艾芙隆海灣社區公司 (AVB) 2013 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the AvalonBay Communities Second Quarter 2013 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 like to introduce your host for today's conference call, Mr. Jason Reilly, Director of Investor Relations. Mr. Reilly, you may begin your conference.

Well thank you Alan, and welcome to AvalonBay Communities second quarter 2013 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 is a discussion of these risks and uncertainties in yesterday afternoon's Press Release, as well as in the Company's Form 10-K and Form 10-Q filed with the SEC.

As usual, 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 available on our website at www.AvalonBay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance.

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

Thanks Jason, and welcome to our second quarter call. Joining me today are Sean Breslin, EVP of Investments and Asset Management, and Tom Sargeant, our Chief Financial Officer. Sean, Tom, and I each have some prepared remarks, and then the three of us will be available for questions. I'll begin by summarizing our results for the quarter, including our updated outlook, and then share some comments on the broader US economy and apartment market fundamentals. Sean will then provide color on our second quarter operating performance, current trends in the portfolio, and discuss our disposition activity. Finally, Tom will conclude our prepared remarks with on update on our development activity and capital plans for the balance of the year.

Starting with our results for the quarter, last night we reported EPS of $0.28 and FFO per share of $1.55, a 15.7% increase over the prior year. Adjusting for non-routine items, which primarily include transaction and other costs related to the Archstone acquisition, FFO per share increased nearly 21%. This marked the eighth consecutive quarter of adjusted FFO growth of greater than 15%.

Overall, operating performance through the first half of 2013 was ahead of budget, driven by better than expected results from our operating and lease-up portfolios. Operating trends remained favorable as year-over-year same-store revenue growth in Q2 was higher than that experienced in Q1, and sequential same-store revenue growth was higher than in the second quarter of last year. The continued strength in portfolio performance is supported by apartment fundamentals. Stronger job growth, favorable demographics, and reduced housing inventory are all contributing to apartment market performance. We believe that we are still in the early portion of this apartment and housing cycle, and the underlying economy continues to improve in important areas that will support a sustainable expansion.

Based on our performance to date and our expectations for the remainder of the year, we have revised our outlook for 2013. We now expect full-year same-store revenues to increase by 4.25% to 5%, or an increase of approximately 40 basis points at the midpoint, and same-store NOI to increase by 5% to 5.75%, or an increase of roughly 60 basis points at the midpoint. We expect adjusted FFO to be $6.20 to $6.40 per share, an increase of $0.15 per share above our initial outlook at the midpoint. About two-thirds of this increase is attributable to better than projected portfolio performance, and most of the remainder of the results have projected savings in overhead and other operating costs. At the midpoint of $6.30 per share, adjusted FFO per share is projected to be up by over 14% for the full year.

Turning to the macro environment, we believe the US economy is better positioned for growth today than it has been at any time since the downturn. So far this year, growth has been driven by the domestic private sector, with consumer business and home builder sentiment reaching pre-recession levels by mid year. This growing confidence combined with significant improvements in consumer and corporate balance sheets are translating into stronger consumption in investment, as corporations are finally putting some of their $2.5 trillion of cash to work. Companies have been investing in manpower as well, as job growth at 200,000 per month is coming entirely from the private sector, and running well ahead of consensus projections made at the beginning of the year. Of course, there remains some well-documented risks that are limiting the county from reaching its full growth potential, principally, in the public, and export oriented sectors, given domestic fiscal pressures and underperforming foreign economies. As long as our fiscal challenges can be managed in a way that doesn't undermine the improved confidence of the consumer and business sector, the economy should be able to continue on its path to a sustainable economic expansion, albeit perhaps more modest than experienced in previous cycles.

Stronger consumer confidence is resulting in increased activity in important areas of the private sector economy, particularly in the auto and housing industries. New automobile sales are running at more than 16 million units per year, the highest level since the downturn, and up roughly 75% from the trough. Similarly existing home sales volume is up around 50% from the trough, and 15% year-over-year, with pricing up over 13% nationally from last year.

While the recovery in the for sale sector has accelerated over the last few quarters, apartment performance has remained healthy and well above long-term trends. As we and others have said over the last few quarters, the strengthening for sale market is more a sign of a healthy economy rather than an unhealthy apartment market. Historically, apartment performance has been heavily correlated with the economy, and a sustainable economic expansion is unlikely to occur without a recovery and expansion of the overall housing market. As a result, we view the recovery in the for-sale housing market as mostly positive for our business, as is largely a reflection of growing consumer confidence finally translating into important economic activity.

Focusing for a moment on the supply side of the housing market, total housing production has lagged [demand] the cycle such that most if not all the excess housing inventory created in the mid- 2000s has been worked off. However, as we discussed at our Investor Day in late June, current US housing production of less than 1 million units per year is 600,000 units short of annual projected structural demand through the balance of the decade. That means that the housing sector in total will need to increase its level of annual production by more than 60% to meet demand. And yet many companies have not invested sufficiently in their organizations, new entitlements, or the infrastructure required to satisfy this level of demand. This is not uncommon in capital intensive businesses that are subject to boom/bust cycles. Periods of over investment are often followed by periods of under investment. The mis-allocation of capital that leads to the downturn in the first place is often followed by dislocation of capital that constrains the addition of productive capacity and new supply that is needed once recovery is underway.

This is where the housing industry is today. On the cusp of a housing shortage that is likely to become more pronounced over the next two to three years. It is the reason why we are seeing double-digit housing price increases, at the same time we're experiencing mid single digit rent increases in many of our markets. All with below trend economic growth. While not all the markets or segments of the housing industry will benefit equally from a growing housing imbalance, most will benefit nevertheless. For example, the lack of single-family supply and recent run-up in prices is impacting affordability and limiting alternatives for renters. We've seen this in our own portfolio, as move-outs due to home purchase remain substantially below long-term averages in all but one market.

Housing affordability is being further pressured by higher interest rates, as long maturity mortgages are up roughly 100 basis points over the last few months. Changes in relative affordability, along with demographic trends and consumer preferences, will continue to impact demand dynamics and factor into performance for various segments of the housing market as the expansion plays out. Importantly though we remain bullish on the prospects of the entire housing sector, and believe that their for sale and rental housing will benefit from compelling underlying fundamentals.

Lastly, I did want to address the issue of apartment supply more specifically. While overall housing production is projected to be well below structural demand, apartment deliveries are on the rise and projected to increase over the next few quarters to 1.5% to 2% of apartment stock, or roughly 250,000 units in annual deliveries. This level of new apartment supply is a bit higher than the long-term average, and represents a higher percentage of total new housing stock than normal.

However, we are not particularly concerned by this level of production for a number of reasons. First, there is still virtually no new condo construction activity adding to new multi-family supply. Second, the current level of apartment starts is generally in line with the past couple of expansions, and basically matches the current level of job growth and household formation. Third, supply is projected to peak at or near these levels by mid 2014, as trailing 12 month apartment starts appear to be leveling off in this range based upon recent monthly start activity. And lastly, apartments should represent a greater share of marginal housing production, because of the composition of underlying demand.

Demographic growth continues to be healthy in the young adult age cohort, or those under age 35 who have a higher propensity to rent and are doing so at much higher rates than past cycles. This age cohort is responsible for almost half of net job growth experience over the last couple of years, and therefore is driving a higher portion of marginal housing demands. While some markets will feel the effects of increased supply, like the DC Metro area, overall we believe that the apartment market is positioned to absorb this level of production with rents growing above trends over the next few years. In fact, Witten Advisors is projecting NOIs to grow by 24% over the 2013 to 2016 time period on a cumulative basis.

So to sum it up, all these factors give us confidence in the broader economy, and support our belief that the apartment cycle still has plenty of opportunity for growth. We are only 13 quarters into the apartment growth cycle, and so far rents have increased by just over 10% on a cumulative basis. By comparison, the 90 cycle lasted 40 quarters and rents grew by more than 50% on a cumulative basis during that time.

And with that, I'll turn it over to Sean for his remarks. Sean?

Thanks Tim. As Tim mentioned, I will comment on operating performance during the second quarter, current portfolio trends, and our disposition activity.

Starting with the same-store results, year-over-year our total rental revenue increased 5.2%, driven by a 4.3% increase in rate, and a 90 basis point increase in occupancy. Year-to-date, total rental revenue was up 5%, and reflects a 4.5% increase in rate, and a 50 basis point increase in occupancy. Sequentially, total rental revenue increased 1.8%, 30 basis points more than the second quarter last year. Same-store expenses for the second quarter increased 2%, and are up 2.7% year to date. Expense growth is being driven primarily by property taxes, including significant increases in rate and/or assessments in the New England, Metro New York, New Jersey, and Pacific Northwest regions, along with insurance. Collectively, all other operating expenses are down year to date.

Same-store NOI growth was 6.6% for the second quarter, and 6.1% year to date. In terms of the Archstone portfolio, overall performance continues to track modestly ahead of our original expectations, as we indicated during the first quarter call. Revenue is slightly ahead of our original underwriting, and expenses are generally in line. In terms of regional performance, the mid-Atlantic continues to underperform the remainder of the same-store portfolio, producing year-over-year rental revenue growth of just under 2%, and sequential rental revenue growth of 1.1%.

In terms of sub-market differences, our suburban Maryland assets are currently underperforming in the Northern Virginia portfolio. And in Washington DC our same-store portfolio of two assets is too small to draw any definitive conclusions about sub-market performance, particularly since one of the two assets is student oriented. The recently acquired Archstone communities in DC however, are performing relatively well, and producing a rent change in the mid 2% range currently. It's no secret that the DC Metro area is facing challenging headwinds in terms of new supply and weak demand. We remain optimistic about the region over the long-term, and recent data indicates the pace of new apartment starts is beginning to decline.

Moving to the Metro New York/ New Jersey region, healthy demand in the city drove year-over-year rental revenue growth of 5.3%. Sequentially, rental revenue increased 210 basis points, a growth rate we have not experienced in the region in nearly two years. Demand continues to be supported by employment growth in the technology sector. Yahoo and Facebook are expanding their presence in Manhattan, and Brooklyn's Tech Triangle is becoming a popular hub for retail, healthcare, design, and technology companies.

In New England, year-over-year rental revenue increased 3.6%. Apartment demand in the Fairfield New Haven area remains weak, as many of the financial services positions that once supported the area have been slow to return. The greater Boston area produced healthy rental revenue growth as rates increased 3.5%, and occupancy increased 90 basis points. Demand in Boston is being driven by job gains in the hospitality, professional, and business services, retail, healthcare, and financial services sectors.

Shifting to the West Coast, Northern California and Seattle continue to produce robust results, posting 8.8% and 8.6% year-over-year rental revenue gains respectively. Both regions generated sequential rental revenue growth north of 2%. Construction, tech, and retail hiring in the greater Seattle area are supporting strong demand. And while supply is being delivered downtown and in adjacent sub-markets, it has not had a material impact on our East side portfolio. In Northern California, tech related hiring remains healthy. And while supply continues to be delivered in the Northern California region, particularly in San Jose, absorption remains robust given underlying job growth. Southern California continues its steady recovery, posting a 4.6% year-over-year increase in rental revenue. Southern California's trade and tech based economy is on solid footing right now. Over the last five years, Southern California has produced stronger average wage growth than it has rent growth, which supports our belief that this region has plenty of room to run.

Lastly, our new lease-ups are performing well. Leasing velocity averaged 27 leases per month during the quarter, about 20% ahead of last year's pace. While rental rates are approximately 3.5% ahead of our initial expectations. Projected yields are about 50 basis points ahead of our original pro forma.

Shifting now to other portfolio metrics, new move-in rent change averaged about 3.5% for the quarter, and renewals were up 5%. More importantly, the trend throughout the quarter was quite positive, as new move-in rent change trended up 100 basis points to 4% from April to June, while renewals increased 50 basis points to 5.25%. The positive momentum has continued into July, with new move-in rent change north of 4%, which is roughly 75 basis points above last year's pace, while committed renewals are averaging 6%, which is in line with last year. Renewal offers for August and September went out in the low 7% range, about 100 basis points above last year's offers. We continue to be aggressive with renewals given current occupancy rates in the low 96% range, and availability in the mid 5%s.

Annualized turnover for the quarter was 56%, essentially flat from Q2 2012. Move outs due to home purchase was 15%, consistent with Q2 2012. And as Tim mentioned, is running well below low long-term averages in every region except one which is New England. In what might be considered good news for the economic outlook, move outs due to job relocation increased 300 basis points on a year-over-year basis, while move outs for financial reasons declined 330 basis points. Household rent to income ratios remained relatively flat at approximately 20% in line with historical averages for our portfolio.

Switching now to transaction activity, we sold two assets during the quarter. Avalon at Dublin Station, a wholly-owned community we developed in the East Bay of Northern California, was sold for $105 million. The sale reflected a cap rate in the low 4%s, and resulted in a $20 million economic gain. We also sold a Fund One Community, Avalon at Civic Center located in Norwalk, California. The 25 plus year old asset was sold for $46 million at roughly a 5% cap rate. We remain an active seller, and currently have $280 million of wholly-owned assets under contract, and another $85 million in the marketing process. The Fund One asset is also under contract for $26 million. Looking forward, we expect to put another $100 million in wholly-owned, and $150 million in Fund One assets into the market in the next quarter.

Shifting to the transaction market overall, dollar volume in the US is up about 10% to 15% on a year-over-year basis, while the absolute number of trades is about the same. In our markets, the number of trades is actually down about 10%, as a result of simply fewer listings in the market. That being said, listing volume has picked up in the last month or so. Buyers continue to be aggressive, and are sourcing different types of debt to maintain equity yield given the recent rise in the 10-year treasury. For example, some buyers have shortened their fixed-rate term to seven years to produce all in rates in the mid 4%s. Others are using variable rate debt, with spreads over LIBOR in the range of 225 basis points, resulting in initial rates below 3%.

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

Thanks Sean. As Tim mentioned, I'll share a few comments on our revised outlook, the development pipeline, and our capital needs. With regards to the outlook, Tim noted the overall strength of apartment fundamentals, and has certainly contributed to our revised higher earnings outlook, particularly be related to the NOI growth assumptions. Our overall operating FFO outlook improved by $0.01 from the interim outlook provided in April, and improved $0.15 from the initial outlook. As compared to the interim outlook, the table included in our press release notes that $0.06 contributed by higher projected NOI growth was partially offset by higher overhead of $0.02, and then $0.03 related to changes in our financial plan including reduced acquisitions, interest on increased line use, and adjustments to the mark to market on Archstone debt. From our original outlook, the $0.15 increase is primarily due to improved NOI, from operating assets of about $0.10. And this was driven by the 60 basis points increase in our same-store NOI growth outlook, as well as the related improvement from our stabilized assets and lease-up communities. Lower overhead provided another $0.04. And finally, reduced interest expense from refinancing less assumed debt and changes in acquisition or disposition activity contributed another $0.01.

It's important to note that of the NOI improvement, 70% is from higher than expected revenue, with the balance coming from expense savings. And just a quick comment on our third quarter outlook, the third quarter now reflects [loss] settlement cost of $53 million that was previously expected to be expensed in the fourth quarter. This and other small non-routine items pertaining to Archstone combined, such that third-quarter adjusted FFO is expected within a range of $1.60 to $1.66 per share.

Turning to development, it was once again an active quarter. We delivered three new communities for a total capital cost of about $135 million. These communities were completed ahead of schedule, and are producing rents that are about $150 above pro forma. The weighted average initial stabilized yield on these communities is nearly 100 basis points ahead of our original expectations. We also started three communities with over 700 apartments for an expected investment of $150 million.

Tim noted that we expect strong operating fundamentals to continue as the year progresses. And given our recent experience with leasing activity, these fundamentals bode well for the communities we expect to start leasing in the second half of the year. We continue to be active with the development rights pipeline, adding nine new development rights with over $700 million in projected capital investment. Year to date, including opportunities acquired in the Archstone transaction, we've added 19 development rights, with about $1.75 billion in projected capital investment.

Today, our pipeline stands at $6 billion, a $3 billion increase over the last three years. The current pipeline is more geographically diverse, with roughly one-third of the pipeline now on the West Coast compared to just over 20% three years ago. Product type and market allocation has also evolved, as the cycle has matured. And as our pipeline is more weighted towards suburban locations and garden product than it was three years ago.

Since 2012, we've completed more than $800 million of development, at a weighted average yield greater than 7.5%. We estimate that this activity produced nearly $400 million of shareholder value when considering current cap rates. Today, we're building new product for about $280,000 a door, while our stabilized portfolio is valued closer to $330,000 a door. Clearly, we continue to find opportunities in the market, and are producing significant value through our development platform.

Turning to capital markets, this development activity requires funding. And we mentioned last quarter, we've increased our disposition and decreased our acquisition plans for the year. We now expect about $900 million of wholly-owned dispositions this year. About half of this activity has been completed, and we're projecting about $100 million of acquisition activity not yet identified. Based on these assumptions and other investment activities, our external capital requirements are modest at approximately $300 million. Our credit facility has ample capacity to fund this need, or we can opportunistically tap (inaudible) and equity markets as opportunities present themselves, or of course sell additional assets.

With those comments, I'd like to turn the call back to Tim.

Well thanks Tom. So in summary, our portfolio performance continues to be strong. And based upon occupancies in the 96% plus range and healthy demand expectations, it's well positioned to absorb new supply at this point in the cycle. Our development pipeline is just beginning to add meaningful FFO and NAV growth, and our balance sheet is well-positioned to fund this external growth over the next few years. As we discussed on our Investor Day, we believe that our capital allocation track record and organization capability set us apart. Our ability to raise, deploy, grow, and manage capital in a value-added manner has led to significant out performance over the last couple of cycles across every important metric, including total shareholder return, as well as per share, FFO, and NAV, and dividend growth.

While all companies have benefited to some extent from improving fundamentals over the last two to three years, we are now in the stage of the cycle where companies that are able to add value in various ways to their business models will separate themselves from the pack in terms of performance. We are excited about the prospects for the industry over the next few years, but equally as important, we are excited about our competitive position and our ability to leverage key capabilities to continue to deliver long-term out performance.

And with that operator, Alan, we are ready to open the call for questions.

(Operator Instructions)

Jana Galan.

Thank you, good afternoon. You had very impressive occupancy gains across all your markets, and I was just curious if this was the result of the stronger job growth and demand, or is it part of your strategy to keep occupancy high as we see the first waves of new supply hit the market?

Yes Jana, this is Sean. Really two things. One, is we typically run at a higher occupancy platform, certainly that is fueled by healthy demand and the job numbers have been a little bit better than expectation, which has supported that. But it also -- there's a little bit of a seasonal component to it. First off so that we're typically building occupancy through the first quarter into the second quarter as we start to push rate harder, which is something that hits all in the second quarter. And then as we get into the back half of the year, we will also try to be building a little bit higher occupancy platform as we go into the slower season through the Winter. And as you're talking about supply, that does tend to be considered more from a tactical point of view within specific sub-markets based on anticipated lease-up activity and when those deliveries start to occur. It's not necessarily a global strategy if you want to call it that, it's much more tactical in nature based on local conditions.

Thank you. And then just on the development pipeline. And a big focus of the first quarter calls was revising construction costs, just curious in terms of the new rights that you're buying and land parcels, how are you thinking about future construction costs and yields?

Jana, this is Tim. In terms of construction costs, they're basically back to the prior peak. So while they have gone down between 20% and 25% depending upon the product type, they're basically back to peak. It depends on whether you're talking about concrete or wood frame construction, they -- it varies a little bit. But in terms of underwriting, we continue to underwrite the way that we always have. It's a little difficult to project the construction costs on something that may take three or four years to get through the entitlement process, and so we do look at it really on a current yield basis as if we if we were building it today and delivering it into the market today and leasing it up. And to the extent we have a view about construction costs and the direction of the market, whether it's rents or construction costs, and that impacts maybe at the margin the kind of yields we might look for. But it's more at an intuitive level I would say that an analytical level. It's probably helped shape more how we think about how aggressive we want to be, as opposed to any particular deal.

Thank you Tim.

David Topi.

Hello guys. I just have a sort of a high level question, you covered a lot of the detail on the call. But when you think about the acceleration in the development pipeline, higher volumes, a bigger overall investment, maybe it's not supply or absorption or job creation that causes you to pause, maybe it's the disruption the capital markets, potentially higher costs of capital down the road. How do you weigh those two macro factors relative to deciding to move forward at an even higher volume of product deliveries?

Well David maybe I'll start, and Tom feel free to jump in. I guess where I'd start, higher capital costs could impact not just -- it just doesn't impact development and your development strategy, it impacts your stabilized portfolio. And as Tom mentioned in his comments, we're delivering new product for $280,000 a door versus a 17 year old stabilized portfolio that is worth $330,000, $340,000 a door. So if you could only own one of those portfolios, I think you'd prefer to having the one that's $280,000 a door and brand new. And so, while -- the fact is then at some level, David, it's I would say probably the replacement cost is a bigger driver in terms of how we're thinking about relative to current values how we think about overall level of development. But certainly, in fact is how we finance the development as we're starting. And Tom maybe just touch on that a little bit in terms of some of the things we're doing from a matching standpoint.

Sure. Well David, as you probably heard me speak to the past, we have something that we've dubbed integrated capital management, which generally requires or generally a guideline is that we match fund our starts as they happen through either equity and debt or dispositions or some mix of capital. If there were a disruption in the capital markets, unless it's a protracted disruption that would really impact future starts, we think that this risk is substantially mitigated by this integrated capital management program or the concurrent funding of our development activity with new capital. So, I guess it is a concern. It's one that we always raise, and I think we presented at our Investor Day, our long-term look at liquidity as well is our short-term look, well we think the way we run the balance sheet and the way we have this structured program in place, really substantially mitigates the risk that can come from a disrupted capital market.

Operator?

Hello guys, sorry I had my phone on mute. (multiple speakers) Just touching on, I do this all the time, I think the phone was a new invention. But the yields appear to compressed a bit in the recent quarter, and I guess is this a spot compression? Is this something we can expect to continue into the end of the year as you push more of this product and more of these development starts through? Or can we start to expect to see that begin to widen out a bit towards year-end?

Yes David, it is probably a few things happening there. First of all, I think as Tom mentioned in his remarks, more of the pipeline is West Coast oriented over the last two or three years, which generally is lower yielding. Lower cap rate. Lower yielding developments. Roughly, East Coast deals you underwrite to current yields of call it high 6%s to 7%. West Coast closer to 6%. So you're getting a little bit of that waiting a little bit of a mix issue that's driving the average projected yield. And then, we just don't have that many deals in lease-up right now. I think out of the 27 that are listed on there, there's maybe -- there's just maybe 7, 8, 10 that are in lease-up.

And so as deals start to come to market in terms of lease-up, just given the momentum and strength we've seen in the market, we actually would expect to see some of those yields come up. And I think we actually have six or seven starting lease-up in the third quarter alone. So the combination of maybe a bit more West Coast coming in that generally have lower yields and starting to ramp up the leasing activity in Q3 and Q4, I think you're going to see a little bit of inner play between those two factors that are maybe working in a little bit opposite direction.

Okay. And then my last question, sorry to keep going. Are you guys seeing any change in the appetite at the municipal level when you go through the zoning, permitting, staging? You're obviously trying to increase density and change some lands, partial zones. Are you seeing any resistance at this point at that level to new supply for apartment product given a pretty big jump in construction level more broadly?

Well, I guess a few comments. A lot of the increase in production has been at urban sub-markets. And generally, the [interrment] process is not as intense. You don't have the same kind of level of an [embism] in the urban sub-markets as you do in the suburban markets. Then the other thing I'd say, a lot of the stuff that's been produced or started to date were deals that were already entitled or had partial entitlements in place before the downturn. So they just weren't as politically charged.

Having said that, there are some I think we've mentioned in the last couple quarters, that we're refocusing back in the suburbs. In many cases, our business back to usual creating value through the entitlement process. And there are some projects that we're involved with as well as I'm sure some of our peers that back to slugging through the entitlement process, and working through that over a two, three, four year period. So, is it more charged than it was at the end of the last cycle? These things tend to be a little cyclical in nature, and there's still a [derth] of activity generally as it relates to construction in the Northeast where it tends to be more political. They are ( Inaudible) are in search of rateables, and so they've been a little bit more accommodating I would say generally in terms to a multi-family proposal.

Interesting. Okay, thanks for the detail today.

Rich Anderson.

Thanks, good afternoon everybody. You there?

Yes, hello Rich. Go ahead.

So, many comments on the call today about how you're doing better versus last year's pace whether it's renewals are lease-up pace or development yields. And I'm curious, what do you think, are there macro events driving that? Are you as a Company more confident to push rents more significantly? What should we read into an improvement versus what were very good conditions last year to this current year?

Well rich, there's a lot of things. As I mentioned in my remarks about a growing housing shortage. I think we continue to see that. That excess inventory burn off over the last year. Obviously, there's more new rental supply coming into the market this year than there was last year. But, on the other hand there's just less overall housing stock demand. I think household formation is estimated to be about 1.4 million this year versus total delivery -- total housing delivery single-family and multi-family less than 1 million. And so I think you're seeing a little bit of that supply/demand dynamic play out a of that and benefit the rental sector.

Yes, but importantly one of the things we try to really impress upon analysts and investors is we don't really see this cycle looking like the 2000 cycle where it was just it went up and then it went down. And as we've talked about, we think this is more similar to the 90s, where you had what we think is the likelihood of a more sustainable economic expansion, met by more stable supply growth. And as a result, we would expect rental rate dynamics to move up and down through the course of the cycle as opposed to one direction up and one direction down which we experienced in the 2000s. So, I think what we're seeing is just a little bit more of the similar to how the 90s played out frankly.

Okay. So if you were to say, I don't know, what inning you would've thought you were in this last year, let's just say fourth inning of this cycle, are you that saying that you could actually have reversed an inning this time around and gone to the third inning? It may be a funny way of thinking about it, but is that kind of what you're saying? It kind of goes up and down that way?

Yes, some folks might say it that way. I don't think that's how we felt. I think we just viewed that the expansion was likely to be a longer expansion, just given frankly the depth of the correction. And there are quite a few similarities with coming out of the late 80s, early 90s in terms of the depth of what we've gone through. And just given the condition of corporate and consumer balance sheets and the deleveraging that we've seen, in many ways we've felt -- we sort of view this as being more locked and loaded for a longer expansion than frankly the 2000s was driven as much I think by a fairly accommodative monetary policy is. That's true your underlying fundamentals.

Okay. One of your comments was made about supply, and you said you're not worried about it because there's a lack of condo component to those supply numbers. I'm wondering why that's a good thing, assuming that condo development will start to happen, why would be happy to hear that 250,000 units is all multi-family? Wouldn't it be worse if -- wouldn't it be better if some of that was condo right now?

Now I guess the point I was trying to make, if you looked over the 2000 cycle, I was comparing apartment starts with prior (multiple speakers) -- apartment starts.

I see.

Okay, so and they both are around call it 250,000/225,000 range. But what we had last cycle is we had 75,000 to 100,000 condos - about 75,000 condos a year. And I think we're under 10,000 a right now as a start rate on new condos. And so total multi-family supply is actually less than what we saw last cycle. And that was the point I was trying to make there.

Okay. Got it. Last question, is if you could have a broad comment on the fledgling business of single-family rentals? We have some companies now out there, to what degree do you find yourself concerned about that business as a competitive pressure for AvalonBay and the industry?

Yes Rich, this is Sean. Just based on the data that we track, we don't see many of our residents moving out to buy, excuse me, to rent single-family homes. Typically it's just a different household type. And I think a lot of studies have concluded that a lot of the people that were homeowners that were foreclosed out, et cetera, they became single-family renter occupants as opposed to people in multi-family moving to single-family for rental purposes. There's certainly some percentage of that, but it's critically negligible in terms of the data that we track. So we're not overly concerned about it right at this moment.

Do you think it's a good business?

You know hard to opine on that. We don't have any experience with it, so it probably wouldn't be wise to share an opinion.

Rich, this is Tim. I think it's good for the consumer. And I think what Sean is alluding, it's unproven I guess from an operator standpoint. And I think it's kind of been the question out there as to whether somebody can really scale this thing and be able to operate it in a real profitable and efficient manner. But I think it's a good thing from a consumer standpoint, right, in terms of having a more professional operator than your aunt or uncle who may be their landlord. So, I -- my guess is a couple will figure it out and be able to make a business out of it.

Okay, great. Thanks, appreciate it.

Karin Ford.

Hello, good afternoon. Just following up on that condo question. I think, Sean we had talked a little bit at [Nareit] about potentially seeing the beginnings of some condo conversion activity of rentables. Are you still seeing that, and do you think that will be a growing trend here as the housing market continues to recover?

Yes Karen, this is Sean. What I think I indicated at Nareit is there was some chatter about that, and there had been one project that we were aware of in the mid-Atlantic where that had occurred, a small project. There continues to be chatter about the potential conversion of multi-family, particularly communities that are under construction where a condo developer doesn't have to design something and go then through the process to construct it over two years. They have readily available inventory. So the major urban centers is likely where you going to see that happen first. That has not happened yet to our knowledge, other than the one community I mentioned. But there continues to be increasing chatter about that. So I wouldn't be surprised to start to see some of that activity occur over the next 12 months, we just don't have actual transactions occurring just yet.

Thanks, that's helpful.

And just to add to that, second, it the one area we're seeing a little some purpose built condos. We're starting to see a little bit in San Francisco and New York, and that may be an indication of where intuitively it matches kind of what we're seeing in terms of home prices versus rents, where condo conversions might make sense sooner rather than later.

Thanks. And Tim, I think you had talked in the beginning of the year about considering a possible re-acceleration of growth in 2014 as you said as new supply reaches its peak and hopefully job growth is getting better. As the economy gets better and as you said, as the second quarter revenue growth was higher than the first quarter already this quarter, are you still thinking about that? Do you think it could happen potentially sooner than you had previously thought?

Perhaps. I guess it was really a broader comment. Again, going back to my response to Rich's question. Again, you get back to the 1990s, you had years their growth rates moved up 100 or 200 basis points and then moved down 100 to 200 basis points the following year. My comments at the beginning of the year were really geared toward we saw supplies starting to level off. We think the peak is likely to be in '14 rather than '13, which I think I said. And our markets we thought it was going to be '13. We have seen some supply get delayed and get deferred into 2014, so we actually think the peak is going to be in the first half of 2014. At least in our markets, and a little bit later than that nationally.

But at a time when we had expected as the private sector started to get on a more sustainable expansion path, that we expected job growth to pick up. And that actually has happened sooner than we'd anticipated at 200,000 jobs per month versus I think the consensus was 135,000 to maybe 150,000 for the first half of the year. So in that respect, I guess it could happen a bit sooner. But again, it was really as much about we see this thing being a more sustained level of performance than a typical cyclical up and then down.

Got in. And my last question is just on the Archstone portfolio. I heard you say that it's still doing better than you had expected on the top line. Can you just give us some statistics on where occupancy stands and where renewal and new lease increases have been in that portfolio?

Sure, Karen this is Sean. In terms of occupancy, as you may know, Archstone ran their communities a little bit lower occupancy platform then what we typically run. So they've been running in the low 95%s, which is consistent with the way Archstone has been running it. As I think I may have mentioned on the first quarter call, their revenue management strategy was a little bit different, and we are looking at what they've been doing in two particular markets just to get a sense of their strategy in those markets relative to ours. And some comparisons in terms of how we manage the revenue management system. So, those communities continue to run in the low 95%s, consistent with that experience as compared to ours in the 96% range.

In terms of rent change, what I can tell you right now is that out of the six major regions that we operate in, as we have started to track rent change, and keep in mind this is one quarter of data at this point, about half of the regions the Archstone communities are outperforming, including the mid-Atlantic by the way. And the other half, the AvalonBay communities are out performing. That's just one quarter of data in terms of what's happened. What we're going to be trying to look for over the next three or four quarters is what's behind that, and is it mainly sub-market differences or is it really a different difference in strategy that's driving that? So, the rent change differences aren't material in most cases, but that gives you some perspective for the half-and-half at this point. But we probably need three or four more quarters of trend to be able to give you more precise information.

Appreciate the color, thanks.

Nick Joseph.

Great, thanks. Did you see any differences in terms of same-store growth in the second quarter between your different brands?

Nick, this is Sean. At this point, we're not providing a lot of information on the performance of the specific brands. It's a little too early, given that some of the communities have just now been rebranded over the last six months or so to be able to provide good information in that regard. So our anticipation is that at some point, as we get further down the road, we'll be able to provide that.

What we can tell you right now, is based on the communities that have been rebranded, for example the AVA communities, we are seeing more of the target audience at those communities. For example, like renovation communities where we've rebranded from Avalon to AVA, there typically has been a shift in the profile to be more AVA customers. Which is something that is a good outcome, and our expectation is that if we're delivering the products and services that that particular customer would desire, then there would be financial benefits associated with it over time and lead to out performance. But the sample size is a little too small at this point, and it's probably a little too early for the communities that have been rebranded to give you any conclusive data.

Tim, it's Michael Billerman speaking. I'm not sure who would take this, but just thinking about development for a second and the significant ramp and growth in your own pipeline, but also your commentary about -- you're seeing it peaking out by the end of next year. I'm just curious, who you see as others that have also been ramping their pipelines and why you think they may also slow down or not start as much? Why you still don't see improving capital markets and the demand is there, why you don't see that others with access to be able to develop won't continue it even if you're being more disciplined?

Yes Mike, I think it's a good question. And maybe it's important to differentiate too between our markets and more national and some of the more less supply constrained markets. I think there are a few things that work. One, we talked about rising construction costs. And so, I do think typically somebody that doesn't have the platform that we've got, just in terms of managing costs, I think the economics are going to probably look a little bit more strained. But I think importantly in our markets, as I mentioned earlier, a lot of the deals that have gotten done were deals that were either entitled are partially entitled, or had infrastructure in place. And it's between $2 million and $4 million of pursuit costs just to get in ground and to an average deal in our markets. And that's back to the deals that we're looking at today and putting into the pipeline, as opposed to something that's relatively close to being ready to go.

So I think it's still keeping some folks away from some of our markets, or at least they're taking a more balanced view in terms of their own footprint. Where their capital sources if they're private guy, maybe they're pushing them more towards the coast with resurgence of some of the Southeast and South Western markets and the ability to leverage their own capital. That sponsored capital across a bigger development pipeline in some of those markets.

I think to the extent that you get more supply it's likely to be in those markets for those reasons. But in terms of others that are ramping up, we have seen it probably more among the either the public's or those private guys that had really well established platforms before. Had good track records, and been able to get the capital to come alongside them. And I think those are the guys that hopefully are maybe paying a little bit closer attention to the transparency and the metrics that are out there in the public domain and that are being provided by guys like you in terms of informing some of their business decisions at the margin.

That's helpful color. And just one lastly, on Lehman. So they're hoping to sell again, it's 60 days past the last offering, is that correct?

Yes Michael, this is Tom. That's correct.

And would you ever use I guess now that the stake has been cut down to just over 5%, would you ever with selling more assets and recognizing that you have significant development on the comp, would you ever use liquidity to maybe take out the rest of that stake on a buyback perspective? Is that something that you would entertain at this point, now the first slug is done?

Well it really is a capital allocation question. And as we sit here today, we think our development pipeline is the most attractive asset class to allocate capital to. We think our stock there's obviously opportunity in the stock today, but there's probably more return to be had from allocating that capital to development. So as we sit here today, we would not be interested in buying back those shares, only because we like the opportunities for development that are in front of us.

Okay, thank you very much.

Rob Stevenson.

Hello, good afternoon guys. Can you talk about what you're seeing in terms of the spread between where you send out renewals and what you wind up netting, and how that trended over the last year?

Yes Rob, this is Sean. It does trend drop throughout year a little bit differently. But, right now what we're seeing is somewhere in the neighborhood of 80 to 100 basis points in terms of the initial offers relative to what's actually signed. And that's been pretty consistent the last couple of months. And so I mentioned, for example, in July that renewals are actually trending to about 6%. hey went out right around 7%, and then August and September are going out in the low 7%s. Typically, when we're in late in the second quarter and third quarter when we're pushing pretty hard, so the spreads tend to widen a little bit, and then they narrow as we go through the one area and we're slightly more conservative. So on average, it's usually somewhere in the 60 to 65 basis point range, but it does move around given the season.

Okay. And then I guess Tom, how many of the Fund One assets are left when you get done selling the $26 million that you have under contract, and the $150 million that you guys expect to market?

Yes, this is Sean again. That is about $350 million in total volume that needs to go out represented by about 11 assets that are left. And our expectation is that we'd be selling somewhere in the neighborhood of 40% to 50% of that the remainder this year, and then the balance in 2014 Rob.

Okay. And then how much of the fund two assets are still left?

Pretty much the whole portfolio, we only sold one asset out of that particular fund. So, originally we had a total of 13 assets and we have 12 now. It's about $800 million or so on a cost basis.

Okay. Thanks guys.

Alexander Goldfarb.

Great. Thank you. Appreciate you taking the call this afternoon. Just two quick questions. Just in thinking about you guys as you ramp up the dispositions, if we look back over the last eight years or so, Fairfield County New Haven has never really been a leader of revenue, in fact it's lagged towards the back. So apart from providing divorcee housing or home remodeling housing, just sort of curious why that market should continue to be in the portfolio or receive further capital investment given that you guys get better growth in other parts of the portfolio?

Yes Alex, this is Sean. Probably a couple of things to keep in mind. One is, if you look back over a long period of time, we have sold some assets in that market, and Stamford in particular. I know of two or three assets that we've sold going back six, seven years ago. So we've sold down some. But the other thing to keep in mind in terms of just Fairfield overall is the development has been highly accretive. So, it's not just the growth rate that we're looking at, but we are looking at the total returns. As we talked about in Investor Day in terms of how we're allocating capital. So, if we can continue to put yields on the book that are 6.5%, 7.5% range in that market, even if the growth is not quite the same as San Jose is an example, the total return still makes sense particularly when trading cap rates in that region are probably in the low 5%s.

So, you've got to look at both sides of it in terms of that initial investment and the growth rate in terms of what the return looks like. But to the extent that we see opportunistic dispositions in Fairfield County, we definitely would be executing.

Okay. And then second question is for Tom. You guys have about $44 million of year to date Archstone expenses. In your guidance, it's $0.75 for the full year or roughly what about $95 million. So what's the split for the third and fourth quarter, or have some of these expenses been housed elsewhere other than that Archstone expense line?

Yes Alex, we didn't parse out. We've given you guidance for the entire amount of the acquisition cost of capitalized and expense. It really hasn't changed that much since our original outlook, or I'm sorry, since the first quarter update, and we didn't parse that out between the third and fourth quarter other than what I mentioned on the call today. In terms of the swap unwind and some other minor acquisition related costs. So, we did give the full year outlook at $6.30 and we've provided reconciling information so that you can understand the difference between FFO and AFFO and substantially all of that difference the Archstone transaction and related costs.

Okay, thank you.

(Operator Instructions)

Nick [Yureeko]

Thanks. I just had a bigger picture question. I'm wondering how you guys are thinking about the size of your development pipeline? How it might change in the face of what we're now seeing to be a more likely shifting interest rate environment? Especially since it's taking at least two years to build stabilized assets.

Nick, this is Tim. I think as we talked about at Investor Day, and I think just about any time we've gotten together with analysts and investors, we think of the development pipeline at least from a guardrail standpoint being in that 10% to 15% of total enterprise value range. We're trending towards the top end of the range. But as we said, we think we see that flattening out over the next year. But maybe more directly yet to your question, I think it impacts how you think about optioning land versus buying land. And the more that you can -- I think it puts more pressure to think about optioning versus being willing to take land on your balance sheet. If rates continue to move up, you do have the opportunity sometimes to renegotiate land if it's optioned as opposed to being owned. So that the economics make sense.

Having said all that, our total land inventory today is, if you look at land owned and land optioned, it only represents about 19% of total projected capital investment for the he development rights portfolio. So it really -- I think it really comes down to more how you manage risk in terms of that land inventory, make sure you're not buying it at hopefully peak values if you're taking in on your balance sheet. And make sure you're being smart about how you option it as you go through the entitlement processes well.

Okay. And then just one other question on Brooklyn. I was wondering how much of the accelerating rent growth you're seeing in New York City is being driven by the Brooklyn asset, and what's the latest on when you might be able to start Willoughby Square?

Yes Nick, this is Sean. I can talk you a little bit about Fort Green, I think you're referring, and then some quick comment on Willoughby. But Fort Green is one of our assets in the city, and it has been my recollection is the average rent growth there on a year-over-year basis is in the 6% range. I co9uld double check that and get back to you, but that's my recollection, slightly above the market average. And the property that's been outperforming the most is Morningside Park, which is up near Columbia. That property has done an exceptionally well the first two quarters, is leading the New York City portfolio overall.

And Nick, this is Tim. In terms of the start of Willoughby, we actually do anticipate starting it this quarter. And we've actually finalized our budgets, and actually anticipate mobilizing fairly quickly on that deal.

Is there anything you could say about how to think about the cost of that project at this point?

No, we'll be disclosing when it starts. We'll be disclosing the economics in terms of costs and projected revs at that time. I just don't have it in front of me.

Okay, thanks.

Jeremy [Mess].

Hello. Earlier you talked about buyers using different debt structures given to move in the ten year, anecdotally we've heard that while cap rates haven't moved yet necessarily the pool of potential buyers for core product has started to shrink a bit, which theoretically could create more opportunities given your capital advantages. Just wondering if you've seen this as well? And secondly, has the treasury move caused any increase in product coming to market as buyers come off the sideline ahead of potential further rate increases?

Yes Jeremy, this is Sean. As it relates to your first question about core buyers, we've sold core assets this year both of those were executed prior to the recent rise in the treasury. But we also have assets that are under contract right now. And based on what we've seen, the pool of core buyers hasn't changed dramatically. It's come down maybe a little bit off of last year, but we're talking nominal percentages, not material. And when you're selling a core asset, and a lot of these are bigger assets for us, everything we've sold that's core is $100 million plus. Consider that the pool of buyers is five to eight players, that hasn't changed dramatically, maybe it was 10 last year as an example. When it comes down to -- typically there is the top five or so that are really competing for deals of that size.

And then as it relates to y our second question about product, yes over the last month as I mentioned in my prepared remarks, we have seen listing volume increase. Can you put your finger on it to say it's as a result of the movement in the treasury? It's possible, but it's hard to explain every individual seller's motivation, but the trend is that there has been a recent spike in activity, yes.

Okay, appreciate the color. And then just one final one. You talked about adding development rights and construction costs back to peak, can you just give a little bit of color on land pricing trends and whether yourself or developers more generally are taking on entitlement and zoning risk?

Jeremy, Tim. You're not seeing land for the most part trade before it's entitled, unless it trades at a steep discount, and that's usually only because there was some level of distress or somebody had a liquidity need. So for the most part, people, including us, are able to option land still and get some time whether it's 18, 24 months sometimes longer to get the major entitlements so that the large entitlement risk is behind you. You might have to take down the property six months, nine months before you're ready to pull the building permit, but you don't have any entitlement risk in front of you at that point. So I'm not seeing a huge appetite in most of our markets just to buy land, and put it on the balance sheet and then pursue entitlements or need to do that.

Okay, great. Thanks, guys.

Paula [Arposcum].

Thanks very much. Just a quick question about what you're seeing in the field. Just given all of the new supply that is coming, are you seeing any pressure on wages or challenges in terms of retention and recruiting at the property level?

Yes Paula, this is Sean. To answer your question, there are specific sub-markets where if there is concentrated amounts of supply there can be pressure, particularly on the community consultants, the leasing consultants. That would put pressure on that in terms of particularly from the private operator, more of the merchant builders, where their model is really to get it leased up. Highest rents and get it sold. It's more of a to think of it almost as just a capital cost or transaction cost as opposed to the steady-state operator. Most of the steady-state operators don't feed into that. They get a permanent business model organization. They look at their competition philosophies, and they stay pretty constant. So you see a slight uptick in turnover at the community consultant level, that's typically where that would show up. But it's not material by any sense, it would be very sub-market driven, and I could think of it in two sub-markets for us right at the moment, but it's not material in any way.

Thanks a lot.

Sure.

And there are no further questions in queue at this time. I will turn the call back over to Mr. Tim Naughton for closing remarks.

Well thanks Alan, and thank all of you for being on the call today. And we hope you enjoy the rest of your Summer, and we look forward to seeing many of you in the Fall at the various investor events and conferences. Thanks again.

And this concludes today's conference call, you may now disconnect.