艾芙隆海灣社區公司 (AVB) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to AvalonBay Communities first-quarter 2014 earnings conference call.

(Operator Instructions)

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

Thank you, Alan. And welcome to AvalonBay Communities first-quarter 2014 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 might differ materially.

There's a discussion of these risk and uncertainties in yesterday afternoon's press release, as well as in the Company's Form 10-K and 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 the review of our operating results and financial performance.

With that, I will turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities for his remarks. Tim?

Thanks, Jason. And welcome to our Q1 call. Joining me today are Tom Sargeant, Kevin O'Shea, Sean Breslin and Matt Birenbaum.

As all of you know I am sure at this point, this is Tom's last earnings call in his glorious career here at AvalonBay. Tom has been here for 28 years with Avalon and Trammell Crow, our residential before that, the last 19 as CFO.

And as all you know, Tom has just been a great steward and leader with a really unprecedented track record as a CFO in the REIT industry. I think I speak for everyone on both sides of this call telling Tom we will miss him and we wish him the best in his retirement.

In terms of the format for the call, we are going to do it the same way as we did last quarter. We received a lot of favorable feedback from our format last quarter. And earlier this morning we did post a management letter and a slide deck before the market opened.

I'll be providing management commentary on the slides and then all of us will be available for Q&A afterwards. My comments will focus on providing a high-level summary of the quarter's results, providing management's perspective on the economic and apartment cycle.

I will then focus a bit on redevelopment and corresponding impacts on portfolio impacts. This is an area we believe that's not that well understood by the market.

It's something we've been talking about a little bit recently in private conversations with many of you. And then, lastly, touch on development performance and funding so far this cycle, an area that we think will increasingly differentiate our performance as the cycle matures.

With that, let's get started. I'm going to turn to slide 4 with a review of Q1 results. In Q1 we posted a solid OFFO growth of around 8% per share, driven in part by healthy same-store revenue growth of 3.7%, which was up a bit from 3.5% recorded last quarter. In addition, it was helped by the completion of $100 million in new developments which has stabilized at an initial yield of 7%.

We also started four communities totaling $300 million in Q1. And raised a like amount of capital, approximately $300 million, in a combination of variable rate debt and dispositions with an initial cost of capital of right around 2.5%.

Turning to slide 5, we believe this cycle has room to run for both the economy and the apartment industry. Job growth is really only at the point now where the economy has just recovered the 8 million jobs it lost from the last downturn. And while cumulative job growth so far this cycle is similar to last cycle, it's only about a quarter of what we experienced in the 1990s when we had a longer economic cycle.

And, so, from our standpoint the labor markets have plenty of capacity to support economic growth. When you look at the apartment sector, and just look at rent growth, rents are only about 5% nationally above prior peak, which occurred six years ago. Cumulative rent growth, this expansion, again, while two-thirds of what we saw in the 2000s, is only about 20% of what we experienced in the 1990s.

Turning to slide 6, we think the private sector should help sustain economic growth, as well. Profits are still increasing so that retained earnings are providing capital liquidity to help sustain additional economic growth. And generally economic expansions have continued two to four years after profits have actually reached their peak during the cycle, as companies eventually put profits in cash to work that they earned earlier in the cycle.

Turning to slide 7, we think the apartment markets and trends in the apartment markets are actually consistent with the cycle that is in the mid innings. When you look at both rents and replacement costs, they're largely on trend, at least the trend experienced over the last 15 or 16 years, such that we believe that current activity and investment levels are not reflective currently of an overheated market that would normally lead to correction, but are actually at quite normalized levels. And, in our view, supports a thesis of apartment markets that are largely in equilibrium but at a very healthy level.

This is further reinforced when we look at the supply and demand fundamentals going forward, just turning to slide 8. Over the next three years we expect job growth, on the right-hand side of this chart, to be largely in line with deliveries. And the supply projection actually doesn't net out units taken out of service or lost to obsolescence.

It also includes -- by the way, this is our markets -- it also includes the balances we know that exist in DC. And it ignores or doesn't take into account just the unusually low level of single-family supply that we are experiencing today.

Similarly on the demand size. We're just looking at jobs here. We're not considering the pent-up demand from significant household consolidation that we saw during the correction, or the higher share of multifamily households that are supported by demographics.

When we just look at jobs versus new supply, it looks like it is about equilibrium, but I think there is reason to believe that it is even better than that when you drill down underneath those two things. And then, as you look versus the last three years, certainly not as favorable but the last three years benefited from an unusually low level of supply, when supply needed to be low, as excess inventory was being burned off in the housing sector. We are now at a point where we believe excess inventory has been absorbed throughout the housing sector basically at a period where markets are in balance today.

Turning to slide 9 and how does this impact our portfolio, when we look at the same unit rent growth after a weak December and January, which saw weak job numbers, as well, we started to see March and April rebound back to levels that were similar to what we experienced in 2013. And, importantly, we continued to gain momentum throughout the quarter and into April. So, overall, not too different from what we experienced a year ago in the same-store portfolio.

Turning to slide 10, I would like to shift now and talk a little bit about redevelopment and how it can impact our portfolio performance. As you know, AvalonBay does not include redevelopment in the same-store bucket for reporting purposes. We separate out redevelopment in its own bucket, as we believe it is a meaningful line of business where we have been investing a fair bit of capital over the last few years.

But we do recognize that most of the industry, if not all, do include redevelopment for the purposes of reporting. So, for purposes of comparison we thought it would be helpful to take a look at what would happen if we included redevelopment in our same-store bucket from a reporting standpoint. And, as you can see, it would add about 30 to 60 basis point over the last three years, 2011 to 2013 to same-store revenue growth if it were included, about 20 basis points in the first quarter of this year.

Turning to slide 11, same-store revenue then would have increased by about 40 basis points from 5.1% to 5.5% over the last three years if redevelopment were included in the same-store bucket. And the same-store NOI would have increased about 60 basis points, or about 100 basis points above the sector. When you look at it compared to the sector, turning to slide 12, at 7.5% NOI growth over those three years, that would have placed AvalonBay towards the top of the sector, at the top of the sector, get about 100 basis points above the sector average over the last three years.

Now, we're just providing this analysis for cross comparability purposes. Obviously it is dependent upon the level of redevelopment being undertaken by us, as well as the comp. So, it is hard to know how comparable it is.

But, frankly the same is true if we exclude redevelopment from our same-store bucket and others are including it. It equally makes that a tough-to-compare performance by looking at same-store metrics alone. And it is something that we have been talking about with many of you over the last couple of quarters.

It is not our intention to change our reporting. We think, as I have mentioned before, we do think it is meaningful to separate out redevelopment to give visibility into the same-store portfolio performance and overall portfolio performance. But we will provide the information in a footnote for cross comparability purposes, as we did this quarter.

Now, I want to touch, moving to slide 13, I want to touch on development and funding activity so far this cycle. So far we have started about $4.5 billion in new developments. About $1.4 billion of that has been completed to date at an initial stabilized yield of 7.4%. We have another $1 billion in lease up that is currently projected to yield around 7.3%.

So, about $2.5 billion or a little more than half of what has been started so far this cycle earning yields that are projected to be in the mid 7% range. Against funding of about $5 billion, or almost $5 billion, so far this cycle that has been raised at an average initial cost of 4.3%. Or spreads of about 300 basis points of development so far, where we have lease up visibility on, at least leasing visibility on, relative to the cost of capital that we've raised so far this cycle.

At current spreads, $1 billion in annual completions, would add about 300 to 400 basis points to annual FFO growth. Which, by the way, is consistent with and explains much of our outperformance over the long term versus the sector.

From an NAV perspective, $4.5 billion started so far this cycle is projected to translate into total asset value north of $6 billion, or roughly the value of BRE upon the sale of Essex, which represents just four years worth of starts. Obviously this growth platform is a powerful growth engine, both in terms of Company scale as well as earnings and NAV growth.

Turning to slide 14, it's certainly the case this year, as we are projected to deliver over 5,000 apartments throughout the course of the year. This will help fuel earnings growth for the balance of the year.

In fact, in the second half of the year, lease up community NOI, net of incremental capital cost, will contribute about as much growth to FFO as the stabilized portfolio compared to the first half of the year. Development is contributing meaningfully to, or lease-up, is contributing meaningfully to FFO growth in 2014, particularly based upon the kind of spreads that I was talking about earlier.

Shifting to slide 15, we continue to match fund this pipeline. In fact, about 80% of all development and redevelopment underway is already capitalized with permanent capital, leaving only about $600 million left to be funded.

When you look at -- turning to slide 16 -- in addition to locking in attractive investment spreads, match funding results in improved credit metrics as development stabilizes, even if 100% of unfunded commitments is financed with debt. The $3 billion pipeline currently underway, about $2 billion of which is incurred, is generating very little current cash flow. But is projected to deliver ultimately about $220 million in incremental EBITDA versus an incremental capital need of about $600 million.

So, even if that $600 million was funded entirely with debt, on an incremental basis you're talking about debt to EBITDA of only about 3 times, which actually would enhance overall metrics, bringing down debt to EBITDA from 5.7% to a projected level of 5.3%. Which is based upon a hypothetical case where, in essence, you would just spend new starts but complete the existing pipeline with 100% debt. But I think this gives a bit of insight into some of the additional benefits of match funding the pipeline as we go along, in addition to locking in attractive spreads.

In summary, we are off to a good start in 2014. Healthy apartment fundamentals continue and we believe markets are poised and are in a prolonged period of equilibrium, similar to what we experienced in the 1990s. Operating performance remains strong and we believe has been near the top of the sector so far this cycle.

The development platform is providing a meaningful source of earnings and NAV accretion that will further differentiate our performance as the cycle matures. And is being supported by a strong balance sheet with a very conservative funding strategy that it insulates us from capital market volatility, and locks in attractive investment spreads.

With that, operator, we will open it up for questions. We are ready to hear questions. Thank you.

(Operator Instructions)

David Toti, Cantor Fitzgerald.

Tom, first of all, thank you for the pleasure of working with you all these years. We will miss you and we wish you well.

My first question, I've got a couple of detail questions. The first one has to do with the notation that you are looking at moving a little bit more towards suburban markets in some of your development strategies. I wonder, number one, do you think there'll be a material impact to the portfolio metrics in terms of rent growth and aggregate price point? And number two in that, doesn't that buck the trend of an increased urbanization among younger demographics today?

Maybe I will start with the second part and, Matt, maybe you can fill in in terms of the impact and how it's impacting our portfolio metrics.

In terms of bucking the trend, David, from a demand standpoint, we agree that there continues to be some urbanization. We do not think people exclusively want to live downtown. There is still demand in the suburbs. I think you're even starting to see employment and office space start to absorb reasonably well in some of the suburban markets.

But what is undeniable is supply has shifted in response to that demand. And if you look just within our market footprint, projected supply over the next couple of years significantly outweighs what we are seeing and what we expect to see in the suburbs and the urban submarkets. So, we think there is some urban submarkets that will continue to outperform, but we think there are many suburban submarkets that will outperform, just based upon what is happening at the margin from a demand standpoint.

The other thing I would say is just where we have seen better value has been in the suburbs over probably the past 12 to 18 months from a development rights perspective, as capital has really been chasing, in some cases, exclusively urban opportunities. Part of it has been opportunistic on our end and part of it has been, frankly, an intentional effort to be a bit diversified in terms of how we're penetrating our markets.

But, Matt, maybe you can just talk a little bit about how it's impacting the overall portfolio composition.

I don't think -- it is a pretty big portfolio so it actually takes a lot to move the needle one way or the other on that question. And we don't think that it is much more bottom-up to top-down. It really starts with the local teams on the ground in each of our regions identifying the best risk adjustment return opportunities for them to invest the capital in new development opportunities.

If you look at what we currently have under construction today, it's actually probably a little bit more heavily urban than the portfolio as a whole. The development rights are more suburban in the current construction. So, as that pulls through, they tend to wash each other out.

So, you'll see us get, perhaps, a little more urban concentration over the next year. So, as very large urban deals, like 55 Ninth in San Francisco, or West Chelsea and AVA High Line and Willoughby, AVA DoBro in New York and Brooklyn get completed. But it is true, certainly, that the starts we anticipate, you've seen this quarter and in the next year or so, will probably swing that pendulum back a little bit. So, if you look out three, four years it will probably be very similar to what we see today in terms of the overall balance.

Okay, that's helpful. I just want to have one follow up question on that topic. When you think about the nature of the suburban assets over time, slightly higher CapEx requirements, lower barriers to entry, more likely increases in competition, do you view those assets as less defensible over time? And potentially do you measure those assets with potentially a shorter holding period from an investment criteria perspective?

Dave, why don't I start and then Matt jump in. I first want to address your comment about lower barriers to entry, which in our market is absolutely untrue. It is actually the opposite. Our suburban submarkets are much tougher to build in than our urban submarkets.

It is usually, the constraint in the urban submarkets tend to be that of economics. There's no shortage of opportunity even in places like New York and Boston. Which, I think, historically people have considered tough to penetrate. It's been largely because the economics just haven't made sense.

When you go into the suburbs, particularly where you look at our portfolio, it tends to be pretty infill, more employment center, not bedroom community type locations, often transit oriented. Those are very difficult places to get entitlements, often taking three, four, five years. And it is an expensive way to play. And, honestly, the NIMBY is much more rampant in those kind of locations.

That is part of what we like about the suburbs, at least in our markets. It may be different as you look in other parts of the country. But, Matt or Sean, maybe you want to address the issue of just CapEx in some of our suburban versus urban, which I think may be a little different than what your assumption might be, David, on that.

David, this is Sean. I think one thing to keep in mind, just from a CapEx perspective, and I will make one other comment, but from a CapEx perspective, the high-rise assets, you do have other components that you don't have in the suburban assets that do drive up CapEx. So, you have got interior corridors, typically, heated and cooled, you've got paint and carpet in the hallways, you have got typically more expensive mechanical systems, things of that sort that you have got to deal with.

We take that all into account in terms of the underwriting of new development opportunities. But the generic statement that the newer suburban assets are more CapEx intensive than a new urban asset isn't necessarily true.

One of your initial questions was just about suburban assets and maybe slower rent growth and things of that sort. I think one thing just to keep in mind for us is, in some of the suburban locations, like take a central or northern New Jersey, you may see slower rent growth. But to the extent that the development yields going in are substantially higher, 7%-plus, as an example, the total return on that opportunity will be quite attractive even though the ongoing rent growth that you might publish in same store is lower. And that is okay.

Okay, I appreciate the detail. Thank you.

Nick Joseph, Citigroup.

Michael Bilerman here with Nick.

Just, Tim, as I think about the $600 million that's left to fund, you talked in your letter about $230 million of wholly-owned assets. And then, obviously, Chrystie Place, which I think could generate the Company well over $100 million of cash from your promote, that takes care of well over half of that funding. How should we think about the remaining? Should we just assume it is debt funded or is there any desire to issue any equity?

Maybe I'll let Kevin jump in. The only thing I would say, Mike, we do expect to take on new commitments as the year continues, as we continue to start the balance of the $1.3 billion or $1.4 billion that was in our initial guidance. So, we will continue to have additional commitments that we will need to continue to be funded. But, Kevin, you might just talk a little bit about overall funding strategy.

Sure. Michael, as you'll recall from our first-quarter call, what we announced was an expectation to source about $1.5 billion of external capital throughout 2014. As you pointed out, we have raised some capital in the first quarter. We raised about $300 million overall when you take into account the unsecured term loan and the asset that was held in Connecticut. We have got some assets that are under contract for sale in the second quarter here.

So, as we step forward here and take on new commitments with respect to development, we are inclined to continue to match fund as we go along with long-term capital. Currently, our most attractive sources of external capital continue to be unsecured debt and asset sales. And, so, we would expect as we step through the year and make new commitments, and more or less ratably source capital, that we continue to primarily source that capital from asset sales and unsecured debt.

Thanks. This is Nick. Just wanted to touch on the Archstone portfolio rolling into the same store. It looked like the occupancy for Archstone right now is about 50 bps below the overall portfolio. So, what are you underwriting in terms of occupancy gains for Archstone for the remainder of this year?

Nick, this is Sean. Let me give you a little bit of insight into that.

First, just to set the table, in terms of where we are trending right now, to give you some perspective, the Archstone bucket is trending around 95.6% in terms of economic occupancy, just where we are for April, versus last year it was around 95.2%. But when you blend that with the AvalonBay bucket, the AvalonBay bucket has come down in occupancy. Last year at this time we were pushing occupancy up in the mid 96% range. That is trending at 95.9% right now. So, if you blend the two buckets together, we are trending around 95.8% economic versus last year being around 96.2%.

We talked about this a little bit, I think on our second- and third-quarter call last year, that occupancy actually drifted up in the second quarter beyond where we had targeted. And, so, we were pushing rents a little bit harder as we got into the third quarter. Were going to have that burden from a comp perspective on a year-over-year basis in the second quarter, giving back that occupancy.

But our expectation right now in terms of the Archstone bucket is that trending at 95.6% to 95.8% economic for the balance of the year would be a reasonable range in terms of our expectation overall.

Great, thanks. And then just one other quick question on concessions. And I recognize it is not a large number overall, but it seems like the year-over-year growth rate increased considerably. So, can you talk about where you're offering concessions and the plan overall with them?

Sure. The concessions are not used a lot, but it does vary from market to market, as you pointed out. Generally speaking, we run on an effective rent pricing basis. That is our strategy. Which has worked pretty consistently, and I think most of the REITs are that way. But there are select markets where the idea of a, quote, special, unquote, is in vogue. And that is a market like Seattle, as an example.

The other place where we look to consider using concessions is in some of the rent-regulated markets and submarkets, where you would like to have the face rent on the lease be higher. And if you give a concession that is okay. You typically see that in New York and some places in San Francisco, as an example. And a little bit, as the Archstone bucket bleeds, then you'll see a little bit of that in the DC area with a couple of rent-controlled assets, as well.

So, I'd say it's more the rent-regulated stuff where you see concessions. But there are certain markets and certain times of the year, like Seattle in Q4 and Q1, where we might see an elevated level of concession just given the nature of that particular submarket.

Great, thanks.

Nick Yulico, UBS.

Just a couple of questions. Appreciate all this talk about the development yields in the management letter. And what I'm wondering is, when you talk about the rents now being higher, it looks like, we calculate the rents are about 10% higher for the 12 communities where you raised rents. And those assets now being 80 basis points above expectations on yield.

What I'm wondering is, how do we think about the other $2 billion that is in the pipeline, as far as how the current yield on that versus how that could possibly get above 7% since you are listing 6.5%, I think, as the overall yield in the development page?

Nick, Tim here.

Just one thing to point out, of the $3 billion that is under construction, we've mentioned about $1 billion that is in lease up, is yielding about 7.3%. The entire bucket is projected to yield about 6.5%. So, two-thirds of that we haven't marked yet to market. Some of it is at market, because we just started this quarter.

But the thing I'd point out is, of that $2 billion, about $1.2 billion is actually California and New York City. So, very low cap rate type market. So, from a value creation perspective, we actually don't see that basket of assets being materially different than that's in lease-up or what we already completed.

The other thing to put in perspective, the $1 billion that is in lease-up, that's increased by about 10%, if you just looked at it from a market standpoint in the submarkets that they're in, I think the rent growth since the time that we started, on a weighted average basis, has been about 5%. So, we've outperformed our expectations, if you will, as adjusted for rent inflation by about 5% so far, that lease up. One way to think about it is what is your projection for market inflation over the next 12 to 24 months as we build out that bucket of assets.

Okay. And then one of the assets that wasn't where the rents didn't go up was West Chelsea. Can you just talk a little bit about how leasing is going there, and whether that just hasn't reached a high enough leased rate whereby you would be raising the rent on that asset?

This is Matt. That is one that we will probably be able to mark to market in next quarter's release. It is a little bit of a unique animal in that it is about 20%, 25% leased.

But there is really two pieces. There's the AVA piece and the Avalon piece. We have not started leasing the Avalon piece yet and so we did not feel comfortable putting a number on where rents are today, given that the Avalon piece, those are the higher rent apartments. So it is a very significant part of the rent roll. And, frankly, the affordables are more heavily concentrated in the AVA piece. So that also affects what is leased to date.

The short answer is, presumably next quarter we will be able to mark that to market and see where those rents are. I don't know, Sean, if you have anything to add?

Yes, just on the velocity question that you had. We leased at a pace of 36-a-month in the first quarter for the AVA component of that property, which is open. The West Chelsea Avalon component is not yet open and leasing. So, that's just the AVA High Line component at that velocity.

Okay. And then, just lastly, can you just talk a little bit about how the competition is over there with, whether it's Gotham West, or some of the other assets, as far as how those buildings are filling up, and whether you're being forced to think about offering more concessions?

Sure. We haven't seen a huge impact on AVA High Line from those assets. But there's two or three assets that have been in lease up that have had some impact on the Midtown West and Clinton deals that we own. And the Gotham deal is probably the least furthest along. I think is around 50% leased right now.

Mercede's House, which is a two-, three-year deal, is about leased up. And there's one other asset there that is about leased up. They've had some impact on some of the existing assets, but we have not had much overlap with AVA High Line in terms of specific competition from the deals you referenced.

Okay, thanks.

Ryan Bennett, Zelman & Associates.

Just staying on New York for one second, in terms of the better-than-expected results that you said in your management letter, was that largely driven by Long Island City getting better from what it had been in the third and into the fourth quarter?

Ryan, this is Sean.

In terms of New York City, Long Island City is underperforming our portfolio average. Where we are getting the best growth out of New York right now in terms of the city product is what is happening basically at Morningside Heights. We're pushing mid 6%s. One of the Bowery deals is pushing mid 5%s. As opposed to Long Island City has been underperforming.

And the other place where we're getting pretty good growth is out of Brooklyn Fort Greene. We're pushing mid 5%s. As compared to the Riverview assets on a blended base are more like 3%, 3.5% on a year-over-year basis for revenue growth.

Got it, thank you. And just one more question on Boston. Just curious, could you provide some incremental color there, in terms of if you're starting to see that market come back now that the weathering conditions have improved, and whether or not, are there any specific trends between your urban and suburban assets in that market?

This is Sean again. In terms of Boston, yes, it was a tough winter. We did see turnover move up in Boston, as compared to the first quarter of 2013. It was up about 5%, which is roughly about a 13% increase in moveouts.

People were still buying homes. It was one of the few markets, if you looked at the home sales data yesterday, that was actually up on a year-over-year basis as compared to many other markets that were down. So we had a little bit of pressure from that. And certainly the weather wasn't helpful from a traffic perspective.

In terms of the different submarkets that you mentioned, the closer-in locations actually did relatively well in the first quarter. So, the Metro Boston stuff like Newton Highlands, Chestnut Hill all did pretty well, producing total rents of revenue growth between, call it, 6%, 7% range. 95, 93 North was putting out good numbers, north of 4%. MetroWest was relatively weak, though, and I think some of the more distant assets where we did see some home buying pressure. And on the South Shore, it was doing okay, it was in the 3% to 4% range.

I would say the more infill markets were doing generally well, as well as 95, 93 North. But the more distant suburban stuff was a little bit weaker.

Great, thanks.

Alexander Goldfarb, Sandler O'Neill.

Tom, we will miss you, so best in your next phase. Just a few questions here. In the letter this morning, you said that ex the winter costs, same-store expenses were up 3.9%. And your guidance for the year is 2% to 3%. So, can you just walk us through what some of the areas where you expect to save on expenses to get the expense within your full-year guidance range?

Alex, this is Sean. You did quote the correct numbers, that it excluded the excess utility and snow removal costs. OpEx year over year would have been 3.9% and NOI growth would have been 3.7%, as opposed to the 2.6% that was reported.

In terms of the outlook for the year, in terms of what we are seeing, basically if we just trended pretty close to what our budget was we would be at the high end of the guidance range that we provided. We are seeing a little bit of relief in a few areas, like property taxes as an example that may come in a little bit below budget based on our reforecast.

So, based on what I had to say right now is we still expect the first half of the year expenses to be elevated for a number of different reasons. And we mentioned that when we provided the outlook. But based on where we see second half coming in with budget and a few adjustments based on things we know right now, we still expect to be within the guidance we provided for OpEx. But certainly trending towards the high end of the range.

Okay. And the second question is, on slide 9 where you show the ramp up, your expected ramp up for rents this year versus last year where it was flat in the first and then stepped up in the second, given the economy is basically the same this year as last year, why are you expecting a different ramp up in rents versus last year?

Alex, it's TIm here. You may be misreading the chart. This is actually monthly not quarterly data, just to be clear. So, these are actuals.

The fourth bar there is actually April through, I think the footnote says through April 22. So, it's not the full month yet. And these are blended rents, so it is a mix of new move-ins and renewals that we know today, or that we have experienced January through March. It is not far off of what we expected, to be honest, but this is actuals, it is not projections.

Okay, sorry about misreading that. Then if I can just ask a replacement question then. In Seattle your occupancy slipped a little but you guys pushed rent a lot. Was that just a concerted effort to focus more on rent? Or was there some unexpected tenants leaving because they did not want to pay, or something like that?

No, not necessarily one specific strategy. We basically, as you know, Alex, [Hugh Zellerone] is trying to optimize for both rent and occupancy. There are certain markets where you forecast things might happen -- I'm sorry, submarkets is what I was referring to -- and they don't come through.

For example, we had an impact in Redmond in the fourth quarter that bled through to the first quarter for us, where some of the corporate activity just changed, as compared to the seasonal history, mainly due to Microsoft. So that had some impact that we had not anticipated. So, things like that, but nothing intentional that we were trying to push it one direction or another. We generally, to be honest, we're trying to protect occupancy a little bit more in Seattle in the fourth quarter.

Okay, thank you.

Dave Bragg, Green Street Advisors.

In your management letter you say that starts in DC are starting to taper off. But the permit trends show that they continue to increase. Can you talk us through the disconnect that might be developing between starts and permits in DC, if that is the case?

Dave, this is Tim. I don't know that we can, to be honest. We have obviously been tracking starts and projected deliveries.

It is not unusual where they might, particularly in a market where people have been spending a lot of capital to get their deals permit-ready, it is not uncommon where they might pull the permit. In our case we pulled the permit at AVA 55M in part to lock in a tax abatement, several million dollars of value. We may or may not start that over the next 12 months. So, I think there's probably some cases like that, but I can't tell you what's -- I don't have a theory for you as to why maybe the permit and the start data might be diverging.

Okay. Do you expect DC starts to be lower in 2014 than 2013?

That is our projection, yes.

Okay, that's helpful. Thank you. And then as it relates to the weather, the disclosure on expenses was quite helpful. But can you explain what the impact could be on the revenue side? It looks like you are trending a little bit below plan in the Northeast in New York and with some occupancy to make up in the Northeast. So, over the course of the year how impactful will the weather from the first quarter be on revenue growth?

Dave, this is Sean. I'm not sure I can answer your question precisely. We still expect to be within the guidance range that we provided.

The only comment I could say, really, is that, as you pointed out, New England started off a bit slower than we anticipated, in terms of not only the typical occupancy gains but as a result of the rent growth that we were able to push through in that region in the first quarter. That being said, it has picked up traction in the last three or four weeks as the weather turned.

I'll give you a couple of statistics. Availability has come down about 50 basis points over the last three weeks. Occupancy has trended up. So, we're seeing some movement there so it's hard to quantify exactly what the difference might be in the impact on revenue.

But on the other side of the coin, Northern California is outperforming. So, I'm not prepared to give you a precise answer, other than we expect to be within the range we provided in terms of revenue growth for the year.

Dave, this is Tim.

Just to follow up, we're basically on plan in Q1. As Sean said, in some of the areas that we missed we had some offsets, particularly in places like Northern California. It is ultimately going to turn on that one chart that you saw, I think, that showed a bit of a ramp up in terms of same-unit rents that we are seeing, and whether or not that holds.

We're running around 4% in April. That is for the AvalonBay legacy portfolio at this point. But to the extent it holds in that range throughout the year, obviously that is pretty good relative to the outlook that we gave.

Got it. And the last question relates to, for the same-store pool, what were your renewal and new move-in gains in 1Q?

Sure, David -- Sean. I can provide you that. For the same-store bucket in the first quarter, as we quoted, the blend was 2.7%. It's basically 5% on renewals and essentially flat on move-ins where we had downward pressure in New England, a little bit in New York, and certainly in the Mid-Atlantic. But it was offset by gains in the Pacific Northwest, Northern California and Southern California.

Thank you.

Derek Bower, ISI Group.

Can you just provide more clarity on the assumptions driving your Q2 guidance? Specifically, what is expected level of dispositions for the quarter? And where are the $0.02 of non routine items attributed to?

Derek, this is Kevin. In terms of -- I have a road map from an OFFO perspective from 1Q to the second quarter, and then touching on some of the adjustments. We had $1.63 in OFFO for the first quarter. And our outlook for the second quarter in terms of OFFO is $1.66.

So, essentially a road map for the first quarter to second quarter, there's probably about a $0.05 pickup in community NOI, of which about $0.03 relates to the same-store NOI combined basket. And then about $0.02 from development NOI. And probably with an offset of about $0.02 in terms of interest expense and overhead combined to create a $0.02 drag on that to get to a net change of $0.03 in terms of OFFO sequential change.

In terms of the $0.02 for next quarter, it is largely prepayment penalties and continuing loss on the parking lot joint venture that we have, combined to produce the $0.02 in OFFO adjustments for the second quarter. And the prepayment penalties relate to some fund dispositions that are scheduled to take place in the second quarter.

So, the $230 million that is currently under contract, that would be a 2Q event, correct?

The $230 million that was in the contract would be a 2Q event. That was wholly owned communities. There's some additional fund dispositions that are scheduled for the quarter that are in addition to that amount. And actually a couple of them have some prepayment penalties associated with them, that would have a flow-through effect on our financials.

Okay. And any promote from a JV disposition is not included in the guidance, right?

That is correct.

Okay, got it. Thanks. And then just touching on the Bay Area, obviously there were some strengths there. Can you talk about how much of a contribution the increasing non-same-store pool was? And would you say the better growth has been driven by you fixing some of the turnover issues you had late last year? Or is it just the market overall is performing better than expected?

Derek, this is Sean.

In terms of a general commentary about Northern California, I would offer a few things. First, as you can tell from what we reported East Bay remains particularly strong. And the contribution from our East communities there, it's very strong.

So, East Bay, generally speaking, strong. Lower price point communities, probably stronger And we have a fairly good allocation of lower price point communities in the East Bay.

San Jose has held pretty steady. And actually I'd say, as we look through the year, San Jose may surprise to the upside just because the impact from supply that we are seeing there, not as much maybe as we expected. I'm hearing similar comments from our peers in terms of the supplies there seem to be absorbed without an issue. Rents are starting to get pushed a little bit harder. So San Jose feels good.

And then in San Francisco, portfolio is performing well. Certainly we have the flagship asset at Mission Bay. But, frankly, our lower price point assets in communities at Sunset Towers, Diamond Heights, Daly City, Pacifica, et cetera, are doing quite well. Some of those lower price point communities are putting up 9%s and 10%s, as an example, in terms of year-over-year growth.

So I'd say the price point communities in San Francisco and East Bay are doing particularly well. And San Jose seems to be on, I'd say, a positive momentum trend as we look through the rest of the year.

Okay, thanks. And then just in DC, where are new rents today? And what are renewals looking like for June and July?

DC specifically, just to give you some sense, in the first quarter renewals were up about 3%, and move-ins were down somewhere around 4%. Looking out to May and June in terms of the renewal offers, they're out in the low to mid 4s. They'll probably settle in the 3% to 3.5% range, would be my expectation based on what I know today.

I'll give you some sense. For example, April is trending at 3.9%, 4% range for the Mid-Atlantic portfolio.

And are new leases today worse than 4%, or are they in line?

In line. April is actually trending a little bit better. It is trending in around 3%.

So, for the whole quarter was negative 4%, and then in April it was negative 3%?

Correct. April to date, correct.

Great, thank you.

Vincent Chao, Deutsche Bank.

I know we spent a lot of time talking about the OpEx impact from the weather. Just curious if you can comment on the impact on just construction activity in general in those weather-impacted markets, and whether or not that may have helped or hurt leasing activity given the potential delays in construction and that kind of thing?

Sure, Vincent. This is Matt. I can try and answer that one.

As it relates to leasing activity, surprisingly it's been pretty strong in our new lease-ups in the Northeast. We averaged 21, 22 leases a month -- 22 leases a month across all of our lease-ups. But the Northeast lease-ups and certainly the Mid-Atlantic lease-ups were at or above our initial projections. People were anxious to lease our brand new apartment homes in these markets, even through the winter.

As it relates to construction, I've not heard of any material delays at this point due to the weather. There is a certain amount of weather days built into the schedule, in general. Did we have more weather days,? Certainly we did in the first quarter in the Northeast. But, generally speaking, these are mostly jobs that take, on average, two years to build. And if you wind up with four or five more weather days in January or February they will find a way to make that up.

Okay, thanks. That's all I had.

Karin Ford, KeyBanc Capital Markets.

I wanted to ask you about condo conversions. It sounded like there might have been a trade of a rental building to a condo converter in New York recently. I just wanted to get an update on what you are hearing there in New York and other markets. And are any of your asset sales to a condo bid?

Karin, it's Sean. To answer your second question first, at this point, no, none of the dispositions that we either have under contract or are contemplating we're expecting to go to a condo converter. That could certainly change. But there is not the expectation right at the moment.

I heard some chatter about the one deal that did convert in New York,. I don't know the details, to be honest, can't tell you anything about it. There has been some chatter about condo conversions in New York and in San Francisco, given the level of inventory that is currently available for sale in those markets. But I have not been close to any specific transactions to be able to give you much insight into that trend.

Thanks, that's helpful. And then just second question is, do you still expect Archstone to be neutral to the same-store growth expectations for the balance of the year after it rolls in?

Neutral to the same-store growth expectations; we're not doing anything different in terms of providing different guidance than we've already provided as it relates to the revenue growth from the portfolio. We provided that in the Q1 information, so nothing has changed from our initial guidance.

Is it roughly, is the same-store growth guidance roughly the same for the two different portfolios though?

We provided initial guidance that the mid point was 3.625% overall for the AvalonBay portfolio.

And we provided Q2 to Q4 guidance.

For the combined basis. I don't have the outlook right in front of me, but nothing has changed from what we've provided in terms of guidance at this point.

Okay, thank you.

(Operator Instructions)

Tayo Okusanya, Jefferies.

This is George Hoagland on for Tayo. Just a couple of questions on the Boston market. First of all, on the Assembly Row project, if you can just give an update there. It looks like it was pushed back a quarter. And also I was just curious on how rents are trending there.

This is Matt, George.

We did actually get our first CO to Assembly Row earlier this week or late last week. That was one that definitely did suffer some delays. Some of it may have been weather related, but I think a lot of it was related to just it's a very complex mixed use construction. It's a joint venture partnership with Federal Realty. We have, actually, a backlog of leasing activity. Folks have been waiting to move in for us to get those C of Os.

We should be off to the races now on the lease up. But we are only about 10% leased there. Again, we don't really mark the rents to market until we can get up to about 20%. And particularly in a situation like where people haven't been -- they've been leasing. The 10% they leased, they haven't actually walked the apartments. It's all been off of plan.

So, again, I would anticipate by the next quarter's release we will have more on that.

Okay. And then, also, can you just comment on how new rental rates are trending in downtown Boston?

Sure, George, this is Sean. I don't know if I have those specific communities with me to be able to quote you that, but I can give you the region overall, if that helps. I can tell you that downtown Boston right now is actually holding up a little bit better than we anticipated in terms of expected rent change.

I mentioned earlier in my comments that the infill markets -- Newton Highlands, is an example, Chestnut Hill, a couple phases of Pru Center have actually been doing pretty well. Keep in mind, our sample in the core of Boston, if you're really looking urban high rise, this is essentially the Prudential Center. I don't have the Pru numbers right in front of me, but we can get back to you on that if you would like that information.

Okay, that would be great. And then also just on the Stuart Street construction project, how big of an impact was there? There was a partial collapse at that structure?

George, this is Matt again.

Obviously a very unfortunate incident there where some steel was apparently, perhaps, overloaded on an upper floor and fell through temporary decking that had been put in place. The way these buildings get built is the concrete core, that goes up first, and then you basically put the lightweight steel up. And that is up multiple stories above where the concrete permanent floor is. The temporary decking got collapsed and lost on about five or six stories there of that structure.

But there is a recovery plan in place. And the team has worked very well with the city of Boston and all the inspectors involved. So, they are now well into the recovery plan and we do not expect any material impact there on the economics of that deal.

Okay, that's all I had. Thanks, guys.

Michael Salinsky, RBC Capital Markets.

Tom, we're definitely going to miss you. And, Kevin, you've got big shoes to fill here.

Tim, first question, you talked previously about 2014 being at peak in deliveries. Given what we're seeing in permitting, I know you talked about DC, but is that still the expectation, that 2014 is the peak? And then do you see it drop down, or do you expect 2015 to be comparable at this point, given what you are seeing?

Mike, in our markets it is. I can't necessarily speak for the US overall, but in our markets we are expecting still deliveries to be just under 2% of inventory in 2014, and to come down both in 2015 and 2016 from those levels based upon starts that have already occurred or starts that we are projecting over the next six to nine months.

Okay, that's helpful. Second of all, in your presentation you provided an interesting chart on replacement costs there. Can you talk about the growth you've seen in replacement costs year over year? And then as you go forward, given the activity we have seen in some of the other sectors picking up on the construction side, is it your expectation that rents can keep place with the growth in replacement cost over the next couple of years?

It is interesting. If you look at these two charts side-by-side, they are important to consider together. It's the relationship between rents and replacement costs that ultimately drive whether there ought to be new supply.

Both of these actually index about 3% inflation over a 15-year period. So, again, supports the notion that you're roughly in equilibrium but we are at levels where the economics do still support new supply. We are still pursuing new deals, as are many of our peers. Not as many made sense as they did in 2009, 2010 and 2011. It's just the nature of cycles but we are still seeing plenty of stuff that we think underwrites and make sense in terms of the basis we have been at, as well as the projected economics.

I think the chart on the right captures our experience with replacement cost pretty well. If you just look back at our total cost per unit, we just went over the $300,000 per unit mark, really for the first time since 2007 recently, with a more concentrated portfolio in the urban market. So, I think this is pretty accurate.

This is an index that is a proprietary index that we put together based upon both construction costs and land cost trends. But it actually matches our intuition and our own experience, so we feel pretty good about what it is telling us. It matches our experience, at least at the moment.

I don't know if that answered your question. There have been some markets where construction costs, particularly on the West Coast, have stilled moved up 8% to 10% over the last year. But on the East Coast we've seen much more normalized levels, in the 3%, 4%, 5% range on a year-over-year basis.

Just in light of that last comment, is there any markets then today where that equilibrium has gotten out of whack to where it doesn't make sense to be putting new construction today? Or where you think there is a significant catch-up potential?

Certainly parts of DC don't make sense. But you still might be surprised how many do still make sense, if you just looked at where assets are continuing to trade in this market. But there are sill some that are just -- one, in some cases it's current economics, but in more cases it is about where we think the market might be going over the next year or two. So plenty of submarkets in DC that we would not consider at this point in the cycle.

When you look at some of the urban costs and construction costs in the Northeast, that is getting challenging, I would say. You take a deal like National Street, it makes sense in part because of our land basis, is actually very attractive relative to what you can secure land today at. There's some, for sure, where the risk-adjusted economics don't make sense based upon where the assets might trade.

And just a final question, then. In terms of the same-store composition change going into second quarter, obviously with Archstone quite a bit of Southern California, as well as DC, just can you give us a sense of what DC and Los Angeles increased to as a percentage of the overall same-store bucket versus currently?

Matt is looking it up here, Mike. This is Sean.

My recollection is that the DC portfolio becomes about 16%, 17% on a combined basis. Give us just a second and we can take a peek at it for you. We will send you a note with that, Mike, the precise numbers.

I appreciate it. Thanks.

Paula Poskon, Robert W Baird.

Just a question on the suburban focus on development. Are you thinking more -- should we be thinking more in terms of your traditional Avalon type garden-style community? Or are you thinking more of a high-rise footprint in transit hubs, such as maybe a rest-in-town center versus center city?

Paula, that is a great question. Actually it has been, if you look at just our development rights pipeline versus currently under construction, the amount of garden is about the same in both. So, really, the shift has been from high-rise to what we think of as mid-rise, which is a combination of, you can call it, wood frame wrap or wood frame podium. And those are often in either on transit TOD-type locations or certainly employment and retail center type locations.

That's really probably been the bigger shift, has really been from central core to exurban infill type sites where the economics are still dramatically different. If you just look at the cost basis of, call it, a Stuart Street or an Exeter or a National Street in downtown Boston versus Assembly Row which is only 3 miles away in Summerville, in some cases you are talking 50%, 60% of the basis, in some cases. That has been probably more the focus of the shift over the last 12 to 24 months in reality.

This is Matt.

A couple of numbers on that. What we currently have under construction is about 25% garden. And the balance is evenly split between mid- and high-rise -- 38% mid, 38% high.

In our development rights pipeline, the future starts, the garden percentage doesn't really change, like Tim was saying. It's about 25%. The high-rise drops from 38% to 15%, and the mid-rise is what moves to about 60% of the pipeline. The bulk of what we are going to be starting is the wrap and podium deals in the infill suburban locations.

That's very helpful, thanks. That's all I had. And best wishes, Tom. We'll miss you.

At this time we have no further questions, so I'd like to turn it back over to Mr. Tim Naughton for any additional or closing remarks.

Thank you, operator. And, Tom, I think you got off pretty easy this quarter. Just said a lot of thank yous.

Anyway, thanks for being on the call today. And we look forward to seeing many of you, unfortunately without Tom, at the NAREIT conference in early June in New York. We look forward to seeing you then. Thanks. Take care.

That does conclude today's call. We thank everyone again for their participation.