-year, driven by annual increases in new move-in and renewal rents of 7% to 7.5% for units with expiring leases. Renewal rates are projected to be strong for the balance of the quarter as offers for renewal increases for August and September are averaging over 7%, ranging from a low of around 5% in Southern California to a high of over 10% in Northern California.

Overall, for the balance of the year, we expect same-store revenue to be up over 6% in Q3 and around 7% in Q4.

On a sequential basis, same-store revenues posted solid increases as well, growing over 2% from Q1. Again, every region experienced strong sequential growth, with the exception of Southern California which grew at about half the rate of the rest of the portfolio. While Southern California has lagged other markets, it continues to improve and is now experiencing a solid recovery with effective rents growing in the mid-single digit range over the last couple months. As we mentioned over the last couple of quarters, while the recovery and expansion is broad-based, we expect that the West Coast will continue to exhibit stronger momentum and outperform the East Coast for the balance of 2011 and into 2012.

Shifting to investment activity and to start with development, we began to ramp up new development in Q2 as we started three communities totaling over $200 million, located in Boston and Long Island. In addition, we've authorized the start of another $500 million that will begin construction in the third quarter, including the start of our $275 million West Chelsea deal in Manhattan, which will be developed with two different products including separate high rise and mid-rise buildings targeting two distinct customer segments. The high rise, which faces 11th Avenue, will command views of the Hudson and be targeted toward a higher-end luxury segment while the mid-block mid-rise building will be targeted to a more youthful segment with smaller, more versatile floor plans and a decidely more modern aesthetic. Avalon West Chelsea is located near the entrance to the recently opened second phase of the High Line, and within a few short blocks of the new Seven Line station scheduled to open in the next two years at 34th and 11th Avenue.

For the full year, we expect to start around $1 billion in new developments, which is up a bit from our previous outlook.

The average projected yield for the development portfolio continued to improve in Q2 and now stands at just over 7%, although we expect it to normalize in the high 6% range once the rest of the plan starts to occur during the second half of the year. With cap rates in the 5% range, the development portfolio is expected to generate significant NAV growth over the next few years.

Based upon current projected yields and current cap rates, we project that development will contribute $1 billion plus of net asset value over the next two to three years, based upon cumulative starts of $2.5 billion to $3 billion from 2010 to 2012.

We also are continuing to replenish and build the shadow pipeline as we added another $200 million in development rights in Q2 and have another $500 million in due diligence. We're remaining aggressive in building the pipeline early in the cycle when development is usually most accretive and many competitors are still reestablishing their development platforms.

Turning to acquisitions, in the second quarter we closed on a total of $400 million in acquisitions including the previously disclosed EDR asset exchange which included six Southern California communities and accounted for $260 million of the total. We also closed on two assets in the DC market totaling $140 million, including one community for the investment management fund located in Rockville, Maryland for just under $50 million. In addition, we have two other fund acquisitions currently in due diligence totaling $150 million. With the investment period ending in August for the fund, these acquisitions are likely to be the last investments for Fund II.

Overall, including these two deals, we're projecting a total capital investment for Fund II of approximately $800 million. Any additional acquisition activity for the balance of the year will likely be funded through balance sheet. As we discussed in the past, this will allow us to be more aggressive in pursuing some of our portfolio management objectives.

So in summary, the recovery in apartment markets has now transitioned to expansion with strong rental rate growth being experienced across our markets. Solid fundamentals are translating into improved portfolio performance despite uneven economic and job growth. And finally, we're continuing to pursue an aggressive growth strategy in this phase of the cycle through acquisitions, redevelopment and new development.

And with that, I'll turn it over to Bryce for some closing remarks before opening it up for Q&A.

Thanks, Tim. I want to wrap up our prepared remarks with a few comments on capital market's activity during the quarter. In April, we took steps to mitigate future interest rate risks by entering into $430 million of forward starting interest rate swaps, where we agreed to pay a fixed rate of interest in exchange for a floating rate of interest at a future date. There's no impact to 2011 earnings as a result of this transaction.

Also during the quarter and early into the third quarter, we were active under our continuous equity program, or CEP, raising about $105 million and we've now raised a total of about $300 million under the current CEP since its inception in November of last year. Overall, the balance sheet remains in great shape with $360 million of cash on hand and nothing outstanding under our line of credit. Unencumbered NOI continues to improve at about 70% and interest coverage is strong at 3.2 times as of quarter end.

Overall, we feel very positive about both our performance so far this year as well as our outlook for the balance of this year and into 2012. We have strong internal growth from our portfolio, strong external growth from our development activity, a strong balance sheet to fund that growth and a seasoned management team to execute it.

Regarding the management team, I did want to comment briefly on the announcement early last month regarding my decision to retire as CEO at the end of this year and Tim's promotion to CEO. As mentioned in the prior announcement, I will continue in a half-time capacity during 2012 and will remain as Chairman during that time. This was a difficult decision for me personally, yet it was an easy one for me professionally. Difficult for me personally as I felt so fortunate to have had the opportunity to be part of AvalonBay for over 26 years and to serve as its CEO for 10.

AvalonBay has been a big part of my life and I'll very much miss it, yet professionally it was an easy decision as AvalonBay has such a deep and talented management team. Tim and I have worked together for over 20 years. Tim knows the industry, the Company and many of you very well and with the support of Tom and Leo and the balance of the senior team, I know they will continue to enhance AvalonBay's reputation as a best in class company.

With that, Amanda, we're now available to answer any questions.

(Operator Instructions) David Toti, FBR.

I just wanted to ask a couple of questions around the development pipeline. And maybe I'm reading too much into this, but it looked like sequentially the additions to the land bank essentially kept your inventory pipeline flat. Is that just something that's lumpy? Or is there a signal that you see that the pipeline maxed out at current levels, at least the shadow pipeline?

David, Tim. I think that's really just a coincidence that the pipeline stayed level. As I mentioned in our remarks, we added a couple hundred in new development rights and half of it starts -- $200 million this quarter. But as I also mentioned, we do have $500 million in due diligence. So, that pipeline could grow at $500 million in one quarter and we are anticipating talking about $500 million next quarter. It's likely to stay flat, though, for the next 90 days.

I might just add to that, David, if you look back and this picks up on some comments from prior calls, but over the past year -- so if you looked at our development pipeline a year ago today, so in the second quarter 2010, we had 28 communities representing about $2.2 billion in the pipeline. Today it's 32 billion -- 32 communities representing $2.7 billion. Over the last year it's grown by $500 million, notwithstanding that we started 13 communities during that time period.

We've been adding at a greater rate over the past year than we've been starting as that pipeline has grown and that really ties into Tim's comments in his prepared remarks that we've been pretty aggressive to add to it during the early part of this cycle when we have had a competitive advantage against many of our peers.

Okay, thank you. And then is it possible to disclose the yields you're expecting for the three new starts that you added this quarter?

The three new starts?

I guess my question is are the yields getting tighter on the new starts or are they pretty much in line with the averages that you've described?

Well, just maybe going back to 2010, I think we spoke about -- and this is Tim, by the way, David -- I think we talked about this in 2010. The deals that we did choose to start in 2010 really represented sort of the best of the best and had average yields north of 7%. When you look at the balance of the development right portfolio it's a mix from some legacy deals that are sub-6% to newer deals that in some cases approach 8% or even more than 8%.

But we expect that projected yield to stay in the high 6% range over the next few quarters as we start some of the deals that are teed up here over the next few quarters.

Okay. That's helpful. My last question just has to do with the notable expense control. Is the increasing level of capitalization in any way tied to that? I know they're quite separate buckets, but I'm just wondering if there's a relationship that we can expect to see continue as your capitalization levels increase?

Because of the asset or CapEx per unit?

The total capitalized interest and development spending, all the capitalized items. I'm just wondering if there's any spillover from your operating expenses into that bucket?

No. There wouldn't be any spillover that I can think of.

Okay. Thanks, guys.

Jeff Spector, Bank of America.

Can you please provide some detail on the four parcels acquired this past quarter and since the -- subsequent to the quarter?

So there were two communities during the quarter and as you mentioned, two right after the quarter. The -- one was in California. One was in New York. One was in Connecticut. One was in Massachusetts. So basically, three East Coast, one West Coast community.

One of them was a relatively recent purchase meaning it went under -- it was priced during 2011. The other deals had been under contract for a number of years and a couple of them had been renegotiated. So the average price per unit is in the high 30s per unit and they're all wood frame -- three wood frame communities, one concrete construction.

Okay, thanks. And then a question on your statement that the higher income earners are replacing those moving out. Obviously, those moving out can't afford the new price points and I guess I'm just trying to think about that customer, if they were a good paying customer and with your portfolio management objectives, over time are you trying to see if there's a way to keep that customer within your portfolio?

Jeff, Tim here. I would say yes. We actually do -- and Leo, you may want to comment on this. We do actually have a fair number of folks that do transfer or move from one community to another, oftentimes over a job change or some other life change. But to the extent we can accommodate them at another community that might fit their means or their objectives, then certainly we would try to do that.

Okay, great. Thank you.

Alex Goldfarb, Sandler O'Neill.

Just looking at your New York performance this quarter, the year-over-year growth, the revenue growth, looked lower than the rate that you guys had in the first quarter, yet the sequential growth fourth quarter to first quarter, first quarter to second quarter, seems to be increasing. So just want to get a little better perspective on that.

Alex, this is Leo. With respect to sequential growth, as you're aware, there are more expirations that occur in the second and the third quarters than occur in the first and the fourth. So, whatever direction rents are moving, the sequential is magnified in the second and third quarter. That's to deal with one aspect of the question.

With respect to New York in general and the discussions that have been out there in the press, the results in New York really are divided into three different areas -- that's where our portfolio is. It's Rockland County, Westchester County and New York. And in Westchester is where our results have been lagging, but in Rockland and New York they've been performing quite well, around 4.5%, 5% on a year-over-year basis. In Westchester, it's really just because of some supply coming in that area. In fact, if you look at our Sound East property, the revenue growth there was just above 1% where if you could compare it to a New York City asset like Riverview, which again is just outside the city, we saw revenue growth north of 7%.

Okay. That's helpful. And then the second question is, just a little more color on the Rock Spring marketing, just curious if this is a pricing issue, if this is a financing issue? Just curious why it's taking a little bit longer than what you initially thought?

Alex, Tim here. I think as we talked about last quarter, we had a partner in the deal that we did buy out last quarter. Sometime after that decided to take it to market which we talked about last quarter. It is a more protracted process in Montgomery County, just to give a little bit of color. The County and the Housing Authority actually have a right of first refusal that often takes 60 plus days to clear.

But at this point in the process, the asset is still being marketed and we just don't anticipate, just giving the timing, that it's going to close before the end of the year. It's a more protracted process, generally, in Montgomery County. The last thing I'd say is like any deal, to the extent we're unable to get the valuation we think represents fair value, it may not trade. But at this point we're still pursuing the sale of that asset.

Okay. So your point is that if you don't get, obviously the pricing that you want despite having the GAAP impact to your P&L, you would retain the asset rather than just sell it?

We wouldn't sell it at any cost, that's correct.

Okay, thank you.

Eric Wolfe, Citi.

Michael Bilerman here with Eric. Bryce, in addition to announcing your retirement, you also announced that you're going on to Pulte's Board of Directors. And I know you entered the empty nest part of your life and with the kids out of the house and them being in that prime renter cohort, what's your advice to them? Is your inclination to help them out and help them buy their first home so they build up equity or is it that they should continue to lease their residence?

Well, Michael, you've covered a lot of topics there. You talked about my career, my family, the rental market and the housing market. So, let me try to be a little bit responsive. I addressed a little bit of this in my prepared remarks, but to be quite honest, as I talk to my kids and try to listen to them and listen to their friends, for the most part the last thing that's on their mind is homeownership. They are focused on their first jobs, their first apartments, their moves. My son is three years out of college. He's already moved twice. He's on his second job already and he just is plenty happy being a renter.

So I think the advice I would give to whether it's my kids or anyone's children is to not let the housing be a burden in terms of their career or lifestyle choices. And at that stage of their life they are quite, quite mobile and put a high premium on flexibility and I think rental plays into that. Now as they mature further into their age, there will be a time when likely homeownership will be the right choice for them. But for right now for someone in their mid- to late 20s, I think that's certainly not the norm.

And among their peers, it's just not something that they talk a lot about or pursue. That's been my experience.

In terms of joining the Pulte Board, I have joined the Board and attended my first Board meeting. I'm finding it interesting. It's always been -- AvalonBay operates in the housing industry. Rental is just one segment of it, so it's just interesting for me to better understand the other side of that coin and hopefully, I can be of assistance to the Pulte Board as well as just benefit the learning in terms of the broader housing market.

Does that put you at all in any sort of conflict of interest?

No, no. I don't see that in any way and certainly vetted that both here and at the Pulte side and neither side saw that.

Eric has a question as well.

Just one quick follow-up question, it relates to what you were talking about in terms of a lot of young renters coming in the door. Have you seen the average age of your residents come down over the last couple of years? And I guess along with that, have you also seen the average length of time that they're staying increase as well?

Eric, this is Leo. I would tell you that we haven't seen any significant change. To give you some perspective, about 28% of our residents are 20-year-olds, about 24% are 30-year-olds and then it drops off pretty precipitously, about 13% of them are in their 50s and then the rest just scatter around. I haven't seen any significant change and the turnover rates have stayed relatively constant which would suggest that the average resident is staying about the same length of time. Turnover was up a couple years ago, but it has dropped down. And over the past year, as you've seen through the first half of the year, it's relatively constant.

Got you. That's helpful. Thank you.

Mark Biffert, Bloomberg Research.

I was wondering if you could just talk about the strong rent growth you saw and the occupancy that ticked down? I'm just wondering how you look at in the future pushing occupancy and you gave us the 7.1% revenue growth. I'm just wondering what mix of the two will drive that number?

This is Leo again. Based on where we are in the cycle, we're taking a much more aggressive stance. A couple quarters ago I believe that we said that we would accept lower occupancy in order to drive rent growth and as long as we believe that market conditions are remaining strong, we will continue to take that stance.

So today, across most of the markets, and it does vary from market to market, we would accept more availability in order to drive rent growth. If we felt like that things were really slowing down, then we would probably switch over, accept less availability and that would pull that rent growth.

But we don't see any signs right now that are causing us to change our approach. We look at it regularly. I'll look at it very carefully at the end of August. Why? Because we're going to go into a period where our seasonal pattern -- traffic patterns typically decrease. But as both Bryce and Tim alluded, our traffic patterns have been up and we've been able to keep or maintain our occupancy around 96%, while pushing rents fairly aggressively on both renewals and new move-ins.

Okay. Tim, you talked a little bit about the development pipeline and the starts from 2010 to 2012 and the NAV creation of about $1 billion from that pipeline. I'm just wondering if you could expound on that and give a little bit of your assumptions either on the cap rate side and just the yield side for how you came up with that number?

Sure. Well, cap rates, as I mentioned, I think in my prepared remarks, just using roughly a 5% cap rate which is roughly where current cap rates are, somewhat lower than that on the West Coast and perhaps in some urban markets like New York or even DC and then just simply using what we're anticipating based upon current rents, the average initial yield of development yields, to be. And that's without any inflation, just to be clear. That's based upon our assessment of current rents, as well as current construction costs for those that started in the 2010 -- that we can expect to start through 2012. Now we've already started about 1/3 of that activity, almost $1 billion of that $2.5 billion to $3 billion. Of those deals the projected yields have been in about the 7% range.

And do you expect that to rise just given the strength you've seen on the rental side?

We would expect it to move with the market. Now having said that, deals that we're going to start from this point forward are more in the high 6% range. So it would be off of a lower base, but yes, we would expect those yields to continue to improve along with the general market.

Okay. And then, my last question is just related to the Fund II that will be closing soon. What is the expectation for maintaining that? Is it -- is there a life to it where you'll start selling assets out of it or where you'll start buying assets for your own portfolio? How will that work?

There is a life to it and it's a second fund. We currently are managing the assets of a first fund that we still have about on the order of $720 million, $730 million of assets under management there. So along with the projected level of investment in the second fund, we've got about $1.5 billion of total investments or assets under management.

Fund I obviously started before Fund II and so that's more seasoned and we are actually starting this year to sell assets in that fund and expect we'll continue to average out over Fund I and Fund II both, due to the fact it's a finite life vehicle as well as just to take advantage of market opportunities here over the next couple of years while fundamentals look to remain strong.

Okay, thank you.

Dave Bragg, Zelman & Associates.

Could you just frame some of the other markets in your portfolio around the 7% to 7.5% increase? I think you touched on Southern California at the low end, Northern California at the high and also New York, but could you go around the rest of the key markets?

Sure, Dave. I would tell you that the strongest markets above that 7% are Boston on the East Coast and then Seattle and either Northern California. Those are showing the strongest trends. Then I would tell you that I would put DC and the New York metro area, I think they're further into the economic recovery.

And then finally, below, obviously we talked a little bit about Southern California, but Southern California is moving in the right direction and it's encouraging for looking forward to 2012. I think it could certainly help our performance. Does that give you the perspective you're looking for?

That's helpful. And then just directionally maybe a little more on DC and how that's looking going forward as compared to the broader portfolio?

The DC results are solid but stable. They're just -- it's just more mature right now. So renewals and new move-ins are just below the average that Tim was sharing.

Thank you. And, Bryce, just your commentary at the open, the scenario that you painted with the demand from the younger cohort, the rent to income metrics being very favorable and perhaps improving despite rising rents, low supply, lack of move-outs to buy homes, et cetera; assuming all of those remain in place over the next 12 months with probably the only if being the job growth, can you give us your thoughts on the ability to repeat the performance today in terms of pricing power next summer?

Well, Dave, we're certainly not prepared to offer any initial guidance into 2012. I did say in my comments, though, that we do believe that we're in the very early stages of a strong economic recovery. We are literally a few quarters into this recovery and we think it's got some pretty substantial legs to it that clearly could be derailed by some macroeconomic conditions, but what my comments were intended to try to reinforce is it isn't just about jobs. There are a number of other factors that have and continue to add strength to the rental market. So we are looking forward to a strong 2012. You'll just have to stay tuned in terms of us to quantify it the beginning part of the year.

Will do. Thank you.

Jeffrey Donnelly, Wells Fargo.

A few questions -- first, can you just talk about the environment for acquiring development sites today? I'm thinking just where is pricing on land versus a year ago? I'd be interested to know who dominates that field and are you concerned that the strength of this recovery could restore some of the sideline merchant builders?

Jeff, I'll offer a few comments. I'm sure Tim will add to it as well, but one, I'd like to think AvalonBay dominates that field. Certainly at least the markets we are active in, we are the most active apartment developer, certainly the most active public apartment builder and I think the most active apartment builder in the markets that we operate in.

I did give some color in terms of the sites, the four sites we just acquired, in terms of pricing, but I guess just to back up, there's no question that prices have been escalating. As the fundamentals have become more -- as the strength of fundamentals have become more apparent, it has attracted more merchant builders.

It's also attracted just an increase in activity from the public builders as well and that, not surprisingly, puts upward pressure on prices and on terms. So the deals today are not as good as the deals 12 months ago. We, as you all remember, we began construction again in the fourth quarter of '09 and we were assembling sites back then. That's one of the reasons I mentioned the growth that we've added over the past 12 months. There's no question competition is up for sites and it's putting upward pressure on land pricing.

And just as a follow-up, I'm not sure if you would agree, but I would argue that asset prices in this recovery have probably outpaced the rental recovery. I'm curious, what signals do you look at to know it's prudent maybe to take your foot off the pedal on construction? Not necessarily today, but down the road. How do you weigh that versus asset sales to balance out a growing development pipeline?

Well, this is Tim. First of all, you're correct. Asset prices have outpaced rents, just by virtue of the fact that cap rates have fallen about 125 to 150 basis points. So, while rents have maybe only recovered here on the order of 10% in many cases. Asset prices recovered probably 2.5, 3 times that across most of our markets.

In terms of construction and when you know when to think about dialing back, that's something we talk a lot about internally. There's certain metrics we look at that we talked about earlier.

We look at, obviously, yields versus cap rates. It gives you a sense of the level of value creation, but also just the amount of cushion, if you will, between what you can earn off of a new development versus an acquisition. But we do look at land prices. We look at the rate of growth in construction pricing as well, which continues to be relatively benign. We're starting to see it inch up a bit, but nothing like we saw toward the end of the last cycle where we had the construction pricing growing at a multiple to inflation. So I think if we saw that, along with land prices that were significantly outpacing inflation over a long period of time, that's a pretty good signal to start pulling back.

Just last question, I was curious for your thoughts, that conforming loan requirements or hurdles, I should say, in a lot of the high cost markets where you guys operate are coming down, I think, at the end of September. Do you think that's going to be a catalyst for demand for you guys after that or maybe it's not as impactful because your move-outs to home purchase are relatively low?

Jeff, it's Bryce. It's tough to know. You're talking about them coming down from a very high level to still a high level. And over time I think we would expect them to continue to come down, ultimately having a marginal benefit to renter demand, but it's just hard to quantify it or believe that it's going to be a major shift. It's directionally moving certainly towards benefiting rental -- renter demand as those levels come down.

Thanks, guys.

Jay Habermann, Goldman Sachs.

Could you guys comment just on your desire as you look at construction on the West Coast over the next part of the cycle? I guess as I look at page 18 of the supp and the developmental rights, roughly $2 billion of the $2.7 billion are concentrated in the Northeast and Mid-Atlantic, but how are you guys thinking about California and starts over the near term?

Jay, Tim Naughton here. I think it's a good question. Historically, what we've seen and what we're still seeing right now is typically, in the Northeast in particular, the development economics are just more compelling than they are in many other markets across the country, but certainly more than what we typically see in California. I think that's a function of a few things. The markets tend to be more stable and I think that volatility sometimes that you see in California really argues maybe for more of an acquisition/disposition strategy relative to new development.

Whereas in the Northeast where they tend to be a little bit more stable, it's the premium you can get for development over acquisition tends to be more constant through the course of the cycle. I think that's one element in play.

And the other thing that we've seen in California, for whatever reason, land often just trades on an unentitled basis and when we look at it on a risk-adjusted basis relative to what you can invest on as an acquisition or an acquisition rehab, it oftentimes just hasn't been as compelling to us.

Okay. That's helpful. And, Tim, you'd also mentioned perhaps some acquisitions after Fund II reaches completion, driven by portfolio management objectives. Can you give us some sense of what you're thinking? Are you expecting Bs to widen out more perhaps in the near-term and create some opportunities or are you seeing better opportunities at this point?

Well, in terms of portfolio management objectives, that's speaking more towards strategic, but certainly opportunistically, we're always going to be looking for opportunities where we think intrinsic value is greater than what the asset is trading at market. So that can happen in, As, Bs, it could happen really any geographic market.

But in terms of strategic opportunities, just geographically I think we continue to look to beef up in Southern California, California in general just given my prior remarks about development economics and perhaps recycle over time in Boston, New York where we have a deep development pipeline and where we think development's going to continue to make economic sense.

Thank you.

Rich Anderson, BMO Capital Markets.

Just I have an obligatory need to ask the question about legalized gay marriage in New York and if you've seen any impact on your business or any noticeable impact on your business? I asked the same question to EQR, figured I'd ask you as well.

Rich, this is Leo. There's nothing that we track with respect to this. There's no noticeable impact.

Okay. That's what I thought you would say, just thought I'd ask. Bryce, the very beginning of the conference call you said that the 8% is the strongest growth that you've seen since the first half of 2007. Using history, then, as our guide, why shouldn't we think that same-store growth will start to trail off from here?

Has it trailed off in the fourth quarter of '07?

Well, what I'm saying is, are we at the high watermark right now at 8%?

No. That's not the intention of my comments. We've gone from '07 to today, we've been through a pretty significant correction in the capital markets and the economy in this country and we are back to the early stages of a recovery. I actually mentioned, I think on the last call, I just found it interesting as we look back to the last two expansions, in the '04 to '08 we had a 4.5 year run, which is relatively short by expansion cycles and in the prior one, '94 to '01 it was eight years. We're just one year into this. We've got cumulative revenue growth of about 6% so far if you look at it that way and in '94 to '01 that expansion, there was cumulative revenue growth for AvalonBay of 50%.

So do we think that year-over-year revenues are going to move to 20% or something on a year-over-year basis? No. But if you look at fundamentals whether it be the demographics that I've spoken to numerous times, if you look at just the fundamental demand for rental housing, the absence of supply and the job growth, of which it is modest, but it is there significantly, certainly in the younger age cohorts, there's a number of factors that give us, I think, valid reason to expect that this recovery is not short lived, but it has a long duration ahead of it. Whether that's going to be two years, four years or eight years, I'm not going to insult anyone's intelligence to suggest that I know how long it's going to be. But I think to expect that it's going to be truncated after a year, there's no evidence of that.

Fair.

Rich, this is Leo. Just to give you some perspective, during the mid-2000 period, this quarter revenues were up on a year-over-year basis 4.5%.

Right.

It was just below 8% during that period and maybe equally, or more importantly, during this period of the '90s into early 2000 it peaked at approximately 12%. So even with the positive results we've seen on a year-over-year basis, those results are still substantially below what we've experienced in the last two expansions.

Right, but not with unemployment approaching 10%, right? I mean the rules are different this time.

Every recovery is different.

Right. Okay.

They all have their own idiosyncrasies to it and as I mentioned, yes, 10% is important. It is not necessarily reflective of the customer of which we are renting to which has a very different profile to that. But clearly, job growth, just to be fundamentally clear, job growth is important to this recovery. Job growth is important to renter household demand. We're not trying to minimize that, but in the absence of really any strong job growth, we and others have had very strong results.

How -- you might have said this in past calls or whatever, but the Class B, move into more of a Class B element to your portfolio, can you kind of quantify how big of a program that is? Is it several billion dollars? I assume it is, but do you have a way of quantifying the overall strategy, not to say how long it's going to take you to get there, but just how big it could be?

Rich, I think some of the numbers we've thrown around are, roughly on a fair market value basis if we're close to 85/15 today, probably a little less than that on A, maybe it's 75/25 which on a total asset value of, call it, $15 billion it would be about $1.5 billion.

Okay, great. Last question I have to kind of go back to the question Mike Bilerman had on the Pulte board membership and why that's not a conflict? It seems to me they would be very interested in the mindset of renters in terms of their business of homebuilding and it's kind of like you're playing for the Yankees and the Red Sox, to use an analogy, at the same time. Are there some restrictions you have in their Board meetings that you can't offer or what makes it not a conflict, I guess my question would be?

First off, as a loyal Red Sox fan, your Red Sox/Yankee analogy really cuts, Rich. That's a hard one.

No. I honestly see no conflict in it and it's something that, again, we discussed before I joined the Board, both with my Board, AvalonBay's Board and the Pulte Board. What I expect to bring to the Pulte Board is my experience in the real estate business and just as an executive. I'm not there to disclose any AvalonBay secrets nor take any Pulte secrets to the AvalonBay side. So no, I don't see any conflicts. As I said, it is -- we operate in the housing industry and insights from the housing industry are ones that can benefit either Company.

Okay, fair enough. Thank you very much.

Nicholas Yulico, Macquarie Capital.

Just a question, it looks like you added a development right in San Francisco in the quarter. Could you just say is that in the city or is that on the peninsula?

It's in the city. It's in the Civic Center area, mid-market.

Okay. So that would be like a high rise or a mid-rise?

Correct.

Okay, great. And then just last, I want to make sure, it sounded like there's really no plans for a Fund III at this point once Fund II is exhausted. Is that right?

Yes. This is Tom. We are, I guess I should start by saying we think the fund business is a great business to be in. We've been through Fund I. We're now closing out Fund II. I wouldn't say that there won't be a Fund III, but there certainly will be a pause for a period of time as we reshape the portfolio and work through the disposition activity under Fund I and II.

Okay, thanks.

Paula Poskon of Robert W. Baird.

Could you just give more color on the lower operating expenses between those that were just a timing shift into the second half and those that were true cost containment?

Sure, Paula. This is Leo. The expenses for the quarter, reductions were in areas like bad debt that we talked about at the beginning of the year, in utilities and in marketing. Those were offset, obviously, as you can see, by some increases in insurance and property taxes. The bad debt we expect to continue for the remainder of the year. We've been having good results and they've asked that -- our bad debt rate has actual been below what we budgeted.

On the utility side some of it is savings that will continue. We've done some things to contain consumption, whether it's co-generation or lighting programs and some of it will reverse. So, part of utilities is timing. Utility bills come in very sporadically.

With respect to marketing, some of it's expenditures that just have not occurred that we expect will occur and some of those expenditures are true savings. So you would probably characterize some of the big areas where there's movement, some of it's timing and some of it's true savings that will carry forward.

Thanks, Leo. And then at the risk of talking about what might feel like ancient history from your comments in the Investor Day last November; back then you discussed having more B product in the portfolio. How do you calibrate that strategy with the demographic and the tenant profile trends that Bryce walked through in his opening remarks?

Paula, this is Tim. I think we've talked about in the past. It's really not intended to be one strategy fits all. It really is a function of the sub-market and what we believe is sort of the ideal product positioning within any individual sub-market. It's just over a longer investment fold, we've found, through our research, that about half the time As or higher-end luxury products have outperformed and about half the time more value products outperformed. Generally, it's fairly intuitive either based upon supply patterns within a particular sub-market or just underlying nature of the demand.

And so it's just our belief that there's just not one strategy that's going to dominate another strategy across all markets and sub-markets and I think that's going to be true during different phases of the cycle certainly, but certainly over a longer investment hold.

Thanks, Tim. And then, just -- I'm sorry, go ahead.

I was just going to add, Paula, this is Bryce. In terms of my comments, I assume you're referring to when I speak to young, affluent college-educated.

Right.

That is the majority of our resident base today and that is the majority of our resident base in the future. Is to mention we're talking about shifting a portfolio from 15% by asset value to 25%. So it has never been the intention to shift it to have the majority focused on B product, but also, it shouldn't be concluded that B product does not include young, college-educated residents. I can assure you I have two sons who are young, college-educated residents of B apartments because that's what they can afford. And that's what we've done through our research is really try to better understand the needs of that age cohort and respond to them with the appropriate product.

Thanks, Bryce, I appreciate that. And then just one last question, any thoughts on the report last week that the Obama Administration is considering pushing a proposal to have the GSEs essentially become landlords by renting out foreclosed homes?

Paula, this is Leo. With respect to foreclosings, number one, we don't expect it to have any material impact. What we find is that renters either choose to be in professionally managed communities or go into the gray market and they really don't overlap a lot. We really see minimal impact of that proposal going forward.

Thank you.

Michael Salinsky, RBC Capital Markets.

Could we have an update on the disposition plans for the second half of the year? Maybe a look at how much you guys are actively marketing and then just curious as to what you're thinking in terms of fund dispositions? I know your guidance you had included some dispositions there.

Michael, Tim Naughton here. As I mentioned earlier, we are marketing our leasehold interest at Rock Spring and then a couple of assets for the second fund, one on the West Coast, one on the East Coast. We are going to be looking again over the next 30 days whether to expand the level of dispositions, particularly for the first fund, just given some of the trends we've seen in certain of the markets, particularly on the West Coast where asset values have escalated pretty dramatically here in the last six months.

Given the pricing you're seeing right now, is there any sentiment towards raising your disposition volume, maybe accelerating your recycling plans there as you're trying to move the -- as you're repositioning the portfolio?

We might. It probably won't have a big impact on 2011 just given that it's basically August 1, here today and by the time you identify, get the asset ready, get it to market, you're into 2012. It's likely to have more of an impact on 2012 than 2011 activity.

Just to go back to Jay's question in terms of East Coast versus West Coast, any bias in terms of new development starts in the next 12 months? Or any impetus to add to the predevelopment pipeline in a certain market versus another at this point?

Mike, I wouldn't say there's a bias. There's a bias for doing good business, but generally, we're open for business in all regions and all markets right now. It's really a function of the opportunity on a case-by-case basis.

And finally, any sub-markets where you guys are getting a little bit concerned about new supply down the road?

Within DC, I think we've talked about it. It's the first general MSA market that we expect to see supply hitting in 2012. Beyond that, we expect maybe to see some in Seattle in 2013. We think California is in pretty good shape through 2013 and Boston, limited amount in 2013 and New York we're actually seeing a little bit of supply hit the market now. We expect it to fall a bit before deliveries picking back up again a couple years out.

That's all for me guys, thanks.

(Operator Instructions) Karin Ford, KeyBanc Capital Markets.

Can you just update us where occupancy stood as of July?

Karin, this is Leo. Occupancy for the month of July is projected to be around 96%, so stable to what you just saw.

Okay. And last question is just on Los Angeles, it seems like LA's performance and recovery is differentiating itself positively versus some of the other markets, such as Orange County, in Southern California. Is that the case? Do you think that LA is going to lead the recovery that you're starting to see in Southern California?

I still would probably put Orange County first, although I feel pretty good about LA. LA just came through the pilot season which always occurs in second quarter and it's a period where you can come under pressure just because of turnover in that market and we came through it pretty stable. So if you asked me to characterize Southern California, I'd put Orange County first. I'd put LA second and I'd put San Diego third. But I feel good about all those markets and the direction that they're moving.

Great. Thank you.

Farooq Hanif, Morgan Stanley.

We've been hearing lenders and banks increasing their liquidation off distressed assets as opposed to extend and pretend. Some of your competitors have certainly been active in that segment of the market. Just wondering if you've considered acquiring some of those kind of deals and if not, is it because they don't fit in the overall strategy for the Company or is it some other issue?

Farooq, Tim here. Certainly we'd look at assets and have relationships with a number of lenders and banks. Yes, it essentially did make sense for us, so I suspect less of their product is in our markets to be honest. So, there's probably some high profile deals that people know about that will likely come to market in some shape or form over the next couple years. But we're looking at those kinds of deals just as we look at any broker deal or any other deal that might come to us directly.

Great. And just lastly, are you updating any of your job growth forecast as part of your guidance? I know you guys gave out expected Avalon market job growth as 1.7%. Is that for the overall market or again, the prime rental cohort which you discussed earlier?

This is Bryce. Hopefully it's clear, we don't generate our own job growth forecast. We certainly update it monthly based upon the updates that come in from the vendors prior to the data. And it has continued to trend down throughout 2011, as I mentioned in my earlier remarks, and currently expecting to be about 1.5%, just over 1.5% nationally is the number that we are running with for 2011.

Within AvalonBay's markets, it's actually a bit below that as our markets do tend, on the job side sometimes, to modestly follow the national average. So, we are certainly students of the job market in the sense of tracking it carefully and watching for changes both at a national, but more importantly, at a regional or sub-market basis.

Great. Thank you so much for the details.

Seth Laughlin, ISI Group.

Maybe just following up a bit on Rich's earlier question, as we try to think about when peak growth rates are going to incur in the sector, there was a more gradual recovery in the '90s. Given the trajectory that we've seen, is it safe to say that while there's room on a cumulative basis, we may be reaching that a bit faster and the cycle would be shorter in duration from a trough to peak?

I'm not sure. I'm not sure I'm following, necessarily, the logic there that you're laying out. Every -- I don't think this recovery is similar to either the prior two recoveries. I think it is pretty darn unique and frankly, it surprised many in terms of the initial strength in the apartment recovery. So if that's your point that it's come on quicker and therefore may plateau at this level, I think we probably would agree with that. But I think the more relevant question is the duration of it and it is just I think a little foolhardy for to us sit here and try to suggest that we can predict the duration of a recovery.

Understood and obviously understanding that this cycle is different in many ways. Has the role of revenue management systems, at least relative to the '90s which I think Tim's compared the cycle more to the '90s in the past than what we saw in 2000, has that played any role in terms of the efficiency of companies able to get to peak rents a little bit faster or at least returning to rents faster?

I think probably so. I mean, certainly transparency and visibility into pricing is much higher today than it was before and so you would expect things to adjust more quickly given that visibility. Tim, do you have anything to comment on this cycle versus prior?

Yes. Just in term of where peak might occur, Bryce, I agree with your comments. Every cycle is a little different. But if you just look at demand supply fundamentals just stepping back, I think we would have anticipated that 2012 would be a year where demand supply fundamentals ought to be peaking, just given that supply's likely to start picking back up in 2013 and probably be at about its lowest level through the end of '11 through 2012 at a time when we'd hope to start seeing more job growth in 2012.

Now, as I said, job growth gets deferred, delayed, that may extend. But just looking at just demand supply ratios off a very high occupancy base and 2012 looks pretty good, too.

Understood. Appreciate the comments.

And we have no further questions at this time.

Well, thank you all. We'll conclude the call and we just thank everybody for their time today. Thank you.

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