AvalonBay Communities, Inc. (AVB) Q1 2011 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities First Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference call, Mr. John Christie, Director of Investor Relations and Research. Mr. Christie, you may begin your conference.

Thank you, Andrea, and welcome to AvalonBay Communities' First Quarter 2011 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. And there are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K filed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I will turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities, for his remarks. Bryce?

Thank you, John. With me on the call today are Tim Naughton, our President; Tom Sargeant, our Chief Financial Officer; and Leo Horey, our Executive Vice President of Operations. And Tim and I will share the prepared remarks, and then all 4 of us will be available to answer any questions you may have. Last evening, we reported EPS of $0.35 and FFO per share of $1.08. Our FFO results for the quarter were $0.06 greater than the midpoint of our prior outlook and reflect both stronger revenue results than expected, as well as expense savings that are primarily timing related, and some nonrecurring interest income items. On a year-over-year basis, our FFO increased by 12.5% and, after adjusting for the nonroutine items, grew by just over 8% per share. We continue to see improvement in our portfolio with same-store sale revenue up almost 4% versus the same period last year, with all of that growth coming from rates as occupancy held steady at 96%. Operating assumptions were essentially flat, driving NOI growth of almost 6%. This was the first quarter in almost 3 years that all regions had positive revenue and NOI growth. On a year-over-year basis, our East Coast markets continued to outperform, but as we had expected, the momentum is now building on the West Coast. If you look at our sequential quarterly results, you'll see that the West Coast is outpacing the East with San Francisco, Seattle and L.A. all showing particularly strong sequential growth. For well over a year now, we've been speaking to the factors which would impact and are, in fact, now driving the strong improvement in apartment fundamentals. It was the fourth quarter of '09 when we decided to begin construction again, a decision that has allowed us take advantage of these improved fundamentals as we have almost $1 billion of new construction underway or completing this quarter. The factors driving the improvement in apartment fundamentals are reasonably well known. Probably most visibly is an improving economy now generating approximately 200,000 new jobs per month. It's both the magnitude and the composition of the jobs that matter, and importantly, a disproportionate share of the new jobs created have been in the under 35-age cohort. Over the past year, job growth in the younger age cohort -- younger age group has been at a rate more than 2x after the economy as a whole. With more jobs, they're increasingly unbundling and creating new household, and this age group are primarily runners. Secondly, corporate investment in equipment and software is rising in an annual rate of approximately 15% nationally, setting off strong job growth in our key high-tech markets, such as San Jose, Seattle and Boston. Another key factor affecting rental demand is the continued weakness in the for-sale market. And yesterday, the first quarter home ownership data was released, which showed the home ownership rate falling once again, now down to 66.5%. The weakness in the for-sale market may provide an obvious and direct benefit to the rental market with households that are increasingly choosing to rent versus buying. As you know, we track the reasons for move-out. And during the first quarter, the percent of residents moving out to purchase home fell to 12%, down from 15% last quarter and is now at the lowest level since we began tracking this data. Historically, the statistic has been in the low- to mid-20% range. The increase in rental housing demand is being met by a sharp reduction in the supply of new apartments. Just to put this into perspective, over the 10-year period from 1998 to 2008, there's an average of about 240,000 new rental completions per year. Last year, there were 160,000, and this year, completions are expected to be below 80,000 units, which should make it a 50-year low. This level of new completions is actually less than the estimated annual loss due to obsolescence. Meaning, that we're seeing essentially a net 0 increase in the stock at a time of strong demand. Now recently, there's been a fair amount of discussion regarding the likelihood of an increased volume of new apartment starts. And there's little doubt that the volume will increase, be that it's [ph] important to remember that we're coming off of a 50-year low. For 2011, third-party estimates project new rental starts in the range of about 150,000 new units, which is substantially below the 10-year average of 240,000 I had previously mentioned. New starts are not expected to approach historical levels until late next year, 2012, which means it will likely not until late '13 and into '14 that we'll see completions return to historical levels. And obviously, it's the completions that -- are what's important in affecting the supply-demand fundamentals. Now often we're asked how this expansion period may compare to prior periods, and while history never repeats itself exactly, a little historical perspective is always helpful. The most recent expansion period for apartments was from middle '04 through the end of '08. And over this 4.5-year period, we saw our revenue growth and our portfolio grow just over 20%, cumulatively, with peak year-over-year growth of about 7.5%. Not bad, but not nearly as strong as we saw in the prior expansion period, which stretched from early 1994 to late 2001. And over this roughly 8-year period, we experienced cumulative revenue growth of almost 50% with peak year-over-year revenue growth of about 12%. Now obviously, we cannot reasonably predict the duration of this expansion phase. We're certainly in the very early stages given that revenue growth turned positive just 2 quarters ago. So that, I'll turn it over to Tim, who'll discuss our investment activity as well as provide additional color on our portfolio performance.

Thanks, Bryce. As Bryce mentioned, I'd like to provide some commentary in a couple of areas. First, I thought I'd offer a little more color on portfolio trends, including what we're seeing so far in April as well as renewal activity for May and June. And second, I want to touch on investment activity in the areas of development and transactions. Starting with the portfolio trends. Growth in portfolio rent is broad-based and is accelerating as we move into the peak leasing season, in the second and third quarters, when over 60% of leases expire. During Q1, year-over-year growth and same-store revenues accelerated through the quarter from 3.2% in January to over 4% in March. This momentum is continuing with April revenues projected to be up around 4.5% driven by an average rental rate increase of 4.8% compared to April 2010. Renewal rates are continuing to escalate as well, with offers for renewal increases averaging around 7% for May lease expirations and over 8% for June expirations, up from around 5% in March and April. Regions with the highest year-over-year percentage renewal offer increases for June are Northern California, New York, New Jersey and New England, each of which is around 9% to 9.5%. Every region is experiencing acceleration in renewal increases, except the D.C. market where renewal increases leveled off in the 7% range for June. As we mentioned last quarter, Seattle and Southern California had been lagging other regions in recovery. However, during Q1, these regions began to recover as they posted the highest level of sequential rent growth for new leases over the quarter. Over the last 3 months alone, new lease rents, which are a blend of new move-ins and renewals, have risen in Seattle and Southern California by 9.5% and 6.5%, respectively. Both of these regions have been held by positive job growth over the last 6 months. With the recent improvement in Seattle and Southern California, every region is now experiencing improving performance. As the year progresses, we expect that the West Coast markets will continue to accelerate at a faster rate than the East Coast, although every region should continue to experience a healthy rate of growth. Shifting to the investment side of the business. While we continue to be active on all fronts, I wanted to spend a few minutes on development and transaction activity. Starting with development. This past quarter, we completed 3 communities totaling $234 million. 2 of these communities represent the last of our 2008 starts or, in other words, the last of our prerecession starts. The average projected yield for the development portfolio has steadily improved over the last few quarters as we've completed these 2008 starts. The current projected yield is now 6.8%, up 40 basis points from last quarter and should be around 7% next quarter as these 3 completions fall off the development community schedule. We currently have $640 million under construction, all of which were started in 2010. While we didn't start any new communities in Q1, we recently authorized the start of construction for 3 communities, totaling around $200 million, which have either already begun or will begin construction shortly. We anticipate that we will begin construction on almost $900 million for the full year. We continue to replenish the pipeline as we added 8 new development rights, totaling over $500 million, this past quarter. Over the last 2 quarters alone, we've added 14 development rights, totaling $950 million for the pipeline, as we've been aggressively taking advantage of our competitive position early in the cycle when development economics are usually the most attractive. New additions to pipeline include 2 large mixed-use deals, totaling over $200 million, located in Boston and D.C, where we're teaming up with 2 established retail companies, Sutter Realty [ph] and Edenton Event [ph]. In each case, AvalonBay will build residential over street-level retail with the retail to be conveyed to the retail operator upon completion. In addition to these 2 deals, we added 3 new development rights in New Jersey, a market where development economics are compelling and where we've increased our development pipeline significantly over the last couple of years. We currently have 3 communities under construction, totaling $135 million, in New Jersey and another 10 communities in the design and entitlement stage, representing an additional $500 million of projected capital investment. This past quarter, we were very active on the transaction front. For the investment management fund, we bought a 448-unit garden community for $78 million in San Diego. In addition, in April, for AVB's wholly-owned portfolio, we closed on a 415-unit high-rise community for $89 million in the D.C. market, located in Falls Church, Virginia just inside the Capital Beltway. We also bought out the equity interest of our partner at Avalon Rock Spring, which clears the way to sell 100% leasehold interest in that asset. We expect to sell the leasehold interest later this year, which will result in a net pickup of around $0.10 per share in FFO in the second half. As you recall from our call last quarter, we included the impact of this in our outlook for 2011. Lastly, in April, we completed an asset exchange with another REIT totaling around $0.5 billion in value. In this transaction, we exchanged assets in Boston and San Francisco valued at $260 million. For assets in Southern California, it totaled $234 million plus $26 million in cash. This transaction helps accomplish several of our portfolio objectives, including increasing our Southern California allocation, shifting some capital into lower price point B product and, lastly, allocating capital to submarkets that we believe will outperform over the next 5 to 10 years. While portfolio transactions aren't that common, we are starting to see increased interest by private apartment owners, who are considering the liquidation of their companies or portfolios, either for estate planning, competitive or opportunistic reasons, as asset values have almost fully recovered from their most recent correction. While we're unsure whether this increased level of interest will ultimately materialized into actual opportunities, we'll look to take advantage of our liquidity and ready access to cost-effective capital if these transactions make strategic and economic sense to AVB. So in summary, a sustained recovery in apartment markets has begun to take hold across all of our regions. We are seeing strong fundamentals translate into accelerating portfolio performance, where all regions are now moving into the expansion phase of the cycle. We've been active on the investment side of the business, investing new capital and new acquisitions and building the development pipeline, which will help drive external growth over the next few years, years that should produce strong FFO growth for AvalonBay. And with that, I'll turn it over to Bryce for some closing remarks before opening it up for Q&A.

Thanks, Tim. I wanted to highlight some of our recent capital markets activity, and then provide a few comments regarding our outlook for the balance of the year. During the quarter, we were active under our continuous equity program, or CEP, creating just over $140 million. We continue to reinforce our already strong balance sheet to provide the capital for future investment opportunities. By quarter-end, we had nothing outstanding under our $1 billion line and almost $500 million of cash on hand. During the month of April, we entered into $430 million of forward-starting swaps pertaining to 2012 and '13 debt maturities. And through these transactions, we were able to mitigate the risk of rising interest rates on about half of our maturing debt during this 2-year period of '12 and '13, and we were able to do so at a time when market conditions for these hedge instruments were favorable and pricing was attractive. Overall, our balance sheet remains in great shape. Our leverage level is the lowest in the sector, and our liquidity is excellent, providing us with cost-effective capital for future investment opportunity. Last fall, at our Investor Day in New York City, which many of you attended, we outlined our expectations and key objectives for the coming year. We discussed our positive outlook regarding fundamentals, which have emerged modestly stronger than our original expectations. We discussed our plans to continue to ramp up our development activity and now expect to have about $1.5 billion underway by year-end. We discussed our goal to both grow through acquisitions, as well as to modestly rebalance our portfolio, and we've been active on both fronts with our recent acquisitions and with the $500 million asset exchange that Tim just mentioned. We discussed our commitment to maintaining strong balance sheet. And so far this year, we have continued to add equity to the balance sheet and have taken proactive steps to mitigate interest rate risks on future debt maturities. Overall, we're pleased with the results for the quarter, and I'm encouraged by the trends we see in apartment fundamentals and in our portfolio. And based upon the better-than-expected first quarter results and the accelerating portfolio trends, we plan to provide new outlook ranges in early June prior to the NAREIT conference. Based upon trends that we're seeing today, we would expect the midpoint of our new FFO range to be at or above the top of our previous range. Andrea, that concludes our prepared remarks, and we're ready to open up for questions.

[Operator Instructions] The first question comes from the line of Eric Wolfe of Citigroup.

Thanks. Michael is also on with me. One of your peers mentioned that they were seeing buyers being fairly aggressive in their underwriting, kind of going after IRRs in the 7% to 8% range. Just wondering whether you're seeing a similar level of aggressiveness, and if you think that's a reasonable return requirement in this environment.

Eric, Tim Naughton here. In terms of the coastal markets, obviously, where we are and the core deals, I would say you are seeing unlevered IRRs priced out in the 7% to 7.5% range. As you move into B product or product that's in not Ground Zero in terms of submarket location, that might migrate up to the high 7s to low 8s. But 7%, 7.5% is not uncommon to be hearing from institutional investors in terms of the kind of unlevered IRRs that they're underwriting to.

And then I guess the second part of that is do you think that's a reasonable return requirement, specifically, for AvalonBay?

I'd say, probably, the answer is no. I think -- we think our long-term cost of capital is somewhere in the 7% to 7.5% range. So based upon that, it's hard to see where there's any accretion or any value add to do an acquisition, let's say, 7% to 7.5% if you're just matching your long-term cost of capital.

And switching topics, I think you mentioned on the last call that you expected same-store growth to trend up from the mid-3s in the first quarter to over 6% in the fourth. It seems like, from some your comments, that growth might be a little bit more back-end loaded that you expected. And I guess with renewals going 7% to 8% in the May and June, can we expect that, that growth to get up to sort of 7% in fourth quarter? Just trying to see how it's going to trend through the year now.

Sure. In terms of -- yes, in terms of what we talked about the last quarter, you're right. We talked about starting in the mid-3s. We came in a little bit higher than that, high-3s in the first quarter. One thing I would remind folks when we gave guidance or outlook in the first quarter for 2011, it was early February. And at that point, we did have visibility through to the February revenues. So virtually all of the outperformance that occurred in the first quarter really was a result of March. As I mentioned in my prepared remarks, we see that continuing into April. And certainly with renewals that are out right now for May and June, we would expect the second quarter to outperform what we had originally expected. Having said that, the back end of the year, we're actually -- we're projecting market rent growth in the 9% range, which was pretty healthy to begin with. So while total rental revenue might move up from the mid-60s that we were anticipating in the fourth quarter, it was based upon some pretty aggressive assumptions to begin with.

Your next question comes from the line of Swaroop Yalla of Morgan Stanley.

I was wondering, given the lagging nature of some of the markets in Southern California, why you were looking to more percentage of NOI in those markets as evident from the swap? And also, similar question for Bs versus As in this recovery.

Swaroop, it's Bryce. Let me take the first part of it, and then Tim may want to add in. As Tim did mention, our focus on the asset exchange was really to accomplish a number of objectives. First, was geographic portfolio allocation, where we're looking to, over the long term, continue to grow. In Southern California, there's a region where we don't have a particularly robust development pipeline and lighten up in some markets that have -- where we have a very robust development pipeline. Certainly, Boston being a good example of that. Northern California as well. The second comment was the desire to have some slightly increased concentration of Bs, which we spoke about at some length at the New York Investor Day, and the transaction also allowed us to do that. In terms of your comment about Southern California lagging, I think probably the more important thing to look at is the momentum in that market, which as I indicated my comments, and Tim did as well, the Southern California region is showing quite strong momentum if you look at it on a sequential basis. So we think that's actually the exact opportune time to be buying something as that momentum is building as opposed to after it's already built and is being priced into the transaction.

Yes. So in terms of -- this is Tim. In terms of the second part of your question, I think you're asking just our expectations about how these might perform relative to As in this expansion. And actually, this past contraction, we didn't see As underperform like we typically see in contractions relative to Bs, and so that might argue that the As may not outperform as much as they have generally coming right out of -- in the early parts of the expansion. I think, importantly, what we discussed is we do think there is some submarkets that just structurally As outperform Bs and then Bs outperform As, and that's really what was driving the asset exchange in terms with the Southern California and, in particular, the markets in which -- the submarkets in which we exchange assets into.

Got it. And just -- second question was sort of your view on cap rates and how they will trend over the remaining of the year -- remainder of the year. One of your peers discussed increasing their asset dispositions, exit rating them. So I was just wondering if you're thinking anything along those lines.

In terms of our asset disposition plan?

Yes.

Okay. Well, in terms of what we're seeing in terms of cap rates, first of all, there wasn't a lot of transactional activity in Q1. Best that we can tell is cap rates of, for the most part, flattened out, still in the sort of range from the low- to mid-4s core West Coast, particularly California assets, to maybe low- to mid-5s for a northeastern, suburban communities. So somewhere from low-4s to low- to mid-5s with urban assets, for the most part, trading in the 5% or sub-5% range. And in terms of how that might affect our dispositions plans, I guess we look at it as a source of capital. So we look at it relative to how other things are trading including equity, which I think most of us believe is trading at still a bit of a premium to net asset value. So that might argue for selling equity instead of assets. And then relative to debt and some other capital options, some of these are other capital options are still looking pretty attractive when you look at unsecured in the mid-4s today, potentially on a 10-year deal. So I'm not sure it's going to be -- disposition plans are going to be driven by more portfolio objectives, I would say, rather than capital-raising objectives.

Your next question comes from the line of Jeffrey Spector of Merrill Lynch.

I just was wondering if you're seeing any pressure from rental housing, anything new.

Jeff, this is Leo. We're not seeing anything new, any pressure from rental housing, if you're alluding to like a gray market. If anything, we're seeing the gray market pull back. We don't -- whereas, a year ago, I would have said there were certain submarkets where we saw more gray market activity. As I speak to the people that run the various regions, we're actually seeing less competition from that rental housing stock.

Then as a follow-up, what is the main reason move-outs are staying right now?

Well, the top reason for move-out the we're experiencing is when people are just relocating. But it's right consistent with historic averages. As Bryce indicated, home purchase is an area where exchange where we're well under historic averages. And then related to rent increase or financial reasons, that's up. And that's up to around 14%, where it's typically run 8% to 10%. So there's a kind of -- that's the number one, and then those are the bigger changes.

And then it's pretty obvious one of the main concerns out there is just how much you and your peers can push rent given some of the economic data we've seen, lower GDP out numbers today, lack of job growth. Really, how are you thinking about that? And is it just -- is it - I'm trying to get, I guess, put something around that question, or is it really just each day blocking and tackling and just seeing how much you can push rent in each market at each building?

I'll try to address that in a number ways. First, we feel really good about the fundamentals that exist in our markets. Job growth is coming, which certainly help us. That's going to create households that we're finding that there's an increased propensity to rent these days. So just structurally, we feel good about that. Supply is decreasing, which also helps us. Now when you get down to the specifics. With respect to new move-ins, we're watching traffic levels. We're watching our occupancy, and we're watching conversions. And in all those aspects, we see that we're able to convert a reasonable amount of the traffic that's coming through the door, and we have seen an uptick in traffic on a year-over-year basis. Because we're converting a reasonable amount, we feel good about the new move-in rents. On the renewal side, as Tim alluded, we're pushing the renewal increases up as well, and we're pushing them up out into the May and June timeframe. There's been very little change in our overall turnover. Obviously, we're getting some pushback because more people are moving out for financial reasons, but less people are moving out to purchase homes. So while we get some pushback, the portfolio is pretty stable. Occupancy is stable. We feel good about that. Turnover is largely in line with historic averages. Do we watch it submarket-to-submarket and, frankly, asset-to-asset? Absolutely.

Maybe just to add to that. This is Tim. In terms of what we've seen so far with the rent increases that we have had, rent, as a percentage of income, has stayed relatively stable. And so while Leo mentioned that move-outs relative to financial reasons is up, that's not necessarily a bad thing because we've been replacing the people who've been leaving, and frankly, with higher income folks. And so we have been able to benefit from -- frankly, there's a higher credit quality, if you will, of the tenant profile. That obviously won't go on forever. Ultimately, for this to be sustainable, you need job growth and income growth, but it's contributed a lot so far.

And just to elaborate a little more on that, historically, in our markets, it's the averages, they're more like 22% or 23%. And for our entire portfolio, rent to income is less than 20% right now. With the range across all markets, it runs from 18% to 21%. So we feel pretty good about the position that we're in.

Okay, thank you. That's all very helpful. And then if I could just ask one last question. A few weeks ago, we put out a joint piece with our Econ [Economics] team analyzing the housing market and really seeing from apartment landlord standpoint, who will benefit most from the decrease in homeownership rate. It seems like the sweet spot is going to be more development for low- to middle-income earners. I know it doesn't exactly fit your profile. But with your development expertise, is there any way that Avalon can get involved in this and somehow make some money from this over the next 5 years?

Make some -- I'm sorry. If I make some money from trying to build more affordable products, is that it, Jeff?

Yes, even -- not necessarily. I don't want to use the word affordable, because I don't want to think just affordable housing, but it's really developments, rentals for lower- to middle-income earners. So just given your development expertise, are you -- this doesn't sound like it's even something you guys are thinking about right now.

Well, no, I wouldn't conclude that. I mean, we have talked about this in the past. We talked about it some at our New York Investor Day. That clearly, the demographics of the rental customer has been changing, continues to change over the immediate term as we look at the influx of just the echo boomers or the children of the baby boomers. Those are the people that are certainly growing in size. They are not the most affluent renters out there. So we have taken that into effect as we look at the types of sites we pick in terms of location and, certainly, in terms of the size of the apartment home. The apartment homes we're building today are materially smaller than the apartment homes we built just 3 or 4 years ago. More studios, greater percentage of both one bedrooms as well as roommate 2-bedroom units. So it very much does impact how we think about our product. And as you did imply, as a development company, we're sort of uniquely positioned to capitalize on some of those trends as opposed to acquiring something that was 30 years old, where you obviously, by definition, you're not changing the size of the apartment home or the unit mix. We do have that ability to do that, and we're incorporating that into some pretty exciting new developments as we speak.

Your next question comes from the line of David Toti of FBR. David Toti - FBR Capital Markets & Co.: Bryce, I have a sort of a simple question. Given conditions in the housing market and your ability to push rents today and your competitive advantage of being first with development, why not develop more than what you've set out to do so far this year, given your capital flexibility?

Well, the simple answer to the simple question is we might. We actually began more last year than we initially thought and even so far this year. In Tim's comment, we raised it a bit, as you mentioned, $900 million, which is up from what we said just in February. So it is something we continue to monitor. And as appropriate, we'll add communities that make sense. There is a rhythm to it, if you will, in the sense of even though we're going to be very active this year, we didn't actually even start any in the first quarter. Part of that is just seasonality in terms of when is the appropriate time to be begin a development, but also is ensuring that the development is ready and the team is ready to do so in a thoughtful and a risk-measured way. So one of the things we watch very carefully is the amount under construction at a corporate level, the amount under construction on a regional level and really try to manage that. So by year-end, we'll have $1.5 billion underway. Just running that out, by the end of next year, that'll approach $2 billion. So it certainly continues to ramp up, and you should expect that to happen. Just expect that we're going to do it in a -- not in reckless way, but in a prudent way. David Toti - FBR Capital Markets & Co.: And just some details along that theme. Is your team finding the entitlement process any easier to they given that there's been no development for some time and that municipalities are a little bit more strapped for revenues and for residents?

I think it's sort of a tale of 2 different stories, if you will. In the more urban markets, the answer to that is probably yes. The cities are more open and hospitable to development. It's not just taxes, but it's jobs. Jobs are a political issue, obviously, today for everybody from the White House on down. So whether it's in New York or Boston or San Francisco, in the more urban markets, it is never easy but there is, at least, people more willing to listen and to be encouraging. In the suburban markets now, it just doesn't enter into their vocabulary. I mean, if you're dealing with New Canaan, Connecticut or Hingham, Massachusetts, that the local municipality-town level, it is still nimbism [ph] and that is worst, and rental housing is still a 4-letter word. So we're not seeing really any let up there. But Tim, you have something...

Yes, maybe just a little more color, David. I mentioned in my prepared remarks that we secured $950 million in new development rights just over the last 2 quarters. A lot of that's already entitled. And we saw, sort of early in the cycle here, an opportunity to go out and get a lot of entitled land. Some of it needs to be reworked a bit. And municipalities are usually very willing to work with you on that. There's maybe a couple of conditions to zoning that you need to cleanup, maybe some redesign that requires a little bit of re-entitling. But we saw, early in the cycle, there was an opportunity there. That is where it's gotten competitive. And increasingly, I think in 2011, we'll be focusing on deals where a lot of where the competition is not. And where they're not right now, at least for the merchant builders, is the stuff that requires entitlement, because the mother's milk for these merchant builders are Cs. They need something under construction quickly, and they starting to bid up entitled sites now. Some of them what we've seen on the improved proof [ph] asset side. David Toti - FBR Capital Markets & Co.: That's helpful, Tim, and then just one last question for you. Have you seen any signs of sort of inflationary pressures in any of the ingredients, in particular, materials obviously but on the labor side as well?

Yes, Dave, this is Bryce, I'll probably take that. On the construction side, you really -- as you alluded to, you kind of break it into 2 parts, labor versus material. And labor is still pretty flat. Ours is starting to see some upward pressure in, potentially, New York and D.C. on the labor side, but pretty flat. It's really materials where we have and are increasingly seeing upward pressure, particularly those materials and commodities that are subject to either high transportation costs or just petroleum-based products, whether that be PVC pipe, carpet, vinyl. But things like concrete, which is a heavy trucking, and so price of oil and gas impact that. Sort of running on the materials side, kind of 5%, 6% up; labor, sort of flat. Materials about half of total costs, so about 2% to 3% overall on construction, and obviously, that's sort of a couple of percent on total development costs. So starting to see some upward pressure but not in an alarming level. But as you would expect, we're starting to see and feel it.

Your next question comes from the line of Jay Habermann of Goldman Sachs.

Just following on David's question there. How much better are the yields today versus a year ago on some of the development starts, or what you're anticipating over the next 12 months or so? I mean, the rent growth is clearly better. Costs sounds like modestly in line, but how much better are the IRRs that you're expecting?

Yes, Jay, Tim here. It really depends on whether it's a new deal or a deal that's been secured, say, in the last 18 months versus a legacy deal. I'd say that legacy deal is still somewhat hampered by higher land costs and some carrying costs. On the new deals, I'd say, generally, kind of -- maybe starting in California, low to mid-6% range going in, going in yields. And on the East Coast, say, mid-6% to mid-7% range. IRRs, generally well north of 10% on an unlevered basis. Most of those deals, I'd say, are probably in the 11% to 12% unlevered IRR versus the 7% to 8% on a core acquisition that we mentioned before. On the legacy deals, the initial yield is maybe 100 basis points less than that, just to give you some sense.

No, that's helpful. And I know in the quarter, you guys announced the acquisition on the wholly owned side with Fairfax Towers. I mean, how much are you looking at in terms of acquisition opportunities? And I know, Bryce, you mentioned you're certainly open to them and perhaps some portfolio deals. But I guess, what are you looking at today, and what do you -- what's on the horizon?

Tim here, again. First of all, most of the deals that we're looking at today are still for the fund. We've got about another 4 or 5 months of the investment period for the fund. There were some specific attributes of that deal that maybe inappropriate for the fund and appropriate for the REIT. As it relates to the portfolios or deals that the REIT might do, I say just generally, again, consistent with our portfolio objectives that we talked about in the past. If you're looking at specific regions, we've been interested in continuing to increase our exposure in Southern California. Over time, we probably would trim a bit more in Boston, New York, just given the size of development engines and pipelines there. And then in terms of the type of assets, as we've mentioned, shifting some of the allocation, the weight in portfolio, from As to Bs, as we've talked, about sort of 85-15 moving to 75-25, As to Bs. So that would necessitate more of the acquisitions beyond the B side than any side I would say.

And just lastly, on the supply side. I know it's remained fairly constrained thus far, but are we seeing any pickup in the lending on the part of the banks? I mean, should that change, do you think, the outlook over the near term?

Not over the near term. Having said that, banks are becoming more receptive to doing construction loans. Sponsorship matters a lot. So I think it's directed towards the higher quality private sponsors that are out there. And I guess, the second part of that is they're not going to be able to do as much as they've been able to do it in the past. So I think for those 2 reasons that banks are being selective about sponsorship. And two, that sponsors that are able to be active aren't likely to be able to as much as they've done in the past. We're not seeing an immediate threat. And as Bryce mentioned in his remarks, it's likely to be 2 or 3 years out.

Just maybe to add one thing to that. There was actually a call yesterday that one of the other banks hosted, where Charlie Brindell, the CEO of Mill Creek, was on, and he spoke to this issue in some length. And I thought, one of the interesting things that he called attention to is, at their peak, Trammell Crow Residential is certainly one of the largest builders of apartments in the country in '07, '08, built 12,000 to 14,000 units per year. That was their run rate. And he expect -- and they expected to be pretty active last year, which they weren't. This year, 2011, they expect to start 3,000, 3,000 units. So this is one of the largest private developers in our space. And I think it's just reflective of how difficult it is to get the machines reenergized, it's not just the capital. But he did speak to -- that it is -- even though more abundant today, it is still difficult and does require full recourse for a period of time, which is not what the private developers like. They consider that a 4-letter word. But then secondly, it's rebuilding the teams and, importantly, resecuring the sites. So to go from 12,000 units in '08 to 3,000 units in '11, after 0 for a couple to 3 years, I think is just a good description of what the private market has seen in terms of apartment supply.

Your next question comes from the line of Jeffrey Donnelly of Wells Fargo.

Just a follow-up question. I think that David asked about the future development potential. I'm trying to estimate how much of your, I guess, the 34 development rights could move into active development over the next 24 months. Are you able to breakout for us how many of those projects, maybe pencil today, based on current market rents but only need entitlement versus those that might have entitlements but needs some seasoning before they pencil?

In terms of how much might move into development, right now, that's about $2.7 billion on -- that's shown on attachment 11. I would say over the next 24 months, potentially up to a couple of billion of that $2.7 billion could move into development. By that, I mean started construction.

Meaning, about a half of it is possible?

No. It's about $2 billion of that $2.7 billion, so the majority of it, 80% -- 75% to 80% of it.

I'm curious, how many of those deals are, I guess, what you guys would characterize as new deals versus legacy deals?

Well, of the 14 -- we put 14 under contract in the last 2 quarters. Those are all new deals. So I'd say of the 34, probably at least half of those are new deals. New deals being since the, basically, it's within the last 4,or 5 quarters. It's about 5 quarters.

And then just one last question. Just clarifying a comment you made before about cap rates being in the range of roughly 4% to 5%. What do you think the spread is between A and B assets for cap rates in the west versus in the northeast?

Yes, I would say it depends on how big the transaction is. Where we've seen the opportunity, pricing opportunity, is just really in the larger B transactions. Oftentimes, when you get into the smaller B transactions, you start competing with a lot of local private guys who are a little put together, high net worth, friends and family. But for as -- I would say the spread on the West Coast, we've seen some assets priced that, call it, in the low-5s or maybe their A counterpart would be mid-4s in a similar location. So I'd say, probably in the low end from 25 to the high end 75 basis points delta.

Your next question comes from the line of Alex Goldfarb of Sandler O'Neill. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: Just sort of taking up from Jeff's thing. Just one thing we had noticed, you guys changed up the development page, Page 17 of the supplemental. The fourth quarter disclosure was very helpful. Don't know if there's a way to go back to that, but if there is, that'd be great. A question for Tom. Last time, last cycle, you guys didn't do the convert market. And as you think about where we are right now with fear of higher interest rates and -- certainly, the stock prices have been strong, and there's a very strong bid for credit. What are the thoughts about maybe doing like a 30-year issuance or doing a convert? Is that something that we'll likely to see from Avalon? Or is that probably just -- or are you guys just going to stick with sort of traditional common equity and 10-year unsecured debt?

Well, Alex, in terms -- let me just start with the 30-year. If you look at a deal versus a preferred, it's a -- I think the bankers would be pretty split between the 2. I've heard arguments on both sides. You have seen some preferreds in the market recently. I think with put option that you get on the preferred, it probably is a superior product. And that after 5 years, you can put it back or you can call it, I guess, would be the way to say that. And I think there's a lot of value in that call feature. Even when you price that call feature, I think you would find that the preferred is a better instrument for REIT issues. So I think you'd see us probably migrate towards the preferred over a 30-year, if we were looking for some long dated fixed-rate capital. In terms of converts versus traditional, I hear you on that. And if you think about where unsecured debt is pricing today relative to convert, that spread between the convert and a conventional deal is not that much. I mean, when we did our 10-year deal in November at 3.95%, at the time, converts were maybe 2%-ish. But that spread was pretty narrow compared to what you saw pre-downturn. So while I think convert has room in our capital structure, I think, today, unsecured debt is pretty competitively priced. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: And my second question is it's a more of New York-centric question. Right now, Albany is debating the rent control and what they're going to do. Where do you guys -- are you sort of agnostic to what Albany decides? Or is it that rent control is actually good because it artificially boosts market rate apartments, or is it bad because maybe it means that they're less favorable to developer incentives?

This is Bryce. As you're alluding to in your question, I mean, it's an issue that has a number of different permutations to it. Some of it are positive and some that are negative. And I think on this call, it's just probably not worth getting into that many great detail. I would like to, though, go back, just address your first comment on Page 17, Attachment 11. Just to clarify what I was referring to, is that our development rights schedule, which, historically, we have listed out each and every development right by specific town, by specifically identifying whether it was owned or option. And we frankly, over the last few months, a few quarters, as the market had been heating up for sites, we had a couple of situations where, frankly, we believe our competitors were using that information against us in order to go after some of our sites. So we are always in the business providing excellent disclosure to our investors. I think we get very high marks for that, but we're not in the business of giving information to our competitors that can harm our business. So we think the schedule, as we constituted, provides adequate disclosure to the investment community in terms of the size of our development pipeline and the geographic breakdown of it. And we hope that everyone concurs with that. So that's the reason for the change.

Your next question comes from the line of Andrew McCulloch with Green Street Advisors.

Hey, Tim, you made a comment earlier in the call that asset values are almost back to peak levels. Does that hold for A and B product across geographies, or is that comment geared more toward the best stuff in the gateway cities?

Well, I'd say, in some cases, probably asset values are back to more than where they were. If you take a D.C. location, where some trades have actually occurred at a pretty decent premium above replacement costs. But it was intended to be more of a general comment. So if asset values are back, say, within 5% of peak levels, there are probably some markets that are still more than 10% off and other markets where they're at or above where we saw peak, D.C. probably being the primary one there. In terms of As versus Bs, I would say, core, probably leaning more towards As except I have recovered more than Bs at this point, if I had to guess. But we are certainly going to see some increased level of investor interest in Bs, probably just because of where As have started to move to from a pricing perspective.

And then just -- when you guys talk about increasing your exposure to B, would that also include buying C assets and bringing them up to a B?

Maybe. It's hard to know what a B versus a C is sometimes. One man's B is another man's C. I think it's safe to say we're not going to be looking for sort of the lowest offering being offered in the market and trying to bring that up to say a B- level of quality. I think, for the most part, what we're going to play is -- likely play is maybe B- bringing to B, B+, probably less of what you might think of as a C trying to being framed to B-. A lot of it turns on location in some market, though. The reality is in a lot of the submarkets we're interested in, you don't see as much of the C stuff that's really suffered from disinvestment. The better submarkets generally have owners that continue to invest over time.

Your next question comes from the line of Nick Yulico of Macquarie.

Just a quick question on the 421-a and -b Program in New York City. So the future developments starts that you guys have in New York City, do you already have 421-a certificates, so in case the program goes away you still can qualify with those projects?

Yes.

And then just also on the development rights. I mean, I know you don't want to give a list of the products anymore, could we just get some more feel for the rights that were added in the first quarter as far as the geography other than you said 3 in New Jersey?

Sure, this is Tim. I mentioned 5 of them. 3 were in New Jersey, one was in Boston, one was in Virginia, those were the 2 mixed-use deals. We also had one in Connecticut and another in D.C., downtown D.C.

And the 3 New in Jersey, I mean, any more feel for where they might be in New Jersey?

Yes, they're infill, I would say, infill-suburban type locations. So they're wood frame, they're not Jersey waterfront concrete construction. They'd be wood frame, generally walk-up or wrap-type construction.

Your next question comes from the line of Karin Ford of KeyBanc.

Just a question for Leo. I know on the beginning of the year, you were pretty positive on Washington D.C. dynamics, but you mentioned that June renewals were flattening out a little bit there. And with the prospect of some government job reductions, potentially, are you -- would you say that there's a possibility that your outlook for D.C. maybe incrementally a little more negative today than it was at the beginning of the year?

Karin, this is Leo. The outlook for D.C. is still positive. I mean, if you look at the absolute numbers, D.C. has performed extremely well and consistently. Do we acknowledge that D.C. did not have as big a fall in this last downturn? Yes. And is it further into recovery? Absolutely. But the technology sector is picking up, that helps us there. And while it may not accelerate to the same degree that other markets will, we still feel pretty good about the numbers that we're getting in D.C. from an absolute sense.

Just last question. I appreciate the color and context from past cycles, what you saw on the revenue side. Can you talk about what you saw trend-wise, when you were pushing rents in the last cycle, when you pushed rents on people sort of the second and third times through versus sort of the first time you put through a fairly large rent increase on people?

Karin, really it depends on just what the other dynamics going on. One of the dynamics that may be happening right now as we're pushing through rent increases is that when we had to bring rents down, people moved from secondary locations into our apartments. We now have high income people who are coming through the door, and we're pushing the rents consistent with that. So the same people will take adjustments multiple years. We got reasonable rent increases and renewal increases over the periods of time that Bryce alluded to. It may not always be the same person. It may be new people that are coming to the door, new households that are being created. We feel pretty good, obviously, and the history would say that there is room, both from an income standpoint and from a traffic standpoint. Don't you want to add some?

I just wanted to pick up on -- maybe extrapolate from that a little bit. Obviously, Karin, we've indicated in both results and in Leo's and Tom's -- Tim's comments about the trends we're seeing in the portfolio, we did notice -- not in your write up but I did notice in a couple of questions that came before the call that there was some question about is, with that growth in the portfolio, why are we seeing FFO in the second quarter relatively flat from the first quarter. So Tom, could you just provide a little color on the kind of roadmap first quarter to second quarter? Just give some guidance there.

Yes. Well, we've got -- we started at $1.05 base, excluding nonroutine item, and we see community operations contributing about $0.07 per share in the second quarter, taking it to about $1.12. This $1.12 will be offset, however, with several timing -- the timing of several overhead category, including comp costs, compensation cost, meetings and conferences and some strategic initiatives on the IT side. So that would bring us back to about $1.08, which is the midpoint of the range that we provided. It's also important to note that the G&A that will actually rise between the first and the second quarter will fall back off in the third and fourth quarter, back to normalized levels. Another thing, I think, if you go through these reports, there's a question about the land lease, which we continue to -- which is very complicated to get questions on. And if you consider some of the individual models the analysts have, it does appear that the assumption for sale of that asset that is subject to the ground lease where the straight-line rents exceed the actual cash paid under the lease is being included in the second quarter outlook numbers for the analysts, not in ours. And I guess I'd repeat, we do not anticipate that sale to occur in the second quarter, we expect it will incur in the second half of the year. Further, if you were to assume a third quarter sale, there would be about a $0.07 to $0.08 per share pickup in that quarter, because we capture prior quarters excess of expense over actual lease payments. And then in the next quarter, following the sale, we would, of course, not have that excess payment. So overall, we picked up about $0.10 per share. Part of it or most of it happening in the quarter in which it sells and then the balance falling off in the last quarter or the following quarters. Obviously, we'll give up some NOI from that asset once it's sold, but that's nominal compared to the land lease accounting. So I just wanted to point out as well.

That's real helpful. And just following up on that, were there operating expense catch-ups that we should expect in the second quarter as well or is it just G&A?

We did have some timing of operating expenses that are going to reverse, where we had some savings in the first quarter that we expect will reverse, not necessarily all in the second quarter, kind of spread out throughout the year. But -- and picking which items are timing is more art than science, but we do expect some of that savings to turn around.

Your next question comes from the line of Steve Swett with Morgan Keegan. Stephen Swett - Morgan Keegan & Company, Inc.: Tim, just one more question on the development pipeline. Can you just speak in some broad strokes in where land pricing is today, sort of where it was versus the peak in some of your key markets?

Sure. And really, Steve, is you almost have to bifurcate it between, again, entitled deals versus unentitled land. On entitled deals, in some cases, it's back to where it was as it relates to apartment land. We're not going to get back to when it was being priced as condominium land like we saw in D.C. or Southern California. So we haven't seen returns to those kind of values. But in D.C. and in Southern California, if you have and entitled deal ready to go, I would say it's at or approaching peak values. As it relates to unentitled land, it's all over the map. In some cases, it's still down by 50% from peak values, but I'd say it's probably more in the 20% to 30%, 20% to 35% range off of the peak values. Stephen Swett - Morgan Keegan & Company, Inc.: And then, Bryce, just last question to clarify. The positive variance you refer to in the core operations is related entirely to revenue, correct?

Well, no. There's -- well, in the press release, we have $0.03 to community NOI. That $0.03 is made up of revenue as well as expenses. And within the expenses, some of the expenses is timing, as Tom mentioned. So roughly half of the $0.03 is revenue, the other half is expenses, and some of that is coming back.

Your next question comes from the line of Paula Poskon of Robert Baird. Paula Poskon - Robert W. Baird & Co. Incorporated: Just on the Fairfax Tower acquisition, how did you source that?

We sourced that through a broker relationship. Paula Poskon - Robert W. Baird & Co. Incorporated: And do you think there are any other opportunities from that particular seller in your markets?

Probably not. That particular seller, I think, only has one or 2 other assets, and I'm not sure that they're in a position to liquidate at this point. Paula Poskon - Robert W. Baird & Co. Incorporated: And just a quick question for Leo. Are you seeing any change in move-outs related to a job transfers?

Paula, no. No real change in -- I mean, as I said earlier, relocation could tie in there, it's basically flat. In fact, it's dead-on the same period as the previous year. It's up slightly from the fourth quarter, but no, no big changes. The big changes are the ones I pointed out.

[Operator Instructions] And your next question comes from the line of Eric Wolfe, a follow-up, of Citigroup.

It's Michael Bilerman. Tom, just on the cap interest, the $6.3 million in the quarter. What balance and what rate was that being capitalized at?

Well, the balance that it's capitalized upon is the CIP, the average CIP during the quarter, and the capitalized rate is roughly 5.25%.

And so, I guess, as we think going forward, as you're raising equity at yields below 4% and then you're investing in development, it's actually accretive.

Well, you actually have to raise debt as well. And the -- sometimes, people get tripped up on this but you actually are raising debt as you fund this as well. And it's that debt that you raised that is part of that capitalized interest cost and the buildup of the capitalized rates. So you can't fund everything with equity. We choose to fund some with that.

But as you can see is -- if you're drawing on the line or raising long-term debt, that's going to lower your overall rate, but that rate will still probably be higher as you re-equitize in the balance sheet at lower rates than your cost of debt to capitalize it.

Well, it depends on what type of capital we used to fund our business and fund the CIP, but you're going to use the line some, although we haven't used it for 2 years. We fund some with debt, unsecured debt, which -- right now, an unsecured debt deal, we can get done for about 4.40%. So you think about that. And overall capitalization right now is about 5¼% because we do still have some legacy debt deals out there that are in the high-6s. And then some will be funded with equity. But in terms of accretive, there is a cost of that capital related to the debt, and it does go flow-through that capitalization rate inclusive of capitalized interest.

As there are no further questions in the queue, I would like to turn the call back over to Mr. Bryce Blair for any closing remarks.

Well, thank you, Andrea, and thank you, everyone, for your time today. And we'll see many of you at the NAREIT conference in early June. So thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.