艾芙隆海灣社區公司 (AVB) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities first quarter 2016 earnings conference call.

(Operator Instructions)

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

Thank you, Aaron, and welcome to AvalonBay Communities first quarter 2016 earnings conference call.

Before we begin, please note that forward-looking statements may be made during this discussion. There are variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the Company's Form 10-K and Form 10-Q filed with the SEC.

As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance.

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

Yes. Thanks, Jason, and welcome to our Q1 call. With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum.

I'll be providing management commentary on the slides that were posted yesterday afternoon, and all of us will be available for Q&A afterwards. My comments will focus on providing summary of Q1 results, talk about trends in the apartment market and our portfolio, and lastly, I'll share some thoughts on capital allocation and portfolio management.

So starting on slide 4, it was a strong quarter, this past quarter where we achieved core FFO growth of more than 12.5% fueled by healthy same-store revenue growth of 5.5%, and same-store NOI growth of almost 8%. As well as contributions coming from our lease-up portfolio from our $2.7 billion development pipeline.

As we mentioned last quarter, external growth from investment activity has contributed roughly 45% of core FFO growth over the last two years, and it continues to add meaningfully to FFO growth in 2016. We were active on the portfolio management front as well this past quarter, closing out $240 million in acquisitions and almost $0.5 billion in dispositions.

Turning now to slide 5, recent market trends reflect shifting patterns across our footprint. This chart shows year-over-year changes and effective rent for each of our six regions, for the full market, as reported by Axiometrics.

A few trends worth noting, include, first, effective rent growth on the West Coast continues to outpace the East Coast by about 400 basis points, running around 6% in the West and roughly 2% in the East during the quarter. Second, the New York and Northern California regions are seeing some deceleration, while our other regions remain stable or are improving.

New York is being impacted by new supply, while Northern California's performance is being driven by a combination of supply, slower job growth than last year at this time, and tough year-over-year comps. Southern California and Seattle continue to post strong gains, while DC is beginning to show modest improvement.

The last point worth mentioning is that these charts really do demonstrate the apartment cycle can ebb and flow, similar to what we experienced in the 90s. With deliveries beginning to stabilize, rent growth is likely to bounce around a bit. Driven more by the demand side of the equation including demographic shifts, growth in employment and wages, and the pace of household formation.

Turning to slide 6, looking at our portfolio, we can see that the average rent change in the markets is consistent with our portfolio, and the overall market trend remains healthy in the 4% range. This rate of growth is down from last year, but is consistent with our expectations as more supply is coming online this year.

In addition, similar to the prior set of charts, our portfolio reflects markets that can be somewhat choppy across the cycle. In fact, just in this cycle, we have seen three periods when rent growth has been above the average at three when it has been below the average during a time span of less than six years.

Turning to slide 7, after having trailed in rent growth versus urban submarkets early this cycle, suburban submarkets began to outperform over the last couple years. This trend has been driven by expanding development pipelines and inventory that began to build in many urban submarkets across our regions starting in 2013, outpacing suburban deliveries during this time. We believe that this trend of suburban outperformance is likely to continue over the next two to three years, given that urban deliveries should be about two times that of the suburbs through 2017.

As capital allocators and active developers, we've been talking about this over the last couple years. We began shifting our focus two to three years ago towards suburban sub markets, particularly infill areas where we saw a better value and less supply. However, just as I mentioned, how market performance can ebb and flow across the cycle by region, the same is true for sub markets.

As capital flows shift their response to these trends, we'll continue to be up to opportunistic in search of the most compelling risk-adjusted returns whether they be in target suburban or urban sub markets. In fact over our 20 plus year history, we have achieved similar returns in urban and suburban sub markets across our regions. We've been able to do this by taking a fine-grained approach to capital allocation, directing new investment to the highest risk-adjusted return to any particular point in time.

Turning to slide 8, another capital allocation topic I'd like to touch on relates to our level of development as the cycle matures. This slide depicts realized and estimated unrealized IRRs of development completions sorted by completion dates through 2013.

Last quarter, we discussed strategies we are deploying to mitigate risk posed by our development efforts, including pipeline diversification, managing land inventory, and match funding new commitments. This quarter, we thought it might be helpful to look at how development has performed historically based upon cycle timing and timing of delivery.

As you can see and you might expect, development generates its highest returns during periods of economic expansion. Particularly in the earlier years of expansion, where projects may have been started during the prior downturn or in the early recovery portion of the current cycle.

What perhaps is less intuitive, is our history of generating healthy returns for projects that delivered during the contraction phase of the cycle. And that were most likely started during the latter portion of the prior cycle, a point in time when land and construction costs are generally peaking.

Across all parts of the cycle, we have been able to comfortably clear our cost to capital and deliver NAV to shareholders through development. My point here is not that development always makes sense, but rather, that we can continue to create value through this capability during downturns if deployed in a skillful, rigorous, and disciplined way that focuses our efforts and resources on the most compelling opportunities in our markets.

Turning to slide 9, it stands to reason that as we pursue development in a disciplined manner as the cycle matures, it ought to result in a diminished opportunity set as fewer deals meet required hurdle rates, and in fact this is the case. Since 2013, while our development pipeline as measured by total capital investment has more or less leveled off, when measured as a percentage of total enterprise value or even by the number of projects, it's declined by roughly 25% to 30%. So we believe that we can continue to create shareholder value through new development at this point in the cycle, albeit at a lesser rate perhaps than earlier in the cycle.

Lastly, turning to slide 10, we've been active in the transaction market recently, and I wanted to share a couple of thoughts with respect to our activities in this area of our business. Over the last few months, we've purchased or cleared due diligence on three communities totaling over $300 million of total investment. Each of these communities are high-quality assets with high walk scores and great sub markets located in Alexandria and Arlington, Virginia and Hoboken, New Jersey.

With many merchant build development deals completing and some investment funds unwinding, we are seeing some excellent assets come to market, much of it unencumbered by long-term debt and expensive prepayment penalties. These acquisitions are being funded and in turn through asset sale proceeds from funds in wholly-owned dispositions, some of which will trade as 1031 exchanges with acquisitions. As a result, our level of asset sales will be dependent on acquisition volume.

As we identify acquisitions that we believe can improve the risk-adjusted returns of our portfolio, we'll pair them with the sale of non-core assets. But overall we do plan on being a net seller of assets this year, we're just taking advantage of an active market to improve the portfolio.

So in summary before opening it up to Q&A, I'd just like to say that Q1 was another strong quarter for AVB, achieving double-digit growth in core FFO for the fourth consecutive quarter. While we are seeing some moderation in fundamentals in operating trends, they remain healthy. The sector will continue to benefit from favorable demographics, and the living patterns of millennials and GenX while new deliveries should begin to stabilize in 2016 at levels that are at or below structural demand for apartment housing.

As we move into the mature portion of the economic expansion, we'll remain disciplined, capital allocators and risk managers. Recognizing that we can continue to create meaningful value for our shareholders through new development, employing the talent and rigor that we have demonstrated over the several cycles during the past 20 plus years.

With that, Aaron, we'd be happy to open up the call for questions.

(Operator Instructions)

Nick Joseph, Citi.

Thanks. I'm wondering in terms of operations, if you can talk about how the first quarter trended relative to where you thought it would at the beginning of the year, and which markets are ahead of expectations so far and maybe what you're behind?

Yes, Nick, it's Sean. Happy to do that.

Overall, based on performance in the first quarter and what we know about the second quarter thus far, we're basically in line with our overall expectations for revenue. New York is a little bit behind, but Southern Cal, Pacific Northwest and the mid-Atlantic are a little bit ahead, more than offsetting New York. And then the other two major regions, Boston and the Northern California region, are basically in line with our original budget.

In terms of to provide a little more color maybe on where we are in terms of recent trends. In the first quarter, rent change was 3.7%, it's trended up in April to 4.2% which is renewals in the mid 5%s and move ins in the high 2s getting to that 4.2%. And to provide some context, when we plan for the year, our expectation is that rent change throughout the year would average about 4.5%, which is down about 120 basis points from what we realized in rent change in 2015.

So based on where we are now, moving into the second quarter of the stronger leasing season when rents really start to ramp up, our expectation is pretty consistent with what's happening in the portfolio. And particularly if you look towards the stronger season and renewal offers, we think we're in pretty good shape. May and June renewal offers are out in the high 6% range, and that is basically a blend of call it 5% in the mid-Atlantic and New York, about 6.5% in Boston, about 8% in Northern Cal and Southern Cal, and about 10% in Seattle.

So overall, we think we're in pretty good shape. Things are unfolding as we expected, and as we look forward into the rest of the second quarter, we're in a pretty good position occupancy wise, we're at 95.7% at this point which is about 20 basis points below this point last year. And availability is in the low 5%s, about 10 basis points lower than we were last year. So those numbers we are comfortable with, taking on slightly lower occupancy, availability is about right as we start to push rents harder going into the spring season.

Thanks for the color. And then in terms of supply in urban versus suburban, the presentation shows suburban supply decreasing in 2017 against urban. But the commentary from the other apartment peers that have reported earnings so far is focused on supply moving out of the urban core and more back into the suburbs. So I'm wondering if you expect that to occur after 2017, or if you think supply will continue to impact the urban core more so at this point in the cycle?

Nick, this is Tim. The slide that we show -- I guess it's slide 7, to be clear, that really is focused on deliveries as we get out to 2016 and 2017. Our peers may have -- I didn't listen to their calls, but may have been focused more on starts which obviously would impact maybe 2018, 2019.

And as I mentioned before, we're relatively agnostic between urban and suburban. And in terms of just even how we are focusing our efforts, if we start to see more value in the urban sub markets we're going to because of some of the trends we're seeing now, we are likely to maybe double back there.

So they may be right. You might see some falloff in 2018 or 2019 if starts in 2016 or 2017 come down in the urban areas. But certainly in terms of deliveries, we don't see that at all over the next couple of years.

And, Nick, just to give you some specific numbers based on our ground up view of supply. Which is a blend of the development team and our operations team and our market research team working together both with our own knowledge as well as third-party information. Those numbers in 2016 are about 2.8% of inventory in the urban sub markets in terms of deliveries, and about 1.9% in suburban.

And the projections for 2017 based on pretty much what we know right now, shovels in the ground, et cetera. So they could move around a little bit, but given the timeline to get things entitled and built probably is not going to move a lot. Some stuff may be delayed from one year to the next, but in aggregate, probably not going to move a lot.

For 2017, deliveries and the urban sub market is around 3%, and suburban about 1.4%. So just based on what we know today, the other thing that that's out there that we probably need to be mindful of just in terms of total supply, is there are some things happening both from a hard cost perspective as well as the construction lending environment that may constrain that a little bit just universally. So that is something to keep in mind.

Thanks.

Janna Gallo, Bank of America.

Thank you. I thought the public private partnership development right added in this quarter looks very unique. Is that something that you're going to look to do more of in the future?

Hey, Janna, it's Matt. I guess I'll speak to that one.

It has been a part of our business for a long time, and we've had a lot of success with public private partnerships at certain points in the cycle. Including in New York, we had some very successful deals in Queens and Long Island City last decade that were somewhat similar. We've done some public private deals on the West Coast, did some transit stations.

So it does play well to our competitive advantages we think into some of our strengths, and that deal is actually a good example. Because we were able to be selected there as a developer, even though others may have offered a higher land value. Because the public authority recognized and respected that given our reputation, given our scale, our balance sheet strength, everything else, that we can deliver on our promises.

And for them, it's as much about certainty of execution. There are some schools to be built there on that site, as well as the project we would own. And by dealing with and selecting us, they don't have to deal with a private developer who is going to have a separate equity partner, a separate lender, a separate general contractor, it's an integrated solution.

So we like those deals. That particular deal, it's a pretty exciting location, 96th Street and 2nd Avenue. It's a full city block, it's right on top of the new 2nd Avenue subway line, which is I think the first new line in the city in many, many, many years. And the timing on that one is such that if given the approvals process that's in front of us there, the regulatory process, that deal actually may well start early into the next cycle which is based on some of the slides that Tim had shown before, frequently deals that have very strong returns.

Thank you. And is there any updates for your upper Westside New York development in terms of a retail component?

Janna, this is Tim. I think you're referring to the Columbus Circle site that we own. Currently, we actually are doing some work on the site. We are doing some enabling work in terms of abatement and demolition.

I think as we've mentioned before, we still anticipate starting the deal sometime mid this year, probably sometime in Q3, late Q3. We are continuing to evaluate different strategies, lay off some risks there, including one way that you mentioned by bringing in a retail partner. We still have people interested despite some softness on the [condos] side, some people are interested in wholesaling some of the building for residential condos as well.

The reality is, we've been spending time really trying to nail down performance obligations for both sides, and it's ultimately got to work. Ultimately for there to be a deal, because it's similar to bringing a retail partner they would essentially be taking title at the time at which we can deliver a cold dark shell to them.

And we want to make sure they're going to be there, and they're going to want to make sure that we can meet certain performance obligations. And until in effect we're almost ready to start the building, the vertical building construction, we're not going to really be in a position to finalize the deal there.

Another strategy in part given the East 96th Street side, we are considering potentially even bringing in a financial partner to lay off some -- as another way to lay off some risk. The deal that Matt just talked about, it's a large deal which is over $500 million excluding the land lease itself.

And so as we think about New York City concentration, we may look at either a joint venture in Columbus Circle or potentially use even other avenues to layoff some of the concentration risks, in a pretty short investment time period in the city. So just stay tuned. We're exploring a number of risk management strategies with respect to this deal and the overall portfolio there, and we will keep people informed as it makes more sense.

Thank you.

Gaurav Mehta, Cantor Fitzgerald.

Thanks. Following up on, new York, you cited cycles as one of the reasons for softness in the market, I was wondering if you could also comment on what you are seeing on the demand side?

Yes, sure, Guara. This is Sean.

When you think about New York, for the most part we do think it is a supply issue. It's about our expectation for this year is about 2% of inventory, but in New York City proper it's about 3.5% direct supply and then if you toss in some shadow supply from condos and things like that that number might be a little bit higher.

On the demand side, demand has actually been pretty healthy. Job growth has been steady across the region, and in I think mid 1% range, and it's been up in the mid 2%s in terms of the city itself. So demand has been there.

But what you have to keep in mind related to the supply is it's all coming in at the pretty high end for the most part. And if you think about New York City and even parts of northern New Jersey, what's going to be delivered this year is about 10,000 units. So there's plenty of demand.

The demand may not look the same as what it has on last cycles in terms of either percentage from the financial sector at very, very high paying levels. So there's probably more diversity of the job growth than what we have experienced in the past. But there has been steady absorption and steady demand in that market.

Great. And then, following up on suburban versus urban. The (inaudible) slide number 7 that you have in your presentation of suburban outperforming urban. But if I look at your New York suburban portfolio, it's by rent growth, just underperforming the urban market. So I was wondering if you could provide more details as what's going on in New York suburban?

So in terms of New York, one thing to keep in mind there is the suburban sub markets in the Northeast in general, including New York and then moving up into New England, are more seasonal. So you tend to see more softness in late Q4 and Q1 in the suburban sub markets. So that's not a surprise to us in terms of where we ended the first quarter, as well as the fourth quarter.

But as you look forward and the impact on supply, to give you a sense where it's headed. For our portfolio, if you look at renewal offers as we move in through the second quarter, they are in the low 5% range. The weakest is New York City at about 4%, but Long Island is at 6%, northern New Jersey is at 7%, and Central New Jersey at 5.5%.

So we do expect those suburban sub markets to pick up steam as we move through the second and third quarter relative to New York City. Purely just as a function of supply for the most part. So we expect it will play out that way in New York overall based on what we know today.

Okay. Thanks for taking my questions.

Sure.

Jordan Sadler, KeyBanc Capital Markets.

Hello, it's Austin Wurschman here with Jordan. Just sticking with New York a little bit. Could you provide a little bit of color on what you're seeing at your AVA DoBro project in terms of lease-up pace relative to expectations, as well as the rents you are achieving there?

Sure. It's Sean again. Lease-up volume has been quite good there. We averaged 39 a month through the quarter, which is quite healthy considering it tends to be one of the lower volume quarters of the year. It typically ramps up in the second quarter and the third quarter.

There's some supply being delivered in that sub market now, there will be a little bit more as we get further into the year. But velocity and rate have both been quite healthy, so rates holding a little bit above what we expected around $60 a foot and velocity has been good. So our expectation is for that to continue.

The DoBro product is a pretty unique product. It's been accepted quite well by the target demographic, and so we are pleased with the early results.

And, Austin, this is Matt. Just to clarify a little bit, we have marked the AVA DoBro piece of that to market, and that's the number that you see updated in the earnings release. Because the Avalon piece, which is the upper floors of the building, we have not yet started to lease there. Those rents are not yet mark to market.

And what percent of the units there are the AVA DoBro?

I think it's about 300 Avalon, and 500 AVA.

Yes, so 500 So 60% or so is the AVA.

Great. Thanks, that's helpful. And then just more sticking on the New York City sub market specifically, despite the supply during the typically slower season, occupancy was up 50 basis points during the quarter. And I was just curious what was driving that, if it was tactical and just some detail there?

As you might know from the previous commentary for us, we don't necessarily target a very specific rate of occupancy for each and every market and sub market, our objective is to optimize revenue. And so sometimes we're going to give back occupancy to get rate and or vice versa to try and optimize revenues. So I wouldn't read too much into occupancy changes from quarter to quarter or even year over year.

The only global statement I'd say is over the last couple of years given market conditions, we're more aggressive on rate, all things being equal, at the expense of occupancy across our footprint. And every sub market is a little bit different, but I wouldn't read too much into the sequential quarter or even the year-over-year numbers other than the trend over the last couple of years being more aggressive on the rate side, and yielding a little bit more on occupancy has been okay.

Thanks. That's helpful. And then just switching, and last one for me, to the portfolio management comments. I guess what are you guys really trying to accomplish as you see acquisitions come to market, and where exactly are you seeing the best opportunities?

Maybe I'll start and then ask Matt to follow up in terms of where we're seeing the best opportunities. There's just a lot of transaction volume right now, and there's a lot of really, as I mentioned in my prepared remarks, a lot of really fine assets. Oftentimes built by merchant builders coming off construction loans so they don't have permanent loans in place that have hefty prepayment penalties, and therefore sometimes doesn't make it attractive to us in terms of assuming secured debt.

So it's an opportunity to take advantage of the fact that we have a lot of unencumbered assets, some of which are non-core that we'd like to trade. And there is a point in time in which there's some really attractive assets that we think we can improve the overall quality of the portfolio by churning a little bit of it. So it's a little bit of a unique moment in time, we think. But in terms of, Matt, in terms of where we're seeing some of the best opportunities maybe you can just elaborate a little bit there.

Sure. I guess I'd start by saying on the macro level regionally, the two regions where we would seek to redeploy capital the most would be the mid-Atlantic and Southern California for different reasons. But those are actually more or less on target for our long-term portfolio, geographical allocation goals, but if where under allocated anywhere it's probably in those two regions.

And some of that was frankly just deliberate in the case of the mid-Atlantic. We sold quite a bit here earlier in the cycle in front of what we saw as a lot of supply coming relative to the mid-Atlantic's history. So we think it's a pretty good time to be buying in the mid-Atlantic, values haven't increased all that much relative to all of the other geographies in our portfolio which makes sense because obviously rents have been relatively flat here for quite a while.

So we see just better value in terms of just total relative to replacement costs, relative to cost per foot, cost per unit. And Southern Cal, it's always difficult there. Archstone really was a transformative event for us in terms of growing our Southern California portfolio, but we are still looking to grow there where we can.

In terms of sub market locations, we are looking to upgrade the quality of the portfolio a little bit, as Tim mentioned. So if you look at the three that we've mentioned so far, they are all in fill, high quality, high density infill suburbs, we would look in the urban cores as well based on pricing where we see the best relative value but higher walk scores.

And then we have been looking at younger assets which is a little different for us. We do find sometimes we're a very successful buyer for assets that maybe somebody else has just renovated, 12, 15-year-old assets where the value-add players aren't going to bid those up to the same extent. So we look at those types of assets too.

But and arguably the Market Common fits that description a little bit. But we're always looking for ways where if we can leverage what advantages we have into sometimes it's a unique deal structure, that may drive us to get a little bit better value on the buy side. But typically we would probably be looking for assets that are a little bit younger than what you may have seen us buying in the past.

Thanks for all the detail.

Jeffrey Pell, Goldman Sachs.

Hello. Thank you. Just looking back at the Archstone acquisition in late 2012, the largest component of the purchase was in Southern California. How do you believe those assets are performing today versus your original expectations?

Yes, Jeff. It's Sean Breslin.

In terms of overall performance, I think it's fair to say that the assets have outperformed our expectations in terms of our period of ownership here. And then on top of that, the other thing I would add is there's probably more opportunity in the portfolio in terms of redevelopment repositioning those assets then we probably expected going in. Archstone did a fine job maintaining the assets, but given the balance sheet they had and the position they were tiedinto with Lehman just didn't necessarily have the capital to invest in the assets to reposition them.

So we're trying to take advantage of that opportunity across the footprint, including a significant concentration that we did acquire in Southern California. So net-net, I'd say we are pleased with our results from Archstone and the values have grown considerably during the last couple of years.

Thanks for the color. And just as a follow up to that, do you believe your Southern California portfolio could potentially outperform Northern California over the next few years?

It's Sean again. It's always a possibility given the underlying demand drivers in Southern California, combined with the very low levels of supply, the lowest of any of our regions currently in terms of our expectation in the mid 1% range, it's a possibility. It tends to be a market that over the long run has been an outperformer with far less volatility than some of the tech markets like Northern California and Seattle, so there could certainly be a period of time where it does outperform, that would not be beyond reason.

Great. Thanks for the color.

Sure.

Alexander Goldfarb, Sandler O'Neill.

Good afternoon. Just first, you mentioned in some prior questions ago about the bank regulation on lending.

As you guys have seen it so far in the banks be impacted by the Basel III coming down on construction lending, has your experience, what you've seen in the field has it been a material cut back on the part of developers and their inability to get construction lending? Or is this really an issue on the edges, and most developers that you see in the market are still able to get construction lending as they historically have been able to?

Alex, this is Sean, and maybe Tim or Matt want to jump in. At this point, we are aware of what's been communicated to the banks and some of the risk retention issues, as well as the incremental oversight of multi-family loans. For the most part, what we're hearing, this is somewhat anecdotal in terms of more pressure on the underwriting, banks putting out targets that are I'd say either even or less than volume they produced last year in terms of construction lending for a multi-family specifically.

So I'd say it's still really early in the game as to the eventual outcome. But there are certain signs of tightening that will put more pressure on bringing either additional equity to the table to get deals done probably is the likely answer, but different pricing as well. And Kevin may want to comment on that as well from a bank perspective.

Sure, Alex. As you know, we are not directly in the market but from what we have been able to learn from being active in our dialogue with banks who do this kind of construction financing. Certainly what we have heard is that construction financing has become tough to obtain, as you point out, especially for small, less well-capitalized developers.

Pricing, for example, has moved beyond 300 bps over LIBOR. And in order to get better terms, often these developers are needing to provide partial recourse, and sometimes make a commitment to provide permanent financing to the bank post construction, and sometimes provide higher levels of deposit. So across the board, there's has been a little bit of tightening that we've seen in that market.

Alex, just maybe the last point on this. I think the way it initially manifests itself, you're going to start seeing a little more deal flow on the land side. So as private sponsors are maybe not getting the terms were hearing what they want to hear from banks or even potentially equity partners those deals oftentimes start to get softly marketed back in the market.

And we're seeing that right now on the a couple particularly attractive opportunities, where the land owner had thought that they were going to develop it themselves. And suddenly they're spinning a different story to the market that they've got a lot on their plate and they need to sell some of what they've got. So I think it's a way you're likely to see it manifest itself, at least initially here, over the next three to six months, but I think it we'll probably all just have to keep a watch out and see is that really having an impact at the end of the day on total start volume.

But the point is that you guys are likely to see some more attractively priced land.

I think we'll see more traffic in land initially, we'll see ultimately what it brings in terms of (multiple speakers).

But on the condo side, on the Sheepshead Bay project where you have a condo partner in there. What's the -- can you, just given all the up talk about condo concern in New York, can you just as far as a financial risk to AvalonBay, if the entity does not perform I assume you guys just automatically take over their spot? Or is there some financial liability to you if they run into some financial difficulty on their own?

Alex, this is Matt. I guess I can take a shot at that one, and I don't know if Kevin wants to chime in as well.

They have equity in the deal. We are providing construction financing really to facilitate the deal because we're building the whole building, and so if they were to default on the loan they would walk away from their equity and we would wind up with their units. I believe there is some guarantee support as well, although I don't remember exactly how deep that goes.

And we have looked at that as a downside scenario, we could take their units back and rent them and we don't think it would be a material change to the economics of that deal. I will also say that it's a very different location. There is no -- you talk about -- there's a lot of condo supply in New York.

It's not in Sheepshead Bay, it's not in Brighton Beach, it's not in that part of Brooklyn at all. So that market is its own little micropocket there that I really think is hardly at all impacted by what's going on across the city.

Okay, and then just final question. The $0.14 land gain in the second quarter, what's that relate to?

Sure, Alex. This is Kevin. That relates to the second phase of the development that we anticipate contributing to a venture with our distinct partners, and in doing so, recognize a gain on that sale of the land to that venture of about $20 million.

Okay. Cool. Thank you.

Rob Stevenson, Janney.

Good afternoon, guys. Sean, can you talk a little bit about what you're seeing in your various DC sub markets performance wise? Stronger versus weaker? And what's likely to be the trend over the remainder of the year as leasing continues?

Sure, Rob, happy to. In terms of the mid-Atlantic, based on where we are to date in terms of performance, and I'll talk mainly from a rent change perspective in terms of where we're getting traction. DC is actually holding up the best right at the moment, mid 2% range versus say 1.5% or so for suburban Maryland and Northern Virginia.

That's up roughly about 75 basis points over last year. Our expectation going forward is that it's probably going to continue to be the softest in the suburban Maryland sub market based on the supplies being delivered across Rockville, North Bethesda, et cetera.

Northern Virginia probably will be the second position, if you want to call it, in terms of performance. And then DC based on asset mix that we have, we think will probably be the leading sub market in terms of performance. And keep in mind what's in our same-store bucket is Northwest, some value oriented assets, a deal tied to American University, et cetera, so it's a very different same-store basket relative to maybe others.

The majority of the supply is actually going to be delivered in the district. So if you looked at it from an market perspective, DC probably will continue to be soft and potentially as soft as suburban Maryland. But in terms of our specific portfolio and the way it's positioned, the DC assets are leading and probably will continue to.

Okay. And then did you guys see any weakness during the quarter in your highest price point units? The super luxury or whatever you want to call it, the $6,000, $8,000, $10,000 plus price point units and stuff like that?

Yes. Any particular market in mind, or just in general you mean?

Well I would guess New York and San Francisco would be the two that I would most target, but I guess across the portfolio as well.

I wouldn't say so. If I think about it like from a New York perspective, the highest rent deal that we have is in the Bowery $80 a foot or so, and it's performing quite well. There's very little supply there to compete against. So I think for the most part it really does depend on where your assets are positioned relative to new supply.

So we've got $50, $60 a foot assets in Midtown West, it's more value-oriented but there's more supply there. So they are struggling more, as an example. But then you go to Long Island City, and it's $50 a foot, $55 a foot, and it's 6% year over year.

And so I wouldn't say there's a common thread to higher end units underperforming across any of the markets at this point in time. It's really more a direct function of to supply in the sub market that you're in.

Okay. So nothing even with like bifurcation between penthouse and mid tier units within the same complex or anything like that?

Not necessarily. No, Exeter at the Pru gets the highest rent, but at the high end floors. So I would say there's nothing that we've seen materially at this point. It would be one-off type things.

Okay. Thanks, guys.

Rich Anderson, Mizuho Securities.

Thanks. Good afternoon. Question on New York.

Is there -- can you make any comment about how things trended over the course of the quarter? Did you notice anything improving as the quarter went on? Was March better than January, or was nothing discernible there in terms of trend line?

Rich, this is Sean. It's certainly picking up steam a little bit. If you look at the region overall, rent change in the first quarter was about 2% which was 1% New York City, about 4% in Long Island, and 2.5% to 3.5% in the Jersey markets.

It has picked up steam a little bit where we are doing around 3% now instead of 2%, which is around low 4%s in renewals and along 1%, 1.5% on move ins. But as I mentioned earlier, when you look at renewals, I'd say it is starting to pick up a little more speed particularly on the suburban sub markets.

As I mentioned, New York City I still think it gets around 4%, but it moves up quite nicely when you get into the suburban sub markets, 5.5%, 6%, 7% depending on where you are. So I'd say the momentum is positive, probably most positive in the suburban sub markets as compared to the city.

Okay, great. And then on your dispositions, do you have any tax protection issues that may be behind some of the motivation to also be an acquirer?

Rich, this is Matt. No, we are planning on doing some of our disposition acquisition activity as 1031 exchanges, but I wouldn't say that we have tax protection issues. Beyond the fact that we can only sell so much without redeploying the proceeds into acquisitions, or paying a special dividend. So we have an overall Company limit on that volume. I don't know, Kevin -- .

Rich, this is Kevin. To add on that, we tend, as you know, to use dispositions as a means of funding development activity, and that certainly is our plan this year that a component of our external capital that we raised to fund development will be in the form of dispositions. At some level beyond a certain point when we sell additional assets and trigger additional gains, and you can see some very robust gains here reflected in what we've sold so far.

You do run into a situation where from a REIT tax point of view you would need to make a special distribution and would retain that capital. So if we want to buy assets to reposition the portfolio and fund that with dispositions beyond what we would need to sell the fund the development, then at some point it just makes to do that incremental repositioning through 1031 activity.

Right, I was talking about that, but also individuals that may own units.

No.

Getting exposed to a gain.

No. We've picked up a little tax protection, our share of that in connection with the Archstone transaction, but that's not implicated in anything we're discussing right now.

Okay, fair enough. And what about just what kind of spread that you're seeing inbound, outbound cap rates, and to what degree is that maybe contributing to some incremental dilution in the near term? Clearly, you're looking to create value long term, but is that something you can comment on?

Yes. It's been a pretty tight spread. This is Matt again.

The sales as of last quarter we sold an asset in Connecticut at a low [5%s] cap, and the buys were in the high [4%s]. So there maybe a little bit of dilution there, but it's relatively small. And from a timing point of view, we're doing some of these reverse exchanges where we are actually selling in front of -- I'm sorry, buying in front of the selling, so I don't think it's material.

How far in advance can you do that? What's the rule?

I think six months.

Okay. All right. Thank you.

Ivy Zelman, Zelman & Associates.

Good afternoon. Great results, guys. Thank you for taking the question.

As it relates to your portfolio and your concentration is more suburban as well as class B, and you think about the inventories how tight they are for resale. And the benefit that your tenants may not be able to find something even if they want to move out, or afford it, or get mortgage financing and some of the challenges.

How do you think about going forward some of the dynamics that incrementally on the for-sale side that might loosen up or more inventory will come? And which markets are you the most vulnerable or may see more pressure for move out to buy within your footprint? Just the first question, and then I have a couple more to follow up, thank you.

Yes, Ivy, just a general commentary on that trend maybe. Move outs to home purchase have remained -- has remained well below historical averages for essentially this entire cycle. It was only 11% this quarter, as an example, which is down about 150 basis points year over year.

And typically, we're probably most sensitive to it in terms of either existing assets or new opportunities is in those markets where home prices are somewhat more affordable. Which would typically be Seattle and the mid-Atlantic, maybe a little bit in Central Jersey.

And based on everything that we see, production is certainly starting to increase some. But it remains well below just structural demand, given the level of household formations that are expected which you know probably better than all of us. So in terms of near-term pressure, I don't think that's likely to be a real issue for us based on what we know today.

Got it. Thank you for that. If there's not a particular market that stands out as one -- certainly a market like Queens or New Jersey there's markets, nothing stands out incrementally within the portfolio, the 11% is pretty consistent across the board in terms of the move out to buy?

No, it does move around by market. As I mentioned, those two markets, mid-Atlantic and Seattle, and then New England end to be at the higher end of the range as compared to New York, Southern Cal, Northern Cal, very expensive markets, it tends to be quite low. The only market that basically was at its long-term average at one point last year was New England, which was around 20%, 21%, it's drifted down since that time. So at this point, every market is running well below its long-term average.

Got it. And if I may ask one more follow up as it relates to supply in the markets where you seem to be in better position that you are not in the New York tougher areas where all the supply is being delivered. What historically has the trickle-down effect been into class B assets where you're seeing rents under pressure or more concessions being offered in class A? Can you go back historically and look at what the impact has been, if any, in the class B suburban or within the urban class B?

Ivy, this is Tim. Certainly whenever there's any supply introduced into a market, it's going to have some impact on all rental housing. And I think of it as concentric circles, if you will, so the stuff that's newer, more recently delivered, is right in bull's-eye.

And as you go down the price ladder, they're obviously less impacted. I think right now in our portfolio, we're seeing, just to give you an example, I think we're seeing class B roughly outperforming class A by over 100 basis points, 150 basis points in terms of rent growths. So and it's probably more significant even in the sub markets that are experiencing a lot of supply.

Got it. Well, thank you. Good luck, guys. Appreciate you taking the questions.

Thanks.

Drew Bavin, Robert W. Baird & Company.

Good afternoon. I was hoping to take the discussion about the Bay Area a letter deeper and talk about specific towns, specific areas whether it be urban or suburban, class A versus class B. And could you talk about which areas are most impacted by new supply, and which areas are most impacted by any marginal slackening of demand?

Sure, Drew, this is Sean. First, maybe to set some context for Northern California. When we provided guidance earlier this year, and Tim alluded to it on today's prepared remarks for the call as well. We did have an expectation that, given the increase in supply across the region which is basically around 3% today as compared to 1.5% last year, combined with a somewhat softening in demand.

If you remember at this point last year, job growth across the Bay Area was running around 4%, a pretty blistering pace, as compared to about 2% today. That we would see softening in performance throughout the year, and that's pretty much on track. As I mentioned earlier, we're basically on budget in that market.

In terms of the performance of the specific sub markets, where you're seeing stronger or weaker results. What I'd say is in general, more value oriented assets are outperforming the higher end assets across the footprint. The footprint being the Bay Area region overall.

In terms of specifics sub markets, San Francisco, the supply is pretty much Mission Bay, the Soma sub market right there, that tends to be a little bit weaker right now. Our assets, the value oriented assets, Daly City, Pacifica, Center of [Fell], they are all outperforming versus the higher end A assets, Mission Bay and Soma is underperforming. San Jose, the supply is Northeast San Jose a little bit south of San Jose, and then it stretches up really into Mountain View as well in terms of supply.

And then on the East Bay, there's not a whole lot of supply really in the East Bay, you have a little bit in Dublin and Pleasanton and some product coming online up towards a public market Berkeley and that area. But it's de minimis relative to what you're seeing in San Francisco and San Jose. So hopefully that provides some context for where the supply is coming online.

That's helpful. Thank you.

Yes.

Tayo Okusanya, Jefferies.

Yes. Good afternoon. I did join the call a little late, so I apologize. But at any point have you addressed updated guidance for 2016 given first-quarter results? And your initial take on what 2Q could look like?

Sure, Tayo, this is Kevin. As you may recall, we historically do not provide updated guidance for the full year on our first-quarter call. We provide initial outlook, obviously for our fourth-quarter call in January, and then we provide a full mid-year update after our essentially our second-quarter call. So that's the plan.

So we don't have a further update, particularly given that you've got the leasing season in front of us and we're only a few months from having done a full budget. So no new news on that front.

This was the first quarter that we provided guidance on the second quarter. And as you can see from our release, the midpoint of our guidance for NAREIT FFO is $2.10 per share, and for core FFO was $2.00 per share.

So that's -- and then in terms of what we did in the first quarter as you know from our release, we beat our initial expectation by $0.06 which is probably the largest beat on our expectations in a quarterly basis in recent memory. So quite strong performance with about probably $0.04 of that $0.06 beat likely to be permanent and $0.02 likely to reverse at some point over the course of the year.

That's all very helpful color. Thank you.

All right.

(Operator Instructions)

Conor Wagner, Green Street Advisors.

Good afternoon. What is your total expected disposition volume this year to fund development beyond what you're going to use for asset purchases?

So, Conor, this is Kevin. I guess essentially what you're asking for is what's our net disposition activity. We don't provide that level of guidance, because essentially that would be, as you recall, when we provided our outlook for 2016. We indicated that we anticipated sourcing external capital of about $1.1 billion, at the time we indicated that that would likely come through unsecured debt and asset sales with unsecured debt hopefully and likely comprising the majority of that $1.1 billion.

So really it's the $1.1 billion less whatever we do in unsecured debt that would represent the net disposition activity. But it certainly represents a minority of that $1.1 billion.

In terms of what we've done so far, as you can see, essentially, the acquisitions that we completed in the first quarter were basically funded through fund and wholly-owned asset sales and the assumed debt in Hoboken. So going forward for the balance of the year, we expect to source still about $1.1 billion, and again, the expectation is predominantly in the form of unsecured debt with the balance through net disposition activity.

Thank you. And then on East 96th, is this indicative of a more competitive land environment, this having to -- doing a deal like this?

Hey, Conor. It's Matt. Actually we've been working on that deal for three years already. So I would say it's indicative in the sense that we've said for a while now that doing straight up land deals in New York is very, very difficult at today's economics. So if we were to source new opportunities, it would more likely be deals like this.

But I wouldn't say that this -- we are generally in the market for these types of opportunities. They are infrequent, and they are complex, and they tend to take a lot of time to get done. But they're opportunities that we seek -- we've sought throughout different points in the cycle over the years.

And given the lengthy process both getting to this point and then to actually get the project started, could you walk away from this deal in two years if after the approval process, rents have moved or in the same way that you option other pieces of land and you have the ability to walk away, could you walk away from this deal?

I don't want to get into too much of the specifics. There is still a lot to be resolved, but suffice it to say, that there are a lot -- there's a fair amount of flexibility on all sides.

Okay, and will there be an affordable component on the units?

Yes. This is a mixed income deal. It is not subject -- there is no 421A program in New York today, but because it's a public private deal, essentially will be doing a private or a synthetic 421A and that's a part of the negotiations and the discussions were having with the ECF in terms of the levels, the amount, the debt, the subsidy and so on. So more to come.

Okay. And then just last one, is there -- what level of capital is at risk on this deal currently?

Yes. It's very de minimis at this current point in time.

It's legal fees and a little bit of planning at this point in time. It's not much.

Great. Thank you very much.

You're welcome.

Greg Van Winkle, Morgan Stanley.

Hey, guys. You just mentioned that $0.02 of the beat in 1Q 2016 is likely to reverse over the course of the year. Can you just elaborate on what you meant by that? Is that just because you have got lower expectation for New York and San Fran over the balance of the year, or just help me understand that comment?

Greg, this is Kevin. To be clear, we're not providing guidance through that set of comments, so I was just confirming that of the $0.06 that we beat our initial expectations in the first quarter, $0.04 likely appears to be permanent and $0.02 is likely to reverse in the balance of the year.

So to give you an example of that, we received $0.01 positive variance in the first quarter from a tax rebate that we received in March that we had budgeted to receive in April. So that $0.01 will reverse in the current month, so that's an example of it. The other $0.01 was related to redevelopment OpEx which was largely due to slight delays and the start of some renovation programs that we still expect to start, so that will probably reverse ratably over the course of the next three quarters.

Okay, I see what you mean. Thanks for clearing that up. And then you talked about seeing some acquisition opportunities right now, and that's the big driver of that is just there's a large quantity of deals coming to market. I'm curious also if you are seeing any change in the pricing that private capital is willing to pay, or how many bids that are out there?

This is to Matt. I guess I'll speak to that one a little bit. I would say not yet.

We are also marketing a fair number of assets as well as in the hunt on buying assets. So generally speaking, there's still a lot of interest, a lot of activity. Again, on the buy side, we see a slight wrinkle in one deal that may draw less interest than others because of some profile of the deal or structure that we view that as a little bit of an opportunity.

And in some cases, that has worked to our advantage. But generally speaking, there might be a little bit less interest in some deals if they are tertiary sub market locations. But broadly speaking, there's still a lot of demand, a lot of people looking to buy property right now.

Okay, great. And then the last one here, I'm just curious on what you're seeing in terms of rent to income ratios in your portfolio relative to what those looked like historically? And just how much of a concern pure price fatigue is becoming, or if you've seen any meaningful uptick already and move outs due to rent in any of your markets?

Greg, it's Sean. Rent to income ratios are still running around 22%, it's been that way for a couple of years now. And it's at the higher the end of the range from an historical perspective, but has remained relatively constant. So one thing we have said is that we continue to expect wage growth to help support rent growth going forward.

And we've seen that so far beginning in last year, in particular, and our expectation for this year. So overall, I think we're in pretty good shape. In terms of move outs due to rent increases, it was down about 100 basis points last year, some markets were down more than others, but in general we are comfortable with where we are.

Okay, great. Thank you, guys.

Wes Golladay, RBC Capital Markets.

Hello, guys. A quick question on what you're seeing as far as traffic goes. We had a difficult start of the year with the equity markets, a lot of volatility, a lot of recession periods. I imagine some companies might have been holding back on their hiring decisions, things look a little bit better now.

Don't know if you've seen an uptick in traffic, maybe a leading indicator of incremental hiring. What are you seeing at the ground level?

Wes, this is Sean. First, in terms of commentary about traffic, one thing to be cautious about on traffic is we influence that number as well. Depending on our level of availability, we may be driving marketing harder or softer to generate traffic. So it's a bit of manufactured number in terms of -- it's based on not only organic demand, but how much of that demand we are trying to capture.

In terms of overall traffic though, it was up about 3%, as I recall, year over year in the first quarter. And if you looked at it per available apartment home, I think it was down about 100 basis points. So not a significant movement one way or another. And I would just be careful about how you think about using that information, that's all.

Okay. And there's no I guess big difference in seasonality between the months of January, February, or March probably, but it sounds like you don't even want to use that number. Looking at the development pipeline, how much of that pipeline consists of the complex deals where maybe Avalon and maybe a few others can compete and take on a deal like the one you did on 96th East versus just a plain vanilla development?

This is Matt. I guess in terms of -- I think a lot of them are deals that probably are more well suited to our competitive advantages than others, not necessarily because of complexity. A lot of those are deals in New Jersey where we have an ability to crack entitlements that a lot of others don't, for example.

So they all have a different story. Therefore, in suburban Boston too, where we have an incredibly deep franchise that has doing that for years. So a lot of them are those types of deals.

We do have a couple deals which are mixed use deals in our pipeline, including one that we expect to start here later this year in Northern California in Emeryville. Which also we think plays to our strengths, not dissimilar to the deal we did with Eden in Northern Virginia, Mosaic or Assembly Row up in Boston, which we did with Federal.

So we have a few deals like that in the pipeline but it's really -- it's pretty diverse. It's diverse by region, it's diverse by deal type. They all have different reasons why from an economic point of view, we thought that we had some kind of an advantage there.

Okay. Thanks for taking the question.

With no further questions in queue, I'd like to turn the call back to Tim Naughton for any closing remarks.

Well, thank you, Aaron. No closing remarks on this, other than to say we look forward to seeing you all in NAREIT in June. Have a good day.

This does conclude today's conference. We thank you for your participation. You may now disconnect.