艾芙隆海灣社區公司 (AVB) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities' fourth-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.

(Operator Instructions)

I would now like to introduce your host of today's conference call, Mr. Jason Reilley, Director of Investor Relations. Mr. Reilley, you may begin your conference.

Thank you, Jessica, and welcome to AvalonBay Communities' fourth-quarter 2012 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the Company's Form 10-K and Form 10-Q filed with the SEC.

As usual, this 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 also 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. And with that, I'll turn the call over to Tim Naughton, CEO and President of AvalonBay Communities for his remarks. Tim?

Thanks, Jason, and welcome to our fourth-quarter call. Joining me today are Sean Breslin, EVP of Investments and Asset Management; and Tom Sargeant, our Chief Financial Officer. We will each have some prepared remarks today totalling about 30 minutes, and then the three of us will be available for questions.

I'll start by summarizing our results for the quarter and accomplishment for the year, and then spend a few minutes discussing the fundamentals supporting our outlook for 2013. Sean will follow and provide additional color on our markets and update you on recent transaction activity. And Tom will then summarize our capital markets activity for the year, provide an overview of key liquidity and balance sheet metrics, and finally, share some more detail about our consolidated financial outlook for 2013, including some of the impact for the planned Archstone acquisition.

To begin, last night, we reported EPS of $1.19 and FFO per share of $1.27, a 6.7% increase over the fourth-quarter 2011. Adjusting for non-routine items, which include a transaction and financing costs related to the Archstone acquisition, as well as expenses related to super storm Sandy, FFO increased nearly 16%. For the full-year, 2012 FFO per share of $5.32 represents a 16.4% increase over 2011, and after adjusting for non-routine items in both years, FFO increased by 18.5%. And concurrent with our release last night, we announced a 10.3% increase in our dividend.

Well 2012 was a very good year for the Company on a number of levels. Strong apartment fundamentals supported same-store revenue growth of 5.8% and propelled solid lease-up performance at many of our new communities. Same-store expense growth of just 1.8% contributed to same-store NOI growth of 7.6%. We continued to actively invest in our business. During the year, we completed the development of eight new communities for a total capital cost of $515 million. These communities were delivered on time, $15 million under budget, with initial yields that are in the mid-7% range, or about 25 basis points ahead of original expectations. We started 12 new developments that have an estimated total capital cost of just under $900 million, and at year-end, we had about $1.8 billion under construction. And we continued to replenish the pipeline in 2012, adding 14 development rights totaling $1.1 billion in projected capital investment.

We continue to grow and expand our redevelopment platform, as we completed 11 redevelopments with an incremental capital investment of about $105 million. Similar to our development accomplishments, collectively these redevelopments were completed on time, under budget, and outperformed pro forma. We purchased four wholly owned assets and completed our final acquisition for our second investment management fund. We also sold four wholly-owned assets in connection with our broader portfolio management objectives, continue to liquidate our first investment management fund, and completed the Company's planned exit from the Chicago market.

In 2012 we began to implement our branding strategy across the portfolio. So far, new brands, Ava and Eaves by Avalon, have been very well received by the market, and by year end, we had converted 37 communities to Eaves through reflagging the redevelopment. And had 14 Ava communities in operation or development or redevelopment. And by the end of 2013, we expect to have 64 Eaves and 24 Ava communities in operation or production as a result of additional investment activities and the integration of the Archstone portfolio. We believe these three distinct brands will differentiate our offerings to the market and allow us to further expand our presence across our footprint.

And finally, as you know, in late November, along with our partner, Equity Residential, we announced an agreement to acquire Archstone from Lehman for $16 billion. We'll be purchasing 40% of Archstone, which represents 66 apartment communities containing over 22,000 apartment homes, three land parcels, and a few joint-venture interests. As part of the acquisition, we'll be adding approximately another $1 billion to the development pipeline with about $300 million of that currently under construction. We are extremely excited about this transaction, as it provides an excellent opportunity to add an attractive collection of assets, while complementing our existing portfolio on three important dimensions; market concentration, sub market positioning, and price points. In addition, this acquisition provides scale benefits in terms of market presence, brand penetration, and G&A leverage, each of which should strengthen our competitive position over time. We're making great strides in our integration efforts to bring this portfolio of many talented associates from Archstone over to AvalonBay and are on track to close at the end of February.

Turning now to 2013, we expect that apartment fundamentals will remain healthy, but that demand and supply will be more in balance than what we've experienced -- recently experienced. And our expectations for our markets in 2014 and '15 is even more positive, as demand supply fundamentals should gradually improve over the next two to three years. Over the last couple of years, rental housing has benefited from a unique combination of historically low supply, modest job and economic growth, a sluggish for-sale market, and fragile consumer confidence. While we might expect certain aspects of this pattern to continue into this year, there's likely to be some important differences as well, that will impact fundamentals and the longer-term outlook for our business.

The consensus outlook for the US economy calls for moderate growth again in 2013 on the order of 2.5% for GDP and a little over 1% for jobs. But there are some important differences as it relates to the sources of growth in 2013 and how that should position the economy going into 2014 and '15. First, while business profits are expected to flatten this year, business investment is rising as companies begin to put some of their healthy cash balances to work. The consumers' balance sheet has improved as well due to reduced debt loads, gains in wealth from the equity and real estate markets, and modest improvements in incomes. As a result, consumer confidence is on the rise, which should provide important support for economic growth and the rate of household formation. The recovering housing market and higher production levels should also bolster private sector growth, particularly as the economy absorbs the impact of any fiscal drags that may come from Washington. And while public sector spending may see some retrenchment at the federal level, state and local governments are better positioned as job losses have tapered off at the state and local level.

So overall, while the outlook for the economy is for modest growth in 2013, the composition of that growth, led by the consumer and private sector business, has helped put the economy on a glide path towards sustainable growth. The combination of improved consumer confidence and historically low interest rates seem to have finally stimulated a recovery in for-sale housing. New and existing home prices and sales volumes are on the rise, inventories are down significantly, and excess vacancy has effectively been absorbed. Homeownership rates may have bottomed, and going forward, the apartment industry is less likely to benefit from higher renter capture rate to support demand. We expect that housing demand will be more balanced over the next few years, much like it was in the two or three decades before the 2000s, when homeownership rates were stable and before various housing and monetary policy actions distorted demand dynamics.

More balanced housing demand will continue to be supported by demographics as the prime renter cohort, those ages 25 to 34, continues to grow. This segment of the population is expected to increase by 500,000 in 2013. Additionally, these young adults continue to be reluctant or unable to buy, either due to lifestyle flexibility needs and/or financial and down-payment constraints. Homeownership rates among this age segment are down over 700 basis points nationally from the peak, or about two times that of the overall population.

In addition to the demographic growth and rising rental propensity from this age segment, they also represent the largest source of pent-up demand. Third parties estimate that there are one million to two million young-adult households yet to be formed and still on task, many of them still living at home with their parents. This unbundling is an important source of potential apartment demand and should help offset the impact of an improving for-sale market. In fact, there is some evidence that this is already starting to occur, as the level of household formation has risen materially, despite any pronounced improvement in the job market. Household formations are now increasing at a rate of more than 1.1 million per year, which is well above total housing production levels. As a result, virtually all of the excess housing vacancy we've had in the US over the last several years has been worked off.

So overall, we're pretty optimistic about housing demand this year and expect total apartment absorption to be higher than it was in 2012. But of course, we know that supply in the form of new apartment deliveries will be higher as well in 2013, and AVB markets, it will be above long-term trends. This is normal during the mature phase of an economic expansion. What is unusual in this cycle, though, is that the supply is coming to some of the coastal markets earlier than normal. Historically, the supply response in our coastal markets has lagged the overall US, but in this cycle, a combination of capitals preference for coastal markets, along with a number of entitled infill and urban sites left over from last cycle, has resulted in an earlier supply response. Interestingly, we expect deliveries to peak in our markets in 2013, but not for the rest of the country. Given high entitlement costs in the places we do business, and capital recently migrating to a broader mix of markets, we do expect historical patterns of more limited supply in our coastal markets to play out in 2014 and beyond.

In 2013, new deliveries will be most elevated in DC and Seattle at over 3% of stock and lowest by far in Southern California, which will deliver about 0.5% of stock. DC will be the most affected by these supplies, given the impact of fiscal retrenchment on job growth in that market. Starting in 2014, we do see more supply shifting back to commodity Sunbelt markets. In addition, rising land and construction costs may temper new starts further, which would have a dampening effect on new deliveries in 2015 and beyond.

So 2013 may well prove to be a transitional year for apartment fundamentals, particularly in our markets. Elevated apartment supply, modest and flat job growth, and a for-sale housing recovery may provide some headwinds, which should be offset by some positive factors, such as the continuation of favorable demographics, stronger household formation rates, and total housing production values that are in line or below total housing demand. As we look out to 2014 and '15, we like what we see in our markets, as we expect supply to begin to flatten and then decline during a period when the economy is projected to strengthen and pent-up demand materializes. As a result, we expect this period of healthy growth for the sector will likely continue for a few more years, and perhaps even reaccelerate in 2014 and '15, when demand-supply fundamentals appear even more favorable.

With that I'd like to turn the call over to Sean to provide additional color on our markets and transaction activity. Sean?

Thank you, Tim. As Tim mentioned, I will comment on portfolio performance during the quarter and for the full year, discuss our market level outlook for 2013, and provide an update on our recent transaction activity. Obviously 2012 was a good year for the portfolio. Fourth-quarter year-over-year same-store rental revenue increased 5%, consisting of a 4.7% increase in rental rates, and a 30-basis-point increase in occupancy. For the full-year, rental revenue increased 5.8% mid-point of our original 2012 outlook. Expenses remain largely in check, increasing just 1.8% over the prior year. This increase was driven largely by higher property taxes and insurance expense, as all other expenses actually decreased year over year. For the year, same-store NOI increased 7.6% relative to 2011.

From a revenue perspective, Seattle and northern California continued to outperform, posting 11% and almost 10% revenue gains respectively, as compared to the fourth quarter of 2011. Sequentially, rental revenue in each region increased by about 150 basis points during the quarter. Stronger job growth, roughly 3% over the last 12 months, largely driven by the tech sector, along with manufacturing and retail trade in Seattle, continue to generate new, high-earning renters.

Shifting to the East, the mid-Atlantic is continuing to face headwinds due to fiscal uncertainty and new supply in certain sub-markets. On a year-over-year basis, rental rates increased 2%, while occupancy declined by about 20 basis points. Although the broader DC-Metro area continues to soften, certain infill pockets of the region and certain types of assets continue to hold up relatively well. For example, our Park Crest development in Tysons Corner averaged 25 leases per month during the quarter, with rental rates that are roughly 8% above our original pro forma. And secondly, our first full Ava development, Ava H Street in Northeast DC, has averaged 18 leases per month since it opened in Q4, with rents that are also about 8% above our original estimates. This unique product with its highly efficient, smaller floor plans and socially activated common spaces has been very well received by the target Ava audience and is currently about 30% leased.

Moving to the Northeast portfolio, healthy job growth and minimal new supplies supported year-over-year revenue growth of 4% in Boston during the fourth quarter. In Metro New York and New Jersey, modestly higher levels of new supply are being absorbed relatively easily in New York City, but weakness in the financial services sector and local government cutbacks are presenting some challenges in Westchester County. Our new development communities in the New York, New Jersey region continued to perform well. We completed two communities in the fourth quarter of 2012, Avalon Green in Greenberg, New York and Avalon Westmont Station in Wood Ridge, New Jersey. Both communities produced a yield on cost between 7.5% and 8% as compared to trading cap rates that are in the low 5% range.

Lastly, Southern California remains on its steady and improving trajectory. For the quarter, rental rates increased 4%, and occupancy increased 80 basis points. Job growth continued to accelerate in Southern California, and is now running at a pace of 1.3% over the past six months, the third strongest of our portfolio behind Northern California and Seattle. Disney, Bank of America, Boeing, and Kaiser Permanente are all adding jobs in Orange County. In LA, employment gains are pretty broad-based, including the healthcare, leisure and hospitality sectors, along with the information services firms that produce content for all of our various mobile devices. And in San Diego, although job growth has been choppy given the influence of the military, it has exceeded 1.5% over the past six months. New supply remains very low in Southern California, with the exception of the Irvine sub market in Orange County and Mission Valley in San Diego, and should support healthy rent growth in 2013.

Shifting to recent performance and how the portfolio is positioned today, total rent change, which represents a blend of both renewals and new move ins, averaged 3.6% in the fourth quarter of 2012, matching what we did in Q4 of 2011. Occupancy is currently about 96%, roughly 50 basis points higher than at this time last year, with availability at a little over 5%, roughly 40 basis points below last January. January's committed renewals are in the mid-5% range. And February and March renewal offers went out in the mid-6%s, which is 75 to 100 basis points below renewal offers sent out during Q1 2012.

Turning to our same-store outlook for the full-year 2013, we anticipate same-store rental revenue to increase between 3.5% and 5%. Similar to 2012, we expect Seattle and northern California to outperform. While job growth is forecasted to moderate from the 3% level experienced in 2012, it is still projected to be at or above 1.5% in both markets during 2013. And new supply in these two regions will be relatively concentrated in certain sub markets, primarily in or near the downtown core in Seattle and in the central and northeast sub markets of San Jose. Rent gains will likely moderate from what we enjoyed in 2012, but should nonetheless be healthy. For example, Q1 2013 renewals went out between 7% and 9% in both regions, pretty consistent with the north of 8% renewal increases we achieved during Q4 2012.

We expect the mid-Atlantic to under perform the rest of the portfolio in 2013, in addition to elevated levels of new supply throughout the year. An uncertain fiscal situation, which is putting downward pressure on job creation will generate headwinds during at least the first half of 2013. Similarly, we expect revenue growth in the New England region to decelerate throughout the year and slightly under perform the portfolio average during 2013. In Boston, job growth is projected to slow from a trailing 12-month average of roughly 2% to about 1.5%. Additionally, new supply in the urban core and a strengthening housing market will slow the pace of rent growth. In Fairfield County, the projected softness in financial services employment and the impact of new supply will result in relatively modest revenue growth.

In the middle of the pack, we expect relatively healthy performance in both the Metro New York, New Jersey, and Southern California regions. Job growth in the technology sector, particularly software and content development, continues to foster apartment demand in New York and northern New Jersey. In Southern California, broad-based steady job growth is expected to continue, while new supply will be the most constrained of any region in the country. Both regions are expected to produce revenue growth consistent with or slightly above the portfolio average.

Moving on to our non-Archstone transaction activity, during the fourth quarter, we acquired one $40 million community in Burlington, Massachusetts. This community contains 203 apartment homes, is located in a supply constrained submarket near multiple employment centers and was rebranded to an Eaves community. We disposed of two wholly owned assets during the quarter, both of which are located in Everett, Washington. These assets contained 625 apartment homes, were sold for about $95 million, had a weighted average holding period of approximately 12 years and generated an unlevered IRR of about 9.5%. In addition to the Everett asset, we generated a $2 million gain via the sale of an asset in Seattle, which was owned by a third-party and in which we held a residual interest.

We also continue to sell assets from our first investment management fund. We sold three fund-one assets during the quarter, one in New Jersey and two in northern California. These assets were sold for a total of about $190 million at a weighted average cap rate of about 5.2%. In addition, we sold a fund one community in San Francisco for $103 million in early January of this year. This community, which included 160 apartment homes and a 32,000 square foot Whole Foods store, traded at a residential cap rate below 4%. There our 10 assets remaining in fund one representing about 45% of our original cost basis, all of which will be sold over the next couple years.

And with that I'll turn the call over to Tom for his remarks. Tom?

Thanks, Sean. As Tim mentioned, I'll spend a few minutes on capital markets activity for 2012. I'll provide an update on our liquidity and balance sheet and then discuss our 2013 outlook. Increased investment activity in 2012 and planned investments in '13 required a number of trips to the capital markets, a total over $3.7 billion. Outside of our Archstone-related capital, we raised $750 million; $300 million in equity, and then $450 million in debt. In connection with Archstone, we raised about $2.4 billion of new capital in a stretch of about 10 days, which essentially pre-funded the transaction expected to close next month. We issued approximately 16.7 million shares of equity at $130 per-share, and executed $250 million 10-year unsecured offering at a 2.85% coupon. There is dilution from this pre-funding in both 2012 and 2013, and we'll discuss that more when we get to the outlook.

Finally, on capital, we did expand our credit facility to $1.3 billion; that's up from $750 million. We also extended the facility's term out into 2017, reduced the rate, and we lowered the fees. These large, well-executed capital raises over a short period was positive affirmation by the market of the Archstone transaction, and combined with the balance sheet that was well prepared for this opportunity when it was presented.

Looking at the balance sheet today, we're carrying about $2.8 billion of cash that diluted fourth-quarter earnings, and that dilution continues into the first quarter. This will largely be resolved next month when we close on Archstone, at which time we'll fund about $670 million of cash and repay approximately $1.7 billion of Archstone assumed debt. This would leave us with over $400 million of cash on the balance sheet and full borrowing capacity on our line to fund ongoing investment activities. Other year-end balance sheet metrics are equally strong. Debt-to-market cap was 20%, interest coverage was 4.7 times, and our unencumbered NOI for the year was 73%.

Turning to the outlook as discussed -- as disclosed on attachment 15 and 16 in last night's press release, we expect 2013 to be another good year for the Company. It's important to note that expensed one-time transaction costs related to Archstone are embedded in our asset outlook, as well as dilution from the pre-funding of the transaction. We included a table in the outlook that provides a road map between FFO and adjusted FFO of $6.15 per share that excludes these one-time costs. However, the projected FFO of $6.15 per share in the table is burdened by much of the capital costs for the entire year, but only benefits from a portion of the NOI we expect to receive. Accordingly the $6.15 is not a stabilized FFO per share that we expect to achieve from a full year of ownership of the portfolio. Pre-funding the Archstone transaction resulted in $2.4 billion of excess cash, which is $0.15 dilutive to first-quarter earnings. We would encourage investors to consider the full-year outlook and make appropriate adjustments to stabilize the first quarter to get a full picture of our expected stabilized FFO, including the Archstone portfolio and the related capital costs.

Now, getting into the operating details of our outlook, we expect same-store NOI to be -- to increase between 4% and 5.5%, revenue growth to increase 3.5% to 5%, and expense growth of about 3.5%. This expense growth is most pressured by property taxes and insurance, both driven higher by rising asset values. As we mentioned in the past, our seasoned tax and risk management teams work hard to mitigate this exposure, and we're adding to these teams in 2013.

Shifting to investment activity, development remains attractive, and we expect to start $1.5 billion of new construction in 2013. This includes two Archstone deals totaling about $200 million. In addition, we'll acquire six deals under construction, with about $100 million left to fund. Our outlook assumes $300 million of non-Archstone-related acquisition activity and about $400 million of non-Archstone-related sales. We will also continue to sell assets related to our fund one and opportunistically sell assets from fund two.

In terms of liquidity, we plan to source between $700 million and $900 million of new capital in 2013. We desire to bring down debt to EBITDA with NOI growth and less debt. Accordingly, it is unlikely that we will issue new, unsecured debt in 2013. This would result in a charge to earnings, as we prepaid the swap we entered into in 2011 at a cost of about $55 million. We repriced that swap today, and the settlement now close to about $50 million. This settlement, along with other prepayment fees related to the Archstone debt, totals about $111 million and is included in our schedule of non-retained items listed in the press release.

Finally, our Board approved a 10.3% dividend increase earlier this week. The 10.3% increase is supported by the performance of our core portfolio, future growth prospects of our development pipeline, and the Archstone acquisition. Most importantly, given all of the non-retained expenses and partial-year impact of the Archstone transaction, we believe this dividend increase closely approximates the new rate of growth and consolidated recurring cash flow once the Archstone portfolio and the related capital markets activity is fully stabilized.

And with that, Tim, I'd like to turn the call back to you.

Thank you, Tom. Obviously 2012 was a very exciting and active year for AvalonBay. We introduced and implemented our branding initiative; invested significantly in our business across all growth platforms; announced the acquisition of Archstone, which will grow the enterprise value of the Company by about 40%; and generated very strong earnings growth for a second consecutive year. Looking to 2013, we remain optimistic about our growth prospects and look forward to sharing our thoughts and plans with you over the course of the year.

So with that, operator, we'd like to open the line for questions.

(Operator Instructions)

Gaurav Mehta, Cantor Fitzgerald.

First question that I have is on 2013 guidance. So your same-store revenue guidance of 3.5% to 5%, what is the operating strategy behind achieving that in terms of are you planning to -- how much rents are you planning to push next year on the upper and on lower end of the guidance?

Yes, Gaurav, this is Sean Breslin. We run revenue management similar to most of our peers. And so it's a blend of occupancy shifts and rental-rate shifts that's really pretty dynamic. And it gets down to not only the asset level but the unit type level in terms of whether one bedroom, two bedrooms, or three bedrooms are performing better or townhomes versus flats. So there's not one precise answer other than we're trying to optimize revenue, which means potentially different strategies in different markets, depending on supply-demand dynamics, as well as the supply-demand dynamics at the asset and the submarket levels. So there's not one generic answer to that question, unfortunately.

Okay. And then I want to go back to your initial comments on your three different brands. I think you mentioned that all the three brands are being very well received in the market. So I was wondering if you could talk about if you are seeing any difference in operating metrics among the three brands in terms of your ability to push rents more on the Avalon side or Ava side or Eaves side?

Gaurav, Tim Naughton here. It's still too premature to talk about it in terms of those operating metrics. One of the things we have looked at -- I think Sean had mentioned Ava H Street in terms of how well received that's been in the market, where rents have outperformed our expectations there. And I think that's one of the things that we've been pretty consistent in saying is we think in many ways, the benefit is going to be on the return on initial capital as it relates to delivering a distinct product to a targeted segment, as opposed to trying to deliver a product that appeals to multiple segments, where oftentimes, you over-program the community. And I think that community is a really good example of it's not trying to be all things to all people. It really seemed to hit a mark in that particular submarket. And we're being rewarded with it with a very healthy yield relative to what you might normally expect in the Washington market.

Okay. Last question that I have is on Archstone acquisition and how that impacts your development pipeline. Tim, on the last call you mentioned that your development pipeline is running on 11% of market cap. So now that you're acquiring the Archstone portfolio, does that change your outlook on how big your development pipeline can be from an organizational capacity or how [material] you want to grow?

Well, Gaurav we were already planning on growing the pipeline next year without the Archstone acquisition. The pipeline would have gone from about $1.8 billion to about $2.5 billion by the end of the year. With the acquisition, it will go to about $3 billion by the end of the year. So it does grow the pipeline by about 20%, if you will, which is about the same percentage if you just looked at the numbers I had mentioned before. We are going to bring about $1 billion of new development in, including what's under construction on top of a pipeline that is currently about $4.6 billion.

We are bringing some new development and construction folks along, as well, so we are growing the capacity of the group commensurate with the amount of production that we expect as a direct result of the Archstone deal. And we do think because you look out to the next cycle, this will allow us to scale up the development platform, maybe not exactly commensurate with the 35% to 40% growth that we are bringing on, but pretty close in our sense. So next year, we're expecting $3 billion, peaking at around $3 billion. It will be about 13% of enterprise value, so it's actually up from 11% right now. But it had been planned that it would be up into the 14% to 15% range anyway. So we're maybe -- it's maybe diluted by about 100 to 200 basis points from what we would have been -- where we would have been in the event we hadn't done the acquisition.

Okay. Last follow-up question, on the last call you mentioned that you have been adding most resources on the development side in southern California and that you could start two to three deals a year in that region. Now that you've acquired the Archstone portfolio, it's going to increase your exposure to southern California quite a bit compared to what you had earlier. So does your previous view still hold in terms of development in Southern California?

It does. Even at that level, Gaurav, it's not an over index, if you will. This transaction, one of the things we liked about, as we talked about, was market concentration. It gets us very close to where our long-term targets have been across the different geographies. But southern California, we think, is scaled appropriately relative to how we want to continue to grow our presence in that market relative to the overall portfolio.

Ross Nussbaum, UBS.

I'm here with Derek Bauer. Couple questions for you. First, on Archstone, can you give us any color on how that portfolio performed in the fourth quarter and what your expectations are for same-store growth from Archstone relative to what you think your existing portfolio is going to do in 2013?

Ross, this is Sean Breslin. One thing that we've looked at in completing the transaction is the long-term growth rate of our existing portfolio relative to the Archstone portfolio of assets we're acquiring. And our expectation is that over the long run, there is a spread there that is probably in the 30 to 50 basis point range. And based on what visibility we have today, I wouldn't be surprised if that's what we would expect during 2013. I can't answer specific to Q4 right off the top of my head, but that's our expectation long-term and what we're seeing at least so far in 2013

Just to clarify, you're saying Archstone will be a greater, higher growth rate than your existing --

Correct, 30 to 50 basis points over the long run, that's correct.

Got it. Okay. Second question, on the mid-Atlantic can you help break out what was the new lease versus renewal growth in the fourth quarter? I'm trying to get a sense for just how precipitously the growth has been slowing there.

Sure. And it does vary by submarket, so to provide a little context there, our experience recently has been that suburban Maryland and Baltimore regions have been a little bit softer in terms of overall performance. And it's been holding up a little bit better in the suburban Virginia market and in the core of DC. The one thing to keep in mind relative to DC, at least for us, is our same-store basket in DC only represents two assets. So it's a little bit skewed there. And then in terms of rent change in the mid-Atlantic, we were close to 4% on renewals in the fourth quarter. It's slightly negative in terms of new move-ins in the fourth quarter. And again, there is some asset noise in there that moves things around, but those are the numbers overall for the mid-Atlantic in the fourth quarter.

Okay. Third question is on the capital markets side, $700 million to $900 million of activity you plan on doing this year. Since you've terminated the interest rate lock you had, are you saying that that's all going to be equity now?

Ross, this is Tom. One, we have not terminated that hedge, so I should probably emphasize that, it's still outstanding. We're still evaluating the hedge and our capital markets activity for the year. What we're trying to telegraph is that, if you look at the capital raising activity we've done over the last two years since we put that hedge in place, we've done over $10 billion of new capital in the last two years through the Archstone transaction. In other words, if you take April of '11 through April of '13, we will have raised $10 billion of capital. And this is a company that normally would raise over a two-year period, $1.5 billion. So it's 7.5 to 10 times what we normally would have done. And that is a very different, obviously, outcome than we thought we'd have in April when we did that hedge.

So it's fair to say that we are reevaluating our need for debt capital in 2013, given the amount of capital activity we've had over a couple years. And I would say that debt-to-EBITDA levels, which will be in the high 6% range upon closing, is something we'd like to work down. And to work that down, the quickest way to do it is to grow your EBITDA and not issue a bunch of debt. So we have somewhat of a very focused intent to get that debt-to-EBITDA number down, and that could impact our willingness to issue new debt in 2013, which would also, therefore, require us to break that hedge.

Understood. Last question from me, I want to make sure we've got the right numbers in FFO in terms of what the non-cash impact is of the mark on the Archstone debt. Are we looking at a number that is somewhere in the $0.30 a share range that's embedded in the guidance?

Yes, embedded in the guidance for the year is about $0.22. If you stabilize that for a full year, it would be about $0.26.

Okay.

Also, that's $6.15. It is important to remember that that number is not a stabilized number. There's $0.15 of dilution in the first quarter because we're sitting on about $2.8 billion of capital. So if you think about that $6.15 and the $0.15 of dilution, and then adjust for the full year, if you will, of that dilution or that accretion of $0.26, you get to an adjusted FFO number on a cash basis that's about 10% higher than last year, which approximates our dividend increase.

Jeffrey Spector, Banc of America Merrill Lynch.

This is Jana for Jeff. Can you give us your move outs to home ownership in fourth quarter? And while you think we're seeing homeownership rates may have bottomed from your earlier comments, do you think that they could hurt you as they move up, given that most of your markets have pretty high home prices?

Yes, Jana, this is Sean Breslin. In terms of your first question on move outs due to home purchases, it was 16% during the quarter. It's up about 80 basis points on a year-over-year basis. But it's still well below our long-term average, which is closer to 20%. At this point in the cycle, all the markets are still fairly well below their long-term average with two exceptions. That being the Boston market, which is running around 24% compared to a long-term average of about 20%, and Seattle, which is running at 23%, which is consistent with its long-term average.

And then in terms of maybe the broader question that you asked about the risk of homeownership, it certainly does exist. And it probably exists more so in, I'd say, suburban assets and larger floor plans. One of the things we're trying to watch is the supply of available product certainly is being chewed up, I think as to Tim's earlier comments in many of these markets. So the supply of inventory that's available is being squeezed in certain places. And then to your point, particularly in our least-affordable markets, New York, San Francisco, Southern California is an example, that may start to come back in terms of increasing towards its long-term average for move outs due to home purchases. But it may be relatively gradual just given the affordability. It's still more affordable relative to its historical levels, but still relatively unaffordable as compared to some of the more commodity markets and potentially some of the northeastern markets like Boston, like I mentioned.

Jana, this is Tim. Just to be clear in terms of our outlook as it relates to homeownership rates, we don't necessarily see them reversing dramatically. We see it, as I mentioned in my remarks, more of a balanced housing demand where marginal homeownership and renter propensities are more in line with longer-term averages, so we don't see it going back to 69% where it was at the peak. It may drift up a little bit over the next few years, but that's what's embedded in our outlook, in our view of the housing market.

Thank you. And on the acquisitions and dispositions planned, can you provide a spread on where you think you'll be selling and buying, and perhaps how are you thinking about the dispositions? Is it more market-driven or more A versus B?

Jana, this is Sean again. In terms of dispositions and the spread on cap rates, historically, we've said probably somewhere in the neighborhood of 25 basis points dilutive in terms of what we'd be selling versus what we'd be buying. And then in terms of markets, we try to look at it from a number of different dimensions. First is from a portfolio allocation point of view, in terms of where we are either over allocated or under allocated, considering the development pipeline that we have in those markets, so that it is from a macro point of view, so it dictates which markets we look back at.

And then from that standpoint, then we go to the next level, which is at the submarket, trying to determine where we think we'll see out performance or under performance in terms of more attractive submarkets. And then that really drives picking a group of assets within a particular submarket where we would be trying to exit. So for us what that's meant more historically is we have pretty robust development pipelines, for example in New Jersey and in Boston. We've been more active on a selling front there, whereas we've been relatively under allocated in Southern California and some of the attractive submarkets there. So that's an example of how we look at it. And we'll take a similar approach this year. We have identified specific assets, but we haven't telegraphed yet which ones those are.

Alexander Goldfarb, Sandler O'Neill.

Tom, just wanted to go back on Ross's question on the capital issuance. It sounds like you're reading through that issuing unsecured debt is probably not likely if you guys want to bring down your debt-to-EBITDA. So should we be modeling in $700 million to $900 million of ATM issuance, or what should we be doing for our assumptions for share count in ATM?

Yes, I think that you should -- as we said in my comments, it's not likely that we will be in a debt-capital markets for additional unsecured debt, and I say not likely. That doesn't mean we preclude it completely. We didn't specifically say what the $700 million and $900 million was, but there aren't a lot of choices left. So I think it's fair to say that we probably -- if we are looking to work down the debt-to-EBITDA, the best way to do that is not through debt, but with equity and through NOI growth.

And then --

Alex, this is Tim. In addition to that, depending upon where the equity markets are, we'd certainly be willing and able to expand dispositions as well. Our outlook does call for us to be a net seller of assets, and depending upon market conditions and what the best source of capital is from a cost standpoint, we may be a seller of more assets. Or later in the year we may issue debt depending upon capital market conditions. So that's just --

And we could have changes in how much we expect to start for redevelopment. There's a lot of levers to pull, but our focus really is on getting debt-to-EBITDA back down to near or below six in a reasonable amount of time.

Tom, to that point, I know in the past you've mentioned adversity to a 30-year unsecured, but what about preferred, or the 30-year non-qualified preferred? Would that satisfy your equity component?

That's why I said that we didn't specify the $700 million to $900 million, because there other options. But if debt is less of an option, it would be -- the preferred would be interesting. That would then you'd have debt and preferred-to-EBITDA calculations, which would still be high. So that's another consideration, but I think it's fair to say that we're very focused on restoring that debt-to-EBITDA number and pulling levers that generally drive that number down quicker.

Okay. Second question is can you walk us back through -- it sounds like you guys had a European-style hedge or a hedge that could only be used during a certain time. $55 million is a lot of money. So can you provide some framework for how much this hedge was going to be used against and on a go-forward basis when you guys get pitched to do hedges in the future, are you going to immediately say no? Or there is a spot for hedging in AvalonBay in the future?

Alex, we don't get pitched to do hedges. We go out and talk to our bankers based on our view that we want to do a hedge. No one talks to us about anything, so no one talked us into that hedge back in 2011. So if you look at our general plan, we had $215 million hedged against the planned issuance of $430 million. And at the time, we had a wall of debt coming due in 2013 that we wanted to protect against. That hedge was done in April of '11 when rates were about 3.4%; the10-year had spiked up. And so I can't say that we won't do hedges in the future.

I can say that there's an appropriate use of hedging, and that you should think of hedging as if we issue debt in April '11. And in November of '10, we issued debt at 3.95%. We were all high-fi-ing at the lowest issuance ever on a debt deal, and that's probably $30 million out of the market right now. And so it's like issuing debt. And if you look at that hedge, you have to think of all the other debt we've issued at 4%, 5%, 6%, 7%, 8% and say, gosh, why didn't you think about that? Why didn't you know rates were going to fall to the point where you could get to $2.85? I'll stop my diatribe now, but that concludes my remarks on the hedge.

Tom, always appreciated. Thank you.

Eric Wolfe, Citi.

It's Michael Bilerman, and I'm here with Eric. Tim, just a question, in a month's time you're going to have when the Archstone deal closes, the Lehman estate is going to step in and be your largest shareholder. They're going to have about 15 million shares of your stock. I'm just curious how going forward you're going to think of them. How proactive you will be, and at some point over the next five years, they're going to have to sell down that stake. So I'm just curious how you're going to approach it being reactive or proactive, also knowing that you'll need capital at some point. You'll want to keep leverage down and things like that?

Well, the registration rights were heavily negotiated as far as transactions to make sure we both had access, ultimately, to the capital markets, because it's in both of ours best interests to allow the other party to have access to the capital markets. In their case, to sell down their position, and our case, to continue to fund the business. So Mike, we try to contemplate in terms of how we negotiate the transaction up front that there weren't any Board seats. So they wanted to have the freedom to be able to access the markets when it made sense. And I really don't know how they intend to reduce their position over time, whether it is over a lengthy period of time or whether they may want to do underwritten offerings, or just sell into the -- just average down by selling into the open market. But I'm not sure I fully grasp your question, but we try to contemplate what the relationship might look like frankly in the way that we negotiated the registration rights.

More so, we've seen in some other cases where some companies have had large shareholders. In some cases they bought back stock. Some cases they've bought back other shares and they've worked together. Are you going to treat them like any other shareholder or try to understand that they are a 10% holder and there's some level of overhang that's on your stock until that gets rectified?

To be determined, Michael.

Eric had some questions.

Just a quick one on your comments about supply peaking in 2013 and perhaps tapering off in 2014 and 2015. I'm just curious how much visibility do you see and do you have today into supply in those years, and whether you think the trend of investors looking for more coastal exposure is going to continue or if, like you said, that they're going to broaden their bases a bit out to the Sunbelt markets?

They've already broadened the base, Eric. Obviously if starts -- if deliveries are peaking in 2013, starts are probably peaking in 2011 into early 2012. So we've already started to see a movement for many of our competitors to start focusing on some of the other markets, where frankly, the pursuit cost capital goes a lot further in terms of being able to get into the ground a lot quicker. I'm thinking a lot about the merchant builders in particular whose business models depend quite a bit on fee generation.

In terms of visibility in our markets, it's pretty good. We built at ground-up through working with between our research group and our local franchises and identify every project that's out there. We handicap the likelihood and the timing of when a deal might go forward. And generally we've been pretty accurate with respect to our expectations there. So as it relates to other markets, obviously we have a lot less visibility. We depend a lot more on third-party estimates there, but I think what you'll find if you go and you look at some of the research houses' estimates, it's generally been the surprise is to the upside on product. It's typically been in markets where it's just been easier to get into the ground.

So we've definitely seen a bit of -- I don't know if it's a pullback, but definitely a number of our peers looking to go back and do business with some of the other markets in which, frankly in many cases, they came from or where their own sponsor capital goes much further.

Richard Anderson, BMO Capital Markets.

Tim, a question for you, what came first, this analysis into 2014, 2015 in terms of supply and the recovery of fundamentals versus 2013 or your decision to pull the trigger on Archstone? I'm wondering how much of that movement in your markets influenced your decision to take a leap at Archstone?

I don't know that that was a driver, Rich. Obviously it's a unique situation, a unique opportunity. I think what helped framed our positive outlook in Archstone is a belief that we are not late in the cycle right now. That this cycle, in some ways, shares more characteristics with the 90s than it does the 2000s. And so we did enter this with the belief that we still had a few more years to run here. As it relates to whether that meant '13 or '14 was going to be stronger, I don't think that was particularly relevant to the decision.

And then secondly, I'd say just the ability to do what we've been trying to do from a portfolio standpoint and by being able to team up with each UR, and therefore, get more of the part of Archstone that we wanted, and they got more what a more of what they wanted, that was extremely attractive to us. And then you just can't decouple the ability to structure the transaction in a way that was appropriate risk from our standpoint in terms of how it was executed.

But if you had seen 2013 was going to be a slowdown, 2014 another one, going negative in '15. But then you've obviously make investments with a long-term mindset, had no impact, right? You still would say that?

No. I'm not saying that. I'm not saying that. Our view on the markets was that generally we had a decent run ahead of us. To the extent that we thought '14 and '15 were turning down significantly it would have impact pricing and valuation.

Okay. Fair. Sean, a question for you. When you went through and looked at the 2013 outlook and all the different markets, we have the numbers now in terms of what will outperform and underperform and market perform, but were there any markets that when you went through the budgeting process you said, wow, this is much worse or much better than I thought it was going to be now that we've done the analysis? What were the standout surprises in your mind?

Rich, I'm not sure there were any real standout surprises. It's all relative to when you were thinking about it I guess. But I don't think there's anything different from what we expected based on where we were mid-last year, how the portfolio was trending in the second half of the year, expectations for job growth. As Tim mentioned, the ability to have good visibility on supply, those factors were fairly well in place at that point. What you'd be looking for is significant changes from a macro point of view. And in certain markets, particularly DC, it's yet to be seen in terms of what that impact is, so you run some sensitivities around that in terms of where you think it will be. But I don't think the nature of the issues are materially different than what we would have expected three to six months ago.

The question is how sensitive the portfolio will be at certain macro events, and I'd say at this point in time, that comes down to jobs. It comes down to jobs from a macro point of view. It comes down to jobs specifically as it relates probably more so to DC than most markets, since it has a fair bit of supply coming, as we all know. And then as Tim mentioned, how much unbundling continues to occur as people start feeling better about the broader economy overall.

Okay. Last, to Tom, if you have -- starting in the second quarter of '13, if you have $6.3 billion of total debt when you move everything around, what are you guys forecasting for -- I suppose we can do the math, but what are you forecasting for 2013 interest expense when you wrap everything together?

Well, we didn't specifically provide outlook on interest expense. I think I'd refer back to debt-to-EBITDA, and that is that the EBITDA would be in the high 6's in April. Following the close, it would work its way down to about 6.2% by the end of the year, and I think you can back into the numbers based on that.

Okay.

We did give the expected interest -- effective interest rate on Archstone.

We did. You have everything you need to make that calculation, Rich.

I'd rather not do the work if you don't mind. (laughter).

Call me after the call and I'll do it for you.

Okay. Lastly for you, Tom, 73% unencumbered Avalon portfolio, what's the number including Archstone?

It will go down into the low 60s.

Low 60s? Okay. Thank you.

Dave Bragg, Zelman & Associates.

Just building on these last two questions, I'm thinking about this potential reacceleration in '14 and '15. It looks like permitting activity in your markets is up on a year-over-year basis in 2012. I think we'd probably agree single-family housing won't be less of a threat in '14 and '15. So do you need better job growth than the 1.1% that you're expecting for 2013 for this to happen?

Dave, Tim. Yes. Our expectations are that, as I mentioned, we do expect the economy to hit a higher sustainable growth rate. Most third-party projections are north of 2% for both '14 and '15 where annual job growth going from 1.8 million nationally to over 3 million. So yes, it is our expectation that job growth would be in the 2% range, maybe a little bit greater where you've got apartment starts going from the mid-ones, as a percentage of housing stock, down to the lower ones where you'd have very favorable supply-demand fundamentals as a result.

Okay. And are you currently underwriting in any markets a reacceleration like this?

It depends on the market and the submarket actually. We actually have a unique growth profile for every submarket in which we do business. In some cases, it does move around a little bit like an EKG. Sometimes it goes down; sometimes it actually goes up in years '14 and ' 15. So overall, I will tell you that yes, our growth -- our estimates for growth in '14 and '15 in many markets are better than that are in '13.

Last question on this topic, as that starts to become a consensus in terms of better job growth in '14 and '15, why would supply subside in these markets?

Well, we're already seeing what's happening with starts, Dave. Again I think in our markets -- I can't really speak as much nationally, but in our markets, we do have a lot of visibility with respect to what's actually happening, what's financed, what's getting started, and have a pretty good sense of how that might be delivered. In some cases, we're handicapping deals. We may be assigning a 75% probability to the extent that the markets get a lot more buoyant. Then we may re-handicap that is 100% probability, which would impact our numbers at the margin. But based upon what we're seeing today in terms of what's starting and what is going to deliver, which oftentimes in our markets, particularly on these urban and infill, David, it's a 7- to a 10-quarter gestation period from the time we start to the time the units actually get delivered into the market.

(Operator Instructions)

Karin Ford, KeyBanc Capital Markets.

Just one question. Following up on Rich's as well, how much does the expectation of a potential reacceleration in 2014, 2015, how much did that figure into the decision to have $3 billion under development by year-end? And if you looked in your crystal ball a few months from now and you thought maybe rent growth was flattening out instead, would you look to potentially pull back on that development pipeline through the course of the year?

That would be on a case-by-case basis. The economics of development pipeline are still very compelling. On average, the $1.8 billion that is under construction, it has got a projected yield of 6.7. The underlying economics of the shadow pipeline of 2.8 are very similar. The deals that we put under contract this year and added to that pipeline are very similar; high sixes. And as long as cap rates are five-ish, low fives, there's a lot of value there to be created. But to the extent rental rates flatten out or go negative in markets, it's going to impact some deals at the margin, but it wouldn't necessarily be, in my view, necessarily a strategic shift of saying, we're just going to cut the development pipeline in half, other than maybe what's happening in the capital markets.

Paula Poskon, Robert W. Baird.

Could you remind us of your expectations for CapEx needs and any redevelopment opportunities in the Archstone portfolio?

Sure, Paula. This is Sean Breslin. Maybe taking your second question first in terms of the redeveloped pipeline, we do expect that there will be opportunities in the Archstone portfolio. We've not quantified that yet in terms of exactly what that means, but we do know over the last several years, Archstone has certainly done a fine job maintaining the assets. But there's not been a significant investment in enhancing the assets and looking for opportunities to reposition those assets in certain markets and submarkets. So we think there's plenty of opportunity there, we just haven't quantified it just yet. We will be doing that as we go through 2013.

And then in terms of CapEx overall, we don't expect it to be materially different from our portfolio. In the 500 to 600 unit range typically is where it's been running. It will probably a bit higher than that in '13 based on some enhancement activity that we're doing and some leasing offices and things like that, but it's not going to be materially different. Probably marginally higher, just given the ages of the assets is a little bit older in some of high-rise but not materially different.

Thanks, Sean. I'm going to borrow Karin's crystal ball to follow up on Jana's question about dispositions. If you sell everything according to plan from your own portfolio, looking back, do you think you would have sold more to your public peers or to the private side?

In terms of what we've been selling in the past year you're referring to, Paula?

To your plans for this year.

Plans for this year. It really varies by asset in terms of who the prime buyers are. Generally, suburban garden product, you're finding that the private leverage buyers are all over that, and the cap rates with the low leverage debt that they can secure nowadays are pretty attractive. Core infill urban high-rises, it's institutional or [Reed Pierce] are the main buyers. The San Francisco asset I mentioned was sold to a pension fund advisor, as an example, versus the other two fund assets we sold in the fourth quarter were private leverage buyers. So there's not probably one answer to that question. It depends on the market and the product more than anything else.

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

Well, thank you, and we appreciate all of you being on the call today. And we look forward to seeing many of you at the Citigroup CO conference in early March. Have a great day. Thanks.

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