艾芙隆海灣社區公司 (AVB) 2014 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities' third-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 your conference.

Thank you, Jennifer, and welcome to AvalonBay Communities' third-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 may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as on 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. This 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'll turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities for his remarks. Tim?

Thanks, Jason, and welcome to our Q3 call. With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. I'll provide management commentary on the slides that we posted this morning, and then all of us will be available for Q&A afterward. My comments will focus on providing a high-level summary of the quarter's results, discuss apartment cycle and fundamentals, talk a little bit about portfolio trends, and then, lastly, briefly touch on development performance and funding.

Starting on slide 4, which is an outline of highlights for the quarter, core FFO growth was just over 6% for the quarter and 9.5% year to date. Same-store revenue growth was at 3.7% for Q3, and 3.9% when you include redevelopment. That rate of growth is up 60 basis points from the second quarter. Sequential same-store revenue growth was at 1.9% versus 1.4% we experienced in the same quarter last year.

We completed eight communities this quarter, totaling $465 million, at an initial stabilized yield of 6.8%. We started another three deals, totaling about $450 million, which brings our year-to-date starts right about $1.2 billion. And, lastly, we raised about $230 million in capital. In addition to that, we sourced another $685 million in the form of the equity forward.

So, let's move to slide 5. Let's take a look at where we are in the apartment cycle versus the 1990s cycle, which we often compare this cycle to. And we'll look at both the US and our markets. For the broader US apartment market, which is depicted by the three slides on the left there, demand-supply performance are tracking very closely in line with the 1990s apartment cycle. When you look at job growth, apartment starts and rent growth, they're almost identical to the first 19 quarters of this cycle, as compared to the 1990s. Market rents have grown cumulatively approximately 15% since the trough, which is similar to the 1990s when rents grew by more than 50% by the end of the expansion.

For our markets, which are denoted with the three charts on the right, our current cycle has performed -- and has tracked the US overall, with rents growing about 15% since the trough. But the fundamentals underlying that performance have been very different than the 1990s. Job growth has been much stronger this cycle, with technology markets leading the way. And starts have been in line with national averages, which is different about this cycle. It's something we've discussed in past calls. Supply has come earlier than normal in our market this cycle, just given the capital preference for gateway markets and also the underlying economic growth in our markets, which has been strong so far this cycle.

Moving on to slide 6. Another major difference this cycle that is driving strong apartment demand is demographics and consumer behavior, which is driven in part by shifts in lifestyle patterns. First, demographics are much stronger this cycle, as shown on the chart number 1 in the upper left, with the growth of the millennials. And this demographic is behaving differently than past cycles. They're buying less, with home ownership rates down about 700 basis points from the peak this cycle, and lower than what was experienced in the 1990s.

Many haven't even yet formed a household, choosing instead to live at home at an increasing rate and for longer periods, perhaps -- or maybe extending -- adolescence and putting life on hold a bit, marrying at an age and starting a family about three years later than the prior generation. So clearly, demographics and lifestyle behavior are having a profound impact on apartment demand this cycle.

Turning to slide 7. I'll talk about supply for a moment. How worried should we all be about supply? No doubt apartment starts are up significantly since the trough, and are now above their 25-year average. But they are in line with prior expansions, periods where underlying demand fundamentals weren't nearly as attractive as they are today. And, starts do appear to be stabilizing, based upon trailing three-month averages over the last year and as shown in the second chart in the upper right. Our comfort level around supply is further supported by broader housing market starts, where starts are already running at about a million per year, which, after obsolescence is closer to 600,000 to 700,000 net starts per year, significantly below most third-party estimates of net household formation that is projected over the next several years.

Obviously, supply could take another leg up and that's something we are watching carefully. The recovery of the apartment REITs this year in the equity markets, and the recent improvement in the NMHC equity index, as shown in the lower right, signal that capital is more confident about apartment fundamentals, which we understand could translate into higher production levels at some point in the future. However, for now, we believe the sector is fine and -- over the foreseeable future, as recent starts turn into new deliveries. But it does bear keeping a close eye on over the next few quarters.

Shifting to slide 8, let's take a look at our portfolio and recent trends and performance there. As I mentioned earlier, same-store revenues accelerated in Q3, with the rate of growth up 60 basis points from what we saw in Q2 on a year-over-year basis. That was driven by improvement in same-unit rents, which have accelerated since the beginning of the year from about 2% year-over-year growth in January, to 4.5% in September. You can see that on the left-hand side of the page. In Q3, same-unit rents were up on average 4.3%, which was 50 basis points higher than the same quarter last year, so increasing, relative to what we experienced in 2013.

Moving on to slide 9. Really all this improvement in rent growth on a year-over-year basis can be -- in terms of the rate of rent growth, can be attributed to strong performance in the West, as growth on the East Coast has more or less been at or just below what we experienced in the third quarter last year. Northern California and Seattle continue to lead the way in the West. But rent growth in southern California was close to 6% in the third quarter, which is the strongest we've seen so far this cycle in that region.

Moving on to slide 10. With supply rising, particularly in urban markets, we've seen a shift in performance by sub-market and price point. As we mentioned last quarter, suburban rent growth is now out-pacing urban rent growth, a trend we expect will continue over the next several quarters when urban deliveries will be more than double that of the suburbs. This is a pretty consistent trend across our markets. In addition, generally value-oriented product, or B product -- or eaves in our portfolio -- is outperforming higher-end luxury product. The trend in our portfolio is skewed a bit by a higher concentration of eaves in the California markets.

There are some markets where A product is still outperforming B. Actually, of the 20 markets that Axio covers for us, they actually report that As are outperforming in 8 of the 20 markets, or about 40%, while Bs are outperforming and the other 12 are roughly 60% of our markets.

Moving on to slide 11 and shift to talk a little bit about development. Our development portfolio continues to perform very well. The $450 million development that was completed this past quarter has stabilized with its rents 8% above pro forma, and yields that have risen by 70 basis points since the start of construction.

Turning to slide 12, this trend is continuing in our lease-up portfolio. Of the nine communities that are currently under construction and have significant leasing activity, where rents are up 6% above pro forma, or $150 and yields are up by about 40 basis points. So, strong leasing and economic performance across the development portfolio.

Moving on to slide 13. Importantly, the development portfolio, or all of the communities under development and redevelopment, that $3.3-billion bucket is fully funded with permanent capital already in place, once you include dispositions that are under contract with at-risk deposits, which total about $200 million and the proceeds that could be drawn down from our equity forward transaction of almost $700 million.

And, lastly, we continue to raise capital at an attractive cost, as you can see on slide 14, enabling us to lock in meaningful accretion on both an FFO and an NAV basis. Year to date, we've raised almost $1 billion of capital, excluding the equity forward, at initial cost that is approximately 300 basis points below the initial stabilized yield on the recently completed developments. So, for every $1 billion of development that stabilizes then, it's generating about $30 million of FFO accretion, adding more than roughly 3% to FFO per share growth and about $400 million in NAV accretion, or about $3 to NAV per share.

So, in summary, 2014 is shaping up to be another great year. Apartment fundamentals remain very strong and we've seen an improvement in the last quarter, a healthy experience above trend growth from our stabilized portfolio. We have a highly accretive development pipeline that is driving strong external growth, and which is fully capitalized, along with a balance sheet that is positioned to provide plenty of flexibility to continue funding projected development starts in a highly cost-effective manner.

So with that, operator, we're ready to open up the line for questions.

(Operator Instructions)

We'll take our first question from Nick Joseph from Citigroup.

Thanks. How did you weigh the decision to issue equity on a forward basis versus match funding using the ATM or use another form of capital?

Sure, Nick, this is Kevin.

In terms of the equity forward versus the CEP or the ATM, the ATM activity that we undertook in the quarter of about $100 million was done in August. And was done in reference to our capital plan for 2014.

So essentially it was capital that we were looking to raise relative to our target for this year. And in raising equity, we essentially substituted that for a like amount of dispositions that we otherwise would have done.

In terms of the equity forward, the thought process there, as you might expect, was a little bit more complex. Fundamentally, however, the purpose in raising that capital was to forward fund capital plan activities scheduled for 2015. So it was really related to next year and not this year.

In doing so, what we did is we took into account a few considerations. First, obviously as we've noted, we face elevated funding needs not only this year with $1.4 billion of starts, but also next year, which we've disclosed we expect to range between $1 billion and $1.5 billion in new development starts.

Second, when you look at our principal funding markets, which for us are the transaction market, the common equity market and unsecured debt market. Clearly the common equity market historically has been our most volatile market to tap.

Access to attractively-priced equity capital can sometimes be reduced for extended periods of time, often for reasons that have little to do with AvalonBay and more to do with broad market factors. So that was something we took into account.

With our stock trading in early September at about $156 a share, we were trading meaningfully above NAV. So our pricing at that point in time was relatively attractive, certainly relative to our development uses.

And I guess the final factor was taking a look at the fact that capital efficiency for our overall funding program benefits, and is enhanced by incorporating from time to time some common equity issuance, when it's attractive to do so. In order to avoid from having to pay meaningful special dividends or excise taxes related to capital gains, which would otherwise be generated from a funding strategy that's wholly reliant on dispositions.

So taking all those factors into consideration, and looking at the fact that we've got elevated needs this year and next year and our common equity price was relatively attractive, we thought it made sense to lock in attractive pricing and funding and create some NAV accretion for investors.

Thanks. With the last investor presentation you put out with last earnings, you put a helpful slide with the cost of capital heat map. So I'm wondering where equity screened at the time you issued the forward equity? And where debt asset sales and equity screen today?

I don't have the data exactly as to when it was at that point in time. But to give you a sense of it, Nick, asset sales on the heat map on a percentile basis have ranged around 78% to 80% over the last quarter or two. So pretty consistent and supporting the comment I made earlier about it being -- the transaction market is a relatively stable market for us from a pricing perspective.

Equity pricing can be a fair bit more volatile, particularly when we look at how we're trading relative to consensus NAV. In terms of the overall equity temperature, if you will, on a percentile basis, which takes into account not only how we're trading relative to NAV, but also other factors, including our AFFO yield and how we're trading relative to bonds and the broader market, overall equity temperature was probably at that point in time in the high 60% range. With our stock premium to NAV trading even higher than that, more in line with asset pricing around the 80% range.

So that's probably where it was at that point in time. It's down a bit today from where it was then, because obviously our stock price is a bit below where it was then. I think our consensus NAV has risen a bit since then.

Great, thanks. Then quickly, on operations. Can you talk about what you're seeing on the ground in Southern California and what you expect going forward?

Sure, Nick, this is Sean. As we noted in the management letter we had expected Southern California to pick up speed. And it certainly played out that way in the third quarter. Generally speaking, Orange County and LA have been the strongest of the three markets, if you consider San Diego, as well.

Just to give you some data points, we talked a little bit about rent change in Southern California in the third quarter averaged in the mid 5% range, as compared to low 4%s last year. So overall, good momentum.

And as you look at where we're headed in the October and then what the renewals look like in November and December in terms of rent change, those numbers are in the mid 5% range for LA and Orange County. And then in the high 4% range in San Diego.

Generally speaking, things are solid across the three markets, with some exceptions depending on the sub-market that you're in and where supply is being delivered. Just to talk to that for a second, to give you some sense of it, in LA, as an example, about 20% of the new supply is coming online in downtown Los Angeles in 2014 and 2015. So probably a little more pressure in downtown LA. We have one asset in lease-up there, no existing assets.

And then also we're seeing some pressure in the Warner Center, Woodland Hills sub-market where there's deliveries under way at this point. A lot of the other sub-markets that we're in are relatively protected and we feel pretty good about that.

In Orange County the supply is really coming online from Irvine, which is in various parts of the Irvine Ranch, a little bit of South County. And then in San Diego, most of the supply is in places like Chula Vista, as an example, where we don't have assets. So it does depend on where you're located. But generally speaking, rising tide in Southern California overall.

Great, thanks for all of the detail.

Sure.

Next we'll go to David Toti from Cantor Fitzgerald.

Just a couple questions around the development pipeline, if I might. I notice that the overall yields on new projects are trending down modestly, but your stabilized yields and your lease-up properties are moving up.

Is there too much conservatism in the original estimates? Or are the -- is it really just a function of the mix of assets that are in lease-up at the moment that are outperforming because of specific market conditions?

David, hi, this is Matt. I'll try and address that one. As it relates to the overall yield on the pipeline, it's down 10 basis points from the last quarter. That really is a function of just the specific assets that move in and out of that bucket geographically.

We added a large high rise in Boston this quarter. And we had a few assets that completed last quarter that are now no longer in that number, that were --I think the assets we completed last quarter were in the low 7%s. Some of it's just the math of that.

Overall I would say we are pretty conservative in our underwriting, but we're consistent in our conservatism. We always under write today's rent, today's cost, today's operating expenses. And then that's the yield that we report until we start leasing the asset.

So frequently there can be an average a year and a half, a year to, in some cases, even two years between when we start the community and when we start leasing it. And so to the extent rents have grown in that interim period; you will get some lift out of those yields. I think we've been pretty consistent in seeing that lift when we open for lease-up relative to when we started the job.

Having said that, there is more supply out there now than there was a couple years ago. It wouldn't be surprising if the amount of that lift isn't quite as strong on deals that stabilize in the next year or two, as the ones that stabilize this year.

That's helpful. And my second question has to do with energy costs. I know this is probably a bit premature, but are you underwriting any improvement in total construction costs on projects that are being underwritten at the moment?

Are you anticipating lower costs? Is any of that being written into the yields that you're looking at today?

This is Matt again. In terms of hard costs, no. We're, again, what we're underwriting every time we update the pro forma, which we'll do throughout the process until we start construction, is what we think it would cost to build today.

There are markets where we've seen construction cost pressures moderate, particularly in the DC Metro area, where they're basically pretty close to flat at this point. The West Coast, it's still moving up pretty strongly, although maybe the edge is off that a little bit.

But honestly, the construction cost pressures have a lot more to do with labor costs and with subcontractor margins. How much business they've got relative to how much business they can handle, or that they want to take on. It's much more responsive to that than it is to commodities pricing.

And then if I can just ask one more. The total dollar value of the rights pipeline went down slightly, to about $10.9 billion. Is that just a function of timing and lumpiness? Or is that an indicator of some contraction in the total size of the pipeline, potentially?

You know, probably a little bit of both. This is a big year for starts. We're starting $1.4 billion this year, $1.3 billion, $1.4 billion, which would be our peak. I think we have said pretty consistently that it probably is our peak for development underway.

We also had a lot of development rights that we acquired through the Archstone transaction last year that we've moved into production this year. So there was a bit of a one-time lift there.

I'd say now it's probably -- hopefully, over the next couple quarters we'll see as much added to the pipeline as what we take out in terms of new starts. But there's definitely -- it's a bit of a bottom-up process and fewer deals have been hitting the targets relative to a year or two ago.

Okay that's very helpful, thank you.

We'll take our next question from Jana Galan from Bank of America.

Thank you. Is it possible to provide like term rent changes for Boston in your outlook there as you had a nice sequential pick up? Maybe also similar stats for Washington DC?

Sure, Jana, this is Sean. I'll give you on New England overall, which includes Fairfield, so it's a little bit of a blend. Boston would be at the slightly higher end of the averages I'm going to give you.

In terms of blended rent change in the third quarter for New England overall, average about 3% in the third quarter. What you're probably going to see as you move -- New England is a pretty is seasonal market.

You get a lot of lift during the summertime from short-term leasing activity. People are in town for different reasons, people on the water, et cetera.

Then it tends to soften up as you go into the fourth quarter. It's more seasonal than the average market that we have. You'll see that trail off as you head into the fourth quarter.

And then as it relates to the Mid Atlantic overall, our blended rent change for the third quarter was positive by about 50 basis points, with new move-ins down about 2.5% and renewals up about 3.5%. Based on what's on the books today, that's a pretty similar pattern for October.

November and December is yet to be told, of course, but renewals are going out in a range that would indicate that those numbers will probably be sort of in that same mid 3% range. Maybe slightly higher on renewals, as we get through November and December.

Thank you.

Sure.

We'll go next to Nick Yulico from UBS.

Hey, Tim, it's Ross Nussbaum here with Nick. Can you talk a little bit about some of the mortgage finance proposals or chatter that's out there from the FHFA, the GSEs? Specifically in their efforts to expand credit to the mortgage single-family housing world and some of their plans at least to looking at 95% to 97% loan to values. As you think about your capital plans going forward, how do you think about what you're hearing out of Mel Watt these days?

Yes, Ross, maybe the one thing that does make sense from my perspective is to what is being discussed with FHFA, is the maybe just some clearer rules around lump put-backs. I think probably as good, just for maybe helping unstick some capital in the home mortgage market.

As it relates to how the GSEs potentially guaranteeing lower down payment loans, I think as you mentioned, as low as 3%. We've been there before. We know what that looks like, I think.

I think there's a real question, at least in the multifamily industry, whether it's necessary. Home ownership rates are back to 64%, 65% range.

They were there for 30 years before the big run up in the 2000s. When you look at demographics and the impacts of higher leverage, which is going to result in higher defaults, question whether how much it hurts ultimately the capital markets and the housing markets, we'll see.

I'll just speak from my perspective as a taxpayer, and maybe secondly, as a CEO. Of all of the things that could have been done, I'm not sure it would have ben high on the list as it relates to stimulating the economy. It does feel a little bit like the old playbook without regard to anything as it relates to underlying fundamentals, changes in demographics.

As it relates to how it might impact our business, I think we'll see. It's our sense that one of the reasons you're not seeing as much home buying, it's not just about the down payment. It is about, as we saw in the slide show, about people's lifestyles and the choices they are making around family and marriage, which is ultimately what drives that purchase as much as the financial side of it.

We'll see in terms of the impact ultimately to multifamily and to the apartment sector. Not crazy about the changes, putting my taxpayer hat on.

Is it your, I'd paraphrase, that the Company is not including a seismic shift in the single-family versus multifamily, I'll call it, dynamics in the home ownership rate over the next couple of years? Is that a fair paraphrase?

We're not, certainly as it relates to multifamily versus single-family. Again, I think the multifamily decision versus single-family really is more of a demographic issue. In terms of whether you choose to purchase or not a condo or a rental, that could be impacted by what's happening, for sure.

But as it relates to our plans right now, it's not impacting the business plan. It may ultimately have an impact on condo values, which you might see some conversion of either existing stock or stock that was planned for to be built as rental shift-over to condominium to the extent more demand materializes as a result of the change in rules.

Nick had a question as well.

Yes, just hoping you could talk a little bit more about New England and the Metro New York City areas. They put up better numbers this quarter versus second quarter.

You talked a little bit about New England. But what else is going on in these markets that all of a sudden feels like there's a bit of a pick up in fundamentals, as these have been lagging markets?

Yes sure, Nick, this is Sean. Maybe a little more thoughts there. New England, one thing to keep in mind is the winter was so rough that status of the bar was relatively low in terms of being able to pick up steam as we went into the third quarter.

So first quarter was pretty challenged, which impacted the activity as we went into the second quarter. Because we weren't able to remove the rent rule much throughout the first quarter. And you have renewal offers that were out in the February or March time frame for April and May. So we really had an opportunity to juice it a bit as we moved through the third quarter.

And then the other thing to keep in mind is the third quarter is typically the peak for shorter term leasing activity in that market. So you get a little bit of boost seasonally in most markets. And it's probably a little more pronounced than a market like New England and another market like Seattle, as an example, in the third quarter.

In terms of overall supply-demand dynamics, I don't think anything has changed materially. The only thing that I'd say that supported our improvement is that turnover was down pretty materially in Boston specifically on a year-over-year basis. It was down about 900 basis points. The whole portfolio was down about 500.

So when you have a pretty sizeable reduction in turnover, which mainly was attributed to people not buying homes as much in that market, that certainly supports pricing power with just less inventory available to lease. That's one nuance as it relates to New England.

In terms of New York, New York is the function of a lot of different sub-markets that we're in. I'd say we started to see a little bit of improvement in the Midtown West sub-market of Manhattan, where we have two large assets that we acquired as part of the Archstone acquisition, Midtown West and Archstone Clinton.

We started to get traction on relatively well in the third quarter. They had been a little more on the weak side with two or three lease-ups they are competing against with Mercedes House and a couple other deals. We started to see those stabilize.

There's another asset near a West Chelsea lease-up that stabilized. So we're starting to see some of those larger assets stabilize, but there's still a fair amount of supply in New York overall.

The expectation is for more supply as we move into 2015. I think New York is going to be a little bit choppy over the next three or four quarters, as those deals lease up.

Great, thanks.

We'll take our next question from Derek Bauer, ISI Group.

Great, thanks. How shall we think about the development margins going forward, especially as it relates to the rights pipeline? You mentioned the 300 bps in the presentation, but would it be reasonable to assume that narrows over time? And if so, where is your expectation on where it trends?

Derek, this is Tim. I'll maybe start and Matt or others may want to jump in. As we look at the margins, they are obviously very, very healthy.

It's not our expectation that was going to continue, it's just the way capital markets work, right? With more supply coming in over the next couple years, in our view, roughly matching demand, you'll see rent growth start to moderate a little bit.

Then as we've talked about in the last couple of quarters, construction costs are starting to out-pace rent growth. Those two things are going to squeeze margins a bit. Hopefully will start to help keep a lid on new start activities at the same time, so that they continue to be healthy, just not as robust as we've seen.

The beginning of the effect, you always have the benefit of construction costs at a cyclical low, and you're delivering into an accelerating rent environment. And you get kind of performance we've gotten, where you get 70, 80 basis points lift, which is dramatic.

You're talking about a 10% to 15% improvement in the economics of the transaction from the time you start to the time you finish. We would expect that level to moderate, as Matt mentioned in his remarks.

Having said that, in the 90s we had a sustained period of time seven or eight years, where we were able to achieve a good couple hundred basis points above prevailing cap rates in terms of profitability. Which, given that cap rates are higher at the time, would probably translate into margins that were 10% less.

This is Matt.

Just one other thing I'd add to that, which is one way we have responded that a bit and that you will continue to see, is a bit of a shift in terms of the product type and location characteristics of the deals that we start. If you look at our future pipeline starts the next year or two, only 10% of it, roughly, is high-rise and it's probably more suburban-focused.

Whereas the stuff that's currently under construction is 40% high-rise and 50% plus urban. Those deals tend to be lower yield, they have lower cap rates, so the margin is still wide.

One other way we have responded a bit has been we shifted our development focus on new rights to more of the medium-density product and more the in fill suburban locations. We'll start to see that come through in the next year or two. I think that will help at least preserve the yield, even if the margins get compressed a bait, based on the cap rates.

So you're still seeing market rent growth out-pace construction costs in the suburban markets?

I would say the market rent growth is probably a little stronger in the suburbs right now. And the cost pressures have been a little bit lighter in that product type in some locations. Maybe not in Southern Cal, but in most of our other locations. So it's probably keeping pace there.

Okay, thanks. And then just wanted to clarify, on Page 13 of the presentation, should we still thinking about that $700 million of forward equity for next year's starts? So does that imply there's still $400 million left to be funded on the current pipeline?

Go ahead, Kevin.

Well, I'll speak to just the funding on the forward equity. We certainly, under the forward contract, have the right to issue shares any time now up through September 8 of next year. But, as I mentioned a moment ago, the reason for undertaking the forward transaction was to lock in the funding associated with expenditures next year on funding.

While we might potentially issue here in the fourth quarter, it's unlikely we will do so. It's likely we're going to issue it at some point next year, entirely over the course of the first three quarters of next year. That's probably the answer to the question --

Just to be clear, the equity forward, as Kevin said, is to fund expenditures against existing commitments. I think where you may is have been headed is do we have additional funding for existing commitments because that was earmarked for future starts? Did I hear your question right?

Yes, it is. Thank you very much.

We'll take the next question from Dave Bragg at Green Street Advisors.

Thank you, good afternoon. This relates to Derek's question. Sounds like 2014 might not necessarily be the peak for development starts as originally planned. Can you talk about what factors are most likely to cause you to end up with $1 billion of starts versus the potential $1.5 billion next year?

Dave, Tim here. It's a function of several things, obviously. It's a function of when the deals are ready. Oftentimes when you think they're going to be ready, it takes another quarter or two by the time you really pull permits.

It's going to be a function of the economics of the deals, as well. Some deals you have to rework if the economics aren't making sense. You might have to value engineer and do some replanning. That can take a couple quarters.

So we try to give a range that we thought was representative of what it could be from low to high, based upon those factors. Capital is obviously always a factor, but less of a factor given our current capital position and the flexibility we have as it relates to tapping the debt and the assets in our markets, given that a lot of our equity needs have already been met.

Right. Going back to the 300 basis point spread that you've enjoyed year to date, at what level does that alone cause you to pull back significantly on the starts?

Well Dave, really starts further back in the process, with the land commitment, if you will. I think you saw that, you see in the press release that -- Matt was answering that question earlier about the amount of development rights.

We are drawing down development rights and not replenishing as quickly as we're drawing them down, in part because of the opportunities that we're seeing in the market are a little bit thinner than we've seen. Not as many are hitting the screen, if you will, or making it through the filter in terms of underlying economics.

So it starts there. The pullback really starts there. If we're doing our job well, it starts there, so you don't get yourselves in a precarious position later in the cycle.

That doesn't mean that it's on automatic pilot that you're just going to start it once you get permit and approvals. We still look to try to create incremental value on a risk-adjusted basis.

If we think the deal makes sense, it's going to be a little bit deal-dependent. But a couple hundred basis points of FFO accretion or 100 to 150 basis points of NAV accretion, in terms of yield over cap rate, is certainly the ballpark of what we would consider still funding and moving forward with.

Okay, thank you for that. The next question is on turnover. Why do you think turnover was down so much in the third quarter? Did it surprise you? What are your thoughts about permanently lower turnover in your sector, given the secular factors such as later marriage, later home ownership going forward?

Dave, this is Sean. When you look at the reasons for the turnover in terms of what's shifted, it's pretty consistent with last year. I mentioned home purchases are down a little bit, they're down about 110 basis points year-over-year. Just as the total volume of activity was down.

If you try to parse it and think about the precise reasons that churn goes up or down, typically it's labor, mobility, options, things of that sort. I'm not sure that there's one specific factor, other than I would cite last year we did talk about the fact that we were pushing rent relatively hard. Maybe a little bit harder than we should have at that point, which created a little more churn in all categories, to be honest.

We're still pushing pretty hard this year, but not seeing the same level of resistance, I would say. So to me what that translates to is generally from an economic perspective, people are feeling a little better about their situations. Whether it's a home purchase or rent increase or relocating somewhere, we're just not seeing the numbers move dramatically, just the overall volume is different.

Then as it relates to the broader question about lower turnover, I guess you could get to that conclusion based on a number of the factors that Tim talked about, as it relates to people delaying marriages and home purchases and things like that. I'm not certain that we'd be ready at this point to call that. We think there's a permanent shift in that. Tim, you may have some thoughts on that as well.

Dave, just to be clear. The point we're trying to make here is more of a generational issue as we compare back to the 1990s. And we think what's an appropriate level of structural demand this cycle versus prior cycles?

As you can see on the chart, at 6, it's really been a gradual trend over the last generation. But it is remarkable when you think in just one generation it's increased by about three years.

I have some friends who would probably wish the turnover would go up a little bit in their own household, just based upon their kids living there a little longer than they had anticipated. I think it's probably more a function of what's been going on with the economy and less labor mobility. That's probably been the result of it this particular cycle, on a year-over-year basis.

Thanks. Last question on DC. What are you looking for in that market to help you foresee a bottom for rent growth?

Dave, this is Sean. I'll make a quick comment and then Tim or Matt can jump in as well. I think, Dave, essentially what we're looking for is more jobs.

We know there's plenty of supply. There's some more supply coming as we move into 2015. Pretty high levels, here, we are talking about 4% or 5% supply coming on line. And you're talking about job growth for this year is projected to be less than 1%.

That's not a formula for a very positive outcome. We have seen a pick-up in job growth recently in this market. But it's going to have to pick up much more significantly for, I think, us or anyone else, to be in a position to say that we've bottomed out, and we can start to see us flat-line and then move up.

When that's going to happen is a function of a lot of different things. But that's essentially what we need, is more job growth out of this market.

Okay, thank you.

We'll take our next question from Haendel St. Juste from Morgan Stanley.

Thanks, good afternoon. So a couple quick ones from me here. First, you've seen healthy new renewal trends in the last couple quarters and we saw the gap widen out a bit further to almost 200 basis points for October.

My question is do you think you can maintain that 200 bps-ish spread on new versus renewals through the weaker seasonal demand periods of 4Q, 1Q? And also perhaps can you give us some regional insight into some of your major regions on that new versus renewal that you've experienced in October, that spread of 200 basis points?

Sure, Haendel, this is Sean. As it relates to maintaining the spread, it's a little hard to predict. We feel pretty good about the numbers that went out, in terms of the offers being in the mid 6% range for November and December, which is up about 150 basis points relative to last year.

We did that based on a few different things. One, certainly the momentum we had in the third quarter, where we were up about 50 basis points year over year. And then in October, in terms of where we are trending.

The portfolio is just well-positioned right now. Physical occupancy is around 96%, availability is around 5%. When you look at the volume of contracted lease expirations in the fourth quarter, it's down about 20% relative to last year.

So you triangulate into how you feel about those renewal offers based on recent portfolio trends. And in general we feel pretty good.

We've also made a few adjustments in our revenue management parameters, that to the extent that we're pushing too hard, the relief valve kicks in a little sooner, if you want to think of it that way. In general we feel good about the numbers we've sent out.

As it relates to the individual regions, I'll give you some numbers as it relates to what we did in the third quarter. I have it in aggregate for the whole portfolio as it relates to the fourth quarter in terms of the offers that have been out and where we are trending in October.

Just to give you some sense, in New England, third quarter move-ins around 1%, renewals in the mid 4%s, New York move ins about 1.5%, renewals just over 5%. I mentioned the Mid Atlantic earlier, down about 2% on move ins and up about mid 3% on renewals.

And then as you move to the West Coast, obviously it jumps pretty dramatically, as Tim mentioned earlier in the slide presentation. Pacific Northwest move-ins around 6%, renewals in the mid 8%s.

Northern Cal move-ins just over 9%. It's actually a market where move-ins are actually ahead of renewals. Renewals were around 8%. And then in Southern California basically right on top of each other with new move-ins in the mid 5%s and renewals in the mid 5%s, as well.

Okay, appreciate that. Couple clarifications. First one, can you -- I guess a qualification on the mechanics of your forward equity contract. If your stock falls below the $151.74 per share contract price of the equity forward by the time you settle the contract, on or before, what, September 2015? Are you responsible to make up that difference? Or is the risk entirely the underwriter's?

We are not responsible to make up that risk. It's a fixed share, forward equity contract. And so we've locked in $151.74 as their initial forward price.

Our proceeds going forward can only be reduced by really two things. One is the dividends that we pay between now and then, and a minor adjustment for a daily interest factor. So we are not exposed to changes in future common equity pricing in terms of funding proceeds under that offering.

Appreciate that. And one more question I have, just some color commentary on the land transaction market. Wondering, given your activity, what you're seeing out there, the pricing environment for well-located land that meets your criteria. Are sellers pulling back a bit on pricing given some of that moderating growth sort of forward outlook you talked about earlier on your call?

This is Matt. I'll take a shot at that one and Tim can give his thoughts. It varies by market. So the most extreme example would be New York City and Manhattan right now, where land prices are so high that rental economics really don't work.

Almost all the land that's trading in Manhattan, and even a lot of the land that's trading in Brooklyn now, it's trading at condo valuations. You're starting to see that a little bit in San Francisco as well, where the land values have gotten to a level that it's pretty hard to make rental economics work.

In our other markets I would say it's not quite that frenzied. Boston is probably flattish compared to maybe what it was a year or two ago. There's definitely been more activity in the suburbs and some of our brethren are starting to look more aggressively in the suburbs, as we have been the last year or two, I would say. So maybe it's shifting a little bit from the urban to the suburban there in Boston.

DC, it probably is off a little bit and terms are more favorable. Deals that you would have had to have closed right away before now, they will give you a little more time on it. Obviously there's a little less buyers for land in DC, but not as many fewer buyers as you might think.

Southern Cal, Seattle I'd say probably pretty steady. Land values increasing probably as fast as rents, if not faster.

Okay, appreciate it.

I'll take our next question from Rich Anderson from Mizuho Securities.

Thanks, good morning. Good afternoon, excuse me. Tim, at the start of the call you said you were keeping an eye on starts activity. It could have another leg up.

Can you say how and where AvalonBay would be prepared to react in a situation like that? In order of priority what would you do? I know you mentioned more low-rise development, more suburban development. What else might Avalon do to react to a rising pace of supply growth in your markets?

Rich, a couple things. The point I was trying to make, a lot of times it's contained by capital, the amount of supply you see in a market. Given what's happened in the public market, as well as private markets, we're seeing equity be more confident about apartment fundamentals.

A couple other things to offer about supply. It has been, since the late 1980s, remarkably stable. I think a big part of that has been really one of the equity requirements. But too, the money equity requiring the sponsor to co-invest, which does limit the amount any one sponsor can do on their own balance sheet. I think that's had a meaningful impact in terms of keeping it relatively stable.

A lot of us just got back from ULI. Pretty much everybody there that you talk to are expecting to do about the same next year as they did this year and the year before, in terms of starts. So you're not hearing a lot of people saying -- I'm going to ramp way up or just cut it off.

There are a few people starting to get a little concerned about construction costs. Maybe not quite as sanguine on the markets as they have been. But overall, a picture of stabilizing supply feels like the expected case from our perspective.

As it relates to what we would do in terms of ramping up, ramping down, again it comes back it to-- it happens in a more organic way, in terms of looking at it on a deal-by-deal basis. We could always increase our target return thresholds, which would maybe choke off the amount of new deals we might see. Or we can lower them.

In terms of what would cause us to lower them, you would have to have a pretty different point of view about the trajectory of the economy. And perhaps maybe a view that housing supplies are just not going to be able to keep up in terms with that growth.

That's not where we are at today, that's not our point of view. But I think that's probably what you'd have to believe in order to think about significantly ramping it up.

Okay, so self-policing in a way. But what about -- I was really thinking also about operationally. Would you be inclined to shift to a lesser aggressive rent growth policy and more protecting occupancy? I assume that would be the case, but how fast do you think you could turn that around? And do you think it will be necessary any time soon?

Rich, this is Sean. Let me mention a couple things, one on the operation side, but also in terms of transactions, just to provide, probably, a reasonable illustration here. The other thing that we think about is, to the extent that you are talking about more supply overall, relative to a supply goes in waves for different markets, is probably being a little more nimble on the trading side of the house.

Which we were here in DC over the last three years, where we sold about $500 million or so of assets before the reported numbers you started to see looked flat to even negative. And reallocating that capital elsewhere into other markets that were ramping up. Southern Cal development is an example and Northern Cal.

So to the extent that you see that choppy from market to market, we might be more opportunistic as it relates to trading. Then reenter a market when we think things have become more fairly valued. So that's one thing.

In terms of operations, yes, there's a number of different things we'd do. It's a laundry list of combat tactics, if you want to call it that, that's probably too long to share on this call. One of the main things we do is we do look at average lease duration and try to stretch that out by offering longer term leases, which we did here in the DC market, starting about 18 months ago.

I think our average lease duration, for example right now, in the Mid Atlantic, I think, is around 16 months, 15, 16 months. Versus before we started that effort it probably averaged closer to about 11.

You can only do so much of that in terms of what the customer is willing to accept. But you price it in a way that you try to get some penetration there and move that average lease duration out, so you can get through some of the big bulges in supply, which we continue to refine in all of our markets.

But particularly when you're a little more combat mode, you work heavily on that. That's probably the one main driver. And then you're always playing off in terms of occupancy and rate. Depending on the type of asset and where it's located and the impact on the customer base that you'll be attracting, you walk a fine line there from asset to asset.

Great. And just one quick follow-up on somewhat unrelated. But on Chrystie Place, I assume that you didn't think of the other strategy of buying out your partner, because you didn't want to over-leverage yourself to New York.

But was that the only reason? Or was there something about the asset that you think topped out from a valuation perspective?

Rich this is Sean. Just a couple comments, then Matt can chime in, as well. I think, first off, as you mentioned, we do have a pretty big presence in New York.

I think it's about 28% of the portfolio right now. So adding an asset of that size in its entirety would be a big chunk for us and inconsistent with the direction we were headed from an overall perspective.

The second factor is it is a joint venture situation. We own two assets across the street. We talked about do you redevelop it? Do you not redevelop it? And things of that sort.

So you start to get into some inherent conflicts and sometimes adventures, that it's easier to clean up when you're not 100% clear about which direction, which part of you want to go. And you might have a different view based on the portfolios that you have there versus your partner.

I think that probably had a little bit to do with it for both of us. As well as just timing in New York and the cap rates there. If you feel like you can trade that asset, call it, at a roughly 3% cap rate, that's pretty attractive capital overall.

Was there a condo? Is there a condo application for the buyer there, that you know of?

Not to our knowledge at this point, no.

Okay, thank you.

(Operator Instructions)

We'll take our next question from Ryan Peterson, Sandler O'Neill.

Yes, hey, just one clarification question. You noted earlier in the call that during the forward issuance your price was above NAV. Were you talking about your internal calculation of NAV?

Ryan, we don't publish our internal calculation. Just to clarify that and give a little more context, the reference was true to consensus NAV, which was in the high 140s at the time.

So we're not necessarily seeking to validate that NAV, but identify that as a reference point for when we are trying to look at the common equity market. Fundamentally, our development funding needs need to be met. And from an equity perspective, there were really only two choices from which to meet them.

One is in the transaction market and one is common equity market. When we look at tapping equity, we also look at the net issuance costs. We try to minimize them as best we can.

The reference to where we did the equity forward offering was about $156 per share, which was probably 5% or 6% above that consensus NAV number, and our discount was 2 5/8%. So in doing so, we were able to source equity capital from the common equity market at above consensus NAV on a net basis.

Okay, great, thanks. And then just one more question. It seems like in the back half of the year here, fundamentals accelerated, but the economy, while it's doing well, seems to be on the same kind of track. Can you give us some more color as to why you think that might be the case?

Ryan, It's Tim. I guess we have actual dispute whether we think the economy is on the same track as it had been. We think it's largely a function of an increase in job growth and income growth.

We are seeing decent wage and salary growth, which was a key assumption in our guidance this year, that we are going to start to see decent wage growth. I think over the last two months we've seen wage and salary growth over 5%, personal income growth over 4%, which is roughly consistent with the kind of rent growth that we're seeing in our markets right now.

We think that it's a good private sector job growth, you are seeing the complexion of those jobs be a little bit more weighted towards middle and higher income, which we hadn't seen earlier in the cycle. And those things are all good for a Company that tends to play at the higher end of the spectrum, if you will, from a pricing perspective.

Okay, great, thank you.

We'll take our next question from Tayo Okusanya from Jefferies & Company.

Yes, good afternoon. Just two quick questions from my end. The land purchases that were made in 3Q, could you just let us know where those purchases were made?

Sure, Tayo, this is Matt. I believe one of them was -- one of the starts was the deal in Framingham. And then one of them was actually in suburban Maryland, a deal that might start next year, a smallish garden field.

And third one was the new development that we added in the Riverside San Bernardino MSA. It's actually in Chino Hills. That was just added as a new development right this quarter. But the way land trades in Southern California that site's already got its first stage entitlements. You have to take the land down and then finish your CDs and get your final building permits. So that would be an expected start next year, likely.

Got it, that's helpful. And then in regards to the $200 million of asset sales on the contract, hoping to get a sense of, again, where you're selling assets and what pricing you're expecting.

We have two wholly-owned assets under contract. One is actually one of the legacy assets in Houston, that was part of the Archstone transaction, which is going to close here very shortly. The other one is in the Northeast that would close early in January. Cap rates on those assets, average is probably high 4%s.

Okay, great. Thank you very much.

We'll take our next question from Michael Salinsky from RBC Capital Management.

Hello. Two quick follow-ups. Sean, you gave a whole bunch of leasing statistics. What was the change in new leases and the change in renewals actually supporting the 4.3% rent change in the quarter?

Sure. Move ins were 3.1% and renewals were 5.4%, blended to 4.3% during Q3.

Okay that's helpful. And then second of all, Kevin, as we think about recycling for next year, does the forward equity issuance take equity off the table next year? Or will you need additional equity via asset sales? Or other means to fund the remaining portion there?

Sure, Mike. We are still early in the budget process, so we haven't formulated our sources and uses for next year. What we have indicated was that we plan on starting between $1 billion and $1.5 billion of new development.

We also have $600 million of debt that's coming due next year, most of that is in November. So we do have capital needs that are likely to approach $2 billion in total. The $700 million represents, obviously, just a portion of that capital need for next year.

To what degree we source the equity needs from other sources remains to be seen. What fraction of it comes in at debt. Those questions we'll be working through here over the next few months.

So I don't really have, at this point, any insight as to what the remaining capital next year will look like, and whether it may include equity from the transaction market or otherwise. Our plan is that $700 million is essentially earmarked for next year, even though we could potentially issue it now.

Okay, does the ATM, can you issue on the ATM without drawing down the forward equity? Or do you have to draw down the forward equity before you could issue on the ATM?

They're not linked. But the reality is we've got access to equity already today under the forward. So if we wanted fresh equity apart from the transaction market, as a practical matter we would go to the forward transaction.

Which is, obviously, Mike, which is effectively an ATM, the forward itself.

Appreciate the color. Thanks.

We'll take our last question from Karin Ford, KeyBanc Capital.

Hi, good afternoon. I wanted to ask about occupancy. It sounded like post quarter end, it had rebounded back up into the 96% range. Do you think you'll be able to, given the turnover trends and the acceptances of the rent increases you've seen, do you think you'll be able to hold that high occupancy level through the winter?

Karin, this is Sean. Based on where we are trending right now, October looks pretty good. But I'd say it's probably fair to say that we'll probably be in high 95%s to 96% range as we go through the fourth quarter. So it may not hold 96%.

Remember, we're pushing the rents pretty hard. And if we're going to get it, we're okay taking a little bit softer occupancy as we continue to move gross potential across the portfolio. Particularly in the forth quarter, which is normally seasonally weaker. So I'd say if you're running a model somewhere between 95.6%, 95.7% and 96%, in terms of overall economic occupancy that's the relevant range we would be targeting.

Great, thanks very much.

And we have no additional questions at this time.

Thank you, Operator. This is Tim. I want to thank everybody for being on the call today. I know we'll see many of you next week at NAREIT in Atlanta. Take care and have a good day. Thank you.

This concludes today's program. Thank you for your participation. You may disconnect at any time.