艾芙隆海灣社區公司 (AVB) 2015 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to AvalonBay Communities' first-quarter 2015 earnings conference call.

(Operator Instructions)

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

Thank you Augusta, and welcome to AvalonBay Communities' first-quarter 2015 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. A discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the Company's form 10-K and form 10-Q filed with the SEC.

As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms which may be used in today's discussion. The attachment is available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I will turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities, for his remarks. Tim?

Thanks Jason. Welcome to our first-quarter call. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. We will each provide some comments on the slides that we posted this morning and then be available for Q&A afterwards.

Our comments will include a summary of Q1 results. We will highlight a few areas of focus that we discussed in connection with the Archstone acquisition that closed a couple years ago but are now starting to pay off for the Company, including an increased presence in Southern California, greater efficiencies from increased scale and expansion and enhancement of important strategic capabilities. Lastly, we will touch on the development funding and activity.

Starting on slide 4, overall results in Q1 were largely as expected for our business plan, and we're off to a strong start as we enter the peak leasing season this spring and summer. Highlights for the quarter include a core FFO growth of around 7.5%, which was consistent with what we saw in Q4 of last year. Same-store revenue growth was up 4.3% over Q1 of last year or 4.4% when you include redevelopment, which are both about 20 basis points higher than we saw in Q4.

We completed three communities totaling $450 million this past quarter at an initial yield of just over 6%. And while that yield is a bit lower than other recent completions, 60% of that capital represents West Chelsea in Manhattan where cap rates have been in the low 3% range, and the other 40% are assets in LA and Seattle where cap rates are currently in the 4% to 4.5% range.

So we're still seeing a significant level of NAV accretion from these completions with margins that have been consistent with other completions of this cycle. We also started two communities in Q1 totaling about $100 million, and we back filled the pipeline with new development rights of over $400 million or roughly a couple hundred million once you net out projects we decided to abandon at the end of last year.

Moving on in turning to slide 5, our same-store portfolios continue to accelerate in early 2015. Year-over-year same unit rent is up 5% to 6% in the first four months of the year. Faster pace than we saw in Q4 and roughly 250 basis points to 350 basis points higher than the same period last year.

This is actually the strongest rent growth we've seen in the first quarter of the year over the last couple of cycles. So the portfolio is well positioned going into the peak leasing season with renewal offers for May and June actually going out in the mid to high 7% range.

Clearly strong portfolio performance is being driven by healthy apartment fundamentals, which takes us to slide 6. As you see over the last several quarters and I'm sure you know, job growth has been north of 2% nationally or over 260,000 jobs per month. And it's been even stronger in the young adult cohort, or the 25- to 34-year-olds, who are our prime renters as you can see there on the upper right on chart 2.

More recently, household formation appears to be rebounding as you see in chart 3, the upper half showing signs of the release of pent-up demand that many have been expecting since the recovery began. The strong demand against a backdrop of stable housing production over the last several quarters at least in the multifamily sectors you can see in chart 4 is resulting in rental vacancies that are approaching 30-year lows as chart 5 shows. And effective rental rate growth that is at or above what we saw early in the cycle, so we've seen a really nice acceleration really going back to Q4 of 2013 and effective rent growth.

Turning to slide 7, strong fundamentals are expected to be more evenly enjoyed across our footprint over the next couple years of the cycle. Over the past four years as you see on the left-hand graph, the West has outperformed significantly, driven by strong job and income growth in the technology markets of Northern California and Seattle while supply's been modest in most markets, particularly in the Bay Area.

Over the next couple years, we expect job growth to be more evenly distributed as more parts of the economy join in on the economic expansion. Secondly, we do expect supply to increase in Seattle and Northern California, and as a result, performance differences between regions should begin to narrow, including in the DC area where performance has lagged over the last couple of years. Conversely Southern California is projected to enjoy the largest disparity in favorable demand greater than new supply over the next couple of years.

Turning to slide 8, this expectation for regional performance to narrow as the cycle matures is consistent with what we've seen historically where the West has generally outperformed early in the cycle during the recovery and early expansion periods. And then performance often converges with East Coast markets as the cycle matures. To be clear we're not calling the top to the West. It's just that we expect performance trends to begin to narrow between the East and West as we move further into the cycle.

Inevitably, relative market performance will ebb and flow and market leadership will rotate. As I mentioned before for example, the DC should begin to rise from the bottom and narrow the performance gap we've seen with other regions. And Southern California should become a top performer in the portfolio.

And with that, that's probably a good segue to talk a little bit more about Southern California. And I'd like to ask Matt to touch on our efforts over the last couple years and how we expect that to bear fruit over the next few years. Matt?

Thanks Tim. As we mentioned at the time that we announced the Archstone transaction back in late 2012, the Archstone acquisition really helps us achieve our long-term portfolio allocation goals.

Slide 9 shows how the geographic distribution of our NOI across our six regions has changed over the past few years, primarily as a result of the addition of the Archstone asset but also due to a lot of organic growth from the legacy AVB platform as our development activity ramps up early in the cycle. The region that has seen the greatest growth is Southern California, which grew from 14.5% to 19.6% of consolidated NOI over the last few years.

We have been underallocated to this region for many years and have always been challenged to increase our exposure to the broadly diversified economy and consistent long-term performance that Southern California has delivered for us for decades. By growing our presence here, we were also able to move relative allocation in the East from 50% to 38% of our NOI, which provides better long-term balance.

Turning to slide 10, you can see how momentum has really been building in our Southern California portfolio over the past five quarters with year-over-year revenue growth increasing each quarter. Right now, we're seeing market rents in all of the Southern California subregions accelerate into the 6% range on a year-over-year basis. We're well positioned for another strong year of same-store revenue growth in Southern California, and that growth will contribute more to overall revenue growth for the Company given our increased allocation to this region.

Looking more closely at where our portfolio growth has occurred across the region, slide 11 shows the locations of our communities with the size of the dots proportional to the size of each property. There are a lot of distinct submarkets within the sprawling geography of Southern California. We've increased our presence in all three of the subregions -- Los Angeles, Orange County and San Diego -- with particular concentrations in the Tri-Cities area of Pasadena, Glendale, Burbank and the 101 Corridor from Woodland Hills out to Thousand Oaks.

Of course for us, it's a lot more exciting to see the actual product than to look at dots on a map, which is why we included slide 12 to give you a sense of the variety and quality of product we're adding to the portfolio in this region. The top row shows some of our larger stabilized assets including Avalon Studio City, which is an 827-unit community acquired from Archstone located right next door to many of the production studios in Burbank.

The middle row features some of our recent redevelopment including AVA Burbank which is one of the oldest assets in the portfolio. This asset was originally constructed in 1961 but has been completely transformed and energized by the introduction of the AVA brand.

And the bottom row includes three of our current development communities, including Avalon West Hollywood which is a real flagship property which will feature a Trader Joe's grocery store on the ground floor and 294 apartments above right on Santa Monica Boulevard. We were aggressive about getting shovels in the ground early in the cycle, and all of these development communities have a tremendous base as to current cap rates and current replacement costs.

Thanks, Matt. At the time of the Archstone acquisition, we talked about some of the benefits of the scale, namely G&A and operating efficiencies as well as the expansion and enhancement of important strategic capabilities. Sean's going to take a few minutes to provide a few examples of what we've been able to achieve in these areas. Sean?

Thanks Tim. Shifting gears now, we thought it would be helpful to talk a little bit about the efficiency and effectiveness of our operating platform, and maybe along the way highlight some initiatives that will continue to enhance our operating performance in the future.

So starting with slide 13, these metrics reflect not only the benefits associated with our larger scale, but also our ability to deliver more cash flow per dollar of revenue generated from the portfolio over time. The chart on the left reflects our operating overhead, which includes G& A as a percentage of NOI both in 2007 and what's expected for 2015.

While our portfolio NOI has increased about 250% from organic growth, new development and the Archstone acquisition, we've been able to contain operating overhead growth to about 20% of the rate of NOI expansion over the total eight-year period. The net result is that overhead is now only 7% of NOI, down about 500 basis points or 40% from 2007 levels.

The chart on the right reflects our same-store NOI margins in 2007 and what's projected for 2015. Margins have expanded by about 200 basis points over the last eight years to 70%, putting us essentially at the top of the multifamily sector.

And when you think about our NOI margins, you really have to remember two important facts. First, we have not enhanced our margins by simply reshaping the portfolio, that is exiting lower-rent markets and acquiring assets in the higher-rent coastal markets.

And second, rental rates declined during the financial crisis and economic downturn which put pressure on operating margins. In fact, if you look at the rent levels today compared to where they were in 2007, the CAGR over the past eight years is only about 3%, which is well below current growth rates.

Moving now to slide 14, I thought I would highlight one or two initiatives that have made us more efficient and will continue to pay dividends in the future. This slide highlights a couple of the benefits associated with our recent investments in proprietary technology, specifically our prospect and resident portals. These new platforms came online mid last year and have enhanced not only the efficiency of our operating platform but also provided a better product to our customers.

Leads generated through our new prospect portal has increased by 300 basis points to 27% of all leads today. At the same time, our costs associated with other forms of Internet advertising has declined by about 28%.

In terms of the new resident portal, enhanced functionality has helped us become more efficient with certain back-office functions. Online resident payments are now about 90% of total payments, up 12.5% since 2013, and maintenance requests or service requests received online are up to about 50% of all requests, which is an increase of two thirds since 2013.

If you move on to slide 15, I'd like to share a few facts about our customer care center located in Virginia Beach, Virginia, which we view as the best in the business and a real competitive advantage for us. We have about 225 associates located at the center, and about 70% of them take customer service calls and execute transactions that would've been done on site at our communities in the past. For example, posting rent, processing moveouts, et cetera.

The cost per transaction is lower than it would've been at the communities because our highly trained customer care associates can handle a much greater volume than any one individual at a property. And these associates are continuously measured and monitored based on their efficiency and effectiveness of processing transactions. The remaining associates handle other corporate functions --accounts payable, cash management, payroll, et cetera.

So I'd highlight that we continue to expand our capabilities at the customer care center with a unique focus on functions that are scalable and a centralized environment and for which we can reduce the cost per transaction by bringing it in-house. One example of a new capability is reflected in the chart on the right side of the slide, collections.

About two years ago, we developed a collections capability at the center which is not easy given the regulatory constraints across all the states within which we operate. We believed, however, that we could materially reduce the cost of collections if we did it ourselves. And if you fast-forward to today, our team is currently collecting about 35% of our total bad debt in-house, which has resulted in a net benefit of about $2 million per year.

The benefit reflects the reduced third-party collection fees or commissions that we would've paid, offset by the overhead associated with our collections team in Virginia Beach. We expect to realize an even greater benefit as we take on more of our bad debt collections in-house. And we also think there are additional opportunities to expand our capabilities at the customer care center, and we will continue to leverage it to our advantage in the future.

So hopefully that provides an overview of some of our operational metrics and initiatives. And now I will turn it back to Tim.

Thanks Sean. As Sean mentioned, we've been able to reduce costs significantly from the system over the last cycle. Part of that's from scale, but importantly part of it's from reengineering how we conduct and operate our business.

Lastly, I thought we'd just take a few minutes and highlight development activity and funding which we believe together position us for outsized NAV and FFO growth in the next two years while being able to maintain a very strong financial position. Kevin, do you want to take this?

Thanks Tim. Turning to slide 16, we highlight the current performance of the five communities under construction that are in lease-up. As you can see from the slide, the performance of communities undergoing initial lease-up is quite strong and continues to exceed our original underwriting expectations.

Specifically for these five communities which represent $455 million in total capital cost, the current weighted average monthly rent per home is $215 or about 9% above initial expectations. In terms of yield performance, the weighted average initial projected stabilized yield for these communities is projected at 6.9% or 60 basis points higher than our original projection of 6.3% for these communities.

Turning to slide 17, our development activity remains well-funded today. In fact, as of quarter end, our development underway of $3.6 billion was completely match funded by the combination of $2.5 billion in capital spent to date plus over $1.1 billion from cash on hand, projected free cash flow, and our equity. As a result, funding risk for this investment activity is essentially eliminated while the opportunity to realize a substantial amount of value creation as these communities are stabilized has been locked in for our shareholders.

Turning to slide 18, this slide demonstrates more clearly how our being match funded on this investment activity leaves us exceptionally well positioned from both the cash flow growth and credit perspective. In particular, the projected NOI from recently completed development and from development under construction totals about $225 million on an annualized basis as shown in the chart on the left. This represents more than a 20% growth in our annualized adjusted EBITDA for the last quarter.

Moreover, to give insight on how this projected EBITDA growth enhances our leverage metrics particularly given that no incremental capital is needed to complete construction. The chart on the right shows how our ratio of net debt to adjusted EBITDA for the first quarter would have declined from 5.9 times to 5.0 times assuming this projected EBITDA from our development underway had been in place during the first quarter.

Of course, our actual net debt to adjusted EBITDA will move up and down a bit over time as we start new projects and source new capital to fund these new projects. Therefore, this slide is not meant to communicate that our leverage is going to decrease to 5 times or that our target leverage is 5 times. In fact, our target range for this metric is between 5 and 6 times.

Instead, the purpose in showing this slide is to convey that unfunded commitments which happen to be zero today but more often will be positive in the future should be evaluated in tandem with the projected EBITDA growth from ongoing investment activity. And as we stand today, funding risk is very low on development underway, and the profit opportunity is relatively high, reflecting two important attributes of our combined investment of funding strategy.

First, the fact that our investment activity is expected to be accretive both to earnings and balance sheet strength. Second, that this cycle continues to offer compelling value creation opportunities for development-focused apartment REIT such as AvalonBay. And with that, I will turn it back to Tim.

Thanks Kevin. Obviously we're off to a strong start in Q1 to the year. As expected, our stabilized portfolio continued to strengthen in the quarter propelled by some of the strongest apartment market fundamentals we've seen over the last several cycles. The development portfolio's contributing meaningfully as Kevin just spoke to in providing additional earnings and NAV growth.

And importantly, actions that we took early in what we predicted would be a strong and durable cycle are paying off, including the starting and funding of over $5 billion of new development since 2010, acquiring another plus or minus $6 billion in stabilized and development assets in the Archstone transaction in late 2012, early 2013, and investing in important strategic capabilities which are driving efficiencies and improving the scalability of our operating platform. All these actions are positioning us to take advantage of what we believe can be a long and sustained expansion period for the current apartment cycle and help us achieve outsized growth. And with that, Augusta, we'd be happy to open the line for questions.

Thank you.

(Operator Instructions)

Nick Joseph with Citi.

I'm trying to reconcile 1Q same-store revenue growth at 4.3% to the growth you saw in January and February. I think in early March at our conference, year-to-date same-store revenue growth was 4.4% to 4.5%. And from the presentation, the March rent change actually accelerated in terms of the spread year over year from February. So what drove the reduction of growth for the quarter relative to where you were in early March?

Hey Nick. This is Tim. You're correct. When we met at the Citigroup conference, we gave a mid-quarter update and we said our expectation would be we'd be at the top end of the range for the year for the quarter, being 4.4% to 4.5%. The reality is numbers like [4.3%], [4.4%], and some of it's on the non-rental revenue side that gets rolled up at the end of the quarter. So really nothing is different than what we expected and anticipated in early March when we met and spoke with investors at your conference.

Okay, thanks. So in terms of DC, it looks like the quarterly year-over-year growth was the strongest you've seen since mid-2013. Can you talk more about what you're seeing on the ground there and expectations for the rest of the year?

Sure Nick, this is Sean. In terms of DC from a broader perspective, it's certainly still a weak market relative to other markets. And there's still a fair amount of supply coming online. Expectations for 2015 are still for supply growth somewhere in the mid 3% range. But what has improved certainly is job growth is now running closer to 1%.

So it's in a position now where from a macro perspective across the region, we're seeing some improvements. And as you think about it in terms of the three markets, the District, suburban Virginia, suburban Maryland, it does depend on the nature of your portfolio, whether it's higher price point or lower price point and the distribution within the submarkets of each one of those markets. But for us at least, right now DC is performing the best and is producing slightly positive revenue growth and rent change.

The two weaker markets are suburban Virginia and suburban Maryland with suburban Maryland being the weakest right now particularly given all the deliveries that are coming through in Rockville, Bethesda, Chevy Chase, all in that area. But if you look at in terms of maybe trends from the first quarter and what we're seeing in the second quarter, the first quarter rent change across the region overall was basically around flat.

But as you move into the second quarter, it's trending slightly positive to the tune of about 100 basis points in terms of blended rent change. So we're seeing that second derivative move positively but at a relatively slow pace, and I'd say with still a fair amount of risk given the supply that's being delivered in the region relative to the anticipated job growth.

Great. Thanks.

Jana Galan with Bank of America Merrill Lynch.

Thank you, good morning. Your turnover continues to decline, and we saw the first quarter homeownership rate drop below 64%. I was wondering how long do you think you will continue to see turnover decline and how that's helping your expenses and then any changes in reasons for moveouts.

Sure Jana, this is Sean. In terms of predicting turnover, a little bit difficult to predict. It's really a function of I'd say job mobility probably first and foremost as well as choices in terms of -- within a local market what choices people have. If they feel like they have more choices at the right price, it influences turnover.

And the reason I say that is relocation is still the top reason for moveout in our portfolio and runs around 20. I think that's consistent with most REITs. So if people are relocating for job reasons, et cetera, that really tends to influence the total amount of turnover.

And then on the other topics, home purchases still running well below long-term averages in the range of 13%. And has been pretty flat, not really moved much. It's down a little bit year over year but not really moving the needle.

And then the other reasons are really financial including rent increases as well as inter community transfers. Rent increases tends to run a little bit higher, closer to 16% to 18%. At this point the cycle, you expect it to be trending upwards.

But in terms of actually predicting what turnover will be, it's a function of the macro variables that I mentioned. And so we're not yet at a point where we're predicting it, but given what we're seeing across the portfolio as well is what's happening in the single-family market and the production levels, it's not far-fetched to assume that turnover will remain below historical averages for the next few quarters for sure.

Maybe just add to that, as Sean mentioned, moveouts and home purchases have been relatively stable, and it's been our expectation that homeownership rates are going to stabilize roughly in this area in the 64%, 65% range. So we don't really have a view that homeownership rates are going down meaningfully from here. It's been our view that you are going to see more of a balanced housing picture over the next few years as the housing markets continue to recover.

And a lot of that's being driven by some of the things we've been talking about, which is demographics and lifestyle behavior in terms of what type of housing choice fits best the need of the emerging population. So we do expect it to be more balanced in the next few years.

Thank you. And then just maybe on the southern California, expense savings this quarter seemed very impressive. I think some of that might have been benefiting from tax appeals, but maybe if you could talk to what else is in there.

This is Sean. That's exactly right. The main benefit that came through in the first quarter was a successful appeal of an asset in Southern California. And that represented the majority of what you're seeing there in terms of the expense change.

Thank you.

Dan Oppenheim with Zelman & Associates.

Just wondering if you could talk a little bit in terms of expectations for some of the pricing where you talked about the best start in terms rental growth at the start of the year relative to some prior cycles. As you think about the balance across the regions, do you think this accelerates further as the mid-Atlantic and Northeast gradually improve? How are you thinking about that overall in terms of the rental rate power?

Sure. This is Sean. Just a few comments on that. From a macro perspective certainly across the market, pricing power is improving at this point.

Tim alluded to the rent change in his prepared remarks not only for the first quarter, which trended higher in each month of the first quarter, but also continued to trend higher into April. We're on a blended basis, we're running at about the 6% range.

And I guess the way I'd describe it is we're seeing increased pricing power across all the markets, but the rate of acceleration is slightly different. The rate of acceleration is probably the strongest right now in Southern California as well as northern California. Those two markets. Northern California obviously has been a discussion point for several quarters now in terms of the momentum there.

And it will be interesting as we move later in the year and more supply comes online, particularly in the submarket of San Francisco and Northeast San Jose whether that starts to throttle back a little bit of the pace in northern California which we saw a couple years ago when we saw bulleted supply come through San Jose. Southern California job growth has certainly ramped up, and supply remains pretty muted relative to other markets. And if you look at a place like Orange County, job growth has really made the difference there where it's up closer to 2% over the last six months.

And so while there's still a meaningful amount of supply coming in on certain submarkets there, Huntington Beach, Anaheim, et cetera, Irvine, the job growth has really caught up to a point where it's pretty healthy. So the momentum in northern California is strong, Southern California is strong.

On the East Coast market, the mid-Atlantic is certainly helpful to see a pickup, and I mentioned that essentially rent change was flat in first quarter. It's positive about 100 points from the second quarter.

And I think it's just going to be touch and go in the mid-Atlantic over the course of the next year depending on how job growth comes out. But assuming we maintain or accelerate on the job front in the mid-Atlantic markets, we know what the supply is going to be likely to see pricing power consistent with what we're experiencing now to potentially slightly better as you move through the year, particular as the household formations start to come through consistent with what's forecasted for 2015.

So really as you talk through the markets, it depends on where you're located, what your exposure is within certain submarkets to supply, et cetera. But in general, pricing power is continuing to improve at different rates across the footprint.

Tim here, just to add a little bit to part of your question I think. Generally the West Coast -- if you look historically has just been more volatile, and the East Coast has been more stable. So as the East Coast has tended to outperform later in the cycle, it's really been -- it's been less about it accelerating past the West Coast and more about it being a stabilizer relative to more volatile performance on the West Coast.

I think it's a little bit of an open question how things may play out this cycle. As you saw on the one chart, if household formation really does recover to the 1.5 million plus range and housing production levels really just don't respond in a material way quickly, we're already seeing rental vacancy rates, 30-year lows, you're seeing ownership vacancy rates approaching longer-term norms. You get another couple quarters of household formation we think we've seen, I think there could be a shortage -- an acceleration in impact potentially all market from a pricing perspective whether that's for sale or on the rental side.

Great. And just looking at the chart where you're showing the new versus the move in on page 5, showing the improvement in the new move-in rental rates, certainly positive there. Just thinking about the renewals especially on the West Coast where the overall growth has been the strongest, how much are you pushing the renewals? Is there any caution about pushing too much and driving turnover higher there?

This is Sean. I mean certainly a conversation we have all the time in terms of optimizing the performance of the portfolio, but at this point, we feel pretty comfortable that we're handling it in a way that's not only optimizing the performance, but also is based on what we think the customers' reaction will likely be given available choices within their specific submarket and general geography.

In one thing to keep in mind is people focus a lot on the renewal numbers versus the move-in rent change. You really have to look at it on a blended basis because it depends on if you're talking about the same unit rent change when the last person moved in if they moved in five years ago, it's very different potential rent if they're coming out five years later as compared to someone who's been there two years. So if you look at it on a blended basis, it's probably more appropriate.

And the other thing we look at is how wide is the gap getting between the absolute rent that a customer is paying as they move into an apartment relative to someone who is renewing in that same apartment in the same community, and that spread today on an absolute basis is only about 2%. So when you think about it, it's not that wide in terms of existing customers going to a website and looking at pricing for their particular apartment home for someone who is moving in. And obviously they have switching costs in terms of their move and everything else.

So that's a relatively reasonable spread, 2%. We'd probably be a little more concerned if that number was approaching 5% as an example, but across the portfolio, I think we're in pretty good shape on that.

Nick Yulico of UBS.

Thanks. Tim, I was hoping to start off with the guidance again. I mean, you guys are at the high-end year-to-date on same-store revenue, above on same-store NOI.

You talked about really good trends so far and even in April. So how do we balance that against you guys not deciding to raise guidance? Is there something in the back half of the year that you're concerned about, or are you just want to take a wait-and-see approach for another quarter?

Yes. Nick, first of all, the first quarter more or less played out the way that we expected, particularly as it relates to the top line. That alone wouldn't drive a need to rethink our outlook at this point.

And we are moving into the peak leasing season, and while we're well-positioned and we're off to a strong start, we're going to have a lot more visibility midyear. And that's typically when we do a more robust reforecast process and reopen the property budgets if you will.

I feel like we will be in a much better position to give the investor and analyst community a sense of where we think we're going to end up for the year. So we're neither changing nor affirming outlook at this point, but we would look to do so midyear.

Okay. And then on the development pipeline, two questions. One is should we assume the forward gets settled all in the third quarter? And then how are you thinking about funding the next wave of development?

I think you guys were saying you could do $1.4 billion in starts this year. Would you consider another forward? How are you thinking about that over the next couple quarters from a funding standpoint? Thanks.

Sure Nick, this is Kevin. I guess there's a few questions in there. First as it relates to when we draw capital down under the equity forward, as I think we indicated in the fourth-quarter call, our expectation is that we do so in the second and third quarters.

Really no new news on that front. It's somewhat dependent on what we do in terms of incremental capital activity going forward over the next couple quarters. Otherwise in terms of disposition activity and raising debt capital pursuant to our capital plan, that could affect the timing there.

I think it's fair to assume that probably at least two thirds of it would be in the third quarter, and a third or less would be in the second quarter, but that number bounces around quite a bit. In there, what we're looking at is just trying to balance cash on hand and minimizing our costs under -- interest expense costs under our line a credit with our other activity in the capital market front.

The second question, just to answer that, it might be helpful just to give a refresh on our capital plan for the year. If you look back at our initial outlook, we had total sourcing uses of $2.35 billion, and in terms of the sources, we had cash on hand and an expected drawdown on unrestricted cash account for about $600 million of that.

As you probably noticed, we drew down cash by $300 million during the quarter to fund Columbus Circle, so that has happened as planned. That left us with about $1.75 billion of external capital in our capital plan for the year. About $650 million of that relates to forward which we just talked about, leaving $1.1 billion.

We sold one asset, Stamford Harbor, in the first quarter. So that leaves about $1 billion of net incremental capital which we expect to source predominantly in the form of unsecured debt and the balance in the sale of assets.

Those are our thoughts regarding the capital plan for the year. I guess the final question is what is our philosophy around the use of the forward? I know we used it for the first time at the end of last year.

The reality is we've been aware of the forward for probably more than five years as a tool that was in our toolkit if you will that we could potentially use to fund development. And as we talked about in the past, you need to have the right confluence of factors that would justify one to use it again. And certainly first and foremost is the expectation of elevated funding needs for development.

We certainly had that this year or have that this year. We saw that by the middle of last year being something we wanted to think about. As we disclosed in our initial outlook, we expect to spend $1.7 billion on development and redevelopment activity.

That's a cyclical high for us so far this cycle and a meaningful amount of capital. And that really informed our view about wanting to be more like 100% match funded rather than being more like call it 75% match funded, which is where we've really been for the most part throughout this cycle.

So it's something it's a tool in our toolkit. It's something we can potentially use, but it's not something we necessarily feel like we need to use all the time but really needs to be driven more by unusual confluence of factors with elevated funding needs being the most important.

Okay. Thanks guys.

Haendel St. Juste of Morgan Stanley.

Good morning. A couple questions here on development. So first, you guys started a couple projects, two that I'd characterize as ex-urban or well outside the core of the MSAs, your Hunt Chase and Lynnwood projects. And you're not seemingly slowing down on your development pace as much in a time period where your peers are slowing more.

So specific to these two projects, what is it about these projects that makes you excited, especially in light of the suburban Maryland weakness comments? Are you giving yourself to capitalize on the perceived pent-up demand in the suburbs, and if so, how much more of your near-term development starts could be more suburban in nature versus urban?

This is Matt. I can speak to that one. It was actually a light quarter for us for starts, $100 million, and we're on track to start $1.3 billion, $1.5 billion for the year. That is obviously a very small portion of our development activity plans for the year.

The Alderwood deal was just a second phase of the deal that actually completed this quarter, and that deal completed at a yield of around a [7%]. And again Seattle market, even in suburban Seattle, that's probably a mid [4%s] cap.

So that's incredibly compelling value creation, second- phase incremental economics. We just phased that deal, phased the land takedown which was great.

The other one that we started this quarter, Hunt Valley, that's a bit of a unique asset for us. It is a suburban location, but it's a transit-oriented suburban location. It's actually at the end of the rail line, it's right next to a Wegmans, it's an old mall that has been turned into a town center, and it's a submarket that has seen no new supply for probably 30 years.

So in some ways, it's a lot like our older northeastern stuff where we're bringing a luxury product to a submarket that has very high homeownership costs and very high-end homes up in that area as well as a decent amount of employment, a lot of other amenities, but just hasn't seen luxury rentals. So we're actually creating a bit of market there, and we don't get that opportunity very often. It also increases our exposure a little bit to the Baltimore Metropolitan area, which has done quite well with cycle and where we're probably a little bit underallocated in the long term.

But more broadly as we look out over our starts for the year, and we have said over the last year or so that we are starting to see our suburban assets perform a little better than our urban assets. And I think you're seeing that in general just because the supply is so concentrated in the urban areas. And also the urban product tends to be more compelling economically if it can be done earlier in the cycle because it's generally higher capital cost when you get into concrete frame.

So when you look at our pipeline going forward, what's currently under construction is about 50% urban versus what's in the pipeline is probably about 25% urban. So it is more suburban than what we currently have underway.

But we actually have some near-term starts, we have near-term start actually in the District of Columbia that we expect to start here in the next quarter. So there's still a decent mix of product, and again, we're generally just driven by looking for where the best total risk-adjusted returns are in the market. And at this point in the cycle, that's where we're finding it.

I appreciate that. Another development type of question. It looks like we're seeing some moderation in certain key input costs, land price costs are going up but moderating, lumber and gypsum cost are coming down, wage growth is moderating as well. I wonder what you're seeing on that front and how you might be factoring that into -- these lower costs into your prospective project underwriting and new starts.

We would love to see some of that come through. The subcontractors have been holding onto it so far. Generally speaking, when we underwrite our business, we underwrite everything on a current spot basis, so we don't trend rents, we don't trend expenses and we don't trend capital cost. We say -- when we sign up a new deal, we say -- if we were building this project today, here's what it would cost us to build it and here's the NOI we would expect to get out of that.

And generally speaking, depending on where you are in the cycle, we may be looking for a higher or lower spread between where that yield is and where cap rates are. If we're in a market where it's earlier in the cycle where we think there's better rent growth ahead relative to cost growth, we might be willing to go in at least to the initial due diligence with the tighter margin than if it was the other way around.

But generally speaking, we're still seeing costs grow at a pretty rapid clip in most of our markets, and again, it's driven mostly by subcontractor, by labor availability which is getting tighter, and by subcontractor margins and just the volume of business out there. There's a lot of construction out there, the subs are busy, so they can afford to be pretty aggressive in the pricing they offer. And other than in Metro DC where they're probably coming off of more production ramping into less production and so they are a little hungrier, other than in DC, pretty much all of our other markets is going the other way still.

Okay, and the last one on Edgewater, I know you had a chance to go through the insurance assessment and recovery process. The $793,000 net loss figure you quote in the press release, is that the final figure? Could there be additional costs?

And any updated thoughts on your plan for that project going forward. If you determined if you're going to rebuild, sell, et cetera?

Yes. Haendel, this is Kevin. I will answer on the first part with respect to some of the costs. The $800,000 of costs that you see flowing through with respect to Edgewater were essentially our initial response costs with tenant displacements, fire watch, et cetera.

We will see what rolls forward there, probably are some modest costs but nothing very significant in that regard going forward since we're clearing the site and the other building has been reoccupied. So not much in the way of Edgewater-related costs that we expect.

In the quarter, what we did in the first quarter is we wrote off the net book value of the building that was destroyed, which was $22 million. It turned out the net third-party insurance proceeds that we'd received during the quarter was $22 million, so that was an offset. So that really had no impact on our financials for the quarter.

Going forward, we continue to work with the insurance companies on securing the balance of the insurance proceeds that we expect. In our initial outlook, we indicated that the loss -- the casualty loss was likely to be with respect to the destroyed building greater than $50 million where we have 12% self-insured exposure of about $6 million.

So we're still working on that, it's a matter of just working through the documentation and obtaining final signoff. And going forward, as we noted in our release, in the event that we receive additional insurance proceeds related to the casualty loss on Edgewater, those additional insurance proceeds would be reflected as a casualty gain, which would flow through an increase FFO but would be pulled out for core FFO purposes.

Haendel, Tim here. Just in terms of your second question, really our focus in terms of the site itself has really been on clearing the site and cleaning the site to date, also just some salvage efforts that have been undergoing in terms of trying to recover some items for former residents. As Kevin mentioned, obviously insurance process which includes trying to help facilitate the settling of resident claims.

We have been evaluating options for the site as well as it relates to rebuilding. There's obviously a number of physical issues to be considered there in terms of the structural capacity of the garage that remains. But there's also political issues that we understand we need to work through with the town in terms of what might rightly be able to be rebuilt there in terms of the form and structure.

And then lastly there is a lender on the site. It is subject to a credit pool that would need to be considered as part of it. So I'd say it's premature yet in terms of telling you what exactly our strategy is and timing around the resolution of the site, but something we're actively evaluating at the moment.

Okay. Thank you very much.

Rob Stevenson with Janney.

Good morning guys. Tim, can you talk about how robust the condo development and condo conversion process is in your core markets today?

Yes, Rob. Others may want to join in as well. I wouldn't say it's all that robust. You're certainly seeing some signs of it in New York and perhaps San Francisco.

There's -- if you just look at apartment valuations are relative to condo valuations or for sale valuations, it still really doesn't make sense in most cases to actually convert an asset to a condominium and take that market risk. And you're just not going to get enough compensation in order to do that.

I think in some cases, and DC may be an example where it actually does make sense to think about new ground-ip development, and certainly New York and San Francisco, that makes some sense. But we're just not seeing a lot of -- frankly a lot of unsolicited interest in our assets like we did in the mid-2000 to potentially convert.

It's pretty isolated I would tell you at this point. And it just makes sense when you go back and you track what apartment valuations have done over the last 10 to 15 years versus what for sale condominium values have done during that same timeframe. It's really going to be isolated at least over the next couple years to really micro locations and really one-off type opportunities.

Okay. And then when you look at your redevelopment pipeline today, what's the expected returns on that, and how much -- how many more projects do you expect to add to the pipeline this year?

Yes Rob, this is Sean. In terms of redevelopment, the pipeline is pretty plentiful, particularly given what we acquired from Archstone. And I think what we've indicated in the past is that we will probably start somewhere in the neighborhood of $100 million to $150 million year roughly in terms of redevelopment activity, some from the Avalon legacy assets but also a relatively high percentage of the Archstone assets would be in the pool.

In terms of the returns, the returns so far this cycle have been actually very healthy. And the way that we look at it is if you take the overall investment into the enhancements at the assets, we're typically looking at returns that are probably underwritten in the 10% to 12% range.

But actual results have been more in the mid-teens, and that excludes components like if you have to replace the roof as part of a development or something where you're not really getting an economic return. It's more like CapEx. But in terms of the actual redevelopment opportunity, kitchens and baths and other enhancements in common areas, underwritten again 10% to 12% and producing mid-teens recently.

Okay, and then last question, the 35 projects on the developments right page, how many of those are shovel ready today, and is there any issue or reason why you guys only started two this quarter? In terms of your thinking, is that that's what was available and that's where the yields were? Is there a situation where the starts are -- and some of the stuff that you're planning for the rest of the year backend weighted towards more urban complex deals, et cetera? Can you talk a little bit about that?

Sure Rob, this is Matt. No, pretty much when they are shovel ready, we generally tend to start them. So there are -- we're planning a fair number of starts this next quarter here in the second quarter.

And it just tends to work out that way. It's as much to do with weather is anything else. You wind up with generally speaking the deals in the pipeline. We're bidding them, we're finalizing the plans and permits.

When we get the final bid numbers and we find the economics satisfactory, we tend to start them. So I wouldn't read anything into that. Like I said this next quarter, we should have a pretty healthy amount of starts, and there isn't really anything in there that's ready to go that we're just sitting on.

Okay. Thanks guys.

John Kim with BMO Capital Markets.

I had a couple questions on your asset sale of Stamford Harbor. You provided the unlevered IRR of 11.9%. But can you also provide the leverage return given this one had mortgage debt and also maybe share some of the characteristics of the buyer?

Yes. This is Matt. We generally haven't provided those numbers. The deal was originally developed off the balance sheet, it was put into a pool in 2009.

So it's hard to isolate that. And the buyer I think was a private buyer. Folks that we've done other business with before. Regional player.

Where do you think your dispositions will come in this year versus your average run rate of $[380] million?

I think we provided some guidance at the beginning of the year with our outlook in terms of the total disposition volume.

This is Kevin. As I mentioned in my earlier remarks, I went through the capital plan that we announced at the beginning of the year, and much of that capital at least externally has yet to be formed apart from the equity forward and sale of Stamford Harbor. That leaves about $1 billion of net incremental capital pursuant to our initial plan for the year.

We don't break it out further than that other than to say that the predominant amount of that capital we expect will come in the form of unsecured debt, and the balance will be in this sale of assets, partly because we don't really want to be overly precise with respect to our anticipated debt capital markets activity by giving specific amounts, and plus because the capital markets conditions can change and the precise amount may change throughout the course of the year. But it will be mostly in the form of unsecured debt, at least that's our plan and hope, and the balance will be sale of assets.

Okay. Just a follow-up question on Edgewater. According to your disclosure, the lender of the mortgage debt can decide how you use the insurance proceeds whether or not to repay the loan or redevelop the asset. So if the lender chooses to redevelop, do you have a choice, and can you potentially change the scope of the project?

Yes. John, this is Kevin again. As Tim noted, we are still in discussions with respect to what the lender and also evaluating what our plans are for the asset. So it's a little bit early to say what's going to happen with respect to whether we're going to redevelop rebuild Edgewater and what's going to happen with our discussions with the lender.

Okay, and then just one final bigger-term question, but California continues to be very strong. At what point do you become concerned with the state's ongoing drought and maybe the potential impact on the economy?

I'm not sure. I'm not sure how to answer that really just in terms of the drought's potential impact on the economy.

Obviously it's affecting our properties in terms of we're subject to the same constraints that other homeowners are. Sean, you might want to just talk about that, but as it relates to its economic impact, it would be total wild speculation on our part.

John, this is Sean. There's been plenty of press out there about state mandated reductions in water usage and higher rates as a result of exceeding the 25% targeted reductions for the state.

So I think people are getting their arms around that in terms of how that actually flows through to the communities and to residents who ultimately pay the majority of the water bill. But I think that the general expectation is certainly that there will be potentially higher utilities cost across the board in that market which would impact choices in terms of residential dwellings, whether it's multifamily,, single-family whatever your choices are.

In terms of our response, our response is as you might imagine trying to be as efficient as we can. And before this even came out, we already started initiatives related to smart irrigation systems and things like that to try to be as efficient as possible as it relates to water usage because there had already been pressure on rates -- water rates in California as a result of the drought.

There's been some market reports that developments are slowing down. Are you seeing this at all?

Developments are slowing down as a result of the water issue?

Yes.

I've not heard that.

Okay. Thank you.

Vincent Chow with Deutsche Bank.

Good morning everyone. Just a quick question. In terms of New England, you outlined the snow removal costs' impact on expenses. Just curious what impact you saw on the leasing side.

It seems like things did track a little bit higher than last quarter on a year-over-year basis. But just curious how much impact you saw in the leasing and if there's been a notable improvement since things have started to fill out here.

Yes. This is Sean. We did quantify the OpEx impact in New England. And if you had excluded the impacts of those storms on OpEx, our year-over-year growth rate in OpEx would've been about 100 basis points less.

In terms of the revenue side, it's a little bit difficult to quantify. I mean you can look at traffic and net leases and things of that sort to try to quantify it as best you can. We had a difficult winter there last year, it's worse this year. So there's some impact, but it's really hard to quantify what that is in terms of who didn't show up.

New England is a market like Seattle that's a little more seasonal than the average market. So typically it is relatively soft or quiet in the first quarter in terms of what you might see in market rent growth, and it ramps up materially as you get into March and April through about July.

And that's pretty much the pattern we've seen this year, so it's not terribly different from what we've seen in the past. We structure our lease expirations in New England in the first quarter to be pretty low, lower than average portfolio in the region. Excuse me, average across the portfolio for the first quarter, and that diminishes the level activity in the region to begin with.

Got it. Okay thanks, and then just another question. Last quarter I think there was a question about the remaining Houston assets that are getting ready to be marketed. Just curious if you had any color on what you're seeing in terms of demand for those assets and pricing and that kind of thing.

Vincent, this is Matt. We are -- we have two assets in Houston. One of them we did market in the last several months is under contract now, so I can't really contract any further that.

I can let you know more when it closes. And we have one other asset there that we are positioning for sale but we have not brought to the market yet.

I mean I know it's under contract, but any comment on the demand you saw for that asset? Was it better-than-expected, in line?

I can't really get into that when it's a pending transaction.

Okay. Thank you.

Dave Bragg with Green Street Advisors.

Thank you for all of your thoughts earlier on your portfolio allocation goals and accomplishments. It's been a very busy period, but I wanted to revisit one goal or idea that you had suggested back at your Investor Day in 2010.

At the time, you said your portfolio was 15% Class B, but the efficient frontier analysis indicates that 25% would be optimal. Where do you stand as it relates to that?

Yes Dave, this is Tim. As we talked about maybe on the last few calls, we think really more from a brand allocation standpoint at this point. But you can think just roughly Eaves as a Class B, generally suburban, and Avalon and largely is Class A. And AVA can be a bit of a mix but probably more Class A than it is Class B.

And what we said is it's less about a target allocation for the entire portfolio than trying to optimize positioning of assets within target submarkets. And that sometimes is going to be a more affordable assets, and other cases, it's going to be more of a Class A or newer build type asset.

And we were just trying to -- back in November 2010, we were trying to give an indication what we thought the outcome of that strategy might look like. But as we mentioned in the last few calls, we're active developers right now, and we're allocating more capital through new development than we are through acquisition. And so you might expect that that waiting to continue to be a little more weighted towards Avalon than Eaves over the next couple years as we build out the portfolio.

Right. That makes sense, and I know you've published this many times but I don't see it in front of me, what's Eaves as a percentage of the portfolio?

Eaves today is about 17%, AVA is about 6%, and the remaining 75%, 76% is Avalon today. And that's by fair market value of the assets if you will. So on a unit count, it would be a little different than that.

Okay. Thanks, and another question relates to the American Bible Society deal. It seems really interesting, we're hoping you can provide a little more detail on that including your expectations for street retail rents in that submarket.

Hey Dave, this is Matt. We are actively working that project. Obviously as we closed the end of January, we put the design team together working through the concept designs right now, moving it as quickly as we can towards hopefully a start sometime in the second half of next year.

And as part of that process, we are talking to potential retail partners, and it is quite possible that we will wind up doing a transaction there to bring in somebody either on a forward sell basis or on a current basis to take the retail. We do have some estimations of what we think retail rents are there, but ultimately we know that that is a material part of the value of that asset and that is not our area of expertise obviously as much as the residential. So we may well bring in a partner there.

It's about 55,000 feet of retail divided between three levels, the ground floor, the second floor and some seller space. And obviously the rents are very different depending which of those floors you're on and even if you're on the Broadway frontage versus the 61st Street frontage. But we're looking at in terms of what the total value of the retail is and therefore what the total value of our net investment will be after that assuming that somebody else ultimately owns that.

Okay, so a lot of moving pieces, nothing else you can share right now.

Right.

All right. Thank you.

[Ann Wiseman] of Credit Suisse.

Hey guys, this is Chris for Ann. In your prepared remarks, you talked a little bit about how you strategically increase your exposure to the West Coast over the last 7 to 10 years.

When you look at your $3.3 billion shadow pipeline, the vast majority of it comes from your East Coast markets. So can you talk a little bit about what you're going to do in terms of develop those assets or those land parcels, or are you going to be going out to buy more land in order to increase your exposure to the West?

It's a fair question. This is Matt. I can get into that a little bit. You're -- obviously you're right, our development rights pipeline is more heavily weighted to the East.

I think that's a function of a couple things. One is the entitlement cycle tends to be very extended particularly in the Northeast, so some of those deals are in there for a long period of time -- three, four, five years.

That isn't necessarily reflective of the balance of where the starts will be. The West Coast deals have tended to come in and move out more quickly, particularly early in the cycle where we were buying sites that maybe someone else had entitled.

So some of it is just a timing mix. Some of it is market timing though that the West Coast markets are more volatile as Tim had mentioned, and so we're trying to be very aggressive about getting in early in the West Coast markets where the development window can be a little narrower.

So I think we are more careful about that, but having said that, we do -- we are looking at some pretty significant West Coast land opportunities right now, and we're continuing to pursue those. So I think you may see that mix change a little bit over the next couple quarters. But generally speaking, the deals in the West do seem to come in and out of the pipeline a little more quickly.

And Chris, just one last thing to add, as we feel like we're getting out of balance between East and West, we can obviously manage that through just buying and selling assets as well. While we're not -- while opportunity may not allow us to do that through development based upon where you are in the development cycle in particular markets. We do have little more flexibility as it relates to buying and selling assets.

Great. That's really helpful. I appreciate it. Just now a couple questions about like impairments and how those hit the income statement.

It looks like you have about roughly $5.8 million impairment hitting the income statement where $4.2 million is coming from Northeast weather and then about $800,000 from the loss on Edgewater. What's the remaining $800,000?

Chris, this is Kevin. The remaining $800,000 is an impairment charge on land that is due under contract for sale that we expect to close in the second quarter.

Got you. And then in terms of the Northeast storm impairment, it's reversed above NAREIT FFOs. Is there any reason why that's the case?

It's a casualty on depreciable real estate which under the NAREIT definition of FFO is added back to FFO.

Okay. That's helpful. And then last, of the $3.2 million you have added back to core FFO, I'm assuming the $793,000 is for the actual impairment. And is the balance the opportunity cost of lost rents? And of the I think $0.09 to $0.11 you have in the guidance for the full year, is that also a mix of opportunity cost and actual cost?

On the first part, the $3.2 million that is added back in our attachment 13 of our release is added back to core FFO from FFO, it consists of about $1.6 million of lost NOI from Edgewater. So we expect roughly speaking that that to recur throughout the balance of the year.

$800,000 as you point out is tied to Edgewater's the incident response cost that we incurred during the first quarter. In the remaining $800,000 is the land impairment costs for the wholly owned parcel that we just mentioned a moment ago. Can you repeat the second question again?

No. I think you pretty much got it, but it sounds like that's going to be recurring throughout the year and that the $0.09 to $0.11 will be the next of those three things.

Well I think we can follow up afterwards, but basically to be clear in terms of what I was just describing, of the $3.2 million, $1.6 million relates to lost NOI from Edgewater. That will recur throughout the balance of the year.

So you just multiply that by three, and that's what we expect to receive over the next three quarters. The other two items, the $800,000 in response cost from Edgewater and $800,000 in land impairment cost, those are one-time items that we experience in the quarter and do not expect to recur over the balance of the year.

Got it. That makes sense. Thanks a lot guys.

Alex Galdfarb of Sandler O'Neill.

Good afternoon and thank you for taking the questions. Just two that are really quick, first Kevin, you talked about potential debt issuance. Going back a few months ago, the rating agencies were -- seem to be indicating they may be looking to upgrade you guys although based on the conversations, the debt markets already price you guys like an A type credit.

So as you are thinking about debt issuance or capital for the rest of the year, are you obligated to change any of your thoughts? Or this is all the rating agency's doing, you guys aren't asking for any of this and therefore you're not changing the way you view your capital structure or development spending, et cetera?

Alex, this is Kevin. Our thoughts around our capital structure haven't changed. The rating agencies are taking their own action of their own accord based on whatever they're seeing in terms of both the evolution of our business and the current capital market conditions. It's a set of actions that are happening independently of us.

In terms of our capital plan for the year, our decisions around how much to raise is a function of how much we expect to expend on development and other activities, so it's driven by our uses. And so as I mentioned earlier, we expect about another $1 billion in incremental activity on a sourcing front in the form of dispositions an unsecured debt issuance, really because of the investment activity we have in our capital plan.

In terms of our choices around what to raise, it's really a function not of the rating agencies but rather what are the most cost effective source of capital at any given point in time. And as things stand today, unsecured debt pricing is relatively attractive.

Moreover, as you can see in our initial outlook from the fourth quarter, we have $650 million of debt that we expect to refinance. So that's a use. And on a leverage-neutral basis with NOI stabilized portfolio growing and development NOI coming online, we can add more than that amount in the form of newly issued unsecured debt and still grow on a leverage neutral basis.

So that's how we around triangulate around our total incremental needs and how much of it might be in the form of unsecured debt. But at this point as you know, we haven't issued anything in terms of debt, so we will just have to wait and see what happens as we progress through the year.

And Kevin, can you remind us what cap rates they use for your unsecured debt? For the unencumbered pool, sorry. What cap rate they use.

I'm not sure if I'm following your question. We have disclosure in our press release that talks about the cap rates that pertains to our line, and I think that's the 60% cap rate if I'm recalling correctly, but you can see the attachment for that. But in terms of the cap rates that the rating agencies use, I don't have any information and I don't know that it would be something I would want to share if I did.

Okay that's cool. And then separate question, are you now done with any of the legacy Archstone dispositions or gains, or is there still potential for more to come?

Well I guess one point I will mention, this is Kevin again and others may want to comment. We expect potentially the second quarter and you probably saw this in the JV income line item to receive some additional settlement proceeds related to some preacquisition that will likely fall through in the second quarter and be included within reported FFO but carved out for core FFO.

But I mean in addition to what you've already disclosed, is there anything future beyond this or first and second quarter clears the deck and that's it.

Alex, this is Matt. There's one more asset. There were two parcels of land that wound up in the parking lot, one settled earlier this year.

There's one other parcel of land out there that we will eventually sell. It may settle this year. It may not settle for a while longer. We will see how the market plays out on that, but that's relatively minor at one-time adjustment if it clears.

It's been actually reflected in the first quarter.

Perfect. Listen. Thank you.

Tayo Okusanya of Jefferies.

Just along Alex's line of questioning, can you just talk a little bit more about what you're expecting for the rest of the year and just in regard to acquisitions overall and generally what pricing you're seeing in most of your key markets? I'm sorry -- disposition, not acquisitions.

Tayo, this is Kevin. I think overall as I mentioned, there's probably an incremental $1 billion of capital we expect to source pursuant to our plan for the year. Most of that we expect to source in the form of unsecured debt. The balance will be dispositions.

In terms of the dispositions that we contemplate, I think Matt outlined that a moment ago that two of them relate to Houston. One we completed in Stamford Harbor in the first quarter. So there's overall, and you step back, there's not an awful lot of disposition activity that's anticipated within our capital plan, and probably those two sources represent the bulk of that.

Okay.

And Matt, anything you want to add just in terms of transaction market generally, what we're seeing out there.

Transaction market has been very high. There's clearly more demand from buyers to buy high-quality multifamily assets than there are assets on the market for sale generally speaking. Obviously it varies a little bit market to market.

So like Kevin said, our needs are fairly modest. We're always looking to transact. On the margin if we can shape the portfolio so we may sell an additional asset if we're using those funds to buy an asset that may be in a submarket we like better. But right now the market is very active, very liquid.

Got it. Thank you.

(Operator Instructions)

Michael Salinsky with RBC Capital Markets.

Just in the nature of time as this call is running a little bit long, just the REIT additions over the last couple quarters seems to be a little bit more of an urban focus particularly with the New York asset there. Is there any shift as you think about starts maybe two, three years down the road moving more urban back in the urban core as opposed to the suburban?

And then just given the starts in DC, you guys are among the first to sell out to reduce your exposure to DC ahead of the downturn. Can you just talk about your outlook for DC over the next two to three years? Is the worst already past, and do you expect 2016 and 2017 -- would you expect DC to perform more in line with the rest of the portfolio, or do you think there's a recovery potential there?

Michael, this is Matt. I can speak a little bit to the first part of the question and maybe Sean or Tim might want to add some color as well on DC longer-term.

In terms of our development rights, obvious that Columbus Circle deal is a very large deal, so that does move the needle in terms of when you start looking at the numbers and weighting it by urban/ suburban in those things. But as I mentioned earlier generally speaking, we're still finding just when you look at overall supply demand fundamentals and you look at where land is pricing, the cost of construction, we're finding better risk-adjusted returns generally speaking on new land deals in suburban markets. And again, a lot of this is infill suburban transit oriented in suburban job centers, some of it is further-out bedroom severs, but most of it is that inner-ring suburbs.

So I would not expect our development rights mix to change materially one way or the other, but it's really bottom-up. We don't sit here and say to the local teams -- go find us five deals in an urban market and now go find us five deals in a suburban market, it's find us the best deals in your market.

And they respond to what they're seeing on the ground, and sometimes those are more urban deals, sometimes they're more suburban deals. But at this point in the cycle, they are still more suburban, Columbus Circle notwithstanding.

As it relates to DC, we are planning a couple of starts in Metro DC here over the next couple of quarters. Some of those are legacy positions, one of them is a large deal in the District that we had inherited the land from Archstone.

But as it relates to the development cycle, it is probably a better time than it has been in the last couple years if you think that DC's had several years of basically flat rent growth underperformance relative to the rest of our footprint, and if replacement costs haven't moved all that much, it's probably a better time to be thinking about that. In terms of where fundamentals are headed and where rent growth might be two or three years from now, I don't know that we're in a position to predict that other than we know there's still a fair amount of supply coming next year or two.

Mike, maybe just to add onto that, to be clear, I said in my remarks we do expect the performance gaps to start narrowing between DC and our other markets. But over the next two years, we do ask that to underperform.

When you just look at the supply that's still coming, and while job growth has picked up recently in DC, we do expect it will be an underperformer relative our average markets over the next several quarters. But to Matt's point as it relates to development, you're really focused on second derivative as well as the first derivative. And that oftentimes where there's good land opportunities. And if you can time it from a construction standpoint, when the labor market's still relatively soft, those are often times our best-performing assets long term.

Appreciate the color guys. Thank you.

William [Pho] of Cowen and Company.

Thanks guys. Appreciate the color in the presentation and the additional data points around the development pipeline. Just looking at page 16 where the five communities under construction in lease up, where the current projected yield is 6.9% versus the 6.3% original, about 10% higher. Given your view of the extended nature of the current cycle and call it two years to deliver the rest of the pipeline on average, is there any reason to think that the current pipeline where if I estimate a 6.2% yield that that won't stabilize at10% higher as well.

Yes William, it's Tim. If you look over the last three or four years, the deals that we completed have all stabilized on average for each vintage year above what we had anticipated upon original production. And it's really just rent growth.

I think it's going to come down to how you underwrite rent growth over the next four or five years. To the extent we continue to see a long sustained cycle where we're getting trend to above trend rent growth, we would expect stabilized returns to be above what we first report in the release when it initially goes on these schedules.

Okay. Thanks. And then just quickly now that Highline West Chelsea is 97% leased, can you talk about the performance of the two different segments versus original expectations and how splitting up that into the two segments has performed?

This is Sean. In terms of performance, we've been happy with both the AVA and the Avalon product. AVA delivered first a little bit bigger building, and Avalon followed. But when you look at it just from a lease update perspective and what happened with rents through the course of the different seasons of the lease up, performance relative to the original expectations was pretty similar between the two both Avalon and AVA.

Okay. Thanks so much.

We have no further questions at this time. I'd like to turn the conference back to Tim Naughton for closing remarks.

Thank you Augusta. Thanks for being on today. I know it's been a long call so we won't take any more of your time, but we do look forward to seeing all of you in June at NAREIT.

That does conclude today's conference. Thank you all for your participation.