艾芙隆海灣社區公司 (AVB) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities' first-quarter 2012 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, Senior Director of Investor Relations. Mr. Christie, you may begin your conference.

Thank you, Sarah, and welcome to AvalonBay Communities' first quarter 2012 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's a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the Company's Form 10-K and Form 10-Q filed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms which may be used in today's discussion. The attachment is available on our website at www.AvalonBay.com/earnings, and we encourage you to refer to this information during your review of our operating results and financial performance. With that, I'll turn the call over to Tim Naughton, CEO and President of AvalonBay Communities for his remarks. Tim?

Thanks, John. Welcome to our first-quarter call. Joining me today are Tom Sargeant, our Chief Financial Officer; Leo Horey, EVP and Chief Administrative Officer; and Sean Breslin, EVP of Investments and Asset Management. I have some prepared remarks, and then the four of us will be available for Q&A afterward.

I'll start by touching on some of the operating highlights from last quarter with a focus on market and portfolio performance. In addition, I'll provide some comments on our development portfolio and recent lease-up performance. Lastly, I'd like to provide a little color around recent changes in executive responsibilities of a few members of the management team that we announced earlier this year.

Last night, we reported FFO per share of $1.28, which was up over 18% from the same quarter last year, and after adjusting for non-recurring items in each period, was up by almost 23% year over year. These exceptional results continue to be driven by solid fundamentals, which in turn are propelling strong portfolio performance. We achieved same-store NOI growth of over 10% for the second consecutive quarter, led by performance on the West Coast, where each region posted double-digit NOI growth in Q1. Revenue growth for the entire same-store portfolio was over 6.5%, and was widespread with all six regions above 5% for the quarter. Northern California and Seattle continued to lead the way, with revenue growth in the 8% to 10% range in Q1.

Same-store NOI was also boosted by a 1% drop in same-store expenses in the first quarter, helped in part by mild weather conditions. Reductions in bad debt and marketing-relating costs also contributed to contain expense growth in Q1. Overall, we beat the midpoint of our guidance by $0.06 per share in Q1, with two-thirds of that coming from community related NOI and the balance from savings in interest expense. Of the $0.04 per share in community NOI, $0.03 was related to lower than expected operating expenses with about 50% of that being timing-related. Top line or revenue performance accounted for the other $0.01 variance, and was largely in line with expectations for the quarter.

As I mentioned earlier, the industry and our markets continue to benefit from strong fundamentals. The nationwide job picture is improving, despite some recent weakness reported in March, and higher unemployment claims reported over the last couple of weeks. For the quarter, national job growth averaged over 200,000 per month, or around 2.5 million on an annualized basis, well above the pace of 2011. Job growth continues to be driven by the private sector, as companies start to put some of their cash to work in the form of increased hiring. Importantly, most of the job growth experienced over the last year was for full-time positions, as the corporate sector converted part-time jobs to full-time, reflecting improved business sentiment.

Over the last six months, job growth has been stronger in AVB's markets, which grew at an annual rate of 1.2% versus 0.9% for the overall US economy. Northern California's our strongest region, with over 2% annualized job growth during this period, as the technology-oriented markets on the West Coast continue to outperform. Markets with a higher concentration of government workers, like DC, are generally underperforming given the current state of fiscal conditions in the public sector. Apartment demand is also benefiting from the continued decline in home ownership. In Q4, national home ownership rates were down by another 30 basis points from Q3, and by 40 basis points among young adults. We see this trend reflected in our portfolio, as move-outs related to home purchase remain low at 13% in Q1, which is still significantly below historical levels.

Against these favorable demand fundamentals, deliveries of new apartments in the US this year are projected to total around 120,000, or about 40% below long-term averages. While the level of starts for five-plus multifamily is picking up with a three-month moving average at just under 200,000 nationally, they still remain below the long-term average, which should keep deliveries in check through at least 2014. Finally, incomes were back on the rise after falling and then flattening during the recession. Median household income is projected to increase by 3% to 4% in AvalonBay's markets in 2012. Combined with rent to income ratios that are at or below long-term averages, renters should have the capacity to pay higher rents over the next two to three years. In fact, Litton Advisors estimates that nationally, apartment market rents will grow faster than their long-term trend by 150 basis points through 2014.

During the first quarter, year over year rental rate performance in our portfolio accelerated from Q4, reflecting the pick-up in economic and job growth in late 2011 and early 2012. The average rent change improved by 100 to 150 basis points from Q4, averaging over 4.5% in Q1, with renewals up by 6% to 6.5% and new move-ins by 2% to 3%. Looking forward, these favorable trends should continue to Q2 as offers for renewal for the April to June period are up by 6% to 6.5%, and new move-ins in April are projected to be right around 4%. The West Coast should continue to outperform, as offers for renewals are generally in the 7% to 8% range, while offers on the East Coast are in the 5% to 6% range.

Shifting now to investment activity. Total development under way now stands at $1.6 billion, with one additional community started in Q1. We are active in all six regions, and development under way will continue to increase, as we expect to start another $300 million-plus in Q2 and project to have around $2 billion under way by year-end. The average projected yield for those communities under construction currently stands at around 7%. The shadow pipeline continues to expand as well, with over $300 million in development rights added this past quarter, and another $400 million in due diligence. While development activity is picking up nationally, our land basis in the shadow pipeline remains very attractive at around $50,000 per unit, or approximately 17% of total projected cost.

For those communities in lease-up, performance has been very strong. Since the beginning of the year we have started leasing and occupancy on five communities, and now have nine in various stages of lease-up. For those nine communities, the average achieved leased rent is up over 4% or around $100 higher than pro forma, resulting in projected stabilized yields of approximately 50 basis points greater than pro forma. With solid fundamentals, rising rents and attractive land and construction cost basis, the next two to three years promises to be a great time to deliver new communities into the market, bolstering AV and FFO growth through the development platform.

In Q1, we continued to be active on the transaction front, buying two communities and selling two more. We completed the final acquisition for Fund II, a $63 million purchase in New Jersey, and total investment in the fund stands at over $800 million. The economics and cash flow of the fund are very attractive, with an average initial cap rate in the mid- to high-5% range, and an average interest rate on the debt in the low 4%s. The two communities that we sold in Q1 were in Fund I, and both were located in the Chicago market. With additional asset and land sales planned over the next 90 days, we will exit the Chicago market by mid-year.

As we have discussed in the past, now that the initial investment period for Fund II has drawn to a close, we plan on increasing the level of transaction activity, both acquisitions and dispositions for our own account, as part of our broader portfolio management objectives. The transaction market continues to pick up, with total volume currently right around historical norms. And pricing continues to rise, with target unlevered IRRs averaging in the low- to mid-7% range, and cap rates in the low-4%s to mid-5%s in our markets. Over the past quarter, we funded new investment activity by drawing down cash from the balance sheet. In addition, we repaid over $200 million in debt from existing liquidity, and debt to total market cap stands at 20%, which is the lowest level in the sector. In addition, we still have over $300 million in cash on hand, and $750 million in unused line capacity. As a result, we have ample liquidity and balance sheet capacity to fund new development opportunities, and allow us to grow through the most attractive part of the cycle.

Lastly, in our release, we included our second-quarter outlook for FFO of $1.30 to $1.34 per share. At the mid-point of that range, that would represent growth in FFO per share of 17%, continuing the strong growth rate in the high teens we've generated over the past three quarters. Most of this growth will be driven internally from the existing portfolio, but over time, as the lease-up portfolio continues to season, we anticipate that healthy FFO growth will be generated increasingly from the development platform, much of which has already been financed with attractively-priced capital.

So in summary, we're very pleased with our first-quarter results. Our portfolio posted very strong results with double-digit NOI growth, we invested significantly in new development, and began to deliver some of the outsized value creation we anticipated when we began to ramp up development over two years ago. We continue to deleverage the balance sheet, positioning us well to fund our growth and take advantage of additional opportunities as the cycle unfolds. The cycle still in its early stages, where we have to remind ourselves that so far we've only experienced positive NOI growth for six quarters.

Before opening up to Q&A, I'd like to provide just a little more color regarding some changes in the executive team responsibilities that we announced earlier in the year. Leo Horey, who is with us today, and who has run property operations for over 10 years, has become our Chief Administrative Officer. In this capacity, Leo will continue to oversee many of the centralized portfolio functions, like revenue management, strategic business services and retail. In addition, he'll have responsibility for many of our corporate shared services like HR, IT and tax. Leo will continue to serve on the Company's management investment committee and chair our executive committee. This is a key leadership position that is necessitated by growth, increased organizational complexity, and the recent CEO transition. Leo's deep understanding of the business and our Company will help make him an excellent leader in this role.

Sean Breslin is also here today, EVP of Investments and Asset Management, has expanded his responsibilities to include property operations. With this change, we've consolidated key portfolio and asset management functions under Sean's leadership. Sean will continue to serve on the management investment committee and participate on earnings calls in the future. Sean will be supported in part by Bernard Ward, who will help direct oversight of national property operations. Bernard has had leadership responsibilities for virtually every region during his tenure on the property operations group. Bernard's primary responsibilities will be for on-site operations, delivering NOI and outstanding customer service.

Matt Birenbaum, EVP of Corporate Strategy, rejoined AVB late last year. Matt previously served as a regional head in the development group, and brings a wealth of investment experience in the apartment industry. In his new role, key corporate investment and portfolio strategy functions will report to Matt, including market research, consumer insight, design and sustainability. Matt will serve as Chairman of the Management Investment Committee. Other execs will continue to serve in their existing roles, including Tom Sargeant as CFO, Ted Schulman as General Counsel, and Bill McLaughlin and Steve Wilson as EVPs of Development and Construction.

I'm confident that this structure and realignment of responsibilities among the executive team will allow AVB to execute on its strategy and meet the demands that will accompany additional growth and complexity over the next cycle and beyond. And with that, operator, I think we're ready now to open up the line for Q&A.

Thank you. (Operator Instructions). Your first question comes from the line of Jeff Spector from Bank of America. Your line is open.

Hi. Thank you. This is [Yano] with Jeff. I was curious if you could comment on turnover, and if reasons for move-out by the different regions, if you're seeing any changes in those trends.

Yano, this is Leo. Turnover for the quarter was 44%, and it was essentially unchanged from the same period of the previous year. The only region that was down in any material way was the Mid-Atlantic which was down 5%, and stood at 36%. The other regions were plus or minus 1% or 2%, so pretty stable. With respect to the reasons for move-out, I would tell you that the two that we continue to focus on a lot and as Tim mentioned, home purchase, home purchase is about 13%. Over the long term, that's averaged 20% or in the low 20%s.

With respect to rent increase or financial for the quarter, for the first quarter, it ran about 18%. The only noticeable changes are that in Boston, Fairfield, and San Francisco, we saw somewhat of a tick-up on the reasons for move-out related to home purchase. And then with respect to rent increase, financial, as I mentioned, it was 18% on average. The only big variances from that were Northern California, where it was in the upper 20% moving out for rent increase, and the Mid-Atlantic, which was in the low teens.

Thank you. And I was curious if you could comment on how renters are responding to the new brands and I know it's early but are you kind of seeing the rebranding and targeting achieving what you had set out to do?

This is Tim. I really probably can only comment at least preliminarily on that. We're actually in the process of starting to really roll out and launch the first eaves communities. So I'd say it's premature there. In the case of AVA, the feedback has been really been very strong.

In many cases, at least the initial AVA communities are really for the most part redevelopments with the exception of Queen Anne, and in those cases, the underlying resident profile really matched the AVA target customer, so in many ways, it's gratifying to see that the product and service model that we're delivering there is really resonating with those residents, getting some really positive feedback so far. So leasing has been healthy on each of the new AVA communities including Queen Anne, which has been -- which is the one new development ground-up AVA that's currently in the system.

Great. Thank you very much.

Your next question comes from the line of Swaroop Yalla from Morgan Stanley. Your line is open.

Hi. I was just wondering if you could comment on the development yields on your Tysons Corner project, as well as the West Chelsea deal specifically?

Swaroop, this is Tim. When you're asking about the Tysons Corner, are you talking about the most recent one that started this past quarter? We do have two. We do have two in the Tysons Corner trade area. Mosaic is actually just south of Tysons by a couple of miles, but is in the Tysons sub-market. The yields on that deal generally kind of in the high 6%s, whereas in West Chelsea, I think we have talked about before, was more of a legacy deal, that's a mid-5%s kind of yield. But again, legacy deal from, in terms of when the land basis there was established back in mid-2006 or '07, I believe.

Got it. And then just I think we heard from another call that there's has been increased turnover in markets which have seen the highest rent growth. Just touching on what you answered before, but I mean, so I'm assuming that you're not seeing that in your markets?

This is Leo again. No, as we reported, turnover has been flat year over year, and I did highlight the fact that most of the markets are 1% or 2% changed on a year over year basis, in other words, considering the same quarter, different period. The only outlier was the Mid-Atlantic which was down a little bit. Certainly we're watching the reasons for move-out carefully. Reasons for move-out related to financial is up over historical norms but fortunately reasons for move-out related to home purchase is well below historical norms, and that's allowed us to keep our turnover constant.

Great. Lastly, what is the job growth projections embedded in your guidance currently?

I think national job growth projections, right around 2 million, Swaroop.

Okay.

As I mentioned in my prepared remarks, the first quarter was on pace, was a little north of that.

Great. Thank you.

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

Tom, can you talk about what the impact was on the first-quarter expense line item from the lack of snow and the warmer weather? You guys did negative 1.1 year over year expense growth. But how much of that is attributable to that and then just how much of it is just your normal expense run rate?

Rob, I'm going to let Leo answer that question.

Rob, with respect to our expenses, the weather really comes through the utilities category. It did not come through the repairs and maintenance, which is where landscaping goes. And just to remind you, in the majority of our markets, in other words in the northeast, we're under contracts so we don't really benefit there. The only benefit that we got from a lack of snow removal would have been in the Mid-Atlantic area. So the majority of it came through where you see our utility results.

Overall, on our expenses, I'll tell you that the minus 1%, which is roughly 3% below what our expectations would have been, it was helped by bad debt, which came in slightly lower than we anticipated. The mild weather that you've alluded to, marketing, we continue to do well with respect to our Internet marketing, and that's helping to drive down our costs. And then we had some insurance claims that we received reimbursement for, that really held down our insurance costs. When you look at our results in attachment 7 you'll see that employee benefits costs really is what drove payroll up a little bit, which offset it, offset some of the positives that I just mentioned. Does that answer your question?

Yes. And then just to elaborate on that, could you guys also talk about what you're seeing thus far, you're basically -- we're at the end of the April so we're one-third of the way through the end of the year, what you are seeing in terms of property taxes?

Sure, Rob. This is Leo again. Property taxes, as you know, expenses can be lumpy, and we have received some refunds, which have helped. I'll tell you that the only noticeable changes, we've had a couple of assets in the Mid-Atlantic market where the assessments have come in higher than we expected, and we've had one in New Jersey, but overall the information that I gave out on the last call, where we expect property taxes for the year to be up between 5.5% and 6%, those expectations are still holding.

Okay. And then last question. Could you guys talk a little bit about where you're seeing new rents on your redevelopment units relative to the underwriting? Are you seeing the similar type of trends that you're seeing on the development side? Is it more or less?

Rob, this is Sean. Generally the movement on the redevelopment deals is relatively consistent with what you're seeing on development. It sort of depends on what stage you're in. In the early part of the cycle, you're delivering the common areas and leasing spaces, and so typically once that's delivered, which is anywhere from a quarter to at most two quarters into the job, we start to see pretty good lift at that point. But to your point, we are seeing a reasonably consistent spread with development.

So if the -- you guys were talking about $100, and on development your average rent is somewhere I guess around $24, versus $2,000 on the redevelopment, so it would be somewhere I would say maybe in the $90.

Think about it in percentage terms. 4% to 5% range in terms of the spread would be reasonable. Okay. Perfect, thanks. I appreciate it.

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

I think we're ready for the next question,

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

Thanks. Tim, you mentioned that the nine assets in lease-up are projected to have a stabilized yield 50 basis points above your pro forma. I'm just curious, what stabilized yield are you expecting now, and if we look at the other 11 assets you have under development, would you expect the same level of out performance from those as well?

Eric, hard to tell on the last question, but generally what we have seen is that the development deals have tracked the market rent growth from the time they started construction. So I mentioned, at least for the deals that have started leasing to date, rents are up a little over 4%. On average, that's what the rents have been up, the market rents have been up for Class A assets in those respective sub-markets so they more or less have tracked market rent growth over the last, call it four quarters, for those in lease-up.

As you recall, our stabilized yields that we quote here before we start lease-up are not adjusted until we have enough data to suggest that we ought to adjust them. So even if market rents are generally moving within a sub-market, we're not updating our rents until generally we have at least 20% or 25% of the leases have cleared the market, if you will. So, I'd just say we're kind of riding the market with respect to the development lease-ups to date. Some have outperformed the local sub-markets and some have under performed, but generally in line with sub-market performance, which has been relatively strong, just given the fundamentals in the industry.

And then for that average of about 7% yield on cost that's in your supplemental or that you're on current rents, what would be the average margin you're assuming in that calculation?

I'd have to look at it. But typically development's higher than our overall portfolio. My guess it's got to be close to 70% plus as opposed to the balance of the portfolio is probably in the mid to high 60%s.

Okay. Then just one last question. Obviously being one of the largest apartment developers, I'm curious to how much your current developments can cannibalize demand for your existing properties and whether that goes into your underwriting as well?

We probably look at it a lot more closely in the case where it's immediately adjacent or a phase deal where the impact is pretty direct. When it's a case of delivering -- in most cases, it's a matter of delivering a community in a market where we have a presence, we might have a presence in that sub-market. It's not as big of a factor in terms of whether we make the decision, as to whether we make that incremental investment. So generally, the cannibalization effect has really taken into account where there's really a local adjacency that really is a direct competitor. In most cases, it's not part of the same competitive set. So it's not as much of a factor.

Got you. That's helpful. Thank you.

Your next question comes from the line of Conor Fennerty from Goldman Sachs. Your line is open.

Tim, on the uptick in investment activity later this year, do you expect to skew that towards any specific market where you see more upside, over the next call it 12 to 18 months or skewed toward any particular coast?

I think you're talking about more on the acquisition.

Exactly, exactly.

I'll let Sean address that.

Conor, this is Sean. We are pursuing opportunities on both coasts but I'd say in terms of the acquisition efforts, probably would skew a little bit more towards the West Coast over the rest of this year. And your assessment is right in that, typically in transaction market, most of the activity, 60% to 65% of it, occurs in the third and fourth quarter and I wouldn't be surprised if we fit that pattern for this year as well.

Okay. And then Tom, just on the capital plans, obviously the cash balance came down quite a bit with the debt repayment. Where do you guys think you could issue today and how are you thinking about issuance?

Yes, Conor, on the unsecured side, probably could get a 10-year debt deal done in the 3.5% to 3.75% range, probably the higher end of that range. In terms of secured debt it's probably 20 to 25 basis north of that, 25 basis points north of that. So I think that we still enjoy great capital markets environment both on the debt and the equity side and as we said at the beginning of the year, we have about $800 million planned, probably equally split between debt and equity.

Okay. Perfect. Thank you.

Your next question comes from the line of Derek Bower from UBS. Your line is open.

Hey, it's Ross Nussbaum here with Derek. I may have missed this but on the disposition front, you didn't do anything in the first quarter. I thought you had previously guided to something around $400 million in the first half of the year. Is that still going to happen?

Yes, I think the $400 million -- this is Sean, Ross. The $400 million is what we expected for the full calendar year, not just the first half of the year. And as Tim mentioned, we closed two Fund dispositions in the first quarter. The pipeline as it stands today is, we have about $175 million of wholly owned assets under contract with hard deposits. Those are scheduled to chose in the second quarter. And in addition to that, we have one additional Fund I asset for about $35 million, that's also scheduled to close in the second quarter. So that's where we're trending in terms of first-half activity at this point. Obviously, the balance would be picked up in the second half.

Are there any geographies in particular that you're targeting for exit, other than you mentioned, I think, Chicago.

Not wholesale, no. Most of the other dispositions are more either opportunistic in terms of where we think the going forward unlevered IRR doesn't necessarily match up with what we think it should be, so there's a disconnect in the marketplace. Or maybe in select sub-markets where we feel like we have a good presence there and we're trying to lighten up in certain areas. So I'd say a blend of opportunistic and strategic, but not a wholesale exiting a market type situation like Chicago.

And then on the development pipeline, I thought I heard that the overall size of the pipeline is going to hit $2 billion by year end. Did I hear that correctly?

You did, Ross. This is Tim.

So the question is from a risk management perspective, is that as high as it's going to get, number one? And number two, as you start thinking about these assets that are getting added to the pipeline now, getting completed in 2014, leasing up into 2015, at what point do you start sitting back saying I wonder what the ultimate value creation is, depending on what the world looks like, particularly given what the Fed may or may not start doing around that time frame.

Okay. This is Tim again. I'll try to address those. First, in terms of the size of the pipeline, $2 billion, it's probably going to go a little north of $2 billion. I don't know that I actually stated the size of the development pipeline. We've got about $2.8 billion there. So right now the organization is geared to do about $1 billion a year in terms of starts, and with the total production cycle, call it eight or nine quarters, that gets you to $2 billion to $3 billion, something like that. I think practically that's where it's going to be Ross, over the next couple years, assuming market conditions warrant.

A couple other thoughts about sizing the development pipeline. A lot of it is opportunity-driven. By that I mean, what are the economics of the opportunities, where are we in the cycle, which, I'll come back to that in a second, given your second question. What's happening with cost trends, both in terms of land and construction cost. The current construction pipeline average cost here is about $275,000 a door. And for the development pipeline, actually a little less than $300,000 a door. Those are in the development right pipeline and we think both those are extremely attractive cost bases relative to average rents that are $2,400, $2,500 a month.

Based on the $4.5 billion that we have in the pipeline today, we like it from a land basis and a cost basis, assuming today's construction cost. One of the things that we're going to focus on as we start to take deals out of development right pipeline and start them is obviously how costs move relative to rents and NOIs. So that's one factor. I would say a big factor.

And obviously another piece of it is as you're getting ready to start, how you're going to finance it and making sure that you still feel good about the spread of both on a unlevered IRR basis from a long-term standpoint, but also just looking at current yields versus cap rates, that you're being appropriately compensated for the risk that you're taking. Lastly, you asked about deals that's going to be delivering in the 14 to 15 range. We do update our growth rates literally every six months, and these deals need to stand up from an IRR standpoint as well as just an initial yield. Initial yields can change from quarter to quarter based upon market dynamics and competitive forces.

In terms of just the economics, we're going to -- they need to stand up from a long-term basis as well. I'd point you back to our cost basis. That is a huge factor in how we think about the development right pipeline, whether we're getting over-exposed from a risk management standpoint or not. But Tom, did you want to add something?

Just real quick, Ross. I think embedded in your question is, coming out of the last downturn, we did have a lot under development and the capital markets turned against us. And one of the things that we learned from that is better matching our capital sourcing with our capital deployment. We've adopted something that we call internally, integrated capital management. As we talk about raising $800 million of debt and equity this year, we do that because we're going to start in a certain amount of development. We want to make sure that's better match-funded than we were doing in the past.

We don't want to have an overhang of commitments to fund without the capital in place to do it. Some of the risk of when you start and when you stop has been taken off the table because how we're managing the capital side, the right hand side of the balance sheet, in a more integrated fashion than we were doing prior to the downturn. So I just wanted to make sure that every chance I get to talk about how we're matching the capital with the development, I try to do that, because it's important in answering I think your embedded question about when do you stop.

I have a smile on my face because that's implicitly exactly what I was asking. Thank you very much.

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

Thanks and following on that question, how much does $2 billion of development, how much is that relative to total assets today than it was in 2007, 2008?

Yes, Rich, this is Tim. I think we actually -- that came up in the last quarter call as well. Market cap today is $17 billion. So it's around 12%. We got up over 20% in 2007 when the pipeline got up north of $2 billion, I think we got about $2.2 billion, $2.3 billion.

Okay. I have a question. We talk a lot about reasons for move-out. And do you -- I think more importantly, what's reasons for move-in? Do you track that and try to compare it with the move-out and strategize around that or is reasons for move-in kind of the forgotten element to the story?

Rich, this is Leo. We spend a tremendous amount of time watching our reasons for move-in. In other words--

Good to hear.

The source from which people are coming.

Right.

Is very sophisticated, it's an area that we invest a tremendous amount of time in, and frankly it's allowed us to invest our marketing dollars more thoughtfully and more effectively.

What are the top three reasons to move in, not where but circumstances.

Circumstances.

I mean, the reason to move out is the rent's too high, or they're going to go buy a home. What's the reason to move in?

It can be family status change. I don't have a specific list. It's typically people relocating into the area, taking a job in the location nearby.

This is Sean. Sometimes what you'll see, a lot of it is family status change, job transfer, things of that sort that are common if you stand back and think about why people move.

It's not tracked as diligently, it sounds, than move-out reasons, right? I guess that's my question.

Not quite as sophisticated as that, no. But we do have some information available to us, the capture rate is just not typically as precise as the reasons for move-out. We see it anecdotally, if someone's coming in via foreclosure of a home, as an example because it shows up in terms of how we screen people. We have different one-off systems that track that type of information as opposed to the reasons for move-out, is very sophisticated.

Okay. And then last question from me is on Adam and Eve -- the AVA and eaves, what is it, the brands? I said Adam and Eve. I didn't mean to say that.

AVA and eaves by Avalon.

Thank you. So one thing -- you have a property very close to where I live, Avalon Edgewater. People in the area say I live at the Avalon. It's very much branded in their minds. Have you thought about how this branding strategy could cannibalize that? I think it's fairly common for people to say I live at the Avalon. Have you noticed that at all?

Well, I think that's certainly true in certain markets and locations. I guess it would be our hope that they would say I live at AVA or I live at eaves. Obviously eaves by Avalon is expressly endorsed, so it's a little bit more visible. AVA, on the other hand, it is a different -- a very different customer segment, a lot more differentiated in many ways. And, therefore, it tends to be not expressed -- we purposely don't expressly endorse it. It's our hope over time, particularly in urban areas, given the nature of that product, that it will resonate the same way with that target customer.

So what are you -- are you doing some market testing and seeing how it's going, and what are some of the results, positive and negative of the brand? You mentioned, you say it's positive earlier in the call, but where has it fallen short, if at all?

It's too early to say on that, to be honest, Rich. We did a lot of testing before we even started redeveloping or bringing this to market, did a lot of both qualitative and quantitative research, ground-up consumer research, developed mock units and imagery for prospective residents to view in terms of getting their feedback and literally walk through, do walk-throughs with them with third-party consumer research firms. Just in terms of understanding the things that they're looking for, that drive the decision ultimately in terms of what their needs are. So it's a combination of, I'd say qualitative and quantitative research. Then you start getting real-time feedback once you actually deliver it to market. So that's what I was talking -- I was talking more about the latter in the earlier response.

Did you disclose how much it costs to roll out these brands?

We haven't, but it's really not significant. In many cases it's frankly costs that we're going to have anyway. From a marketing -- think about the brand development. I think a lot of times people think about the investment spend around advertising and making the presence known. In our business, that's done at the local level anyway. You've got to do that whether it's an Avalon deal or it's an AVA deal or an eaves by Avalon deal. There's some minimal level of costs just in terms of re-signing, things like that, Rich, having to put a new skin in terms of the website and presentation to the consumer but it's not material relative to the investment in the deal.

Rich, this is Sean. Back to your original question about brand awareness. Part of that question probably relates a little bit to scale in a market or sub-market where if you have one property that stands on its own versus getting some scale in a market, you get better awareness. Just to give you one example, we did open two AVA communities in the Seattle market. One is in downtown in Belltown, one's relatively close to that in Queen Anne.

Those in terms of the real-time feedback we're getting from customers is, it's generally been very positive in terms of the look and feel of the spaces, of the apartment homes, and the vibe which is what we were trying to create with that particular brand. So I think the sample size is limited at this point, but the feedback we're getting from the market, we've got two up and operating at this point, is positive and we'll continue to track that as we roll out AVA in other markets and eaves as well.

And just out of curiosity, my verbal slip-up at the start. It's not subliminally attached to Adam and Eve, is it?

No.

You're sure? It sure sounds like it.

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

Sean, you gave a lot of color on the disposition front. Do you have anything under contract on the acquisition front, and also just as you're thinking about the Fund, I think you mentioned you have one asset under contract, is there any plans to kind of accelerate that given current asset pricing?

In terms of the acquisition front, as Tim mentioned, we acquired about $82 million in the first quarter. One of those was a $63 million asset for Fund II, which was the last acquisition for that Fund. In terms of other acquisitions, we do have about $100 million under contract right now that's in due diligence. There's no assurance that they'll make it through due diligence, but under the assumption they do, that activity would close in the second quarter as well. As I mentioned, the first quarter is typically pretty slow as it relates to transaction activity so would expect to see that accelerate, particularly as you get into Q3 and ultimately Q4 is where most of the action typically happens. But in terms of the -- when you talk about Fund dispositions, I assume you're referring to Fund I dispositions. Is that correct?

Yes.

We do have one additional Fund I disposition under contract right now that will close in the second quarter, as well. And then we'll be evaluating additional dispositions for Fund I throughout the rest of this year. We have some in mind, but we haven't made any firm decisions on those assets just yet.

So it sounds as though you're not as concerned about cap rates rising there in the space in the near term, in terms of pricing.

What we try to do is take a look at where valuations are today, but then also take a look at what we're expecting in terms of NOI growth over the next year or two and then run some sensitivities as to how much would cap rates have to move before you get to a point where the value in the future looks materially different from today. We make decisions around those types of analysis, as well as just remaining duration of the Fund and how long we plan to hold those assets.

Mike, Tim here. The other thing you have to take into account with the fund is prepayment on the debt. That factors in obviously to the returns and the calculus if you will.

That makes sense. Second question is more of an operations question. Are there any markets where you're facing greater pricing resistance in the last call it 60 to 90 days, where you've noticed an uptick. One of your peers mentioned they were seeing a little more resistance in New York and San Francisco. Just curious if you were seeing the same thing.

Mike, this is Leo. The only place where we've seen a significant move in reasons for move-out related to financial would be in the San Francisco market or the some of the Northern California, but generally we've been able to fill it and keep occupancy stable. So it really -- yes, we're seeing some resistance, but it's not like we haven't been able to keep our occupancy stable. Through the first quarter, our occupancy remained around 96%, and early indications for April are it will stay in the same level. Then when you look at turnover and conversions, conversions percentages, we aren't seeing anything that creates any alarms for us.

Okay. That's helpful. Thanks, guys.

Your next question comes from the line of Philip Martin from Morningstar. Your line is open.

Thank you, and good afternoon. A question on, just looking at how you're underwriting the potential headwinds of, for example potential improved home affordability over the next couple of years, I'm just trying to better understand the scenario analysis you might be going through.

This is Tim. In terms of -- you're bringing up the issue of home affordability. Obviously, it's fairly attractive, relative to historical norms. A lot of that is obviously driven by cost of capital, interest rates, so to the extent that changes, that changes the home affordability relationship, and I'd just remind that in our markets, it's not as affordable, relative to national norms. That's one of the reasons we're in the markets that we're in.

It's hard to run it in isolation, to be quite honest. It's something we talk a lot about, but a pick-up in housing affordability doesn't necessarily mean it's going to drive housing demand, particularly what's going on in the mortgage side of the business. I think what's happening a fair bit is renters are saving at this point, and consumers are still in the process of restructuring their balance sheets and deleveraging in terms of their consumer debt, whether it's student loans or other kind of consumer debt that they might have.

And I think that's going to continue to be a drag regardless of the housing affordability issue. But that's part of what's a drag on the overall economy. So as that starts to fix itself, you think the economy's likely to pick up and rates are likely to pick up and housing values are likely to pick up. So it's a dynamic process that we've struggled with how to isolate the one variable in terms of its impact on overall housing demand. It is a variable in terms of what we model but it's hard to isolate it.

And I guess, as you've mentioned, you're dealing -- I'm thinking about a relatively large development pipeline going forward, and having to model and scenario out that pipeline, but also your cost basis provides a bit of down side protection as well, so --

I think that's right. One of the things we really do focus on, it's not just the land basis but fundamentally what product are we delivering into that sub-market. If it's toward the end of the cycle and you're the first guy to deliver a high rise in a market which otherwise has been wrap or wood frame podium product, that's a very different kind of risk profile than being early in the cycle and building a wrap product where everyone else is building podium. That's more where we're at right now in this particular cycle.

Okay. Now, in terms of maintenance level CapEx, would you expect this to rise a bit going forward, at least for a certain percentage of your portfolio, given that arguably there's a higher percentage of renters in the portfolio that historically may have been homeowners? Would it be fair to assume that this group would have different needs and wants that may require a higher level of maintenance CapEx, et cetera?

Philip, this is Sean. I don't think we're expecting that, and we've had quite a few people move in from homes over a long number of years. But certainly, it's been skewed more recently as well. Historically, our CapEx has run somewhere in the neighborhood of about $500 a home. 2011 increased a little bit, up to $573, as we started to make incremental investments in refreshing leasing offices and things of that sort. Probably be up a little bit in 2012 as well related to same kinds of things in terms of investing early in the cycle in our assets, as well as some investments we have made in the areas of sustainability in terms of lighting retrofits, co-generation, et cetera. But I don't think we expect the long-term run rate to change because of the customers that are coming from homes, to your point.

Okay. Just something we think a fair amount about, especially given affordability probably gets better going forward here. Rents, arguably in each market, are closer to their peak than their trough and again, the renter profile is shifting, due to just uncertainty that isn't going to go away any time soon in the single family housing market. So again, with that renter profile changing, and rents being where they're at, I understand the income levels and the demographics of your market are fairly strong. But certainly it's an issue that you and your peers will have to obviously manage through, as you have in the past. So okay.

Maybe just to add a little bit to that. To be clear, rent to income levels and capacity to pay are still at or below historical norms, while housing affordability has gotten more affordable, rent -- multi-family's not less affordable than it's been historically. So I guess I'd offer that. When you look really over a long period of time, rents are still at or below inflation over a fairly long period of time, and so it's our sense that they're still -- there's still capacity to pay. They're not going to grow to the sky, but we're still approaching historical norms, if you will.

Okay. I appreciate that, and thank you again.

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

Thank you. Good afternoon. Just one big picture question. Tim, regarding the realignment of the responsibilities on the management team, do you now feel l you have all the right skills in the right seats or do you still feel like there's some opportunities given your projected growth profile.

Are you in the market or --?

Call me offline. Just kidding.

No, Paula, I think that the team is settled at this point. It's something I wanted to do early in my tenure as CEO to get the right skills, the right people and the right seats, allow us to really take advantage of what we think is going to be a great cycle as it unfolds, and not to have a lot of organizational anxiety persist over an extended period of time.

Thank you very much.

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

Good afternoon. A follow-up question on operations. Where does availability stand today here at the end of April, and how does that compare to this time last year? And it looked like from your commentary that new leases were accelerating from 1Q levels into April. How does that acceleration compare timing-wise and magnitude-wise, versus what you saw last year?

Karin, this is Leo. Availability is probably 30 basis points higher than it was in the same period of last year. It's something that I track very carefully, and watch on an ongoing basis. With respect to how rents are moving, on an absolute basis, as we said on the first-quarter call, we expect that this year to roll out very similar to last year. The absolute rents are following similar patterns.

The good news is that last year, when you blend new move-ins and renewals for the first quarter, that blended to around 3.5%, 3.6%. This year, that number's blending more to 4.5%, as Tim had said in his earlier remarks, and then when you move into April, seeing the new move-in rents step up to 4%, that's very positive. And then when you look for the quarter, the quarter is 6% to 6.5% on the renewals but when we go out as far as July, it becomes north of 7%. So we feel pretty good about the patterns that we're seeing. We feel pretty good about the forecast that we put out there on the revenue side and our ability to achieve it.

Do you think that, that 100 basis point spread that you mentioned on the blend, new and renewals that you saw in the first quarter, will persist into the second quarter? Or do you think it will be 100 basis points better than last year again in the second quarter?

I think it's going to tighten up some. I believe that the comparable periods are going to become more challenging, but we'll see. But I do believe it's going to tighten up in the second quarter for sure.

Okay. Thanks very much.

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

Hey, hopefully I'm coming through this time.

Yes, we can hear you fine, Alex.

Okay. Don't know what happened before, but appreciate it. I'll be really quick. First, did you guys already comment on whether or not you're going to seek to do a Fund III to take advantage of some of this strong institutional demand for multifamily?

Alex, this is Tom. I think in the past, and our view hasn't changed, we have basically said that we like the Fund business. We think we're going to create value for our investors. But at this point, being through the second Fund investment period and harvesting in the first Fund, we have some portfolio reshaping objectives that we would like to achieve, and those are best achieved without a partner. I think we'll revisit this down the road. It's a business we like. It's a business that we know well, and I'd say we're going to hit the pause button for now and stay tuned for future developments. But for this point in the cycle, we're going to acquire and dispose, or at least acquire on our own account.

Okay. Second, is just in Seattle, with all the development going on there, especially downtown, has that changed your view of developing in that market, either trying to accelerate some deals or taking a pause on some deals?

Alex, Tim here. Seattle as you mentioned, most of the supply or a lot of the supply is coming downtown. Look, when you step back and look at the broader market, while it will have elevated levels of supply and deliveries in 2013, it is one of the stronger job growth markets, where we think generally, when you just look at it from a macro standpoint, the supply will get absorbed. That's unlike our impressions on DC, just to be clear, where we think supply will rise above levels of absorption for the macro market. So San Jose and Seattle kind of both fall in the same category there that we think there will be some sub-markets that will under perform, but overall we feel good about the market's ability to absorb the amount of supply that we see coming.

So I don't know that's going to affect the ability -- generally, our desire to push forward on development is being driven more by the construction cost dynamic than anything else. We don't expect costs to go down from this point. We expect them to go up. We've been seeing a little bit of escalation on costs as of late, and we would like to take advantage of trying to lock in as attractive of a basis as possible by taking advantage of the construction market as soon as we can.

Okay. And just, final, Tom, on your debt side, on the unsecured, I think you have a little spacing in the 2018, 2019. So curious your thoughts doing shorter term versus possibly even hitting the 30-year market as Simon and a few others have done recently.

Alex, that's a good question. My guess would be that we would want to -- playing in the middle is probably not where you want to be right now. I think you want to be either very long or very short, and by short we'd like to have more floating rate debt in the capital structure than we have today and we've done that synthetically through swaps. We have looked at some longer-dated paper, and I think 10-year is still the sweet spot. I think if we were in the market, we would seriously look at something of longer date. I'm not sure if 30 years, but we'd certainly look at something longer.

Thank you.

(Operator Instructions). Your next question comes from the line of Dave Bragg from Zelman & Associates. Your line is open.

Hi. Good afternoon. Just one topic on DC, specifically. You successfully ramped up occupancy in that market. Wanted to ask you about your strategy, as you seem to be more vocal about the threat of supply at the end of this year than some of your peers. So was the occupancy gain a targeted strategy and what are you experiencing pricing power-wise right now?

Dave, this is Leo. In general, we went into the fourth quarter in all our markets trying to stabilize occupancy, as I've talked about in the past. DC was no different. Generally, from a strategy perspective, when there is new supply coming in any market, that would compete with one of our assets, we would try to get occupancy stabilized going in. DC is performing well for us. The performance to date has been good. The real issue that we're watching pretty carefully is the supply that we've talked about is going to get delivered in the back half of the year, more or less. And that's when it's going to start coming, and that's when we'll be watching it more carefully. So as we get to mid-year, yes, we'll look to ensure that our availability is in check and our occupancy is in check, before we experience the additional competition.

Right. And Leo, in that market, could you give us a sense for where you're sending out renewal increases right now?

Sure, just give me a sec. Renewal increases in the Mid-Atlantic went out in May and June, frankly, at about 5%.

Okay. Thank you.

There are no further questions in queue. I turn the call back over to the presenters for any closing remarks.

Well, thank you, operator. Thanks for being on the call and we hope to see many of you at the NAREIT conference in June, when we can update you further on our business at that time. So thank you very much.

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