艾芙隆海灣社區公司 (AVB) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities' fourth quarter 2014 earnings conference call.

(Operator Instructions)

Your host for today's conference is Jason Reilley, Director of Investor Relations. Mr. Reilley, you may begin your conference, sir.

Thank you, Alan, and welcome to AvalonBay Communities' fourth-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 in the Company's Form 10-K and Form 10-Q filed with the SEC. As usual this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. This attachment is also available on our website at www.avalonbay.com/earnings. 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 fourth-quarter 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 all of us will be available for Q&A afterward. My comments will focus primarily on a summary of Q4 and the full-year 2014 results, a discussion of the outlook for 2015. And then I'll also drill down on development and the earnings NAV accretion coming from this platform.

Before we get started I'd like to take a moment to acknowledge the unfortunate event that occurred at our Edgewater, New Jersey community last week. As you know, a fire broke out at this community late the afternoon of January 21. One of the buildings containing 240 of the total 408 units was substantially destroyed. The other building containing 168 units was largely unaffected and reopened over the weekend for residents to return home. While we were relieved that there are only minor injuries to a handful of people, we are saddened by the displacement of over 200 households, including 3 of our own associates, who are unable to return home. Along with others in the community, we are working to help them begin the process of putting their lives back in order.

I'd like to just quickly acknowledge the extraordinary response of the firefighters and neighbors, state and local officials, the American Red Cross and many of our associates, who together worked tirelessly, with great bravery and care to help contain the fire and comfort those impacted by it. We are extremely grateful to them for their remarkable efforts. And lastly, I'd just like to thank many of you that have reached out to us over the last few days expressing your sympathies and support.

With that, I'd like to start on slide 4 and provide some highlights for the quarter and the year. Core FFO for the quarter was at around 7.5% and almost 9% for the full year. Same-store revenue growth came in at 4.1% for Q4, or 4.2% when you include the impact of redevelopment. We completed four communities in Q4, totaling $360 million at a 7.3% average projected yield -- initial yield. And for the year we completed $1.1 billion at an initial projected yield of 7.1%. We started another three communities in the quarter, bringing our full year to $1.3 billion. And lastly, we raised $400 million of new capital in the quarter through unsecured debt and the sale of non-core assets.

Turning to slide 5, we ended the year on a strong note, with year-over-year same-unit rent in Q4 up over 4%, well above the rate last year, more than 250 basis points above the same time last year. And the momentum is continuing into 2015, as January same-unit rents are growing around 5%, so getting us off to a solid start for the year.

Turning to slide 6, for the full year, as I mentioned before, we completed over $1.1 billion in new development. This development was actually completed at a basis of right around $275,000 a door, or about 25% lower than the estimated value of our stabilized portfolio, which averages 19 years of age. And at rents that are 7% higher than our existing portfolio, resulting in an estimated value creation on the order of $500 million, based upon current cap rates.

Turning to slide 7, the completions this year were geographically dispersed both East and West Coast, across most of our regions. Represented, really, a mix of product from high-rise to mid-rise to garden, to town home, and a mix of brands between Avalon and AVA. A couple on this slide that are worth noting are AVA 55 Ninth Street, which was a purpose-built AVA community, which is, upon stabilization, is worth about twice what our basis is. So it's worth well north of $200 million. And secondly, Avalon Mosaic, which is located at Fairfax, or the DC metro area, which is yielding above 8% upon stabilization in the soft DC metro area. So both those are really, I think, worth noting.

Moving onto slide 8, despite what we think is outstanding development performance and a long track record of success in this area, it's not clear that the market is currently rewarding us for this capability. Since the downturn, if you start on the left-hand side of this slide, portfolio performance is roughly in line, or even a bit stronger than the sector, when you look at same-store revenue and same-store NOI growth. And as you move over to the far right, that's translated into total shareholder return, which is about equivalent to the sector. So those two facts make sense together.

But then when you look at core FFO growth since the downturn, we've outperformed by almost 2,400 basis points there, which has been driven by capital allocation and our accretive development and most part, and importantly, with significantly less leverage. We think there's a bit of a disconnect between cash flow growth and total shareholder return. In effect we have suffered multiple compression while out-performing. It's a bit perplexing, but perhaps the market expects this pattern to reverse or maybe that the development cycle is fully played out, at least for this cycle. We believe that the cycle has additional legs, as we've talked about on past calls. And we think there's a lot more value to come through this capability.

So let's look forward to how we are viewing the year ahead, turning to slide 9 and I'll start with the earnings outlook. In many ways 2015 is expected to be a repeat, or sequel to 2014, but we are off to a stronger start to the year as compared to 2014. We are projecting core FFO growth of around 8.5%, driven in part by same-store NOI growth at 4.25% at the midpoint, or accounting for about half the projected core FFO growth. Which in turn is being driven largely by same-store rent growth, which is projected to be 3.5% to 4.5%. In addition, external growth through the development platform primarily is driving the other half of core FFO growth of 8.5%, with stabilizing development. As we are expecting to occupy roughly 3,500 new units, which is expected to generate almost $70 million of additional NOI.

Turning to slide 10, in our release we also announced a dividend increase last night of almost 8%, which has obviously been driven in part by the outlook that I just described in earnings. Since 2011 dividends are up 40%, so 40% in four years. And over the last 20 years-plus dividends have grown by 5.3% on a compounded basis. It's easy to forget sometimes in market swings like we have experienced recently, but dividends have actually accounted for almost two-thirds of our total return of 2,300% over the last 20 years. So roughly 1,500% of that 2,300% has come through dividends. Importantly, I think it underscores the accretion and growth embedded in our business model.

Turning now to slide 11, and I won't go through this whole slide, but suffice it to say the key macro factors driving the economy are decidedly pointing up. The risks appear to be just contained at this point largely to the public sector, on the fiscal side, in terms of continued deficits, although a bit more moderate. We think more importantly, just the potential impacts of shifts in monetary policy with any potential withdrawal or wind-down of the Fed stimulus introducing some uncertainty, potentially, to asset values, or even the long-term prospects for economic growth. But other than that, we see all factors pointing north.

Turning to slide 12, a big driver of our business obviously is job growth. We are projecting to see additional strength in our markets over 2014, with projected job growth ranging 2% to 3% across regions and being more evenly distributed than we have seen over the last couple of years beyond the tech centers of Northern California and Seattle, which we think bodes well, particularly for the Northeast and Southern California, which are more diverse economies. In addition, job growth is expected to continue to be stronger in younger age cohorts, which bodes well for our business, particularly in the peak millennials, which are age 23 to 25 prime renters.

Turning to slide 13, we also expect income growth to improve in 2015. We are expecting personal income to accelerate by about 200 basis points. A tightening labor market should result in leverage shifting to workers, particularly in knowledge-based jobs and for a college-educated workforce.

Looking now to supply on slide 14, completions are projected to increase in 2015, but are stabilizing and/or declining as we look into 2016. Multifamily starts, you can see in the upper right, have been leveling off over the last 12 to 18 months now. Overall, we are expecting to see completions average around 2% in our markets over the 2014 to 2016 time period, or roughly in line with job growth or housing demand. And then when you factor in apartment demand, should be further bolstered by favorable demographic growth, changing lifestyle patterns, as delayed lifecycle events extend average age of first-time homeownership. And any pent-up demands, which we estimate at roughly 1 million households still that could begin to unbundle. We expect fundamentals in the apartment space to remain very strong in 2015.

Shifting now to slide 15, so having these fundamentals translate into portfolio performance. As I mentioned earlier, we expect same-store revenue growth to average 3.5% to 4.5%, led once again by the West Coast in the 5% to 8% range, with Northern California again setting the pace, but with Southern California starting to come on strong. This past quarter, Southern California actually saw the highest sequential growth in our same-store portfolio. The Northeast is expected to be more in the 3% range. And New York and New Jersey, we expect that to be pretty broad-based across submarkets. And in Boston, we do expect suburbs to outperform as urban supply starts to come on line. The Mid-Atlantic, as we discussed, we do expect to lag again, although an improved job picture there may help to form a bottom in 2015.

Moving to slide 16, development underway is expected to stay in the $3 billion range, as we roughly start and complete about $1.2 billion, $1.3 billion at share.

Moving to slide 17, the [2,000] pipeline should remain disbursed geographically, as we are expecting starts to occur in every region. Should be more infill suburban than urban this year. Many of the deals are -- many of the ones shown here -- are tough to replicate in terms of opportunities or economics, including deals like the West Hollywood deal in LA in the top middle of the page, Great Neck in Long Island just below that, and then just to the left of that, Dogpatch in San Francisco. So all unique high-density infill suburban or urban communities.

Moving on to slide 18, our $3.7 billion development pipeline is fully funded at this point, yet has only delivered about $50 million of NOI on an annualized basis in Q4, which leaves roughly another $200 million of NOI or EBITDA to come. You get a general sense of that as you look at the right-hand side of the page, as those three boxes or sack bars to the right of that chart, really reflect the NOI that's yet still to come.

Moving onto slide 19, and as we look forward to our 2015 capital needs, over 50% of that capital is already in place. As a result, we only expect to have to raise net new capital of roughly $1.1 billion, which we expect to source primarily through unsecured debt and non-core asset sales, much like we did this past quarter when we raised $400 million through debt and asset sales.

Slide 20, we just thought it would be helpful to take a look back since the start of this cycle. When we started and raised roughly about $5.5 billion worth of capital and invested that, or committed that, into new development. For deals that have had leasing to date, we have been achieving yields with average spreads over cap rates of roughly 250 basis points, which accounts for roughly about $22 per share in NAV growth, which is depicted on the right-hand side in that table.

Lastly on slide 21, our options to capitalize new development starts going forward are varied and all remain attractive, with debt and asset sales being the most attractive relative to historical precedent in terms of debt being more attractive only 2% of the time, and asset sales 12% of the time. Although equity still is also attractive, but frankly not necessarily needed, given our balance sheet and the growing EBITDA that we expect to come through from the development pipeline. As we discussed before, we will continue to monitor and source capital depending upon relative costs, our balance sheet position and our overall outlook on the apartment and capital markets.

So in summary, I guess I would say 2014 was another solid year of growth for the Company. As expected, the markets gained strength as the year progressed, generating solid earnings growth from the existing portfolio. And the development platform, as I've just mentioned, has generated outsize earnings and NAV accretion. And for 2015, we expect more of the same, as we are here mid-cycle. And we're off to a solid start with a strong demand supporting apartment market fundamentals. We believe we are exceptionally well positioned in stable markets with a robust development pipeline that should deliver additional earnings and NAV growth.

With that, operator, ready to open up the call for Q&A.

(Operator Instructions)

Nick Joseph, Citigroup.

Thanks. Tim, you talked about the development pipeline and how much value creation you've had through the cycle so far, and maybe did not rolling through to the multiple with the market pricing that we're into further to the development cycle. You mentioned in the management letter that we're mid-cycle. So I'm wondering how much longer do you think we will be in mid-cycle and when can we expect you to take your foot off the gas in terms of development?

Yes, Nick, in terms of how long the cycle might play out, as we have discussed in the past as we compare it to prior cycles, we think given the underlying economic fundamentals, the depth of the correction and where we currently stand relative to jobs, the amount of job growth that we have seen, as you mentioned, we think we are mid-cycle. If you look at accumulative rent growth so far this cycle, we have seen about 17%. In the 1990s, by contrast, we saw about 53%, 40 quarters. We are about 19 quarters into this current up-cycle.

So we think this could play out for a few more years. And then when you overlay the demographic growth, which should stay strong through 2020, we think there's some additional reasons why the apartment cycle, in particular, should be prolonged. And the second part of your question, Nick, was?

It was really that kind of --

Oh, in terms of -- Yes, I'm sorry -- in terms of the development pipeline, yes, as we have discussed in the past, we do expect it to start to drift down. While we are expecting to start about $1.5 billion year and for it to stay in the $3 billion range over the next couple of years, the development right pipeline is down about 15% on a year-over-year basis, as we haven't really been replenishing it as quickly as we have been drawing it down from a start standpoint.

Part of that is in terms of how attractive deals look between land cost and construction cost inflation, the going-in yields on the average deal generally aren't as compelling as they were last year, or the year before. Given where we are in the cycle, we would expect that to continue such that it's going -- as we get further and further into the cycle, less and less deals we will underwrite.

Thanks for that. And then you mentioned Southern California coming on strong, so I was wondering if you can give a couple more details in terms of what you're seeing on the ground there.

Sure. Why don't I let Sean address that.

Yes, Nick, it's Sean. In terms of the traction in Southern California, certainly the second half of 2014 things came on strong. As job growth continued to accelerate in that region, supply has and remains, very well in check relative to the rest of the country.

And so as you look through the different markets, we thought at some point we would see that acceleration, as we have talked about over the past couple of years has certainly kicked in. And it did kick in all three major regions, LA, Orange County and San Diego.

We were probably a little more surprised that it kicked in as fast as it did and as strong as it did in San Diego. But I'd say in the other two regions, you could see it starting to build, the momentum building.

And rent change has really moved up pretty dramatically there. If you look at where we are trending in January as an example, we are in the 5% range, north of 5% on a blended basis in Southern California, which is only behind Northern Cal and where we are trending in Seattle right now.

And if you look across the markets, it's generally pretty evenly distributed, slightly stronger in Orange County as compared to LA and San Diego. But all three markets are producing solid momentum at the moment. And as Tim pointed out, the sequential change was the strongest of any of the markets in the last quarter.

Great, thanks for all the details.

Sure.

Andrew Rosivach with Goldman Sachs.

Good afternoon, guys, thanks for taking my question. I apologize, this may not be the best format for this, but when I talk about or pitch Avalon to clients, I highlight a ton of earnings growth outside of same-store, particularly for development.

And I got on my screen right now the last 20 years. Just to give you some numbers, you were 7.6% NOI, 18% FFO growth in 2012. The year I could get closest to now was 2005, you were 4.2% NOI growth, you were 12.12% on FFO.

This year you're calling for 4% on NOI but only 8% on FFO. I guess the question is, is your business model no longer going to have the same kind of leveraged external FFO growth as it's had in the past?

Andrew, this is Tim. It's hard to parse it in just any one year, to be honest. A lot of it has to do with the ramp-up and ramp-down. Sometimes you actually benefit when you're starting to do one or the other, in terms of how capitalized interest works relative to expense interest. And conversely as you're starting to draw down any extra inventories, as you're starting to reduce the overall development.

But if you look at, as I mentioned in my remarks, at 8.5%, you call it roughly half of that, or 4%, 4.25% attributable to NOI, we wouldn't expect on a steady-state basis to get 8% or 10% from the development platform. If you run the math on $1 billion or $1.2 billion, that you get a couple hundred, 200 to 300 basis points of accretion on, what you might expect over time is to get 3% or 4%.

But when you look at it over a long period of time, over a 20-year period, we basically have grown FFO at around 7%. And we have grown NOI just over 3%, 3.5%, you get the benefit of some free cash flow that you invest. But those are the numbers. And as you get to mid-cycle, we would expect those numbers to more or less be in line with that.

I guess the last thing I would say is we have been more disciplined around match funding this cycle, which does bring the full cost of permanent capital into the picture a little earlier than when you're funding it off the line. So that would be the other fact I would point out.

The challenges, and you guys talked about it on slide 8, you show your past. The problem is the guidance that you're giving now, if the consensus is correct, Avalon is going to have about the same earnings growth as the rest of the REIT sector. And I appreciate you're taking low risk.

The problem is if your own comment on being mid-cycle is right, and we still have multiple years of revenue growth ahead of us, the companies that run with more leverage and a smaller development pipeline are still going to have very competitive growth rates relative to Avalon. I don't know if you guys have thought about that.

Yes, Andrew, this is Kevin. It is something we do think about and talk about and are aware of. If you go back to the mid-2000s, there was a several-year period where those who had higher leverage experienced higher FFO growth.

I guess, to dovetail with Tim's remarks when we think about our development platform and how we want to fund it, and how we want to fund the business, we do think about the full business cycle and trying to outperform over the full business cycle. And it's always easier to add leverage than to take it back down at a time when you're late in the cycle and capital costs are rising against you and can potentially rise against you pretty quickly.

So there is a, it's called, if you will, a short-term cost, if you will, for being more match funded. But over a full cycle, we think that it's actually an accretive funding strategy.

I appreciate that. I would just say like for example, and, Kevin, you and I have been back and forth on your cash balance for long time. But you increased your cash balance by $200 million over last year. You put a 4% cost on that, that's $0.07 a share.

And $0.07 a share was literally the mid-point of your guidance versus the Street. And your stock's off today, it's impacting your cost of capital. And I guess my question is, did $200 million of extra cash, is that really ruining the integrity of your balance sheet?

I don't know that it's necessarily impacting our cost of capital across all the markets in which we fund, because I don't think, number one, it impacts asset sales or unsecured debt. What you're suggesting is whether it impacts our cost of equity. And I think there's probably a number of different things that can bear upon that besides the one variable you're pointing out.

$200 million in a liquid market is not a lot of money to go find. In a highly illiquid market it can be hard to find and expensive to obtain. And you only have to consider some of the dilutive equity offerings that were done by a number of REITs in 2009, and the permanent impairment that that brings to bear on your total returns and your ability to deliver out-performance over the cycle, to think about what the implications are about getting a little bit out over your skis.

You're right, we've talked about the cash balance and so forth. As you can see in our outlook for this year, we do think we have reached a point where we can run with less cash. And actually with an unrestricted cash on hand of over $500 million, we anticipate drawing that down here rather briskly early in the year to the extent of $350 million, with an implied year-end cash balance of around $150 million at the end of this year.

What is driving that is really the notion of we think we are more comfortable being -- right now we are a little bit more than 100% match funded if you bring into the effect the equity forward. As we pull that down and roll through the year, we think we will probably be more like 70% to 80% match funded. And we are comfortable with having that level position and running with a little bit less cash, because as Tim pointed out, we've got a lot more NOI to come online with the construction that's underway and in the process of being leased up.

And Andrew maybe --

All right, I'll yield the floor because I think others probably have questions. But you know what would really be helpful, Kevin, you've probably REITs do this, if you guys have ever thought about a three-year plan, and if there's a lack of better word, light at the end of the tunnel, or there's a year where there's a lease-up versus capped interest which is impacting numbers, other apartment REITs have started to put it out, and I think it actually would be more helpful for Avalon than anybody else.

All right, Andrew, thank you. Thanks for that comment. I guess the last thing I would say and then just cut this off, we are obviously managing the business for the long term. It's one of the reasons why we look back from 2010 to 2014.

We have still outperformed on a cash flow basis by 2,400 basis points a sector. And then when you look it over a 20-year period, it's about 400 basis points compounded annually in terms of out-performance on a cash flow growth standpoint.

When you're building FFO from $1.60 20 years ago to $7.35 20 years later, $0.07 isn't going to move the needle a whole lot in the long run. I guess I'll make that the last word. Did you have any other questions before we move on?

No, I appreciate your comments. Thank you.

Thank you.

Jana Galan, Bank of America.

Thank you. I was hoping you could provide more color on your Metro New York outlook. The boroughs and New Jersey are expected to go out of supply in 2015. Do you expect Manhattan to offset that? Or do you expect strong absorption metro-wide?

Yes, Jana, this is Sean. I will make comments and then Matt or Tim can chime in as well. In terms of Metro New York, New Jersey for us is an accumulation of a lot of different markets. So certainly if you're putting New Jersey in that, you've got the Northern New Jersey market as well as us being in Central New Jersey.

Northern New Jersey, we are expecting a fair amount of supply coming on line, particularly as you get into Hudson County and right along the waterfront there, all the way across the Gold Coast, as they refer to it. So there's a fair amount coming in there.

When you look at Long Island, it's a little more protected. And then as you get into Westchester, it's a little more protected as well. And as you get into the City, and you start going across, really where we are expecting the most supply to come on line is really in Brooklyn, and then in the Midtown West submarket of Manhattan.

Those are the two places where we are expecting it to be a little bit softer if you're looking at within the Greater New York market. Which submarkets are going to be a little bit softer, I would say those two are going to be relatively soft compared to the other markets that I just mentioned.

But it's not dramatically different. We are talking about 50 basis points on one side or the other, depending on which market you're looking at. So without providing specific details for every single market, since it's a pretty large region, hopefully that general color will make some sense to you.

Thank you. And then quickly on development. Do you get any benefit from lower oil and construction materials costs?

Hi, Jana, this is Matt. I wouldn't expect a lot. This is one of those things where, when all prices go up, the subs will use it as an excuse to raise pricing to us. And then when oil prices go down, we hear, well, it's mostly the labor.

The truth is, by and large, what drives construction cost is the labor cost and the subcontractor margin. And that's really a function of how busy folks are. And folks are busy in all of our regions other than Metro DC, they're busier now than now than they were last year.

So I don't expect -- perhaps it keeps a little bit of pressure on the margin off of some of the commodities pricing, which ultimately feeds into the cost basis a bit. But I don't think it's going to have a material impact.

Thank you.

Steve Sakwa, Evercore ISI.

Great, thanks. This is actually Derek on for Steve. Going back to the markets and touching on DC, it seems like you guys are calling for slight improvement next year. Can you talk if that's driven by any particular market or region? And if you could talk about what the growth spread might be between Northern Virginia inside the district this year.

Sure, Derek, this is Sean. In terms of the performance of DC, I think the punch line is we are not expecting it to be materially different. Our outlook reflects maybe a slight improvement as it relates to what Tim alluded to earlier, in terms of improved job growth in the region overall.

There are some nuances with very specific assets that really make up the shift from 2014 to 2015. So I wouldn't say there's a significant either improvement or deterioration in any one specific submarket in 2015 relative to 2014, other than with the exception that as you look at NoMa and DC, the inventory that's going to be delivered there in 2015 is substantially more than 2014. That's probably the one place that I would highlight.

But as you look at Northern Virginia, Western Fairfax is still outperforming. The RV corridor is soft. If you go into suburban Maryland, North Bethesda, Rockville, Gaithersburg, is all pretty soft. As you get further out into Columbia, it's performing a little bit better.

So it's really a function of where the assets are positioned within their submarkets. That really matters probably more at this point, maybe with the exception of NoMa, where the supply is overwhelming at this point. And I think most all asset classes are impacted.

Got it, thanks. And then going back to development funding, I appreciate your development needs for this year are fully funded. But as you think about 2016 starts, should we start to expect you to begin to pre-fund some of those commitments later this year?

Derek, it's Kevin. It is premature to really think about how we are going to fund 2016 activities at this point. And as a minor clarification, while more than half of our capital needs are addressed and in place relative to development activity, we still do anticipate sourcing $1.1 million of incremental capital, either from the transaction markets or the capital markets, over the course of the year. So at this point our focus is really on thinking through how to best source that capital over the balance of 2015.

Got it, thank you. And then I need projected yields, or maybe yields today, on the $1.5 billion of starts scheduled for this year.

Yes, this is Matt. It's pretty much holding in the mid-6%s. I think that's where our pipeline has been averaging. Our development rights pipeline has been running that level for the last couple of years, give or take. And it looks like the starts basket for 2015, the way it's underwritten at least today, probably goes in at that same mid-6%s level.

Okay, appreciate it, thank you.

Nick Yulico with UBS.

Thanks. Tim, as I read through the management letter, there's a lot of positive talk in there. And I'm trying to relate that back to your guidance, because you talk about apartment fundamentals strengthening during 2014, yields on your pipeline, continuing to get better. We have a stronger economy this year. You're projecting job growth to accelerate, be closer to the US average as far as your markets now catching up to US average.

And yet your same-store revenue guidance calls for a modest increase over 2014. So what I'm wondering is if demand is improving so much, why isn't your same-store forecast even more bullish? Is supply the big problem here? Or are you just being conservative about certain markets picking up?

Yes, Nick, I think you hit it. As I mentioned in my remarks, we are looking at 2015 to be elevated in terms of supply, but be roughly matched with demand. And so both years, both 2014 and 2015, we've have talked about rising supply matched by demand.

And we see the same thing playing out in 2015. So honestly, I guess I would be surprised if our projections would be much different, based upon those underlying fundamentals, than what we experienced in 2014.

So if we go back to what happened in 2014, you had the apartment REITS generally raising guidance. You had people's forecast from Axiometrics and others get better throughout the year.

And most people pointed to job growth getting better. If job growth continues to pick up here, is that the biggest impact for how fundamentals could be even better for you guys or the industry this year?

I think job growth is the biggest piece of it, yes. As I mentioned in my remarks, we still think there's a lot of pent-up demand out there. It's just the last couple of years, when you look at the number of young adults still living at home, that's flattened.

But we do expect at some point, as confidence rises and they start to move on with their lives, that they are going to start to form households. And that could create some additional demand that the economy and the housing market may not be able to address as quickly. So I think those are the two areas that would lead to potentially an upside surprise.

All right. Thanks for that.

Yes.

Rich Anderson, Mizuho Securities.

Thanks. I just have one question, most of mine have been asked. When you formulated your outlook, did you take into account at all declining oil? I know it's been brought up about your development costs, but what about just disposal income and a quasi tax cut that could arguably affect your entire portfolio, since you don't have anything in Houston. Any comments on that? Or is that just gravy potential for the future?

I'll start and maybe, Sean, you want to jump in. Personal income, that's why we pull it out, is a big driver of our models. It's not necessarily disposable income. It really speaks more to the changing balance in the job market more than anything else.

But perhaps you do get a little bit of lift from additional disposable income relative to falling oil rates. But Sean, I don't know if you have anything to add.

Rich, the only thing else to add is certainly we have scrubbed that pretty hard as it relates to our utilities expense. But when you get down to it, I mean oil really only drives about 2% of the heat and demand across our portfolio.

Most of it relates to natural gas, which had started to decline much earlier than oil did. And there are other factors influencing the price of natural gas, independent of oil. And so that's one area we scrub pretty hard.

And then certainly we haven't seen it bleed through in terms of construction costs, as Matt mentioned earlier. There may be a small pickup there at some point, but we are not expecting that to be material in the current market environment.

I was thinking more about someone who doesn't have to pay $3 to fill their tank but $1.75.

Absolutely. As Tim mentioned, that's reflected in the personal income forecast that we rely on.

Oh, I see, okay.

But to the extent that those forecasts are off, that certainly could be helpful on the other side of the coin to the extent that rate of job growth slows as a result of reduced capital spending in that sector. Yes, it doesn't impact us as much as maybe some others, given our market footprint. But there could be some ripple effects there that could go the other way.

Okay, great, thank you.

Alex Goldfarb with Sandler O'Neill.

Good afternoon, just a few questions here. The first one is just going -- Tim, I appreciate the total return analysis that you guys provided. But if we look on an NAV basis, you guys are trading (technical difficulty) up near similar to like an EQR Essex, which I think you guys would consider certainly a peer group.

You spoke about maintaining a $3 billion development program for the next few years, which obviously it requires additional incremental capital. Even if you guys are -- well not even -- if you guys are good at developing and delivering the returns, perhaps the market is just pushing back on the capital it knows is coming.

So is there consideration to maybe paring the pipeline down to maybe $2 billion in the next year or so? Maybe just kick out some of those projects that may not look as attractive right now? And maybe let some of the in-place NOI and the development NOI deliver to the story to help the stock's performance? Is that something that you guys would consider?

Alex, not really, not as long as the development we view as accretive to what the incremental cost of new capital is. I think the alternative that we think about is just recycling more capital as opposed to raising additional external capital.

As I mentioned in our remarks, we are looking to rely more on asset sales and debt, in part because where the balance sheet is positioned today at 5.2 debt to EBITDA. And if you think about that $200 million of EBITDA that hadn't materialized yet, just the extra borrowing power that gives.

And assuming we are mid-cycle and underlying cash flows on a stabilized portfolio continues to grow, it does give us a lot of funding options without having to really lever the balance sheet in any material way. But then we always have the option of recycling capital and selling more assets and recycling that back into development.

So fair question on your part. I think what's going to drive down the development pipeline is when we just don't think that business makes sense relative to our underlying cost of capital.

True. But obviously as you sell assets, you lose that NOI, so there's a net wash. Second question is, as far as the Edgewater is concerned and the implications, obviously the media has been abuzz, and there was some press down out of Princeton. Do you think that any of what may happen could slow down or delay any projects? Or your experience in the past with dealing with tragic incidents like this, is that obviously a lot of thought goes into these codes, and therefore as people review them, everything, hopefully what's there is fine.

Yes, this is Matt. I guess I can speak to that a little bit. I think you're right in the sense that we have been developing as a public company for 20 years. And codes evolve, codes change over time. The product changes and evolves over time. Technologies change.

And so I think this is a very unfortunate incident. It is very fortunate that there was no loss of life, but nevertheless, there was an awful lot of property damage. And so time will tell how it plays out, but it is certainly part of the overall process that codes evolve and change over time and continually refine and improve. And we are pretty adept at adapting to that.

Thank you.

Dan Oppenheim, Zelman and Associates.

Great, thanks very much. Good job highlighting the development portfolio and what you've been doing there. Wondering in term of the AVA projects, given they've come in so well ahead of expectations, do you think you will increase their share of future developments knowing it's clearly difficult to get land for those but how do you think about that?

Yes, Dan, this is Matt again. AVA, as a percentage of our portfolio, it is growing as we develop. It's about, I think, a quarter of our development pipeline. So we look at in a couple of years AVA should be about 10%, 11% of the total portfolio. I think it's about 7% today by value.

So it is growing, but it really is a bottom-up opportunity set. You have to go through market by market and see where the opportunities are. They do tend to be more urban product.

So I wouldn't expect their share of the development rights pipeline to necessarily grow dramatically from here, because what we are seeing as we get more mid-cycle, is that we are generally shifting our focus a little bit more to suburban assets. And because the economics are getting tougher in the urban areas, that's where you're seeing a lot more of the supply. Land prices have probably run up more aggressively in the urban submarkets than the suburban submarkets.

It's driven bottom-up by the opportunity set. And the ones you're seeing now, like AVA 55 Ninth, those were started early-cycle in some markets that have seen a lot of rent growth. And also delivered a product that was very unique and well received by the market.

And we think, well positioned to outperform, not just in the lease-up, but over time because of the distinctive nature of the product. We love the brand, we'd love to grow it more, but I think it's unlikely that it's going to become a materially bigger part of our development pipeline in the next year or two than it has been.

Sure. And then in terms of operating expenses in the guidance, you're looking for lower expense growth in 2015 than in 2014. Clearly some of the taxes, repair and maintenance, were a little bit high, if we look at 2014 and thinking it will be better in 2015. Is it some key metric there, one of those issues that's going to be driving it lower? What are you thinking about turnover, given that we are already low, as more supply could lead to a bit more turnover there?

Yes, Dan, it's Sean. First acknowledge 2014, there's definitely a lot of noise in 2014. Particularly look at it a tale of two buckets, where there was significant pressure on the Avalon portfolio as it relates to taxes, a maintenance cost that was unexpected due to a number of different factors that occurred in the first quarter of the year and the fourth quarter of the year, et cetera, et cetera.

So as we look forward to 2015, a lot of those anomalies our sense is, certainly going to dissipate. But really what's driving 2015, if you look at it pretty basically, is property taxes. Our expectation is that for 2015 we are probably going to be in the mid-5% range for taxes, that's one of the primarily drivers.

And then the second one I had mentioned is payroll. We are basically in a cycle now where we think we are probably looking at wage growth that's in the 3% range, as an example. And that's about 90% of our total payroll cost.

But we are getting pretty material upward pressure on benefits, which is only about 10% of our cost of payroll, but we are anticipating benefits to go up by about 10%. So you're adding 100 basis points there. So you're probably going to be in the high-3%s on payroll by the time you consider the wage growth and the benefits burden. And then you've got taxes moving up.

So you're talking about just those two components alone, being north of 50% of what likely is our expense growth for 2015. The rest of it's pretty nominal in terms of growth. So those are the two big drivers as we think about 2015.

Thanks for the color.

Yes.

Vincent Chao, Deutsche Bank.

Good afternoon, everyone. Just wanted to touch on the comment about some of the impacts to expenses in 2014, one of which was in the first quarter in terms of just the weather and conditions like that. I'm curious, relative to the full-year outlook, do you expect the first quarter same-store NOI growth to be significantly higher as we normalize those expenses and then moderate over the course of the year? I think it was about 110 basis point hit to same-store NOI in the first quarter of last year.

Yes, this is Sean. In terms of the spread, what I probably would comment on specifically is obviously we are not through the first quarter, but we had elevated OpEx spend in the first quarter of last year as it relates to a couple different things.

One is related to the snow removal in the Mid-Atlantic, which is something that we don't necessarily contract for in bulk; it's more episodic in terms of how we purchase that. As compared to the New England where it is bought in bulk. And then utilities also put significant pressure on the first quarter of last year.

So if you isolate those two, I wouldn't expect to have inflated Q1 growth as it relates to those two components. And then the other piece that we identified last year for everyone, is we expected 2014 OpEx in total to be a little bit elevated as a result of the Archstone acquisition, where the first 12 months you can capitalize certain things and then it's expensed.

That expired mid-year so you're going to have some offsets from that. So I don't have the exact numbers right off the top of my head in terms of what those components add up to, but we can certainly talk you through that offline as well, if you'd like.

Sure, that would be helpful. And then just one other question, going back to the very positive economic outlook for the year, in terms of improving job growth and rising wage inflation. I'm sure you don't want to get into the habit of projecting interest rates, but curious given that positive view, particularly around wage inflation, how are you expecting or thinking about interest rates trending over the balance of the year here?

Vincent, it's Tim. Honestly, given the length of fed stimulus that we have seen, and I guess a shared belief in the markets that at some point that's going to have to reverse itself. That's part of the reason why we have stayed as match funded as we have been.

Rather than trying to predict rates, we really try to manage the business to try to isolate the impact of them, as it relates to our open commitments, particularly through the development pipeline. At some point rates are going to go up. We have stopped trying to predict when they might, but we are trying to manage our business to protect ourselves when they do.

Okay, thanks a lot.

Dave Bragg, Green Street Advisors.

Thank you, good afternoon. Can you discuss your plans to use JV capital for development? I don't think we have seen this from Avalon in some time. So is it part of a broader effort to do more JVs? Or is it a one-off project-specific deal?

Yes, Dave, this is Matt. It's the latter. There's two deals in particular that we expect to start this year. One of them was land that was promised in a legacy JV structure going back to the Archstone acquisition.

The other is just a very unique site that happens that the way we structured the deal was to leave the landfiller in as JV partner. That's what they wanted and we generally try and avoid that, but for special sites we'll consider it. So it's more of a one-off.

Okay, thanks for that. And you happen to have several assets in Texas right now through the Archstone deal. Given all of the focus that's being placed on the Texas transaction market and especially Houston, can you share your observations on your efforts to sell those assets?

Yes, it's Matt again. Ask us in a couple quarters. We closed one in the fourth quarter that was contracted for in the third quarter, where there was incredibly deep demand. That was an early 1990's era asset in the area of Memorial Heights.

So we have two assets left in Houston. They were both deals that were under development when we closed the Archstone transaction. We completed both of those and we are planning on bringing those to market. In fact one of them, I believe, is just launching in the market now. So we will have a much better sense in three or four months.

And have you seen any volatility just as you began that process of launching that sale?

No, it's really too early to say.

I don't think there's really much on the market at this point, Dave. The most you get from brokers is nothing has changed in the last three weeks. I think we will see it as we start to see those assets brought to market in Q1. So it's a good question, but I don't think we have any visibility on that yet.

Okay, understood. Last question just relates to your acquisition appetite. You have shared a lot regarding the returns that are available via development, but how do acquisitions stack up in your mind? And what sort of returns do you look for there relative to development to even get yourself interested?

Dave, I guess the way I would say it, at this point in the cycle we look at acquisitions really as portfolio management, opportunities. So as we talk about it internally it's about -- if we see an asset that we think is particularly attractive that might outperform other stabilized assets from a long-term perspective, and would help us from a portfolio balance standpoint, we ask ourselves which asset would we sell in order to fund that.

It's really, if you look at our history, we try to be aggressive early in the cycle where we think there's a lot of run with acquisitions, and have tended to be more recyclers of capital, net recyclers of capital. And then if you look over the history, ex-Archstone we have been a net seller over time and recycled that into development.

So it's hard to separate it from our business model. We don't necessarily look at it because we are trading at a premium NAV we should be expanding the balance sheet aggressively to buy mid-, late-cycle assets that may not have as much room to run. It's really more of a portfolio management exercise.

Okay, thanks for that.

(Operator Instructions)

Haendel St Juste, Morgan Stanley.

Good afternoon, thanks for taking my question. Tim, you mentioned rising supplies as a key risk as you look at 2015. Curious what else is on that list as you look ahead? And specifically how you're thinking about the prospects for a recovery in the single-family housing market as a risk?

We have seen robust single-family housing starts estimates out there calling for 20% plus of year-over-year starts. Home builders seem to be more willing to offer incentives. We're seeing slowly improving mortgage credit availability.

Potentially this paints a picture for a more competitive for-sale housing market as a headwind. So I'm curious what you're thinking about that.

Yes, Haendel, sort of mixed feelings about single-family housing. I think our general view is if it starts to heat up, it creates crosswinds for our business, in a sense that it typically contributes to economic growth as the single-family housing industry kicks up.

As we have talked about in past quarters, when you look at total housing production of 1 million against a back drop of what we think is going to be closer to 1.5 million net household formation, and when you factor in all sorts of -- it's got to grow at some point here over the next few years. Our underlying forecasts are really for more balanced housing demand. It's much like we saw from 1975 to 1995 where both businesses were very healthy for the most part, and homeownership rates didn't change that much.

We don't anticipate, when you just look at underlying demographics and how people are living. I think you have single person head-of-households now making up the majority of US households. They are generally not looking for a four-bedroom single-family home in the suburbs.

So I just think there are reasons other than the housing bust as to why what's happening right now with the single-family housing business. It's not going to reverse itself in 2015 and 2016. So while there might be some additional strength, we don't see it having a big impact on our business in any kind of negative way.

So we don't see that as a risk. The risk that we worry about are the big geopolitical macro things that you can't do anything about, that have a way of creating shocks in the economy and impacting growth that ultimately translates into job and income growth.

Appreciate that. Sean, maybe one for you. Curious on what you're seeing and thinking about LA. Clearly that market has lagged the Bay Area for much of the past, almost the past decade, really.

And while we are seeing some green shoots of recovery with the pickup again seen in the recent quarter, job and wage growth there has materially lagged the Bay Area. So is it a reversion to the mean story and affordability, perhaps, on rental versus home buying? Would appreciate some thoughts on the key drivers for the LA recovery and how much more upside you think that area, MSA has?

Sure. I'll make a few comments and then Tim, Matt, or others can join in as well if they like. As it relates to LA, LA is pretty highly correlated with the national economy, very broad-based, diversified economy. Think of all the different sectors, as compared to the Bay Area you pointed out, much more highly concentrated in the tech space. There's certainly a substantial number of jobs in the tech space in Southern California, but as a percentage of the overall job market there, it's substantially smaller.

And so it certainly has revved up as the national economy has revved up. Certainly you would think it has a pretty good outlook and we do, just based on the volume of supply you can put on the ground there. It has and remains, as I mentioned earlier, the market or the region with the lowest amount of supply projected to come on line again in 2015.

And then the other benefit that it has, even though it's not as unaffordable as, say, San Francisco, as you go across Los Angeles and look at the median income relative to median home price, it is still relatively unaffordable. And so I think all three regions, LA, Orange County and San Diego, we feel pretty good about as we look forward over the next couple of years.

And as it relates to LA specifically, it's just a function of, I think, where you are. If you're in downtown Los Angeles, you're probably a little more nervous than you might be if you're on the West Side, as an example, or the South Bay or some of those other submarkets.

So in general, the outlook is positive for us. It's never had the same kind of cycle as Northern California in terms of the volatility. It's more the tortoise versus the hare story, but it is coming back and it's coming back pretty strong.

How do you think LA stacks up in 2015 versus San Diego and Orange County?

Our outlook for LA is more robust as it relates to San Diego, and slightly behind Orange County. Orange County has had great momentum, we've got a lot of built-in growth in that market.

There are a couple of pockets in Orange County that if you have higher-end assets in Anaheim or Irvine, you might be a little bit nervous, given the volume of supply coming on line in those two specific submarkets. But a lot of our portfolio in Orange County is more affordable assets in certain submarkets that are more protected. And they are performing quite well.

So as we look at those particular assets and their performance, I think they are going to carry the day in Orange County. San Diego is a smaller portfolio for us but generally also consistent with Orange County, lower price-point assets and they continue to perform well also.

Thank you.

Sure.

Tayo Okusanya, Jefferies.

Yes, good afternoon. Just a quick follow up in regards to the discussion on operating expenses. Just curious in regards to 1Q 2015 and the recent snowstorm whether that changes your view in regards to what snow removal expenses could look like in 1Q 2015 relative to 1Q 2014? Or whether because it's just a one-off storm that you still feel there will be some net benefits or positive variances between the two quarters.

Yes, Tayo, this is Sean. Based on what we know today, I wouldn't say that Q1 of 2015 is going to look like Q1 of 2014. Certainly it's one storm, concentrated in the northeast, which as I mentioned for the most part is under contract, fix-priced contract as it relates to snow removal.

Where we probably have more exposure is if we had a massive storm in the Mid-Atlantic, where that's more of a, call it, pay-as-you-go in terms of the snow removal strategy here. And then it hasn't been as cold for as long. But obviously we are talking about this on January 29, so we've got some time to run here to see how it comes out. But based on what I know today just the current storm, I wouldn't be too worried about it.

That's helpful. And then again on Edgewater and the unfortunate incident there. Is there a sense yet of what the Company ultimately plans to do? And the current residents that are displaced, are they being absorbed into nearby AvalonBay communities? Or what's the situation there with those tenants?

Yes, Tayo, this is Sean. I'll make a couple of comments and then Kevin or Matt can chime in as well. But first as it relates to the existing community and the residents, as Tim mentioned in his prepared remarks, one of the two buildings, the smaller building has come back on line and is reopened.

That was certified by the city last week. So residents have re-occupied that building, which is the smaller of the two buildings.

And as it relates to the residents who were displaced from their homes at the larger building, which is known as the Russell Building, they have dispersed to other communities, both ours and others. Some of those residents are also still in temporary housing, whether that be a hotel or friends or family, et cetera.

And then the last part of your question as it relates to our plans for Edgewater, we have not made any specific plans at this point as it relates to any kind of rebuilding. We are still working in the investigation and understanding mode. And then ultimately we will turn towards what those next steps are at some point down the road here.

Thank you very much.

Neil Malkin, RBC Capital Markets.

Hey, guys. I was just wondering as you look at your same-store portfolio and how that's constituted, what if any, is the difference between what the non-same-store portfolio growth rate would look like for revenues in 2015 versus same-store? Is there a big difference? Is it meaningful? I don't know if you looked at it that way, if you could talk about that?

Yes. We could probably get back to you with more detail. I mean, in general what you would expect is that there's several different buckets out there.

Sure.

Same-store obviously development is separate with a lot of different things happening in development in terms of when deals come in on line. So it's not a bucket that you at all really want to compare to same-store.

The other two main buckets are redevelopment and other stabilized. Redevelopment is growing at a slightly faster rate than same-store. And I think when we have looked at it for 2015, the equivalent is it would add, say, 10 or 20 basis points to the same-store growth rate.

So it's growing faster but it's a relatively small bucket relative to the base, in terms of the redeveloping contribution. And then the other stabilized, I don't have the detail right in front of me in terms of the growth rate on that specific bucket, but we can certainly send it to you.

Okay, great. And then as it goes for your revenue guidance for 2015, what kind of new lease and renewals have you baked into your assumptions? And what -- I don't know if you gave what new lease and renewals have been to date in January, and then what you're sending out in February and March are, but if I can get those, that would be great as well. Thank you.

Yes, why don't I give you a few data points. That would probably help you with what you're trying to solve for. We mentioned both in the management letter and in Tim's remarks, the Q4 rent change was 4.3% on the same-store bucket, which is about [260] basis points above Q4 of last year.

January is trending into the low-5% range. Last time I looked, last couple of days here, it's been around 5.2% or so. And then renewal offers for February and March are going out at around 7%, which is about 225 basis points greater than where we were at this time last year.

And then in terms of thinking about rent change for the year, one comment to make is that we are not expecting 2015 to be terribly different from 2014, as Tim alluded to, for all the different factors that are out there. We started the year, if you look at January gross potential and what we are billing, we started the year with embedded growth of 1.6% to 1.7%.

So if nothing else changed in terms of rent growth through the year, that would be baked. So you could back into, based on the mid-point of our guidance, what the rent change would be implied throughout the year to get to the overall mid-point, if that makes sense.

Sure. All right, thank you.

Yes.

It appears there are no further questions at this time. Mr. Naughton, I'd like to turn the conference back to you for any additional or closing remarks, sir.

Thank you, and thanks all of you for being on today. We look forward to seeing you at some of the upcoming conferences this winter and spring.

And that does conclude today's conference. Ladies and gentlemen, I'd like to thank you for your participation. You may now disconnect.