艾芙隆海灣社區公司 (AVB) 2015 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the AvalonBay Communities second-quarter 2015 earnings conference call. At this time all participants are in a listen only mode. Following remarks by the Company we will conduct a question-and-answer session.

(Operator Instructions)

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

Thank you Christine.

Welcome to AvalonBay Communities' 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. There's a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the companies that form 10K 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 also available on our website at www.avalonbay.com/earnings and we encourage you to refer to this information for review of our operating results and financial performance.

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

Thanks Jason welcome to our second-quarter call.

Joining me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. We will each provide some comments on the slides and that we posted early this morning and then will be available for Q&A afterwards.

Our comments will include a focus on a summary of Q2 results in the revised outlook for the full year. We'll provide an overview of fundamentals in the portfolio performance, and lastly we'll touch on development activity and funding.

Starting on slide 4, overall results in Q2 were better than expected as apartment demand continue to strengthen as a result of an improving macro environment along with housing fundamentals that continue to favor rentals housing.

Highlights for the quarter include Core FFO growth of 10%, or about 250 basis points higher than last quarter as rent growth continued to improve through the peak leasing season. Year-over-year same-store revenue growth was 4.7% for Q2, up about 40 basis points from Q1, and when you include redevelopment, came in at 4.9% on a year-over-year basis.

Sequentially revenue growth came in at 2% or 2.1%, when you include redevelopment from Q1, and was the strongest sequential growth in Q2 that that we've seen since 2010 and one of our strongest second quarters ever. We've completed three communities this quarter, totaling $275 million at an average initial yield of 7.3% and started with another four communities this quarter, totaling about $400 million.

Year-to-date starts are right around half a billion, and from a funding perspective we're active in the second quarter, as well, raising over $600 million through a combination of unsecured debt and asset sales, much of the capital going to pay off the secured debt, which Kevin will touch later.

Turning to slide 5, as a result of stronger fundamentals in recent operating performance we've updated our projections and outlooks for the full year. Core FFO growth per share is now expected to increase 11.1%, at the midpoint of our revised range, or about 270 basis points above our original outlook from the midpoint. More than half of this increase is coming from operations and the balance from a combination of favorable capital markets activity and lower interest expense.

Same-store revenue growth is now expected to come in at 4.5% to 5%, or about 75 basis points at the midpoint above our original outlook. Our NOI is expected to come in and about 5% to 5 3/4%, or up over 100 basis points from our original outlook at the midpoint. Development starts are largely unchanged, and more or less on track to start about $1.2 billion this year at share, and capital funding is up about $200 million from what we had originally anticipated, largely to refinance additional secured debt.

Now moving on to slide 6, this operating environment is benefiting from improved economic conditions. Jobs continue to grow at a pace of north of 200,000 per month, with growth increasingly in the mid- to higher-wage jobs. Job openings are now outstripping hiring as you see in chart 2 on the upper right, which, combined with higher-quality jobs is leading to stronger wage growth as you see in chart 3 where the employer cost for employee comp survey now reflects wage growth north of 4% nationally.

When you combine a stronger job picture with lower debt burdens, shown in chart four, this is driving consumer confidence and is providing a strong foundation for a healthy housing market, which is evident when you turn to slide 7. Annual net household formations now appear to be recovering from pre-recession levels of about -- and are now running about $1.5 million per year after having languished below $1 million really over the last several years.

Meanwhile housing starts are not keeping pace, as you can see in the upper right, coming in at $1 million may be just over $1 million per year as of late. And this balance is even more severe once you consider the impact of housing attrition around 300,000 to 400,000 homes annually.

No surprise then that housing inventories continue to be depleted as evidenced by falling rental vacancy rates, as you can see on chart 3 in the lower left. And for sale housing stock, which is now less than five months of inventory level that is considered to be quite tight for the for-sale market.

Moving to slide 8, the picture is even more favorable when you look at the apartment sector. Young adult job growth continues to outpace the rest of the population by about 100 basis points, which is leading to strong rental housing demand, and is particularly tight with unemployment rates for college graduates up less than 3%, which we think bodes well for higher end rental housing in new lease up performance.

Homeownership rates continue their decline since the recession with reductions pronounced in young adults under 35, but also those ages 35 to 44, which is also a significant part of our renter base.

The one area that bears watching is new supply. As you can see in the lower right after multi-family starts have leveled off over the previous 18 months in the mid-$300,000 range we saw an increase over $400,000 in Q2. Some of the increase can be explained or may be explained by the threat of the potential expiration of the 420 1A program in New York City, as many developers have rushed to get deals permitted and started.

But with rental demand fundamentals so healthy and housing inventories falling, the market may simply be increasing production to meet strengthening demand. In any event it's a trend worth watching, and particularly in relation to total housing production and what's happening in the single-family market.

Turning to slide 9, perhaps we ought to be looking at the rental housing market through a different lens this cycle than we have past cycles. Here are just a couple of excerpts from recent research published by Moody's in the Urban Institute suggests, one, that the economic expansion may be far from reaching its end, according to Moody's, particularly when you consider the depth of the recession and the moderate level of growth we've experienced since then.

In fact, Moody's and many others believe that this cycle is far from over, which we think will benefit cyclical industries like housing. And second, researchers at the Urban Institute posit that rental housing demand is actually in the midst of a generational surge that still has 15 years to run, a period that they anticipate that five out of every eight new households will be rental households.

So we've looking back over the last couple of cycles to draw comparisons to how this cycle may play out to the industry but maybe we need to start asking whether the cycle really has a precedent when you consider the confluence of trends that are positively driving rental housing demands. Indeed when you turn to slide 10 you can see that effective rental rate growth has recently re-accelerated, despite what is still a moderate economic expansion.

If we are in the middle of a prolonged economic and housing cycle this decade it may prove to be the best we've seen in our industry and our markets. Even surpassing the 1990s, with cumulative growth reaching him a 60% over a ten-year period, or more than twice what we've seen so far this cycle in our markets.

And now I'll turn it over to Sean, who can provide some color in terms of how our portfolio is performing, given this favorable environment.

Thanks Tim.

Turning to our portfolio results on slide 11, we are certainly experiencing acceleration Tim highlighted in the previous slide. Same unit rent changed in the second quarter averaged 6.2%, about 80 basis points greater than the first quarter and 250 basis points greater than Q2 2014.

All of our regions are experiencing greater rent changes compared to last year, including the Mid-Atlantic which is up about 100 basis points to roughly 1% as compared to basically flat Leicester. July is generally consistent with the second quarter with achieved rent change as of earlier this week at 6.4%.

Turning to slide 12, our results in the first half of the year combined with the current positive momentum in the portfolio supports our increased outlook for the full calendar year. We increased the midpoint of our same-store rental revenue outlook by 75 basis points to $4.34, excluding our redevelopment activity.

We expect better revenue growth from four of our six major regions. The exceptions are the greater New York, New Jersey, and mid-Atlantic regions, which are expected to be within our original range. In the mid-Atlantic, better job growth is supporting the higher end of our original range in New York and New Jersey, which is expected to be at the lower end of our original expectations, New York City, Westchester County, and northern New Jersey are performing as planned. But both Long Island in central New Jersey are coming in below original expectations.

New England supported mainly by Boston, and the West Coast markets, especially Southern California are expected to outperform our original expectations for the year. As we highlighted last quarter, momentum in Southern California remains quite positive. In the second quarter, rent change was about 7% in LA and San Diego and almost 8% in Orange County. In San Diego rent change is running about 200 basis points above last year, while in LA and Orange County it's between 300 and 400 basis points greater than last year.

Turning to slide 13, we believe the positive momentum in our portfolio supported by our allocations in many supply constraints infill suburban submarkets. This slide from Axiometrics shows the year-over-year effective rent growth in urban and suburban submarkets over the last several years.

While urban submarkets certainly outperformed in the early part of the current cycle, new apartment supply, which takes longer to deliver in urban submarkets given the nature of the product is now beginning to keep pace with, or has surpassed demand in many markets. As a result, urban growth rates have slowed, while the suburban submarkets have improved.

Moving to slide 14, the suburban urban trend is highlighted in a couple of our markets. On the left is year-over-year effective rent growth in Boston for both suburban and urban assets. While every asset is unique and performance varies depending on where your portfolio is located within a certain submarket, the general trends over the past year has been improved performance in the suburban submarkets, while the urban core has moderated due to increased supply. We are certainly experiencing this trend in our Boston portfolio.

On the right-hand side of the slide is the same data for Seattle, which is experiencing a similar trend given the significant amount of supply being delivered in the urban submarkets relative to suburban submarkets. Overall Seattle is still a really healthy market, given th very strong job growth that has been produced in the region, but on a relative basis, suburban assets have started to outperform recently.

Turning to slide 15, I thought I'd like to highlight a relatively recent shift in our operational strategy one that we believe is improved our performance over the past year and will continue to do so. The two charts on this slide represent our lease expiration profile throughout the calendar year in 2014 and 2015 for both Boston and Seattle. While many of you are familiar with the seasonal nature of our business, the demand patterns in these two markets are much more seasonal than the rest of our footprint.

In Boston the seasonal week this in the fall and winter is driven primarily by the weather. In Seattle, it somewhat relates to the use of contract workers in the high-tech industry a percentage of which leave the country during the holiday season. Both regions experience greater demand in the summer from short-term rentals, corporate hires coming out of college etc.

Over the past year we changed our inventory management strategy to better align our supply of available units with the highly seasonable demand pattern in these two markets. Specifically we pushed an even greater percentage of our lease expirations into the month with the best demand and highest rents. In New England we had 20% more expirations in May through July, compared to last year, while in Seattle its about 40% more.

We reduced contracted inventory in the fall and winter months in both regions when demand softens and rents typically decline from their summer peak. By further reducing expirations in the fall and winter seasons when demand is lower, we will have less inventory to lease, and therefore either higher rents for the units that are available to rent, or fewer transactions at lower rents. We continue to identify opportunities to enhance our operational execution including these refinements to revenue and inventory management practices, and believe they will produce dividends for us in the future.

Without alternative back over to Tim.

Thanks Sean. Now I'll ask Matt and Kevin to take a few minutes to highlight development activity and funding, which together are helping to drive outsized Core FFO and NAV growth in 2015, and we believe over the next few years.

So Matt.

Great. Thanks Tim.

Turning to our development activity you can see on slide 16, that our lease [up] communities continue to post impressive results. As a reminder, our general practice is to report rents on an untrended basis on our development communities until we open for business in at least enough apartments to get a good sense of where current market rent levels are compared to where they were when the deal broke ground.

This quarter we marked the rents to market on 10 of our 29 development communities, and the rents at those ten communities are running $200 per month above the initial underwriting, which in turn is driving a 50-basis point increase in the yield on those deals to 7.1%.

And importantly we are achieving those rents while getting absorption upon average 29 leases per month in the second quarter, which is actually the strongest pace -- lease up pace we've seen so far this cycle. With cap rates roughly in the mid-4% range across the markets, this provides significant NAV accretion as these developments come online.

Turning to slide 17, we broke ground on four new development communities last quarter, representing approximately $400 million worth of new investment. Many of our starts this year have been transit-oriented infill suburban locations, picking up on the theme Sean had mentioned, as we are seeing better rent growth in the submarkets, due to less apply.

But our largest start so far this year is actually the AVA Noma community in the north of Massachusetts Avenue District of Washington DC. This project should have a pretty compelling cost basis of less than $340,000 per unit in addition to benefiting from the $7 million ten-year tax abatement provided by the District of Columbia. And it's also a good example of how our multi-brand platform provides us with a wider variety of product and service offerings to appeal to different customer segments.

This community was originally acquired as land as part of the Archstone acquisition, and Archstone has designed it to be the second phase companion to the First and M community next-door. And we were able to reprogram it to provide what we expect will be a very different living experience with different price points, floor plans, amenities and services, as well as different style and sensibility that will reflect the contrast between our Avalon and AVA brands. This is similar to the up approach we've taken at our downtown Brooklyn, West Chelsea, and Somerville sites, where we diversified a concentrated investment in a single location by building multibrand communities.

On slide 18, you can see that our local teams have also been busy backfilling the development pipeline and identifying future opportunities for future development. Our development rights pipeline, which represents sites which we control mostly under option contract, has expanded over the past few quarters after bottoming out late in 2014, and now stands at $3.7 billion.

The pie charts on the lower part of the slide also show how the future development pipeline is migrating a bit towards suburban transit infill oriented locations. And that is just a reflection of the fact that we're finding better risk-adjusted returns in the submarkets at this point in the cycle, which is not surprising given the concentration of new supply in the urban cores, and the higher cost basis of high-rise construction, which tends to make urban developments more profitable in the early part of the cycle.

And with that I'll turn it over to Kevin to talk about our activity on the right-hand side of the balance sheet.

Thanks Matt.

Turning to slide 19, we highlight the Company's funding position against both our updated capital plan in our development activity underway. As you can see on the slide, the Company remains exceptionally well funded in both areas. Specifically for our updated capital plan we now contemplate raising $1.95 billion in external capital.

Through June 30 we raised about $1.4 billion, including $570 million in [remaining] proceeds under our forward equity contract. In the second half of the year we expect to raise another $580 million in external capital through a combination of asset sales and the issuance of unsecured debt. As for our development activity at the quarter end, our development underway of $3.8 billion was nearly 100% match-funded of the combination of $2.6 billion in capital spent to date, plus over $1 billion from cash on hand projected free cash flow on the remaining proceeds under our equity forward. As a result we've eliminated nearly all funding risk, while locking in significant value creation, as these communities are completed and stabilized.

On slide 20, we show the evolution of a few key credit metrics since 2010, and in order to highlight how we have further improved our strong credit profile through recent refinancing activity.

During the second quarter, we raised $620 million in external capital, including $520 million in ten-year unsecured debt at about 3.5%. And we repaid $580 million of secured debt with the cash interest rate of 6.2%, and a GAAP interest rate of 3.7%. As a result of this activity, our unencumbered NOI percentage is now 76%, up 700 basis points from year-end 2014 and the highest it's been since before the financial crisis.

In addition the composition of our debt significantly improved such that 56% of our debt is now unsecured, up 900 basis points from year-end. Further since 2010 our weighted average GAAP Interest rate has steadily declined by 130 basis points to 3.9% today, while we reduce the amount of unamortized debt premium for the Archstone transaction down to $60 million today from about $150 million when we closed that transaction.

The next two slides highlight the contribution that development provides both to our earnings growth and to our NAV growth and serve to underscore the merits of our time-tested development capabilities. In slide 21 we depict the components of our projected growth in 2015 Core FFO per share. Of the $0.75 in projected Core FFO growth this year, $0.37 was projected to come from development and redevelopment activity net of financing cost.

Of this $0.37 development is projected to contribute $0.34 , while redevelopment is projected to contribute $0.03.. Thus develop alone should add 500 basis points to our growth rate this year and account for nearly half of our overall earnings growth.

In slide 22, we highlight developments contribution from an NAV perspective and over a longer period of time. By estimating how much per share we've created, we expect to create through development thus far in the cycle.

Specifically, development starts and completions since the beginning of 2011 total $6.1 billion. Of this about $4 billion is completed or undergoing initially lease up, and is producing, or has produced, an initial stabilized yield of 7%. Applying a 7% initial yield to the $6 billion in starts and completions, and then capitalizing the resulting NOI at a current market cap rate of 4.5%, produces an implied value creation above our cost of $3.3 billion. This in turn equates to an estimate of $30 per share in NAV creation from development starts and completions since early 2011.

So in sum, through our development capability AvalonBay has provided and continues to provide significant incremental earnings and NAV growth for our investors. While at the same time adding new and exciting apartment communities that enhance the quality of our portfolio and the product offering for our customers.

With that, I will turn it over to Tim.

Well, thanks, Kevin. So 2015 is shaping up to be another strong year. Core FFO growth is expected to come in at more than 11%, driven by strong same-store portfolio performance as you heard from Sean, with same-store NOI expected to be north of 5%, healthy external growth from development as Kevin just touched on, and finally a strong and flexible balance sheet that is allowing us to fund and support this growth with attractively priced capital. And with that, Christine, we would like to open the line for questions.

Thank you.

(Operator Instructions)

Steve Sakwa, Evercore ISI.

A couple of questions. I know you guys are not providing 2016 guidance, just revised 2015 but if you just kind of look at the trajectory of rent growth that you've seen over the course of the year and you look at where you're sending out renewals is it a fair assumption that to think that absent of a real occupancy change that revenue growth will next year is at least equal to 2015 kind of from a directional standpoint?

I'm sorry Steve was that it or did you have a follow-up?

And I guess this was the other question which is -- would be for Kevin, there was on page 20 of the supplemental, there was a little change that said an expense overhead and it almost sounded like that might have sort of retarded how much the FFO would've gone up this year. I'm just wondering if you could expound on that and kind of quantify that for us.

Okay, I'll take the first question Steve, and certainly others can join in and maybe Kevin take the second question regarding overhead.

You know as you saw on one of the slides, we've been seeing like kind rent change north of 6% the last few months and it's been positive in terms of its trajectory this year and that's obviously a leading indicator in terms of portfolio performance. Sean mentioned we're expecting to see same-store revenue growth 5% or north of 5% in July and just implied from our guidance based on what we did in the first half of the year we're expecting 5%- ish, 5% range for the back half of the year.

I mean we have said we think we've got another two or three or four years of potentially above trend growth and the question is how much above trend. It's a little bit dependent upon the ebb and flow of markets. We don't anticipate that Northern California will continue to grow at 10% but on the other hand we don't anticipate the DC area to continue to languish at roughly flat rent growth.

So Steve it's going to be a function ultimately of the different markets. When you look at this from a macro standpoint particularly I guess the point I made about the end of production of housing we think a stronger employment picture in terms of the quality of the jobs and we're starting to see decent wage growth we expect will continue to see good healthy above trend growth and fundamentals will continue to favor housing and specifically rental housing. Whether that translates into 4% or 5% plus growth, more to come on that.

So Steve this is Kevin. Just to answer your question on overhead and I guess to begin by providing a little context for everyone on the call, for reference on page 20 of our supplemental or our attachment 13 we provide our outlook for the year at the bottom of that we indicate that our expectation now is for expensed overhead which comprises corporate G&A property management and investment management. We expect that that will increase year-over-year from initially 0% to 5% to now 6% to 8%.

To give you more color there we now project total overhead to increase by about 7% this year, versus basically a 3% increase at the beginning of the year. The 4% increase represented about $4 million of which about $1 million was recognized in the first half of the year and $3 million is expected to be recognized in the second half of the year.

The majority of increases tied to increases in expected compensation based on expected performance to date, and expected performance for the year. And in terms of the underlying 3% growth that we initially expected for the year, about half of that was driven by a legal settlement in 2014 that's not present this year. And the other half was driven by severance cost recognized in the first half of the year.

Nick Joseph, Citi.

For the lease expiration management how do you think about the benefit from having more leases roll during the peak leasing season versus the risk of being concentrated too much at one time? And do you expect to keep tweaking from here or is the portfolio currently optimized?

Yes. Nick this is Sean. Just to talk about that little bit.

We highlighted the two markets where it matters a lot which is New England and Seattle. They tend to be the two more seasonable markets in our footprint so we have applied the same basic strategy to the rest of the portfolio.

And when you think about it in our portfolio typically what we've experienced is more optimizing revenue when occupancy is somewhere in the mid-95% to 96% range. Every market is little bit different by the way in terms of what sort of average market occupancy is but that's been our experience. And so as we looked at what was happening with demand patterns across the portfolio we felt like we can continue to push more expirations into the second quarter and through July and to the extent that we could drive enough traffic to the portfolio to continue to push rents at the pace that we have actually experienced.

We think we're in pretty good shape and it allows for us to -- if you want to call it this -- sort of have an appropriate glide path as we go into to the fall because expirations were up in the second quarter about 7% or 8% that actually peaks in July which is up about 14%. But then it comes down in August and September, 7% and 8%, and 4% and 5% in the fourth quarter.

So we expect to be able to continue to maintain pricing power at a pretty healthy clip as we go into the fall and winter season probably more so than we've experienced in the past. As a result of the expected lower supply of inventory that we're going to have during those periods.

And in terms of the balance between occupancy and rate growth, we think we're in a pretty good position right now as it relates to what we did in the second quarter, what we expect in the third quarter. But it's always a little bit of a dance in terms of whether you experience too much availability and you have pricing pressure or not. We did not experience that in the second quarter and based on where we sit today we think we're in pretty good shape -- 30 day availability peaked around 6% now it's down about 50 basis points to 5.5%, physical occupancies mid-95[%] going into a variable low expiration so I think we're positioned pretty well and the strategy we pursued was the right one.

In terms of whether we're sort of done, lease expiration management is something that is sort of a continuous activity. You have lease breaks, short-term rentals, a lot of things that occur in the portfolio and so you're always adjusting what allowable leases you'll offer to a customer and at what price points for those leases to make sure your profile stays optimized. So might be a little more detail than you like but I thought maybe it would help in terms of providing context to everyone about our strategy.

Thank Sean maybe if I could just add to that too. Obviously the model's dynamic and is always responding to shifts in demand as we see it. But it's also important to understand what the market is doing -- what the rest of the market is doing in terms of expiration management.

And that alone is going to make us try to maneuver to optimize the opportunities. So for example, if the market is smooth -- starting to smooth its expirations relative to where we think demand patterns are then we are going to benefit from concentrating more expirations in a peak leasing season. The opposite can be true as well, Nick. So it's going to be a dynamic process in terms of how we manage through it in part because not only is demand dynamic but also supply in terms of how the rest of the market is using revenue management.

Thanks that's very helpful. And then just in terms of capital needs and looking out to 2016 it seems like the spend in terms of development will be similar to this year so would you do another forward equity offering at this price?

You know obviously Nick we don't comment a lot about future activity in the capital front and I think we've been asked a number of times what our views are on the use of an equity forward, I guess to just provide everyone that answer again I guess. We've known about an equity forward as a tool in our toolkit for probably five or six years. We've used it only once, it takes sort of a special confluence of events to justify using it. It's a good tool to have.

And it really is a function of whether or not one has elevated funding needs, what one's capital position is at a given point in time and what one expects capital pricing might be as well as availability in the coming period. Given where we are now we feel like we're in really great shape from a balance sheet point of view with net that EBITDA in the mid-five times range. And we're essentially nearly 100% match-funded against the development that is underway.

So we feel good from a capital standpoint even if it might turn out that spend next year is roughly on par with this year. As an aside we haven't gone through the budget process so we don't have -- we have some visibility on it but we don't have final visibility on what our spend levels will be but they're likely to be meaningful just given the level of start activity.

But in terms of the capital choices we might make they often evolve naturally what capital pricing is. And at this point today, if I were to rank order based on attractiveness the choices we have, asset sales are much more attractive as a source of equity than is common equity at this point in time. So I would rank them asset sales and unsecured debt and then followed by common equity issuance. So as we stand here in July it's far too early to say what our capital plan might be for 2016.

Thanks.

Ross Nussbaum, UBS.

Tim you commented a little bit in your slides about the uptick in starts and permits over the last few months, obviously the 421a situation in New York has put some noise into the numbers. If you had to sit back and say on a scale of 1 to 10 how nervous are you that we're moving into a new threshold or new level of supply in the multifamily business? How would you sort of rank your level of concern, how would that compare maybe where your head was 6 months to 12 months ago?

Yes. That's obviously a question on everybody's mind as I said it bears watching but maybe to start with the demand side of the picture. I think as the industry -- I think the investors and honestly developers and sponsors are looking at the demand side of the picture as being stronger than it may have a year or two years ago. And the cycle may be play all little bit longer.

I think there's probably some truth that there's just more confidence. More investor confidence, more developer confidence. And that there's probably good reason for that when you look at underlying demand so I think there is a decent probability that supply will move up from here.

I think it needs to move up in order for the market to be anywhere close to being in balance. We're seeing how it can get distorted in places like Northern California and Seattle, even Seattle where we're delivering over 3% supply and yet we continue to see 7%, 7% revenue growth.

I think what's interesting -- probably my biggest concern is who provides the supply. If you just look at our outlook, we're looking at terms of constant dollar volume roughly in 2015 that we started in 2014 and 2013 and probably 2016 won't be materially different. It's actually a smaller unit count, and as you go around and you talk to some of the more experienced -- it's kind of a similar story you hear so the additional supply I think will likely come from new entrants. Often times I think -- in sometimes -- muddy up the market a little bit.

So I think that's probably worth watching as much as anything Ross where the supply's coming from, where the net new add is if you will -- is it somebody who is developing an apartment community on a piece of land that they've owned for a long time. For the first time is it a commercial retail developers are doing this for the first time -- and have other objectives in terms of providing additional supply to the market.

So I mean that's a little bit long-winded, I think it's a decent chance that it will occur Ithink it's the market can absorb and it probably needs it just based upon household formation and just the balance of demand between rental and for sale.

Okay thanks. And just a question on the second quarter turnover ratio. I think you guys did a good job of explaining that I think you intentionally had higher turnover but you accelerated where the least expirations are.

Were there any markets where the turnover surprised you? Maybe as a sign that you might've pushed too hard on the rent gas pedal or was it all kind of intentional?

This is Sean. Good point about it being somewhat intentional. Turnover rate was certainly up but if you look at it as a move out as a percentage of expiring leases, it was actually down about 120 basis points year-over-year. All the markets were down with the exception of Northern California which was up about 120 basis points.

I wouldn't say it was necessarily surprising given the level of rent growth in that region. But Northern California certainly is the one outlier where there is continued pressure on rental rates and driving more turnover in terms of the existing residents but still being able to replace them with high-quality residents at a higher income.

Jeff Spector, Bank of America.

Just a follow-up question on previous comments on where we are in the cycle Tim and your comments today just given the better first half of the year acceleration, expected to continue. Do you think we're still in mid-cycle and have you -- do you feel that obviously things are stronger than you were expecting that we're still in earlier stages, or still in mid-cycle but longer? I just want to clarify those comments and how that ties into the increasing -- you know the decision to increase the development pipeline.

Yes. Yes Jeff thanks. Yes I would say somewhere in mid-cycle. I don't know if I can be more specific than that as we've said.

We think there's probably both the economic expansion and this apartment cycle probably feels more like the 1990s when you just look at sort of the economic drivers that usually start to portend that may be the expansion starting to slow down is just not present right now. When they start becoming present usually you often have another two, three, four years before you start to see any kind of economic corrections.

So things can change, but based upon the underlying fundamentals it just seems like this has a few years to play out from our perspective economically and from a real estate cycle standpoint. Now how does that impact us in terms of supply? In certain markets we're probably more -- a little bit more confident in other markets, we're probably as gun shy as maybe we've been over the last six or nine months.

For example in Southern California as you saw we bought a $100 million piece of land and 6 acre site in Hollywood where it's kind of unique opportunity to build 700 apartments on a dual branded site. But -- we felt pretty confident about it. And on the other hand had that opportunity had been in Northern California where rents have already increased 50% this cycle, and to win the auction you might have to assume they're been a growing other 50%.

We probably wouldn't have been bold enough to take a piece of land down that size. So I think it's going to be a little situational and we're probably going to be a little bit more frisky in markets like a Southern California or a DC where we see just fundamentally a different part of it its real estate and expansion cycle.

Okay. And can you comment, specifically, on New York City and especially on the supply front the numbers we're seeing for 2016? How you feel about New York City?

Well we are expecting supply deliveries to go up in 2016 as you know. I think the big question is are all these permits going to translate into starts? Last time we saw the threat of the 421a expire. We did see a bit of a spike a couple years later so that risk is out there.

I think from a land market in a construction cost market you need to be extremely careful in New York City today. I think there's a chance that some of this will translate into starts which is going to put additional pressure on construction costs.

I think there's a chance that the land markets get a little noisy for awhile and that you might be, you might benefit from standing back a little bit and seeing where the dust settles and take advantage of opportunity that's permitted and after a point at which markets, construction markets maybe have a chance to settle down or re- price a little bit. So I think it's going to create -- any time you see uncertainty around regulation it creates more distortions and uncertainty and you know that will create its own set of opportunities. I just don't think it's today right now.

Great. Thanks.

Austin Wurschmidt, KeyBanc Capital Markets.

Just given the continued momentum that you guys have seen into August and September, and sort of that 8% range on the offers, should we expect that you guys are going to continue to run at that pace? Or would you anticipate you dial that back a little bit and look to rebuild occupancy as traffic could slow later this year?

Yes Austin, it's Sean. 8% is what we've got out there at this point. You know we haven't necessarily dialed up what the offers are going to look like for the fourth quarter.

I guess I just may refer back to the comment I made earlier that based on our lease explanation strategy with fewer expirations beginning in August through year-end our expectation is that we'll be able to hold better pricing power potentially than we have in the past during that season. 8% is a pretty healthy level.

And so our expectation is that as availability has come down price and power has remained healthy. Naturally just through lower expiration volume we would expect fewer move outs and better occupancy. But how that plays out in terms of what the rent offers might look like going into the fourth quarter is hard to comment on at this point.

Thanks and then just touching on homeownership. It looked like that declined another 30 basis points in the second quarter. As we get sort of to one standard deviation below the historical mean nationally, 2-plus standard deviations looking at sort of the primary renting cohorts. How does that stack up today versus in your markets versus historical average?

I think when you look at homeownership in our markets versus historical average I think it's obviously lower because our markets have lower homeownership, but I think they're running at around 53%--

Right now for our markets, if you look at the four quarter average, it's about 51% right now. As compared to the previous peak was 58% so we're down about 700 basis points in our market at this point.

Which the 58% wasn't the norm because (multiple speakers) because nationally the peak had gone up about 500 basis points from 64% to 69%. So I would guess that it was pretty consistent in terms of that trend.

Great. Thanks.

Ian Weissman, Credit Suisse.

Hi guys. This is Kris for Ian. Congrats on the great quarter.

It makes sense that you'd be developing more in the suburbs given where we are in the cycle, but just curious about your thoughts on the volume of those starts especially as you work through the shadow pipeline. It sounds like there's some good value creation there but just concerned about adding too aggressively to the suburban markets particularly in the Northeast. Any concern there?

This is Matt. Actually if you look at what's under construction today, it's actually more urban than our portfolio as a whole. So kind of our urban percentage is going to rise here in the next year or two. But the shadow pipeline is more suburban focused.

But ultimately when you play that out, five years from now, our portfolio just based on that probably those proportions don't change a whole lot. It's a big portfolio and the other thing that we find is we can shape the portfolio much more aggressively through dispositions and potentially through acquisitions really on the development front. Most of the time what we're looking at is where we find the most compelling opportunities where we can add value through what we do so well.

And it is true a lot of that is in those Northeastern suburban submarkets and you will see us tending to sell more out of those locations to keep the portfolio balanced. We did sell one asset this year for example in Stamford. We sold an asset last year in Danbury. So those are the types of locations where we're probably more likely to sell.

Okay that makes sense. I guess just thinking if this kind of recovery lasts as long as what we're talking about now a few more years, that would be -- give you the ability to kind of work your ways all the way through the shadow pipeline. And if you did that you'd kind of increase the suburban exposure but it sounds like you'd just sell out of your -- some of the older assets in those same locations, is that kind of what you're saying?

Yes, I think that's fair. It's also important to note that the character -- not all suburbs and suburban locations are the same. A lot of the character of what we're focused on now is pretty high density infill, job center, suburban so as compared to say a Danbury for example, when you look at what some of the infill suburban starts we've had recently or we have coming up whether it's Great Neck, which is North Shore, Long Island where we been trying to get in for years and years very close in. Or we have a big development start coming probably early next year in Emeryville in the East Bay.

Or even some of the stuff we're doing in Seattle which is kind of in the infill suburbs -- Mosaic District her in Merrifield outside of Tysons Corner. Those are some pretty exciting locations as well. And it will be great long-term investments too.

Great. Thank you very much.

Rob Stevenson, Janney.

It looks like the redevelopment page dropped in the supplement -- can you guys talk about how many projects are in there and what the additions to the pipeline and expected returns look like for the rest of the year?

Sure Rob, this is Sean. In terms of the redevelopment activity right now there's noted about $123 million underway and seven communities, about 2800 apartment homes. The mix does continue to shift.

Our expectation, what we expressed in the past, is we plan to start between $100 million to $150 million per year in redevelopment activity and as you look at our track record, the track record has actually been quite healthy in terms of returns from that activity. Where if you think about redevelopment there are two components to it. There certainly is some capital that does not earn a return that sort of end of use life activity whether you're replacing roofs and things like that.

But there's also the enhancement component and enhancement component for us -- we typically underwrite somewhere in the 10% to 12% range. We've actually been hitting probably more mid-teens in that activity. So I think you can expect it to be somewhere again running in the $100 million to $150 million range and the kind of return profile that I would expect -- we don't expect to ramp it up dramatically nor see it soften up materially over the next few quarters.

What is that $100 million to $150 million mean on a per unit basis?

You know it varies a lot, we have deals that run anywhere from I'd say a low of $15,000 to $20,000 up to about $50,000 a unit. The average in the portfolio now is probably running somewhere in the neighborhood of about $40,000.

Okay. And then are you guys seeing any meaningful difference between the operating performance over these last six months in the various suburban DC, suburban Maryland district and even into the District?

Yes. I'll make a few comments on the submarket.

So out of the three major markets, here in Metro DC, basically being the District, suburban Virginia, and suburban Maryland, suburban Maryland has been the weakest of the three over the past quarter. A lot of supply being delivered in Rockville, North Bethesda, a little bit in Gaithersburg so that's certainly been the softest.

In suburban Virginia it's probably holding up relatively well. Western Fairfax as an example. The submarkets that of the softest in Northern Virginia are the RBC corridor in Old Town right now.

And then in DC, it's a function of positioning first off but I'd say geographically at the softest points are in NoMa as an example. But we've also had some softness around Gallery Place. Keep in mind for us we don't have a material relative to the whole portfolio in DC. So our experience is relatively small sample size but that's what's happening in the District for our portfolio.

Okay. Thanks guys.

Dan Oppenheim, Zelman & Associates.

Thank you. I was wondering if you could talk a little bit more about the Northern California -- about the rent growth as it is, given the difficulty in terms of just incomes keeping pace with the rent growth as it is.

What are you doing in terms of thinking about -- obviously a good problem to have in terms of the rent growth in at levels here -- but are you doing anything in terms of rent -- the tenant screening up front in terms of looking at residents, potential residents, thinking about if you're getting 8%, 9%, 10% rent growth it could quickly mean that the residents that qualify today won't be able to handle it in a year or two from now. Are you doing anything to think about that in terms of how to minimize terms over the next couple of years?

Yes, Dan, this is Sean. In terms of that point obviously you're talking about a topic that is somewhat regulated if you want to think about that way it in terms of how you screen people and who you can turn away and who you can't so for us it's a pretty disciplined process, hasn't really changed.

People qualify based on their incomes today you know they're going to move in. We tend to keep an eye on it just to know what the opportunity is to push rents on those folks in terms of who's in the existing portfolio.

But it's hard to sort of size people up to say you can afford this today but can you afford it a year from now? I'm not sure. The question really is as people are moving out can we continue to replace them with enough demand to pay the higher rent? And the answer thus far this cycle has been yes.

Got it. And then the AVA Theater District in Boston looks as though certainly the rents and that submarket moving up and I think you're expecting now higher rents there. But keeping the stabilization, timing as is, is that in terms of pushing rents more than leasing out faster than you would plan with the construction cycle and how are you thinking about that overall?

Yes this is Sean. I'll make a couple comments and Matt or Tim can add on if they want.

The Theater District, first off very pleased with the rent profile that we've experienced thus far. But I'd say for two reasons we've pushed rents but probably are leaving a little bit of gas in the tank if you want to call it that

The two issues are one: the seasonal nature of Boston which as you get into the fall it falls off pretty quickly and as you get into the winter it can be pretty quiet. And then secondly: there's a fair amount of supply being delivered in the urban submarkets there in Boston and more to come.

So our strategy with that asset has been to march the rents to market based on where we see today but making sure that we're continually adjusting them to reflect the supply demand dynamics in that market to achieve targeted velocity each month. And thus far we've been able to do that but given the seasonal patterns that we experience in the supply we probably aren't going to push too hard on that and we'll probably off slightly more for velocity than rate as we move through the fall and the winter in Boston.

Great. Thanks very much.

John Kim, BMO Capital Markets.

I had a question of your disposition guidance, because it looks like your net gains will be at the highest level this year other than maybe 2011 or 2013 on a GAAP basis. So I wanted to know if you could provide us some guidance on the gross proceeds you'd expect for the year and if these proceeds are already characterized as capital or sourced on slide 19 of your presentation?

John this Kevin. I'm not sure if I fully understand the thought process in terms of your comment on gains. But in terms of dispositions for the year they really come in two types: wholly-owned dispositions and fund level dispositions, wholly-owned obviously being much more meaningful here so I'll focus my comments on that.

In the first half of the year we sold one asset, Stamford Harbor for about $115 million. We had some additional asset sales lined up for the second half of the year.

Earlier in my comments I talked about what our remaining capital sourcing activity was for the second half of the year. We expect to source about roughly $600 million of capital the back half of the year and probably about roughly half of that we expect currently will come through the issuance unsecured debt and the balance through asset sales. So in terms of -- I'm not sure how you triangulate on gain activity but if there's comments that -- the question you have on that, let me know.

Sure. It's just that for the outlook, for the year you have net gain on asset sales on $1.69 to $1.83 for the year but just backing into that the full-year number.

I'm not sure it's necessarily a cyclical high. It's certainly not a cyclical high in terms of the dollar value of assets that we've sold so far this year but some of the assets we're selling have a fair bit of gains associated with them there.

The case of the asset like Stamford Harbor was an asset that we built an awful long time ago and held for quite a bit -- and had a lot of built-in gain based on profitable development activity and that's true for a couple of the other assets we expect to sell in the second half of the year that come from more of a suburban market profile that we had a long time ago.

And sticking to guidance, your capitalized interest figure for the year has increased. But your development spend is pretty much unchanged and your interest costs have declined. So can you just elaborate on why the increasing capitalized interest?

Yes. There's a couple of pieces there.

Overall we expect an additional $6 million in capitalized interest expense for the year. A portion of which were about $0.02 is included in the capital markets and transaction activity in the table shown on the earnings release. So -- and that relates to additional investment in land that will be held for development.

As Tim mentioned we bought $100 million parcel in Hollywood, California, so that's part of that. The remaining $0.02 to $0.03 that flows from that variance in capitalized interest is included in the interest expense line item, and is driven by a mix of variables related to calculation of capitalized interest but primarily due to slightly higher than projected CIP balances throughout the year.

Okay great. Thank you.

Haendel St. Juste, Morgan Stanley.

Good afternoon. A couple quick ones.

I guess Kevin one first for you, looking at the debt maturity schedule, looks like there's a couple above market unsecured tranches, high five coupons set to mature in 2016, 2017. Pretty well above the 3.5% you recently issued 10 year paper at. I'm curious as to what's your current thought here how are you weighing the opportunity to perhaps replace these slugs given the rate risk and versus I guess that debt prepay penalty?

Sure, Haendel. You know we've got about 215 maturing next year in unsecured debt, high five coupons and it's something we'll take a look at it as we roll forward here -- nothing planned as yet in regard to that. But it's a relatively modest maturity for us.

We have $6.4 billion of debt, probably about $5 billion of it is maturing in the next 10 years or so, so an average maturity year for us is about $500 million. So that makes 2016 actually a pretty light year with only about $250 million probably the $280 million if you include some amortization on top of that maturing next year. But there may be an opportunity there for us to act on, but nothing that's in the plan as yet. In terms of 2017, that's a larger tower, about $950 million.

Most of that is represented by secured debt of about $700 million that is in a GSE pool that we assumed in connection with the Archstone transaction. Much of that is in place to help support tax protection obligations that Archstone had made and that we inherited. That matures as indicated in 2017. It has two extension options so we can extend it for one or two years based on our election before that point in time so we've got some financial flexibility but how do we address that given that it's tethered to some tax protection obligations it's less likely a candidate for early action for retirement of that debt.

I guess probably what's more germane right now is that within our guidance we do anticipate paying off additional debts, about $200 million in total, than we expected at the beginning of the year. And it's driven by your comment which was what's the opportunity for refinancing and the prospect of facing a potentially rising rate environment. And we do see some opportunities in our debt portfolio if you will to pay off some debt here in the next quarter and do so in an accretive basis.

From an interest rate perspective just to clarify one thing while the cash coupon on some of the debt is 2016, 2017 is attractive - it's in the high 5% in the case of 2016 in a cash interest rate in the 2017 debt is also relatively high. The $700 million of debt that we inherited from Archstone while it has a 6% cash pay interest rate it has a gap interest rate of about 3.4%.

But that's just something to point out for modeling purposes but from our point of view if we could repay that secured debt in 2017 today, we'd likely consider ways of doing so because it would be certainly attractive to try to refinance that to a lower coupon. But that does have a prepayment penalty associated with it that makes it an economically unattractive choice today.

Great I appreciate the insightful comments. Next question maybe for Tim, maybe for Sean. A question on Seattle. The last couple years we saw meaningful uptick of supply in downtown Seattle plus 6% more or less of supply percentage of stock.

The next two years the supply picture really shifts out to Bellevue, we're looking up at a 15%, 16% expansion over the next two years which is more of where I believe your Seattle exposure as well as a number of your peers are. So I'm curious how you're thinking about your Seattle exposure and price point positioning today can and should you be calling? And then is it inconceivable that your SoCal portfolio could surpass your Seattle portfolio this time next year in terms of same-store revenue growth?

Yes Haendel, this is Sean. I'll make a couple of comments and then Tim or Matt can jump in as it relates to development.

Your comment is certainly accurate that the majority of the supply high percentage has been focused in downtown, Capitol Hill, Queen Anne. And if you go there today, I was there just a couple weeks ago, there are sort of cranes everywhere in those various submarkets.

It certainly is starting to accelerate in terms of the volume of supply that is planned in the Eastside and North End submarkets which is where most of our portfolio is concentrated. And we will continue to watch that carefully.

At this point you're talking about a market that's producing close to 4% job growth. There is some supply coming online in Bellevue in the North End -- not as meaningful as Downtown but it is being absorbed quickly and we're still producing 7% revenue.

So at this point what is planned there in terms of the level of supply at current rates of job growth probably doesn't concern us a lot. That job growth is not likely to continue at that pace forever obviously, so we'll have to continue to watch how it evolves on both sides. At this point what's in the pipeline, though, for Bellevue, Redmond, North End, Linwood, with some of those submarkets isn't all that concerning.

And we've got a pretty diversified portfolio in terms of our positioning. We have a lot of older product at reasonable price points and we've been opportunistic on the development side and have some higher-end assets that we are underway with in Newcastle, Redmond et cetera, that we think will do quite well. In the current environment they should be early deliveries in those submarkets relative to the rest of what's in the planning cycle. So we think we're pretty well-positioned but certainly it's going to have to be something we're going to watch as supply starts to ramp up more on the East side.

Any thoughts on SoCal versus Seattle as we move into, well, next year?

Yes it's a very good question. I mean historically Southern Cal hasn't been nearly as volatile as Northern Cal nor Seattle. Just given the underlying macroeconomic fundamentals in that market. But there certainly have been times in the past where it's produced numbers up in the, call it, 7% range.

We'll call it roughly 6% now, demand is pretty healthy. Still the lowest region of any region in terms of supply over the next two years. So while it's hard to predict where things are going, it's not unimaginable that if you had job growth slow a little bit in Seattle and it continues to move up in Southern Cal with the supply we have that it could get to that level.

I appreciate the comments. Thank you.

Vincent Chao, Deutsche Bank.

Good afternoon. Just a few follow-up questions, just going back to the debt side of things. Just curious if the recent treasury volatility has really significantly impacted your cost of debt here and do you think you'd still be close to that 3.5% that you recently issued at or is that somewhat higher today?

You know the quotes that we're receiving today for issuing new 10 year unsecured debt for us range between 3.6% and 3.7% today so little bit back of the 3.47% yield to maturity that we achieved in May. But not an awful lot. Call it on average about 20 bps back.

Okay and then just given the funding you'll need for next year as well as expected issuance here at sometime in the second half. Would you consider increasing that amount just to sort of pre-fund given the rise in rates and also just again lock in some pre-funding?

Our approach is when it comes to funding is not really necessarily to try to speculate on where we might be tomorrow and mobilize capitalize -- mobilize capital as a result. It's really much more driven by our uses in our development activity and so what we're much more inclined to try to do is to is to match fund capital. So as we make development commitments go out and try to find the long-term capital with that.

So given that we're nearly 100% match-funded today, you know I don't know that we necessarily feel the need to be more than that at any point going forward. So probably not highly inclined to try to go out and issue new debt today in advance of the need next year.

Okay. Thanks for that. And then just one last question.

Just on the comments earlier that you made about bringing -- on the turnover side bringing in folks with higher incomes and that's helping support some of the rent growth. Just curious if you had the stats of what the rental household income was for the new move-ins versus the existing portfolio?

Yes, Vincent, this is a Sean. On the lease income data for us if you think about the way we manage the business I think it's the case for most of our peers as well -- is you get a snapshot of someone's income the day they apply but at the time that they renew their lease, whether it's one year, two years, five years later, you're not re-verifying income.

So really the income data that we have for the most part is based on new applicants coming to the community that convert to a move-in. So I can't really disaggregate it for you between move-ins versus renewals based on the new applicants the lease incomes are up about 6% year-over-year for our portfolio.

6%?

About 6% correct.

Okay. Thank you.

Ryan Peterson, Sandler O'Neill.

Just touching again on the development pipeline. You added it $400 million in the quarter you talked about previously kind of tapering it back. Is that $400 million you consider that still tapering or is this a reflection of your increased optimism that you talked about the legs of this cycle?

Ryan, I'll start, this is Tim. And Matt feel free to jump in.

I mean if you look -- I know we don't consider tapering, we've been running starts at about $1.2 billion to $1.4 billion in the last three years. If you look at our total pipeline rising � development rights and development communities underway we're about where we were at the end of 2013 right now in terms of dollar value. A little less in terms of unit count, but about the same in terms of dollar value.

We talked about in the past we said one, we expected it tapered back a bit just based on opportunity opportunities, so it's really driven more by opportunities than anything else. And we have seen some good opportunities over the last few quarters that we may not have expected to have seen call it a year ago.

Now there are markets where we are being more judicious as I mentioned earlier particularly the Bay Area and New York City to name a couple. Where I guess we'd be surprised if our pipeline didn't dial back a little bit just based upon underlying construction costs, [lien] costs, fundamentals and projected returns for where we are in the cycle.

Great thanks. And then if you could just touch again on the New England fundamentals being ahead of expectations for the year -- what's driving that, is that all from your new kind of management or is there something that you weren't expecting in the actual market?

Ryan, it's Sean. I think a couple things: one, the market is just performing better particularly the suburban submarkets. Job growth is picked up and there is very little meaningful supply really in the suburban submarkets as compared to the urban core in Boston.

And then certainly we have changed our expiration strategies as I alluded to earlier with New England and Seattle being the two where it's probably the most pronounced. And so we just had a greater volume of transactions in the second quarter which will continue through July in that market which has put material upward pressure on gross -- potential growth -- and a good quarter in New England. So our expectation is that the suburban markets will continue to perform well and so good market combined with shift in strategy are really the two components.

Okay great. That's it for me. Thanks.

Tayo Okusanya, Jefferies.

Just two quick ones for me. First of all just same-store operating expenses and quite a few regions in Q2 was I'd say probably higher than we were expecting. Just kind of curious about the high levels of OpEx that quarter and what we should be expecting in the back half of the year?

Sure, Tayo, this is Sean. In terms of the second quarter, we provided original guidance which was between 3% and 4% -- we were a little bit low in the first quarter, a little bit higher in the second quarter. It was always our plan to be a little bit higher in the second quarter, in fact our original expectation for the second quarter was a little bit higher than when it came in. But we received some favorable adjustments in the properties tax [credit] which helped alleviate some of the year-over-year pressure.

I mean as we reiterated in the outlook we still expect operating expenses to be between 3% and 4% that hasn't changed since the beginning of the year. The components may have changed a little bit so probably a little bit more favorable outlook on taxes as an example. But obviously we took a hit in the first quarter in terms of the storms in the New England markets. So the components are moving around but still expected to be in the 3% to 4% range and it's about -- was about as planned, slightly below planned, in terms of the second quarter.

Okay. That's helpful. And then the second one is along the lines of construction. Can you just talk a little bit about what you're seeing in regards to construction cost trends at this point and specifically if you're starting to run up against any issues with labor as construction is generally ramping up?

Sure Tayo, this is Matt. It's a challenge. It's a real challenge in Northern California. Where it seems like hard costs are still growing at as much as 1% a month.

It's a challenge in Southern Cal, although a little bit less pronounced there, probably a deeper subcontractor base that had more spare capacity when you think about the for-sale market and how active that had been the last decade there and how far it fell back. New York right now I think we've been a little bit surprised at how it's been moving up in New York and again that could be related to the spike in permits of the 421a but it is definitely a challenge in those hot markets. You know Seattle I don't think is any different than it's been the last couple of years -- it's been a little bit -- it's moving up but in a more measured way.

And I do think in some of these markets, San Francisco, maybe high rise in Boston, similarly with some of these subcontractors are just full up. They probably are scrambling to get labor and they're also making hay while the sun shines and really pushing their margins. And ultimately that probably does correct itself because it will some point make it difficult for deals to pencil in and we are already starting to see some of that.

Okay. That's helpful. Thank you very much.

(Operator Instructions)

Drew Babin, Robert W. Baird.

Good afternoon. I was hoping you could talk about the New York metro area. Same- property revenue growth year-over-year has been relatively sticky around 3%.

Is that primarily a product of new supply hitting? Is rent fatigue real? If you could just break that out and talk about kind of the individual submarkets and where they fit in.

Sure Drew, this is Sean. Happy to talk about that.

It depends on which market you're in so maybe I'll kind of walk through some of them. If you're looking at New York City generally speaking for our portfolio for the most part the impact that is kind of keeping a lid on revenue growth is really supply. And it's probably most acute in Brooklyn and in Midtown West.

The strongest performing asset that we have in the greater New York City area is the two Avalon Riverview Towers which are in Long Island City as well as our Morningside Heights deal up near Columbia -- those two are the out-performers at this point. Midtown West's been a little bit on the weaker side, Brooklyn's been a little bit on the weaker side, and the Bowery has done okay.

When you move outside of New York City, northern New Jersey has actually been one of the stronger performing submarkets right along the Gold Coast. We've been seeing 4% or 5% revenue growth. And then as you push out into -- push down into central New Jersey it tends to be weaker more in the 2% to 2.5% percent range.

Long Island has done okay but a little bit below average. Long Island has been in the 2% to 3% range as well. And then Westchester's been holding its own but you know it's the kind of market that's if you're doing 3%, 3.5% maybe 4% at the high-end, that's sort of about what you expect in that market.

And for those when you think of central New Jersey, Long Island, Westchester it's not typically about supply that's the issue, it's more about just demand and where the choices are or the choices that the people are making. So it's typically about the demand side in those markets generally speaking.

Would you say that rent fatigue is a real phenomenon in Manhattan, or are you seeing anybody kind of voluntarily pushing further out of the city in the interest of saving money?

Not really, no. There's plenty of supply, plenty of options. And it really hasn't been a big issue there in terms of people moving out due to rent increases relative to other markets like on the West coast or something like that. So not really significant rent fatigue.

Okay. Thank you.

Wes Golladay, RBC Capital Markets.

Looking at the expiration shipping will this give you guys a new structural high for the occupancy or is this more of a rate phenomenon for you guys?

Yes Wes, this is Sean. I wouldn't think of it as a structural high in terms of occupancy going forward. If that's what you are talking about in terms of it being high.

I mean if anything in the second quarter through July probably, it would actually put a little bit of downward pressure on occupancy given the greater expiration volume, greater move outs potentially. But also gives us more of a rate opportunity really in terms of more expiration, but at that point more transactions when rents are at the highest point during the season. So that was the main reason of the shift was to take advantage of that opportunity and give us a little more protection going into the fall, and in the winter in terms of continuing to hold pricing power with just pure transaction.

Okay thanks a lot guys.

Conor Wagner, Green Street Advisors.

On the Hollywood deal, that's a fully entitled land site - how does that work for an Avalon/AVA mix given that you target different unit sizes and mix with AVA versus Avalon?

Sure Conor, this is Matt. Typically the way it works is the entitlements, and it's true in this case as well, are more about the overall FAR parking count, unit count, building mass. And that site actually has five different buildings, four or five different buildings on it and multiple street frontages.

But the entitlements usually don't drill down specifically to this many one bedrooms, this many two-bedrooms, this much average unit size. So we have the flexibility within what's been approved to kind of re-pack the building if you will. And we may take one of the buildings and if the whole site's been approved for 695 units we may take one of -- 300 on one side, 400 on another we may shift that around and put 380 up here and 320 down there. As long as we stay in the kind of the overall limits, so there is flexibility to reprogram and we've done that in a number of places.

Okay thank you, and then earlier you guys alluded to a slight increase in debt cost this year versus where you could issue tenure now versus earlier in the year. Have you seen any movement in the debt cost influence cap rates in the disposition that you're looking at?

It's Matt again. No, not yet.

We have not been as active in the last quarter as we were kind of last year but we do have some fund assets in the market, we're getting ready to come to market now trying to take advantage of what we see is a pretty compelling opportunity. But we just closed one fund asset in the second quarter, it's the only closing we had last quarter and it was right around a four cap rate on an older asset in Southern California that was bought by a value-added buyer.

So we're hearing talk that maybe buyers are going down the duration so they'll be seven-year debt instead of 10-year debt to make their numbers. But obviously they may be getting more bullish on rent growth in awhile to make up for. So far it really hasn't had an impact on the transaction.

Conor this is Kevin O'Shea just to add to that. Their interest rate cost I guess on 10-year debts are up 20 bps over the last few months. But they've been pretty flattish over the past year or so in the fourth quarter we did 10-year debt and I think was around 359 which is pretty much where we are now. So I think unless there's much more pronounced and durable move upward in interest rates it seem likely that other factors will probably drive asset prices more.

Thank you very much.

Ladies and gentlemen this does conclude today's question-and-answer session. At this time I'd like to turn the call back to Tim Naughton for any closing remarks or comments.

Thanks Christine, I know it's been a long call so I just want to thank everybody for attending today. And I hope you have a great summer and we'll see you in the fall.

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