艾芙隆海灣社區公司 (AVB) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the AvalonBay Communities fourth-quarter 2015 earnings conference call.

(Operator Instructions)

Your host for today's call is Mr. Jason Reilley, Senior Director of Investor Relations. Mr. Reilley, please go ahead.

Thank you, Greg.

Welcome to AvalonBay Communities' fourth-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 risk and uncertainties associated with forward-looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the Company's form 10-K and form 10-Q filed with the SEC.

As always, this press release does include an attachment with definitions of 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 to you refer to this information during the review of our operating results and financial performance.

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

Thanks, Jason. Welcome to our Q4 call.

With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. Kevin and I will provide commentary on the slides that we posted last night, and then the four of us will be available for Q&A afterward. During our comments, we'll focus on providing a summary of Q4 and the full-year results, and then spend a good part of the time talking about the outlook for 2016. I'll talk about the economy, apartment markets and operations and then turn it over to Kevin who will talk about development, as well as capital and risk management as we move further into the cycle.

So let's start on slide 4. Highlights for the quarter and year include core FFO growth in Q4 of 14.4% and 11.4% for the full year, which is about 300 basis points higher than our original outlook at the beginning of the year. Importantly, we continue to generate FFO growth this cycle toward the top of the sector, while having the lowest leverage.

Q4 same-store revenue growth came in at 5.4%, or 5.7% when you include redevelopment, as many of our peers do. And for the full year, same-store revenue growth came in at 5.0%, or 5.2% including redevelopment. Same-store NOI for the year came in at 5.8%.

We completed about $500 million this quarter, at right around a 7% yield. And $1.3 billion for the full year at an initial yield of 6.7%. We started another four communities totalling about $400 million in Q4, bringing our full-year level of starts to roughly 1.2 billion, or roughly in line with completions this year. And lastly, we raised $400 million in new capital in the quarter, principally through a $300 million unsecured debt offering. And for the year, we raised a total of $1.9 billion in capital to fund new investment and refinance maturing debt.

Turning now to slide 5, the $1.3 billion of new development that we completed this year that I just referenced is contributing to healthy earnings and NAV accretion. Yields of 6.7% are roughly 250 basis points greater than our initial cost of external capital raised this year, and the cost basis of these completions at $310,000 per unit is more than 30% less than the value of our average stabilized asset on a per-unit basis, with rents that are 12% to 13% higher. Implying that value creation was around 50% over cost, or roughly $650 million in net NAV created, or $5 per share in 2015 alone.

Turning to slide 6, in addition to strong financial results, we excelled in other aspects of our Business in 2015, including customer satisfaction, where we were ranked number one nationally among all apartment operators for online reputation. Associate engagement, we were ranked number one in our sector, number two among all DC Metro base organizations on Glassdoor. Corporate responsibility, where our multi-year focus on sustainability has put us toward the top of the sector in the US and globally, and community recognition, where a number of our newly developed communities earn prestigious awards from various industry groups.

We probably don't talk enough about this with investors, but we know that achievement serving the needs of these important constituencies, our customers, our associates in the community, as well as the shareholders, is critical to building the kind of culture and company that can be enduring and successful.

Shifting now to 2016, let's move to slide 7. We're projecting 9% core growth in core FFO per share this year, driven by about two-thirds internal operations from the almost 6% same-store NOI growth that we're projecting at the midpoint. And about a third from new investment activity, once you net out the cost of new capital issuance, which is coming mostly from stabilizing new developments.

The principal difference in growth between 2015 and 2016 is that we expect less external growth from new investment activity, which in turn is being driven by the impact of fewer deliveries in 2015 that will be stabilizing in 2016, and some unevenness in the timing of capital raising activity. When looking at the earnings impact of our development platform, it's probably more helpful to view it over a multi-year period. For example, if you look at it over the 2015, 2016 timeframe here, new investment activity net of changes in capital costs is projected to deliver approximately $0.70 per share to core FFO, or around 10% cumulative growth over the two-year period.

Moving to slide 8, given our outlook for 2016, we announced a dividend increase of 8% this year. The dividend is now up by more than 50% over the last five years, and importantly has grown by 5.5% on a compounded basis over the last 20 years. Dividends are an important component of total return. They represent almost two-thirds of the total return of roughly 1800% that we've earned over the last 20 years, and that kind of growth really does underscore the accretion and growth embedded in our business model. I think sometimes this gets a little lost during the market volatility and ramp in trading activity we're seeing in the sector today.

Turning to slide 9, our outlook is being driven in part by the prospect of a stable economy, continuing into 2016 and from our perspective appears to have reached mid-cycle in terms of GDP and employment growth. Improving consumer should benefit from stronger labor market in 2016, and then the public sector is expected to actually contribute to overall economic growth this year, although it's still at a lesser rate than the private sector after having been a drag for a number of years to overall economic growth.

Turning to slide 10, job growth in our markets is projected to outperform the US again in 2016, as it did in 2015, at just over 2%. The East Coast is expected to improve in 2016, while the tech-heavy West Coast market should moderate off the blistering pace of the last couple of years, although still remain at healthy levels around 2.5%.

On slide 11, total personal income growth, which combines job and per capita income growth is expected to accelerate in 2016, as wage growth gains traction, particularly for the younger millennial cohort, most of whom continue to rent. Wage growth, as we discussed in the past, will becoming an ever-increasing important driver of our business, as economic cycle matures and more supplies starts to come online in 2016.

Speaking of that, moving to slide 12 and supply, we do expect that completions in our markets will increase in 2016 by about 50 basis points to around 2% of stock, or roughly in line with job growth, suggesting pretty stable conditions overall. Of course some sub-markets, particularly in urban cores, will see higher levels of deliveries that may impact local markets, as owners use concessions to simulate absorption during lease-up. This is particularly true in urban and high-rise product, where inventories can build quickly, as deliveries tend to occur over a more concentrated period of time.

But overall, housing demand should continue to favor the apartment sector due to many of the things that we've been talking about over the last couple of years, including favorable demographics, pent-up demand as millennials continue to unbundle, and ultimately changing life-style trends with delayed marriage and family formation. All these factors should help support another healthy year for apartment fundamentals in 2016.

And turning to slide 13, that's, that is reflected in our outlook for our same-store portfolio this year, where we are looking for same-store revenue growth of 4.25% to 5.5%, with modest improvement on the East Coast. On the West Coast, we expect some moderation in Seattle and Northern California, after exceptionally strong growth in 2015. Overall then, growth is expected to be healthy, with performance between the East and West Coast narrowing a bit in 2016.

And with that, I'll turn it to Kevin who will discuss development and capital activity.

Thanks, Tim.

Turning to development activity on slide 14, we show development under construction in absolute terms and relative to our total enterprise value, both projected for year-end 2016 and historically going back to 2004. As you can see here, ongoing development activity as a percentage of our total enterprise value has been relatively stable over the past few years at around 10%, which is at the low end of our target range. This reflects our continued discipline in allocating capital to this activity as we move further into the cycle.

Moving to slide 15, profit margins on our development activity have remained remarkably resilient and healthy in this cycle, thanks to the underlying strength of apartment fundamentals, our sector-leading development and construction capabilities, and the decisions we've made about which opportunities to pursue as the cycle matures. Since 2012, our development completions have increased from about $0.5 billion to more than $1 billion. During that time, developing yields have been around 7%, while corresponding cap rates for those particular assets have been at or below 5%, resulting in stable profit margins on development in the low 30% range.

As shown on slide 16, communities currently in lease-up continue to provide healthy profit margins. For the 12 communities undergoing initial lease-up in 4Q 2015, which represent $970 million in total capital costs, the current weighted average monthly rent for home is $115 above initial expectation. In terms of yield performance, the weighted average initial projected stabilized yield for these communities is currently 6.7%, or 30 basis points higher than our original projection of 6.4%.

Turning to slide 17, I would like to talk about how we manage risks associated with our development activity. The first way we do so is by maintaining a broadly diversified development pipeline, one that is diversified by geographic regions, by product type, and by exposure to urban and suburban submarkets. As the charts on slide 17 illustrate, while our development pipeline remains diversified across regions, future development rights are biased toward infill suburban submarkets and mid-rise product. Where rents, construction, and land costs are more affordable, development economics are more favorable, and the production cycle tends to be faster. Going forward, we expect our development rights pipeline will continue to be an important source of outsized growth in NAV and FFO per share.

Moving to slide 18, another way we manage development risk is how we source and structure new development opportunities. With the overwhelming majority being controlled through long-term purchase contracts, with modest at-risk deposits, and relatively few being controlled through land we've purchased and hold on our balance sheet.

At the end of 2015, our development rights pipeline consisted of 32 communities, representing $3.4 billion in projected total capital costs. Of these 32 communities, 25 are controlled through purchase contracts, while we own the land on the remaining 7. In addition, of these seven where we own the land, two account for approximately $420 million of the $485 million in land held for development on our balance sheet. We expect to begin construction on these two community development rights, Columbus Circle and Hollywood, in 2016, which would reduce our projected land held for development by year-end 2016 to the lowest level in more than a decade.

A third method which we use to manage development risk is substantially match-funding new starts with long-term capital, a topic we've talked a lot about in this cycle. On slide 19, we highlight our funding position against the total projected capital costs of development under way. As you can see, we only need to source about $500 million in long-term capital against a $3.4 billion in development under construction or recently completed.

Taking into account the $2.2 billion of capital already spent to date, $400 million of unrestricted cash on hand, and $350 million of projected annual cash flow from operations after dividends. This means that about 85% of the value creation from ongoing development activity has already been locked in for our shareholders.

Turning to slide 20, we show how being substantially match-funded significantly enhances our growth in EBITDA, while simultaneously enhancing our already sector-leading credit profile. Essentially making us similar to an acquisition-oriented REIT from a funding risk perspective, but with lower leverage and stronger built-in earnings growth.

Specifically, the projected EBITDA from recently completed development and from development under construction totals about $216 million, as shown on the chart on the left. This represents about 18% growth and annualized core EBITDA from the fourth quarter. Even in a worse case, if all the $480 million in unfunded commitments were funded with new debt, our net debt to core EBITDA would still decline from 4.8 times to the mid-4s, after taking into account the EBITDA from new development.

Of course our actual net debt to core EBITDA will move around a bit as we source new capital to fund incremental development activity. Therefore, the slide isn't meant to communicate that our leverage is going to decrease to 4.5 times or that our target leverage is 4.5 times. In fact, our target range for this metric is roughly between 5 and 6 times.

Instead, the purpose in showing this slide is to convey that due to our match-funding strategy we are optimally positioned to benefit from development activity, that is expected to be accretive both to earnings and balance sheet strength and that our credit profile is actually enhanced by our profitable development activities, given our funding strategy.

With that, I'll turn it back to Tim.

Thanks, Kevin.

Just ending here on slide 21 before opening up the call, you know, in summary, 2015 was a very good year for the Company and the industry. We are expecting 2016 to look a lot like 2015. Once again, benefiting from above-trend growth. I think this outlook is not surprising, just given our view that we are mid-cycle with healthy apartment fundamentals continuing, and then just a stable level of deliveries and healthy accretion coming from our development pipeline.

As we move further into the mature portion of the economic expansion, we are highly focused on managing the investment and funding risk of the business. As Kevin mentioned in his remarks, we are doing this through managing the size and diversity of our pipeline, reducing land inventory, match-funding new commitments, and maintaining leverage at the low end of our target range.

And with that, Greg, we would be happy to open up the call for Q&A.

(Operator Instructions)

First from UBS, we have Nick Yulico.

Thanks. I guess my first question would be, you've talked a lot about how you've been able to deliver projects at higher yields and underwriting for the past few years, you continue to do that. But as far as your guidance goes for this year, is your assumption for development pipeline that you're basically, you know, delivering at the yield that you give on the development page? And so that if you actually beat by 30 basis points at the high end of your range, or could you just put a little sensitivity around that?

Nick, this is Tim. Matt, feel free to jump in. In terms of the attachment that shows the development pipeline with the projected yield of 6.3%, that is based upon current rents and rents marked to market once you start leasing and you get up to about 20%, 25% occupancy. For those communities that have started construction where there may have been market rent growth but we haven't yet started leasing, we haven't marked any of those to market, just to be clear.

Then as I think you can probably see over the last few years, we've generally been beating the initial pro forma yields by 30 to 50 or 60 basis points just because of the strong market rent growth and the fact we've been able to bring deals in more or less at budgeted cost. I think it really is ultimately -- if you look at the development pipeline today, the shadow pipeline of deals that haven't yet started, the economics of that look a lot like what, you know, the economics look like on the deals that we've been starting over the last couple of years.

So I think a lot of it's going -- how you would underwrite those would depend upon how you would underwrite the markets ultimately in terms of where we're doing business, and how you might underwrite construction costs relative to market rent growth change as over the next couple of years.

That's helpful. Related back to the guidance, should we be assuming that if you are getting the 30 basis points beating on original underwriting, is that already kind of factored into your midpoint of your guidance, or is that sort of get you to the higher end of your guidance range on FFO?

Yes, no, I'm sorry, in terms of FFO reflects the budgets for each of those assets, they would have some embedded level of market rent growth, commensurate with the markets in which they reside.

Okay. Got it. That's helpful. Then one other question was on, you gave your outlook for US job growth, basically being similar to last year. If job growth were to be slowing here, which people are concerned about, where do you think -- which of your markets have the most risk then from a fundamental standpoint?

Nick, this is Sean. There's probably a couple of answers to that question, but I guess what I would probably say based on historical precedent in the markets is the sort of high beta markets, if you want to think about it that way, tend to be the technology markets, so Northern California and Seattle, tend to have a greater reaction in rent levels relative to a given change in job growth in many of our other markets. So the technology markets are the ones you probably would be most concerned about, that's assuming, of course, that any reduction in job growth is somewhat proportional.

You know, in the past, we've had some losses in the energy sector. It has not had a direct effect on our markets, but there's certainly some indirect effects as it relates to a reduced amount of capital investment on behalf of those companies. It's going to ripple through the economy. So those are the markets I would probably be most concerned about, given a reduction in job growth.

I guess one last quick question. Then maybe it's for Kevin, is that I think the concern would be that you guys -- although you guys have a great balance sheet and you are mostly funded for the development pipeline today as you look at it year end, still starting more projects, and people then worried about you guys and having to raise capital a year from now. I mean, what would be your sort of answer to that, that shouldn't be a concern for folks?

Well, there's a few things, Nick. First of all, as we demonstrate in 2009, if we don't think we have reasonable access to capital, we don't have to start new projects. That would be one thing to keep in mind. We don't need to keep creating commitments if we don't think cost effective capital is available to us in one of our principle funding markets.

And I guess the second thing to keep in mind is that we do keep a very strong balance sheet both from a match-funding perspective, but also from -- in other dimensions, including having low leverage and ladder maturities. So that we have an awful lot of flexibility to deal with an air pocket that might exist where there maybe a disruption in the capital markets before we've been able to sort of adjust and dial back on new starts. So I think, you know, fundamentally, we have a great deal of flexibility in the commitments we create and the capital we're going to be able to source to deal with volatility in the capital markets and that's how we manage the balance sheet.

Thanks.

And next we have Nick Joseph from Citi.

Thanks. You talked about the development rights pipeline and its current focus on infill suburban submarkets. Do you think that there's a difference in investor demand in terms of the transaction market between urban core assets and infill suburban assets? And then how do you think about that in terms of the IR differential between the two?

Nick, this is Matt. There's great demand for almost everything right now. I think there is a difference in cap rate.

Clearly urban core assets do tend to trade at a lower cap rate. How much lower depends on what you're comparing it to, if you're comparing it to here in DC, DC versus Arlington is not going to be that different versus -- as compared to, say, DC versus Tyson's Corner, for example. But we do reflect that in the target yields that we put out for deals.

We look at where we think the cap rates would be on those assets, specific sites today, and where we think long-term exit cap rates might be. So we try -- we do factor that in.

Going forward, you know, I don't know. It's speculative. There has been foreign capital that's probably preferred to stay mostly in the urban type of trophy assets. That's one reason the cap rates are a little bit lower on those. We've got pretty strong, healthy demand for both at this point.

Thanks. Well, if we were to enter into a recession, do you think there's more stickiness to the urban core cap rates versus the suburban? Or do you think they would move up together?

I don't know. I think every cycle is different. It's hard to know.

Nick, I guess, I think it's probably liquidity premium for the urban core stuff. So to the extent you get into a period of more significant capital dislocation, the probability of being able to move or to monetize an urban asset I would say is probably greater than a suburban asset. I think that's part of the, that's part of the premium valuation or discount cap, the discount for the cap rate, is just that there's just that liquidity aspect of it.

Thanks. And then in terms of rental affordability overall, are we at a point in the cycle where rental rate growth will more closely track wage growth, or is there still room to be able to increase rents at a higher pace than overall wage growth?

Nick, this is Sean. We are at sort of the upper end range on that metric. It's running around 22%, which is, you know, within the band of history. But certainly at the upper end of that band, so there's no question that we need to continue to see income growth to support rental rate growth in the future.

So if we had a sudden deceleration in income growth for whatever reason, which is not what's expected, I think we're seeing that throughout the economy now in terms of pressure on wage growth, then there would become greater constraints on pushing rents further in the future. No doubt about it.

Nick, just to add to that, when you look at wage growth, as we've talked about in the past, there is a bifurcated labor market, right, in terms of college grads and non-college grads, where you've got 5% for the total population unemployment, 2.5% for college grads. The majority of our residents are college grads. And we are seeing that they are probably getting higher than average. They are making higher than average wage gains, which just provides a little bit more support I think for our business in terms of being able to continue to generate decent rent growth.

Nick, just to give you a sense, on a year-over-year basis in the fourth quarter, lease income for a new residence relative to last year was up more than 5%. So we're seeing that for our population of residents, for sure.

Thanks.

Yes.

Next we'll go to Gaurav Mehta with Cantor Fitzgerald.

Thanks. Good afternoon. Going back to your funding activities, can you talk about how you are thinking about asset sales versus capital markets today?

Sure. This is Kevin. You know, as we laid out in our outlook, we anticipate sourcing about $1.1 billion in asset sales and unsecured debt. And, I think in terms of the attractiveness of those markets today, both are highly attractive and I would say while we don't comment on the precise mix in part because the capital markets themselves can be volatile and the pricing can change over time, of that $1.1 billion, the majority of the capital in our plan is contemplated to come in the form of unsecured debt issuance.

So not much asset sales this year?

Well, it's $1.1 billion, so, you know, we haven't, again, precisely identified the actual mix. A minority of that amount will come through asset sales. The majority will come through unsecured debt, as is our current capital plan. Tim, do you want to add?

The other thing to add there, you are limited somewhat on how much you could sell from a tax perspective and retain the capital without having to do a special dividend, just because of the tax gains that are embedded in a lot of the assets that would be on our disposition list. So that would impact at the margin in terms of how you might think about debt versus asset sales.

And the other point to bear in mind is that with our leverage being a little bit, currently being a little bit below our target level, we've got capacity for incremental debt, particularly when you give effect to the deleveraging impact of stabilizing development.

Okay. And then lastly, on your development pipeline, the 6.3% average yield that you have on your current pipeline, is it possible to break it down between expectations suburban versus urban assets?

You know, we haven't really broken it down that way. It really varies by market. I mean, yields are lower in New York City, where cap rates are lower. So maybe they are a little lower on the urban stuff. Again, we think cap rates are, you know, 25 to 50 basis points lower on the existing assets. I don't know that the urban yields are that much lower, but they are probably a little bit lower.

Okay. Thank you.

Next we'll hear from Jordan Sadler with KeyBanc Capital Markets.

Hi. It's Austin Wurschmidt here. Thanks for taking the question. You mentioned the average initial cost on the $1.9 billion in capital you raised last year was around 4.3%. What are you, I guess assuming in your guidance in terms of that cost of capital in 2016?

Austin, that's probably a little bit more specific than we've ever guided to before. So I don't really have any comment on that.

So like maybe a little bit differently, when you think about the spread between the development deliveries and the cost of capital you plan to raise this year, would you think it would be something along the same lines as you achieved last year?

I think probably, in that ballpark. Tim, do you want --

Just to -- we said we're primarily looking to rely on debt and asset sales. If we had two debt deals this past year that we could probably issue debt at about the same pricing today on a 10-year basis, around in the mid 3%s somewhere and, you know, cap rates are going to range, depending upon which market you're selling in, probably from the low 4%s to the mid 5%s. So they are more weighted towards leverage, which we're likely to be, this year that I think it gets you probably in the low 4%s again, like we were in 2015.

That's fair. Thank you. And then just separately, given your guys' focus a little bit more on increasing your development exposure to suburban markets, you've talked a lot about the growth in the 35 to 44 year old age cohort. Just curious about your thoughts given we've kind of seen that homeownership rate within that segment tick up here more recently, and how you're thinking about that in terms of renter demand moving forward.

This is Matt. I guess I can speak to that one a little bit and Tim if you want to chime in as well. The demographic trends are long trends. The great thing about it, you can see it coming 5, 10 years down the road.

As we think about how we want to position our portfolio, where we are seeing the best risk-adjusted returns, opportunities to invest out of program communities for the future, it's driven by some of those big macro trends. So I don't think a small movement in the homeownership rate on the margins is going to impact that when you look at just the raw numbers coming through, pretty dramatic shift that's going to occur here. So I think things will have to change a lot before it changes our opinion on that.

I guess the only thing to could add is you're really starting to get to the leading edge of that active boom. If you look back -- a lot of people don't realize this. If you look back over the last 5 to 10 years, the drop in homeownership rates are most pronounced in that 35 to 44 segment, more so than the 25 to 34 segment. You're going to have a lot more people moving into that segment. They drop by like 1100 basis points, something like that.

Even if it ticks back up, still you're talking about a lot more rental households over the next 10 years coming from that segment. And it's impacting how we're thinking about product right now in terms of providing -- I think we've talked about the signature package, in terms of a higher level of finish and some larger units than we've maybe been doing over the last few years, and certain deals. It impacts how you think about amenities as well. We do think it's going to be a pretty big source of demand and it represents -- that age cohort represents about 20% of our residents today, whereas the under-35 cohort's maybe 40%, 45%.

Great. Thank you.

And our next question comes from John Kim with BMO Capital Markets.

Thank you. There was a recent article that Facebook was offering employees $10,000 to $15,000 to move closer to its headquarters in Menlo Park. I'm wondering if you had heard other Silicon Valley companies doing this and if you've seen any impact in your properties?

John, this is Sean. We're not specifically aware of a, I guess I'll call it a global offering like Facebook made. Obviously, there are other companies out there recruiting, people across America that provide incentives for them to relocate. We don't necessarily track that.

It's very episodic in terms of how it occurs. It's just part of the normal fabric of the process on a daily basis. There's nothing material out there that we're aware of other than the recent Facebook offering and we're not hearing about it in a way that it's influencing our data in any form or fashion.

Okay. And it sounds like Northern California may decelerate in revenue growth this year. Can you comment on markets that you see may have the best chance of accelerating growth this year?

Sure. Sean, again, I guess what I would say is at this point, you've properly identified Northern California as one of the markets where there's probably a little bit of concern about a slowing. It's come up a couple of different times.

But in terms of markets that have some upside, certainly the Mid-Atlantic is one that has some potential upside in terms of, we're at a point in the cycle where we know that supply is. It's about 2% last year. It's going to increase to about 2.5% this year.

More importantly as we're getting pretty good job growth out of the Mid-Atlantic now, up into the low 2% range, and it's starting to have, a nice effect on occupancy and rent change across the markets here. So the expectation is that there's potential for some upside in the Mid-Atlantic. I would not describe it as opportunistic and that there's significant upside.

There's still a fair amount of supply coming. And it's not a sort of high beta market as I described in the Northern California and Pacific Northwest region. So you tend to get a moderate recovery.

And we're seeing that here in terms of recent trends. Where rent change is up about 100 basis points in the first quarter as compared to the first quarter of 2014, so there's nice momentum there.

And then the other market that may have some upside, I would say is Boston. Boston's been performing well. Job growth has been steady. And supply is projected to decrease this year relative to 2015.

So there's probably a little bit of potential upside in Boston and the Mid-Atlantic are the two that probably stand out the most, I would say. Southern California has been increasing nicely and we expect that to continue, but I wouldn't think it falls into the potential surprise category like the others do.

Okay. Thanks for that. And finally, on Edgewater, on your settlement in January, can you remind us what you plan to do with the proceeds? Are you planning to potentially redevelop the asset or just repay the mortgage?

John, this is Kevin. The mortgage we repaid last year, we've already, as we've indicated in the release, received $44 million in proceeds. That was back in 2015. We anticipate receiving another $29 million in final additional proceeds in the first quarter. And so part of that is meant to compensate for the lost income on the project and so it essentially becomes a source of cash for us in 2016, and that's from a funding point of view how we view it.

I'm not sure--

John, I would just add, this is Matt, we are planning to rebuild and we've been having conversations with the local jurisdiction there and are expecting to file rebuild plans shortly.

Okay. Looks like the settlement amount came in close to your last point of book value. I'm just wondering where you see it versus replacement cost?

Well, maybe I should just correct you on the first piece. It -- we wrote off the book value last year and even after having done so with the $44 million of proceeds that came in reflected we had a casualty gain. So the proceeds receiving last year exceeded our remaining book value and the destroyed building, as I indicated, a significant portion of the proceeds, about $20 million relates to compensation for lost income, due to the business interruption of losing the building. So that's one little point of clarification.

In terms of the costs to rebuild, I don't think we know yet exactly what it's going to cost to rebuild. We have to finish the plans and bid it out. Relative to the overall recovery, it would certainly be less, right, Kevin?

Yes, overall received $73 million and about a little more than $50 million that related to the destroyed building and our sense is that was meant to cover the replacement costs for that building.

I was looking at the replacements on the book value in your 2013 10-K. Thank you.

That probably also included in the other building that was not destroyed.

Next we'll move to Jana Galan with Bank of America, Merrill Lynch.

Thank you. You mentioned rent as a percent of income is kind of at the upper end of historical ranges. Any submarkets where you're above the prior peaks and how do you think about maybe millennial budgets where they might not have a car?

Yes, Jana, good question. In terms of markets where it's I guess constrained, there's not necessarily any one market that's well beyond historical ranges. You've got, certain markets are more expensive, but obviously got people making substantially more income. So there's nothing that's on the extreme outlier side, if you want to call it that.

And yes, we do try to take into account millennials and the choices they make, so those numbers tend to be higher in some of those urban locations where people don't have cars, using Metro or the subway or whatever it might be. So we do find that in those cases, people are in a position where they can tend to spend a little bit more of their income on rent than in other geographies. It's a fair point.

And then maybe just on your outlook for your Metro New York, New Jersey portfolio, could you maybe talk to the different submarkets, as certain submarkets are seeing much more supply than others?

Sure. In terms of the Greater New York, New Jersey market, if you look at across, say New York City, Northern New Jersey, Central New Jersey, Long Island, Westchester, it's a pretty diverse geography. A lot of the supply is concentrated in New York City and Northern New Jersey. So if you're looking at Hudson County and then you spread throughout the boroughs, you're going to see that.

Supply as a percent of inventory is still in Westchester, Long Island, Central New Jersey, is pretty insignificant. So even though you have greater demand in those markets that identify with greater supply, there is a lid on growth next year as a result of it. There's not a wide variation for the most part. New York, New Jersey is going to be probably in the mid to high 3% range. There's not one market that's in the low 2%s and another one in the 5%s, to give you some perspective, if that helps. It's a pretty tight range.

Thank you.

Next from Janney, Rob Stevenson.

Good afternoon, guys. Sean can you do more or less the same for the DC submarkets, in terms of fourth quarter performance, was there any bifurcation by sort of submarket in the DC Metro? And then in terms of your 2016 outlook, any material differential in expectations between DC proper, Northern Virginia, et cetera?

Sure. As it relates to the, I'll call it sort of recent momentum, including the fourth quarter and spill over into early 2016, I would say the [laggard] across the Metro area has been suburban Maryland. Job growth has been okay, but the supply has been heavy and steady throughout that region, particularly Rockville, North Bethesda, Chevy Chase has been inundated with supply. So it's been the softest.

The strongest has been in and around DC. So DC proper as well as the close in sort of [Arby] corridor and things like that, towns and submarkets that are close into DC. And then I would say the rest of Northern Virginia kind of falls into second place. Call it the district, and immediately adjacent submarkets, Northern Virginia, and then suburban Maryland being the laggard as kind of recent conditions.

In terms of expected performance in 2016, what we have is overall for the Mid-Atlantic, probably be in the mid 1% range. Again, it's relatively tight. I would say what we're talking about is suburban Maryland probably right at the midpoint there.

We may see a little bit better performance out of DC, just given the nature of our specific assets in DC. Which is, we've got Gallery Place, Foxhall stuff in the northwest corridor that's older and rent-controlled.

When you look at it from a market perspective, I would say though one thing to be cautious about is the greatest amount of supply to be delivered in 2016 is in the District, just depending on the distribution of your portfolio within the District really will dictate what your performance is going to be. The way I think the market would probably look at it is DC, people would expect to be a little bit softer, given the nature of the deliveries, infill suburban submarkets probably in Virginia performing better, and then western Fairfax, I would say, and suburban Maryland probably being the laggard.

Okay. Can you talk about expectations for the three main Southern California submarkets in 2016 and how you see that sort of shaping up and, any type of issues in any of the individual markets that you're worried about from a supply standpoint?

Sure, happy to talk about that. In terms of, again recent performance rolling forward, I'll try to keep it relatively brief without going on too long here, but where we've started to see some supply impact is in Orange County. Orange County softened up a little bit, there's a fair amount of supply coming into Irvine, there's some in Laguna Hills, there's supply in Anaheim, there's been supply in Huntington Beach, a little bit in Costa Mesa. So that softened a little bit and our expectation for 2016 for that market is for it to trail the other regions as well because of the same issues.

San Diego and L.A., we expect to lead going into 2016 and continue throughout the year and for the most part, that's not only the nature of the market, but how our portfolio is positioned. Which is for the most part, it's B assets in suburban submarkets across San Diego, which is relatively small portfolio, but that's where the majority of our assets are located. Los Angeles, same thing in terms of the distribution of the assets within the submarkets, we don't have any same-store assets in downtown L.A. as an example, which is getting supply now that's equal to double-digit percentages of existing inventories.

So you're going to have softness in some of those submarkets like downtown L.A., where you're getting a heavy amount of new deliveries. So I would say for 2016 overall, you're probably going to see L.A., San Diego leading and Orange County lagging, just given the nature of our portfolio, but also just from the market perspective in terms of where the supply is concentrated.

Okay. Very helpful. Thank you.

Next up, we have Anne Weissman with Credit Suisse.

Hi, guys. This is Chris Freeman. Obviously don't do a lot of acquisitions. Can you talk a little bit about what motivated you to do the Avalon Hoboken and then what, what's the forward cap rate on that asset?

Sure, Chris. This is Matt. You're right. We haven't done a lot of acquisitions historically in this cycle. At this point what we are doing is we're trying to -- we are always looking for opportunities to improve our portfolio where we can, and that happened to be a very unique opportunity there in Hoboken.

We weren't per se looking to add in New Jersey on a net basis, but we're always looking to improve our submarket exposure. It's a highly supply-protected submarket. It's one of the few parts of New Jersey we have not been able to penetrate through new development.

Cap rate is about 5%, which is pretty attractive for an asset that's only seven years old. The average unit size there is about 1,000 square feet, so it's actually more targeted at families than necessarily at young singles. And that's what -- in that part of Hoboken, it's kind of interesting to see how it's evolving in that way as Hoboken kind of matures as a desirable location, not just for people kind of right out of school, but for people, married couples who are a little bit older as well. There's a supermarket right next door.

It was just a unique opportunity and we feel like we were able to, based on some unique characteristics of the way the asset was marketed, get it at a price that was more compelling than most of the acquisition opportunities we see.

Great.

Maybe just to add to that, maybe implicit in your question, too, we're not looking at acquisitions as a growth platform right now to be clear, but we are -- we are seeing a lot of volume. We see it as an opportunity to potentially upgrade the portfolio, and so we do look at it sort of midcycle where we see a lot of volume. We're focused both on asset management and portfolio management to try to upgrade and improve the portfolio as we can.

As I mentioned earlier, in one of the other questions, we are somewhat limited in terms of how much dispositions we can do before you can't retain the capital anymore. But we -- but we do see that as -- we do have some assets we would like to sell and we're seeing an active transaction market where we see assets we would prefer to own. So we're trying to do some fair trade along the way as well.

Got it. That's helpful. Then the 5% is how much CapEx per units does that have there?

Normally when we quote cap rates, it's just kind of typical market convention. I don't know the exact number, but this is, again, a fairly young asset. My guess is like [$400] or [$500] a unit. Something like that.

Okay, great. I appreciate all the color on the risk mitigation you guys do on the development pipeline, but just wondering if you can give us some perspective on where cap rate spreads were on new starts before the market entered a downturn last time around? And where those spreads ended up, and I guess at the 250 basis point cap rates spread you've got now, is that enough cushion to kind of stay profitable as things turn?

Yes, this is Tim. I would say, we're probably looking at development yields around where we're looking at today, mid 6%s. There was a year or two where they came in around closer to 5% in terms of actual performance. Conversely, I would say, you know, cap rates were probably in the mid 4%s where they are today. And really, as you know, there are hardly any trades at all, but to the extent there were trades, it probably went north of -- it probably went north of 6% for a year or two. But, you know, hopefully that's helpful.

If you look at the deals that we were building in 2009 and 2010 that ended up stabilizing initially at 5%, those are more like 6.5% and 7% today, just to put it in perspective. So they are fine assets. We're not going to make the same kind of return that we made on deals that we started two years later, for sure. But, you know, still a fine outcome, given the kind of recession we went through.

Chris, this is Kevin. Just to add to that, looking at some of the data that we have here internally in terms of original projected yields and initial stabilized yields by vintage of completion and going back to that time period, yields fell about 100 basis points. To their initial underwriting.

Got it. Okay. Thanks a lot, guys.

That's a great point, Matt's alluding to. The match-funding is the most critical thing, because comparing sort of -- you have to really compare the yields on the deals that have started with the capital that are sourced in the same period of time. That's the virtue of match-funding. You lock in the NAV growth right now at this point in time.

Perfect. Thanks.

Our next question is from Ryan Peterson with Sandler O'Neill.

Hi, thank you. Just on your Columbus Circle development, could you guys provide an update on any plans to monetize a portion of that through either retail or condominiums?

Sure. This is Matt. I can speak to that a little bit. We are working on it. The program is getting set.

As an example, I think when we first bought the land, we thought we were going to do about 50,000 or 55,000 square feet of retail there. The program that we have now is more like 67,000 or 70,000 square feet of retail. We were able to add some retail at a seller level and subseller level. So it's now matured to the point that we have a pretty good definition of what the offering is and we have been talking to folks and we'll keep you updated as we make progress on that.

Okay, great. And then my second question is just what your thoughts are on 421-A, whether that will be resuscitated or whether you think that will kind of severely curb development in New York?

I think it's obviously too early to tell. It is a program that's been around for a long, long time and it is important to make rental production work for the most part in the city, in New York City. So I think our local folks would say probably there will be a program in some form or fashion that will come back at some point. These things get snagged in politics and in New York there's kind of this unique situation where it's not just the city, but Albany, the state legislature is involved as well.

As it relates to our portfolio specifically, doesn't really have much impact. The deal we were just talking about at Columbus Circle, we were never intending to put that deal in the program, so our plan there is not to have any affordable, so not to have any tax abatement from the start. And the other deals that we have going in New York, it's already been vested. So it might impact the land market until things settle out, but it's too early to say what its impact might be going forward.

Okay, great. That's it for me. Thank you.

Next from Zelman & Associates, we have Dan Oppenheim.

Thanks. Was wondering if you can talk a little bit in terms of what you're thinking about for, you said you'll start Columbus Circle here in 2016, any thought in terms of timing for that, or just finalizing in terms of the retail offering and overall plans?

Our current expectation is we start in the second half of the year. I think we're starting demolition right now, so we've got some work to do there as we're just finalizing the plans. It is in the plan for the back half of the year.

Got it. I guess relatedly, on page 5 of the slide, you talked to basically show the, where you're getting in terms of the rent and the capital costs for the development projects that were completed in 2015, basically showing some of the, call it higher gross yield relative to the stabilized portfolio. How do you think about that in terms of the growth rate? I mentioned Columbus Circle, look at that a couple years from now, almost going to look the reverse in terms of lower yield, but likely thinking about a higher long-term growth rate, and so wondering how you think about the growth on this or what you've started in 2015?

Well, Dan, this is Tim. In terms of, in terms of each -- and we've talked to this in the past. Every deal has a target yield that's impacted by what we think the projected growth profile, cash growth profile of that asset, or that submarket will deliver. So something like a Columbus Circle where we'd think we would have a higher growth profile than the average deal in our portfolio, we would expect that to have a lower go in yield and that's pretty much how land markets and development markets price.

So, so it's a fair point, because we do have a couple large deals that, and the Hollywood deal as well, which is an L.A. deal, which usually California deals are lower cap rate and higher growth. So that will impact the projected initial yield, if you will, because we're expecting basically the same IRR, but more of it through residual and cash flow growth.

Thank you.

Next we'll go to Vincent Chao from Deutsche Bank

Good afternoon everyone. I just wanted to go back to some of your job outlook growth, especially the New York, Metro New Jersey area, hearing some other forecasts calling for some deceleration there. Looks like you're looking for things to pick up in 2016 versus 2015. Just curious if you could comment on what's driving that, if it's really your expectations in New York City or if it's some of the suburbs.

We rely on third parties for our job forecasts, so I guess I would start there. There is some chatter. I think partly what's been going on in the equity markets, whether some of the economists and consensus is going to drift down a little bit in terms of GDP and job forecasts in general, to the extent that if they change it related to the equity markets, I guess it would be logical that maybe New York, New Jersey might be more impacted than the average market. We have a -- we use some judgment but when we're quoting job growth, we are relying on third parties that we have found to be most helpful in the past.

Okay, that makes sense. And just one other question, just in terms of L.A., it sounds like expectations for Southern California overall are going to be for continued acceleration, but it did seem like revenue growth here in L.A. slowed a little bit, and I'm just wondering if there was something specifically that kind of weighed on growth here this quarter, understanding it's still 6%, which is good, but--

Vincent, this is Sean. There's nothing specific that we're concerned about as it relates to L.A. Every asset has different characteristics in terms of lease expiration profile and things of that sort. You're trying to push rate in some cases and then in other cases, trying to gain occupancy.

So you are just kind of getting the quarter-to-quarter noise. I don't think there's any concern about L.A. at this point at all.

Okay. Thanks.

Next we'll go to Dave Bragg from Green Street Advisors.

Thank you. Good afternoon. Couple quick ones for you. The track record of the cycle on development is clearly compelling, as you laid out on 2015. Thinking about it from the profit margin perspective that you laid out, what level of profit margins are you targeting on incremental starts?

Well, Dave, as you mentioned, we typically do start with the cost of capital and add some accretion factor to that. I mean, it ends up being in the 150 to 200 basis point range in terms of, in terms of premium from a target perspective. But -- and we've been able to meet or exceed that certainly this cycle.

As we put the slide up there that showed the, the average deal was costing about $310,000, just using your data, if you sort of extrapolated that out, using the rent premium that those deals are getting, they would suggest an average value of about $470,000 for that book of business. Then you look at the pipeline, the shadow pipeline, that has an estimated cost of about [$350,000] a door today with honestly a bit more urban-oriented product, probably has a little bit higher rents on average, slightly higher rents. So it's still a pretty healthy-looking margin based upon what we know today, which are today's rents and today's costs.

Okay. Thank you. And, Tim, you've mentioned a couple times, or you've alluded to a limit surrounding your disposition potential in 2016. Could you put a number around that?

Well, it depends which assets you choose to sell at the end of the day. It's not atypical. It's probably the assets we're looking to sell have more than a 50% embedded gain on the proceeds. So to the extent you've got, call it $200 million or $300 million of capacity before you start getting into a, into requirement just to distribute, you could sell 2X that, but it depends on the mix, Kevin. I don't know if you've got anything you want to add to that?

Sure. Just a couple of things in that. Probably tax is not an area people are overly eager to get into a deep discussion on, to be sure. There's really two issues. One is just the special dividend obligation, associated with the fact that we are a tax-paying entity, but for the fact that we have dividend paid deduction, but there's also excise tax considerations as well.

So I think from our standpoint, when we look at using asset sales to fund development, we have a fair bit of running room in terms of being able to sell assets before we have to worry about a special dividend obligation. We would probably more likely encounter a situation where we might have to pay an excise tax, which is a little bit of a 4% tax payment on excess income over distributions.

So it becomes sort of almost like a transaction cost, if you will, that gets added to selling assets to fund development. So we certainly have a reasonable amount of ability to continue to sell assets to fund development, but what we would run into first is probably having to pay an excise tax, which is just an extra transaction cost, if you will, which we would rather not incur if we can avoid it, but it's something that's probably more relevant.

All right. Thank you for that. One last one for you, Kevin. You suggested that you'll lean on unsecured market as it relates to the sources of funds. What are your latest thoughts on 30-year money?

Well, we don't really have 30-year unsecured money in the balance sheet today. We do have a fair bit of $1.1 billion of tax exempt debt that's secured and has probably on average about 21 years left to run, so that's something we have done in the past and we like that form of capital, though it's far less available today.

In terms of 30-year unsecured debt, since we don't currently have it, you have to ask yourself what's it in substitution for. I think probably it's been a little bit more of a compelling equity substitute for those who want more leverage than a compelling substitute for 10-year debt when you do the breakevens. For us, we might be willing to entertain doing it.

I guess probably one guiding principle would be if we were to look at the total amount of debt we were going to issue in any one year, there is only so much we would want to issue in the form of 10-year unsecured debt before, in a future period, we would have more debt coming due than we would prefer. Which as we've talked about before, we tried to target having level maturities that are on balance less than or equal to our projected amount of dividends. So if we felt we were going to be issuing a certain amount of debt in the unsecured markets in a given year, that might be more than we want to have coming due in 10 years. We might think about doing the excess in the form of a 30-year note offering.

Great. Thank you.

Next from Jefferies, we have Tao Okusanya.

Yes, good afternoon. I was curious, given all the market volatility concerns about a recession, are you seeing your tenants reacting any differently when you gave them new acting rents in January? And when renewals were coming up, whether they are being much more, you know, aggressive about trying to get a rent cut or decline or some type of relief, kind the given the overall nervousness and the economic backdrop?

Yes, Tao, it's Sean. Answer that directly based on the data, the answer is no in terms of the actions they are taking. For example, rent increase is too high I'm moving out, moveouts rent increase doesn't really move that much on average. It has in certain markets.

And so I think you probably have to go market by market to figure out where that's most pronounced. There's certainly been pushback in Northern California that's above historical averages, but that's a market where we've seen pretty significant rent growth in the last three years, so you sort of expect that when someone gets their third, 8%, 9%, 10% rent increase, wages have been growing but they're not growing that quickly there's some pushback. I would say it's part of the normal process, there's not a significant shift one direction or another that we're seeing across the portfolio.

Okay. That's helpful. Thank you.

And from Robert W. Baird, we have Drew Babin.

Good afternoon. I was hoping you could talk about a couple of your larger developments out there, the Willoughby Square, Dellboro asset and north station in Boston? And where those yield expectations stack up kind of relative to that 6.3% and what gives you confidence for those assets in particular that, you know, targeted yields will be achieved either from a cost control standpoint or market fundamentals?

Sure, Drew, this is Matt. I can start on that and Sean, if you want to chime in on anything.

Those are two big urban high-rises and, again, we think about the target returns starting out relative to kind of what the spot cap rate would be on those assets is one thing we look at, as well as what the projected growth profile would be to kind of get from different potential starting target yields to target IRR, which is more similar across different deals.

Those two deals were underwritten in kind of the high 5%s, based on the rents that were in place when we started those deals. We have not marked either one to market yet.

The Willoughby square deal is a very large building, so it will be a while before we have 20% lease, which is typically when we would mark it to market. But I think we're feeling pretty good about the capital budget there and we're feeling pretty good that, based on what we've seen so far, the market is certainly a little bit above where it was pro forma and Sean--

Drew, this is Sean. As it relates to Willoughby AVA DoBro which is really, as you may not know, it's two components of the building. There is an AVA component and an Avalon component. We have product in the AVA section of the building right now. It was delivered late in the fourth quarter after a few delays with the MTA and their space.

But early returns are good. We have a market to market, but face rents are in the $60 a foot range. I think pro forma is around $55 and $60 a foot that's a slow leasing season, Christmas, January kind of rates. So feel pretty good about that in terms of how that product is positioned in Brooklyn.

As I mentioned, we don't have the Avalon component yet, but those will be the nicer units, the top of the buildings. So our expectations once we open those up, probably mid-year, we're going to see a nice pop in overall rates for the building.

Drew, this is Tim. I would just add maybe on the cost, we feel pretty good about the costs. We do act as our own GC. Sometimes with a CM, a construction management firm, but we hold the contracts.

And so we typically have, you know, better visibility than if we were working with a third party in terms of any cost pressures on deals. We feel pretty good about, as Matt mentioned, we feel pretty good about those deals right now in terms of bringing those online for the budgeted amounts that we laid out on our schedule.

Great. That's helpful. One more. Should there be any slowing in employment growth in the bay area, how do you feel that the San Francisco MSA kind of stacks up against Silicon Valley against the East Bay area, either from a supply standpoint? What are the dynamics on the ground in terms of setup if things get slowed down?

Sure Drew, it's Sean. A couple of thoughts on that. In general, across that market when things soften up, the most expensive price point product tends to suffer first. So if you have the most expensive high-rise in the city, you're going to see some reaction to that. If you -- so that's just a macro comment. Sort of depends on when it occurs and what supply is being delivered.

As we go into 2016, there's more supply concentrated in San Jose than there is in either the East Bay or San Francisco as an example. That's across San Jose, now it's concentrated in northeast San Jose, up into Mountain View, certain submarkets, there's about three or four submarkets there.

Up in San Francisco, there's a fair amount of supply being delivered into Soma, so if you're exposed so Soma, you're probably going to get hurt just as much. Sort of depends on when in the cycle it occurs and what supply is being delivered at that point in time. But generally speaking, the higher price point assets tend to suffer first, and what you tend to see is people will migrate as things become more affordable, they'll migrate back towards into the city and the cycle kind of repeats itself. Hopefully that provides some broad perspective about what happens in the market.

That's helpful. Thank you. That's all I got.

Next we have Rich Anderson with Mizuho Securities.

Thanks. Sorry to keep it going here. But a question, looking at the development pipeline, do you develop eaves product? Are they all kind of retrofit from current assets?

Rich, this is Matt. I wish we could, but, you know, those are all renovations or--

Okay. Okay. So that's -- I get it. I thought so, because there's none listed there. And that's my recollection. But then I noticed that you also have been selling some of these product. I'm just curious how that brand is doing relative to AVA.

Rich, it's Sean. One way to think about it is just how the portfolio eaves community is just performing relative to Avalon or AVA. That's typically a story of which market it's actually in, if it's Northern California obviously it's been very strong versus Westchester. But generally speaking right now, within the market footprint, our eaves communities are pretty synonymous with V communities, as you refer to Axium metrics or Reece or any of those. And eaves communities tend to be outperforming right now, to give you some perspective in the fourth quarter for our portfolio the B assets or the eaves assets, which for the most part, the B assets. We're about 70 basis points ahead of how the A assets were performing.

As you look at Axium metrics, it's a pretty similar pattern there in terms of the outperformance. So this part of the cycle, well positioned, value-oriented communities are outperforming. To the extent we're selling one of those communities, it typically is related to either submarket specific or asset specific, either issues we have or concerns about concentration in terms of other activity we might have in the region. That typically drives those disposition decisions as it relates to pretty much any community. But eaves as well.

Okay. And then bigger picture on the development pipeline, in light of the fact that you're projecting your land position to decline in 2016, 26 projects under development, about 10% of your asset base is tied up in development. Where -- if you were to kind of roll forward three or four years from now, would that number -- would those numbers be materially lower than they are today, if you had to hazard a guess?

Rich, this is Tim. My guess is they will be lower. How materially, it really kind of depends a bit on the opportunity set. We've been a little surprised, honestly, over the last I would say year, year and a half, that we continue to see we think are pretty compelling opportunities at reasonable land prices.

So to the extent that things get, start getting too expensive or too distorted, which they have on a limited basis, for instance, in the bay area we're, it's tough to make the numbers work in the bay area. So all the markets started looking like the bay area, it would -- we would deplete the development rights inventory pretty quickly, but that's, that's something I guess. Typically the northeast, Mid-Atlantic tend to be a little bit more stable. I would expect, the expected case would be it would start to draw down a bit over the next three years.

Okay, great. Thank you.

And gentlemen, your final question of the day comes from Wes Golladay with RBC Capital Markets.

Guys, it's actually Neil on for Wes. Just a question on occupancy. Looked like this quarter you saw pretty strong drop in occupancy across the board, particularly in Northern California. Just wondering if you can comment on that.

Was it a function of just seasonally weak or lower leasing, a function of you switching your expiration to the middle, higher volume, higher velocity times of the year, pushing rent too hard? Can you comment on that?

Sure, Neil. This is Sean. One thing to keep in mind is while occupancy was down on a year-over-year basis, if you look at it on a sequential basis we were actually up 20 basis points. And there were a couple of markets at the end of 2014, particularly Northern California and the greater New York region, where frankly availability was lower than we had wanted it from an ideal perspective in terms of pushing pricing and occupancy drifted up a little heavy. We're not too concerned about the year-over-year change, sequential change.

We're perfectly fine with, we're well positioned today in terms of where we sit. We're basically mid-95%s in terms of economic occupancy, it's down about 30, 40 basis points, but it's right about where we think we should be as we look towards the spring, we want to try and push pricing as much as we can. And availability is in the mid-5% range. It's up 30, 40 bps from last year at this point in time, but as I mentioned, we thought we were probably a little bit on the low side at this point last year. We think we're in pretty good shape and just looking on a year-over-year comp that was creating that change in occupancy.

Okay. Thanks. And then lastly, are you seeing any evidence that in the bay area for some of your rentals on the higher end that people maybe are pushing back or maybe seeing some softness in renewals or new leases, that would lead you to indicate that there may be something more than a temporary blip going on in that market?

Good question. I mean, obviously Q4 is typically the slower period. I would say it was a little beyond a seasonal adjustment in the fourth quarter. Whether it continues to soften a bit is yet to be seen, but I think as we indicated earlier, we're expecting job growth to slow in that region. Deliveries will be accelerating in that market, so we are expecting it to soften a bit as we move throughout the year.

Whether that was first sign of it in the fourth quarter or not is yet to be seen. We did expect some softening. We realized that and the question going forward here is what's the pace of job growth since we know what supply is going to be. Our expectation is the market will moderate through 2016, given just the fundamentals that are in place.

All right. Fair enough. Thank you very much for taking the time.

Yes.

And with no more questions, I would like to turn things back to Mr. Tim Naughton for any closing remarks.

Well, thank you, Greg. I know people are busy, given the time of year. I just want to thank you all for being on today, and enjoy the rest of your day. Take care.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation.