AvalonBay Communities, Inc. (AVB) Q3 2014 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Avalonbay Communities' Third Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference call, Mr. Jason Reilley, Director of Investor Relations. Mr. Reilley, you may begin your conference.

Thank you Jenifer, and welcome to Avalonbay Communities' Third Quarter 2014 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There 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. This 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'll turn the call over to Tim Naughton, Chairman and CEO of Avalonbay Communities, for his remarks, Time?

Thanks, Jason, and I welcome to our Q3 call. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. I will provide management commentary on the slides that we posted this morning and then all of us will be available for Q&A afterward. My comments will focus on providing a high-level summary of the quarter's results, discuss apartment cycle and fundamentals. Talk a little bit about portfolio trend and then lastly briefly touch on development performance and funding. I’m starting on Slide-4 which is an outline of highlights for the quarter. Our quarter FFO growth was just over 6% for the quarter and 9.5% a year-to-date. Our same store revenue growth was at 3.7% for Q3 and 3.9% when you include redevelopment that rate of growth is up 60 basis points from the second quarter. Sequential same-store revenue growth was at 1.9% versus 1.4% we experienced in the same quarter last year. And we completed eight communities so this quarter totaling 465 million at an initial stabilize of 6.8%. And we started another three deals totaling about 450 million which brings our year-to-date starts right about $1.2 billion. And lastly, we raised about $230 million capital in an addition to that we have sourced another $685 million in the form of the equity forward. Let’s move to Slide-5 in that let’s take a look at where we are in the apartment cycle versus the 90s cycle which we are think this cycle too. And we’ll look at both the U.S. and our markets. For the broader AVA apartment market which is depicted by the three slides on the left there. Demand, supply and performance are attracting very closely in line with the 90s apartment cycle. When you look at the job growth, apartment starts and rent growth they are almost identical through the first 19 quarters of this cycle as compared to the 1990s. Our market rents have grown cumulatively approximately 15% since the trough which is somewhere to the 90s when rents have grew by more than 50% by the end of the expansion. Our core markets which are denoted with the three charts on the right that our current cycle has performed and it tracks the U.S. overall with rents growing about 15% at the center trough but the fundamentals underlying that performance have been very different than the 90s. Our job growth has been much stronger this cycle with technology markets leading the way and stores have been in line with national averages which is different about this cycle and something we discussed in past calls, suppliers come earlier than normal in our market this cycle just given capital preference for gateway market and also the underlying economic growth in our markets which has been strong so for this cycle. Moving onto Slide-6, another major difference this cycle than its driving strong apartment demand is demographics and consumer behavior which is driven in part by shifts lifestyle apparent. First demographics are much stronger this cycle shown on the chart number 1 in the upper left with a growth of the (inaudible). And this demographic is behaving differently than past cycles. They are buying less with rates down 700 basis points from the peak this cycle and lower than what was experienced in the 1990s. Many haven’t even yet formed the household, choosing it’s best to have home at an increasing rate for longer periods. Perhaps or it’s maybe extending out lessons and putting life on hold a bit marrying at an age of starting a family about three years later than the prior generation. So clearly demographics and lifestyle behavior and having profound impact that apartment demand this cycle. Turning to Slide-7, we talk about supply for a moment, how worried should we all be about supply. No doubt apartment started to have significantly since the trough and are now above their 25 year average but they are in line with prior expansions, periods were underlying demands fundamentals want nearly as attractive as here today. And starts to appear to be stabilizing based upon three months averages over the last year and shown in the second chart in the upper array. Our company level supplies further supported by broader housing market starts and only running at about a million per year which after (inaudible) is closer to 600-700 net starts per year. Significantly below most third party estimates of net household formation that’s projected over the next several years. Obviously supply could take another way out and that’s what we’re watching carefully, the recovery, the apartment breach this year in the equity market and the recent approval NMHC Equity Index show them a lower rate, signaled a capital is more confident about forming fundamentals which we understand could translate into higher production levels at some point in the future. Now however for now, we believe the sector is fine and over the foreseeable future as recent starts turn into new deliveries, but it does bear keeping a close eye in over the next few quarters. Shifting to Slide-8 let’s take a look at our portfolio, recent trends and performance there. As I mentioned earlier same-store revenues accelerated in Q3 with the rate of growth up 60 basis points what we saw Q2 on a year-over-year basis that was driven by improvements at same unit rents which have accelerated since the beginning for about 2% year-over-year growth in January to 4.5% in September and you could see that on the left hand side of the page. In Q3 same unit rents were up by an average 4.3% which was 50 basis points higher than the same quarter last year, so increasing relative to what we experienced in 2013. Moving onto Slide-9, we always improvement in rent growth on a year-over-year basis could be – in terms of the rate of rent growth can be attributed to stronger performance in the last. As growth by the East Coast is more or less has been added just for what we experienced in the third quarter last year. Northern California and Seattle continue to lead the way in the west but rent growth in Southern California was close to 6% in the third quarter which is the strongest we’ve seen so far this cycle in that region. Moving onto Slide-10, with supply raising particularly in urban markets we’ve seen a shift performance by submarket and price point. And as we mentioned last suburban rent growth is now outpacing urban rent growth and try to waive back, it will continue over the next several quarters when urban deliveries will be more than double that of the suburbs. This is a pretty consistent trend across our markets. In addition generally value OE product or B product or maybe or EUs in our portfolio is outperforming higher end luxury products. The trends in our portfolio skewed a bit by higher concentration of Eaves in the California markets. There are some markets where A product is still outperforming B, actually of the 20 markets that AXIA covers for us they actually report that A is well performing in 8 of the 20 markets or about 40%. Now well, B is outperforming in the other 12 are roughly 60% of our markets. Moving on to Slide-11, shift to talk a little bit about development, our development portfolio continues to perform very well. The $450 million development that was completed this past quarter stabilized rents of 8% pro forma and yields that have raised by 70 basis points since the start of the construction. Turning to slide 12, this transit continuing in our recent portfolio of the nine communities that are currently under construction and have significant release activity for 6% above pro forma or $130 and yields are up by about 40 basis points. So strong leasing and economic performance across the development portfolio. Moving on to slide 13, importantly, the development portfolio, all the communities are under development and redevelopment of $3.3 billion bucket is fully funded with permanent capital already in place, include that dispositions that are under contract with deposits which totaled $200 million and the (inaudible) from our equity for transaction of almost $700 million. and lastly we continue to raise capital at an attractive cost as you can see in the slide 14 enabling us a lot meaningful accretion on both assets and basis year-to-date we have raised almost a billion capital excluding equity forward. Add initial cost that is approximately 300 basis points below the initial stabilized yield on the recently completed developments. So for every billion of development, that stabilizes then of about 30 million of FFO accretion adding more than roughly 3% FFO for shared growth and about 400 billion in NAV accretion or about $3 to NAV per share. So in summary, 2014 is shaped up to be another great year. The fundamental remains very strong and we have seen improvement in the last quarter -- from our stabilized portfolio. We have highly accretion development pipeline that is driving strong, external growth and which is fully capitalized along with the balance sheet that is positioned to provide plenty of flexibility to continue funding projected development starts in a highly cost effective manner. And so, with that operator we are ready to open up the line for questions.

[Operator instructions] And we will take our first question from Nick Joseph from Citigroup. Go ahead sir your line is open. Nick Joseph – Citigroup: Thanks. How did you weigh the decision issue equity on a forward basis versus match funding using the ATM or using another form of capital?

Sure Nick. This is Kevin. In terms of the equity forward versus the CED or the ATM, the ATM activity that we undertook in the quarter of about $100 million was done in August and was done in reference to our capital and for 2014 potentially it was capital that we were looking to raise relative to our target for this year and in raising equity, we essentially substituted that for like amount of disposition that we otherwise would have done. In terms of the equity forward, the thought process there as you might expect it with a little bit more complex fundamentally however, the purpose in raising that capital was to forward fund capital plan activity scheduled for 2015. So it's really related to next year not this year and so in doing so what we did, we took into account a few considerations. First, obviously as we have noted we faced elevated funding needs not only this year with $1.4 billion to start but also next year which we’ve disclosed we expect the range between 1 billion and 1.5 billion in new development starts. Second we will look at our principal funding markets which for us the transactions market common equity market on the debt market, clearly the common equity market historically has been our most valuable market to tap, access to – priced equity capital can sometimes be reduced for extended period of time often have little to do with market factors. Out of that something we took into account. And with our stock trading in early September about $156 a share we were trading in above any of these so pricing at that point time was relatively attractive, certainly relative to our development uses. I guess the final factor was just taking a look at the fact that capital efficiency for our overall funding program benefits and is enhanced by cooperating from time to time for common equity issuance when it is attracted to do so in order to avoid from having to pay meaningful special dividends or excise taxes related to capital gains which would otherwise generated from the funding strategy that’s wholly relying on dispositions. And so taking all those factors into consideration and looking at the facts of elevated needs this year and next year, common equity price was relatively attractive we thought it made sense to lock in attractive pricing and funding and create some NAV acquisition for investors. Nick Joseph – Citigroup: Thanks. With the last investor presentation you put out last earnings you put a help slide I guess with the cost of account for heat map. I am wondering where equity screened at the time you issued the forward equity and where kind of debt assets sales and equity screen today?

I don't have date exactly when it was at that point in time but to give you a sense of assets sales on the heat map on a percentage basis have ranged around 78% to 80% over the last quarter or two. So pretty consistent and supporting the comment I made earlier about being the transaction market is relatively stable market for us for pricing perspective. Equity pricing can be fair a bit more volatile particularly when we look at how we are trading relative to consistent NAV and in terms of the overall equity temperature if you will on percentile basis which takes into account not only how we are trading relative to NAV but also some other factors including our yields and how we are trading relative to bonds in the broader market. Overall equity temperature was probably at that point in time in the high 60% range with our stock premium to NAV trade even higher than that more and more in the early 80% range. So that’s probably where it was at that point in time. It's down a bit today from where it was then because obviously there are stock prices is a bit below it was then and I think our consistent NAV has risen a bit since then. Nick Joseph – Citigroup: Right. Thanks and just quick on operations, can you talk about what you are seeing on the ground in southern California and what you expect going forward?

Sure, Nick this is Sean, as we noted in the management letter, we had expected Southern California to pick up speed and certainly played out that way in the third quarter. Generally speaking Orange County in LA have been the strongest of the three markets if you consider San Diego as well just to give you some data points, we talked a little bit about rent change in Southern California in the third quarter averaged in the mid 5% range as compared to low 4 last year. So overall good momentum and as you look at where we are headed in the October and then what’s renewable look like in November and December in terms of rent change, those numbers are sort of in the mid 5% range for LA and Orange County and then in the high 4% range in San Diego and generally speaking things are solid across the three markets with some exceptions depending on the submarket that you are in and where supplied being delivered. So just to talk through that for a second to give you some sense of it, in LA as an example, about 20% of the new supplies coming online in Downtown Los Angeles in 2014 and 2015. So, put a little more pressure in Downtown LA we have one asset and leap up there no existing asset and then also we are seeing some pressure in the Warner Center, Woodland Hills sub where there is still delivery underway at this point. A lot of the other sub that we are in are relatively protected and we feel pretty good about that. In Orange County display is really coming online from urban which is various parts of the ranch, little bit of sub county and in San Diego, listed supply is in places like (inaudible) as an example we don't have assets so it does depend on where you are located but generally speaking in Southern California overall. Nick Joseph – Citigroup: Great. Thank for all the detail.

Sure.

Next we will go to David Toti from Cantor Fitzgerald. David Toti - Cantor Fitzgerald & Co., Research Division: Hey guys. Just a couple of questions around with the older pipeline if I might. I noticed that the overall yields on new projects are trending down modestly but you stabilized yields and your recent property are moving up. Is there too much conservative in the original estimates or are it's really just the function of the mix of assets that are in lease up at the moment that are outperforming because of specific market conditions?

David hi this is Matt, I guess I will try to address that one. As it relates to the overall yield on the pipeline, I guess it's down 10 basis point from the last quarter and that really is a function of just the specific asset that move in and out of that bucket geographically. So we had large rise in Boston in this quarter and we had a few assets to complete it last quarter that are not longer in that number. They were I think the assets we completed last quarter were in the low seven. So it some of it just the math of that overall, I would say we are pretty conservative in our underwriting but we are consistent in our conservative and we always underwrite today's ranch, today's cost, today's operating expenses and that's the yield that we report until we start leasing the asset. So frequently that can be an average year and half, a year in some cases even two years between when we start the community and when we start leasing it so the extend rates have grown in that period, you will get some list of out the yields. So I think we have been pretty consistent seeing that list when we open for lease relative when we started the job. Having said that, there is more supply out there than there was a couple of years ago. So it wouldn't be surprising if the amount of that list isn’t quite as strong on deals with stabilized in the next year to the ones that are stabilized this year. David Toti - Cantor Fitzgerald & Co., Research Division: Okay. That's helpful and then my second question just has to do with energy cost. I know this is probably a bit premature but are you underwriting any I guess improvement in total construction costs on products that are being under at the moment? Are you anticipating labor cost, any of that being written to the yields that you are looking at today?

This is Matt. In terms of the hard cost no, I mean I guess again what we are underwriting every time we update the pro forma which we will do throughout the process until we start construction is what we think would cost to build today. There are markets where we see construction cost pressures moderate particularly in the DC metro where they basically pretty close to flat at this point. The west coast is still moving up pretty strongly although maybe the edges off that a little bit but honestly the construction cost pressures have a lot more to do with labor cost and with some contractor margin just how much business they have got relative to how much business they can handle or they want to take on. It's much more responsive to that than it is to commodity pricing. David Toti - Cantor Fitzgerald & Co., Research Division: Okay. And then, just ask one more the total dollar value of the right pipeline went down slightly to about $10.9 billion is that just the function of timing and lumpiness or is that an indicator of some contraction in the total size of the pipeline potentially?

Probably a little bit of both. I mean this is a big year for start. We are starting a billion four this year, a billion three, billion four which would be kind of our peak. So I think we have set pretty consistently that this probably is kind of our peak for development underway. And we also had a lot of development rights that we acquired through the outstanding transaction last year that we moved into production this year. So there was a bit of one time lift there, so I would say now it's probably hopefully over the next couple of quarters we will see as much added to the pipeline as well, take out in terms of the new start but there is definitely – it's a bit of bottom process and fewer deals have been kind of hitting the target relative to year, two ago. David Toti - Cantor Fitzgerald & Co., Research Division: Okay. It's very helpful. Thank you.

And we will take our next question from Jana Galan with Bank of America. Go ahead ma'am.

Thank you. Is it possible to provide like term when changes after Boston and your outlook there as you had a nice sequential pick up and then maybe offer similar stats for Washington DC?

Sure Jana. This is Sean. I’ll give you guideline on New England overall which includes Fairfield, Boston some of it be slightly higher end -- give you but in terms of blended rate change in the third quarter for New England overall average about 3% in the third quarter and what you are probably going to see is as you move – New England is a pretty seasonal market. You get a lot of lifter in the summer time from short term leasing activity, people come from different regions, water etc. and then it as you go into the fourth quarter it's more seasonal than sort of the average market that we have. So you will see that trail off as you head into the fourth quarter and then as it relates to the bit lag overall a blender rent change for the third quarter was positive about 50 basis points with no move in down about 2.5% and the renewals up about 3.5% and based on what’s on the books today that's the pretty similar pattern for October. November and December is yet to be total course, but renewals are going out in a range that would indicate that those numbers are sort of in that same mid 3% range maybe slightly higher on renewals as we get through November and December.

Thank you.

Sure.

And we will go next to Nicholas Yulico from UBS.

Hey Tim its Ross with here for Nick. Can you talk a little bit about some of the mortgage finance, I guess proposals or chatters that's out there from the (inaudible) specifically in their efforts to expand credit to the mortgage single family housing world and some of their plans at least to looking at 95% to 97% loans to values. As you think about your capital plans going forward, how do you think about what you are hearing out as a Milwaukee space?

Yes, maybe the one thing that does make sense from my perspective is to what is being discussed with FA as the maybe just some clear rules around loan put backs which I guess probably is good just for maybe helping unstuck some capital and home mortgage market but as it relates to GSEs potentially guaranteeing lower down payment loans I think as you mentioned as low as 3% we have been there before kind of that look like but I think there is a real question at least in the multifamily industry whether it's necessary and how long ship rates are back to 64%, 65% range over there for 30 years before the big run up in the 2000. So when you look at demographics and any impacts of higher leverage which is going to result in higher defaults question whether how much it hurts ultimately the capital markets and the housing markets we will see but you got to speak from our perspective, tax payer and maybe secondly to see of all things that could have been done I am not sure, list as it relates to stimulating the economy it does feel a little bit like real playbook without regard to anything as it relates to underlying fundamental changes in demographic. So as it relates to how it might affect their business I think now we will see. In our sense that one of the reasons -- much home buy is it's not just about the payment, it is about, we saw in the slide show about people's lifestyles and choices they making around family and marriage which is ultimately what drives that purchases as much as the financial side of it. So we will see in terms of the impact ultimately to multifamily and see the department sector but we are not crazy about the changes to speak and putting my tax ahead on.

Is it your I guess maybe I paraphrase that the company is not including a size makeshift in the single-family versus multifamily or call it dynamics in the home ownership rate over the next couple of years that’s a fair paraphrase?

We are not certainly as it relates to multifamily versus single-family then I think the multifamily decision versus single-family really is a – is more of a demographic issue chances where he chose to purchase or not a condo that could be a fact of by what’s happening for service related to our branch right now it’s not impacting, it’s not impacting the business by any delay, ultimately have an impact on apartment on condo values which you might see some conversion of existing stock or stock that was plan for to be built as a rental shift over the condominium to the extent more demand materializes as a result of the changing the rules.

Yes, I just if hoping to talk a little bit more about knowing and then the areas they have put better numbers this quarter versus the second quarter you talked a little bit by knowing but and what else is going on in these markets that often there is a bit of pick up in fundamentals as these have been lagging markets?

Yes, sure. This is Sean there and maybe a little my thoughts there, I mean New England, one thing that you keep in mind is the winter was so rough that it says that the borrow is relatively low in terms of being able to pick up steam as we went into the third quarter, so first quarter was pretty challenged which impacted the activity as we went into the second quarter because we won't be able to move the rent roll much throughout the first quarter and no office the rollout is in the February, March timeframe for April and May. So we really had an opportunity to sort of juice it a bit as we moved through the third quarter and then the other thing to keep in mind as the third quarter is typically sort of the peak for shorter term leasing activity in that market you will get little bit of boost just seasonally. In most markets and as far lower pronounced then the market like New England and another market like Seattle as an example in the third quarter. So in terms of overall supply demand dynamics, I think it exchanged materially they only think that it’s a, that’s reported our improvement is that turnover was down pretty materially and Boston specifically on year-over-year basis so it’s down about 900 basis points, the whole portfolio was down about 500. So when you have in our pre-sizable reduction and turnover which mainly was attributed to people not buying homes as much in that market that certainly supports pricing power which is less inventory available to lease. So that’s one sort of new answer to leases of England. In terms of New York, New York is the function of lot of different submarkets that we are in and I’d say we started to see a little bit of improvement in the midtown west submarket of Manhattan where we have two large assets that we acquired as part of the outstanding acquisition midtown west Clinton, we started to get traction on relatively one-third quarter they have been a little more in the week side with two or three lease -- they are competing against and couple of deals, we started to see those stabilize, there is none of assets (inaudible) that stabilized, so we’re starting to see some of those larger assets stabilized but there is still a fair amount of supply in the New York and execution is from more supply who move into 2015. So I think New York is going to be a little bit choppy over the next 3 or 4 quarters as those deals lease up.

Great. Thanks.

Yes.

And we will take our next question from Derek Bower, ISI Group. Derek Bower – ISI Group: Great. Thanks. How should we think about the development margins going forward especially as it related to the right pipeline you mentioned that 300 bits in the presentation but with that, would be reasonable to assume that narrows of retirement. So where is your expectation and where it trends?

Derek, this is Tim, maybe start matter of this may want to jump in, I guess it’s as you look at the margins they’re obviously very, very healthy, it’s not our expectation that that was going to continue just the way capital markets were great. So, with more supply coming in over the next couple of years, roughly, in our view roughly matching demand you will see start to moderate a little bit and then as we talked about last couple of quarters, we’ve construction cost are starting to pace rate growth so two things are going to squeeze margins a bit. Hopefully we will start to help keep a lid on these start activities at the same time so that they can tend to be healthy just not as robust as we see and we always have the benefit of construction cost that are (inaudible) and you are delivering into a – and accelerating in the right environment and you get the kind of performance we have got where you get 70 – 80 basis points which is dramatic. You are talking about 10% to 15% improvement in the economics of the transaction for the time you start to time you finish. So we expect that level to moderate as Matt mentioned in his remarks, having said that, we in the 90s, we had a sustained period of time 7 – 8 years where we are able to achieve good couple of hundred basis points above the cap rates in terms of profitability which given the cap rates are higher at the time probably translate into margins that were 10% less.

Does matter. I just want to add to that which is one way we have responded to that a bit and you will continue to see it a bit of shift in terms of the product type and location characteristics of the deals that we start and that so if you look at our future pipeline starts the next year to only 10% of it roughly as higher and it's probably more suburban and focused where as the stuff it currently entered construction 40% higher rise and 50%+ urban. So and those deals tend to be lower yield. They are lower cap rate so the margin, but one of the way we have responded a bit has been we shifted our development focus on new rights to more of the new density product and suburban locations and we will start to see that come through in the next year to and I think that will help at least preserve the yield even if the margins get compressed a bit based on the cap rates. Derek Bower – ISI Group: So you still see market rate growth outpaced construction cost in the suburban markets?

I would say that margin rate growth has probably little stronger in the suburbs right now and the cost pressures have been a little bit lighter in that product type in some locations maybe not in southern California for the most part of the location. So it's probably keeping in pace there. Derek Bower – ISI Group: Okay. Thanks. And then just wanted to clarify on page 13 of the presentation, should we still be thinking about that 700 million of forward equity for next year start, so I guess that implies still 400 left to be funded on the current pipeline.

Well, I will speak to just the funding on the forward equity. We certainly under the forward contract have the right to issues shares any time now through September 8 to next year but as I mentioned at the – a moment ago, the reason for undertaking the forward transaction was to walking the funding associated with expenditure next year on funding. So while we might potentially issue here in the fourth quarter it's unlikely we will do so. It's likely we are going to issue at some point next year entirely over the course of the first week or the next year and so I don't know that's probably the answer to the question.

Yes, just equity forward as Kevin said was to fund expenditures against existing commitments, I think we are -- do we have additional funding for existing commitments because that was year marked for our future commitments, future starts. Does that answer your question, right? Derek Bower – ISI Group: Yes it is. Thank you very much.

And we will take the next question from Dave Bragg with Green Street Advisors. Go ahead sir your line is open.

Thank you. Good afternoon. This relates to Derek’s question it sounds like 2014 might not necessarily be the peak for development starts as originally planned and you talked about what factors are most likely to cause you to end up with a billion dollar of start versus the potential 1.5 billion next year.

Hi Dave, Tim here. It’s probably – its function of a several things obviously it's already. Often times we think there is going to be ready taking another quarter or two by the time you really -- 75% of the economics is deal as well. I mean some deals you have to rework at the economic start making sense you might have to value engineer and do some re-planning that can take a couple of quarters. So we try to give a range what we thought was representative of what it could be from a lot of high based upon those factors and capital obviously, always a factor but less of a factor just given our current capitalization and flexibility we have to release the assets markets given lot of our equity need to have already been met.

Right and going back to the 300 basis points spread that you have enjoyed year-to-date at what level does that alone cause you to pull back significantly on the starts?

I mean really starts further backing the process with the land commitment if you will and so I think you saw – you see in the press release that Matt was answering that question earlier about the development rights, we are drawing down development rights and not refurnishing as quickly as we are drawing down in part because of the opportunities that we are seeing in the market are little bit thinner than we have seen in the and not as many as kind of hitting the screen if you will or making it through the filter in terms of underlying economics. So it starts there. The pullback really starts there. If we are doing our job well it starts there so you don't feel yourself in the precarious position later in the cycle. But that doesn't mean that it's on automatic pilot that you are just going to start once you get permitted and approval. There – we still try to create incremental value on a risk adjusted basis and if we think the deal makes sense it's going to little bit deal dependent but a couple of hundred basis points of accretion or 150 basis points of NAV accretion in terms of yield over cap rate is certainly the ball park of what we consider the funding and moving forward with.

Okay. Thank you for that and the next question is on turnover. Why do think turnover was down so much in the third quarter? Did it surprise you and what are your thoughts about permanently lower turnover in your sector given the secular factors such as later marriage, later home ownership going forward?

Yes Dave this is Sean. When you look at the reasons for the turnover in terms of what shifted, it's pretty consistent with last year. I mentioned how purchase are down little bit. Down about 110 basis points year-over-year just the total volume effective was down and so if you try to pause that and think about the precise reasons that goes up or down typically to labor mobility, option, things of that sort, I am not sure that there is one specific factor other than I would say last year we did talk about the fact that we are pushing rent relatively hard maybe a little bit harder than we should have at that point which create a little more in sort of all categories to be honest. We are still pushing pretty hard this year but not seen the same level of resistance I would say. So to me what that translates to is just generally from an economic perspective people are feeling a little bit better about their situations and so whether it's a home purchase or rent increase or relocating somewhere, we are not just seeing the numbers move dramatically just the overall volume that's different. And then as it relates to the sort of broader question about lower turnover I mean you could I guess you get to that conclusion based on a number of the factors that Tim talked about is it relates to people delay in marriages and home purchases and things like that, I am not certain that we would be ready at this point in call that we think there is a permanent shift in that but to be thoughts on that as well.

Yes to be just clear, the point we are trying to make here is more of a generational issues we compare back to 90s we think sort of what the appropriate levels structure demand cycle versus the prior cycles. I think seeing that chart, it really has been gradual trend over the last generation but it is remarkably thinking just one generation that’s increased by about – it's increased by about three years. Probably wish the turnover to go up a little bit on house hold based on the kids living there, they anticipated but I think it's probably more going on with the economy less labor mobility and that's probably – it's probably been the result of this particular cycle on year-over-year basis.

Okay thanks and last question is on DC, what are you looking for in that market to help you foresee a bottom rent growth?

Dave this is Sean. I will make a quick comment and then I have got Tim and Matt jump as well but I think Dave, essentially what we are looking for is more jobs. We know there is plenty of supply. There is more supply coming as you move in to 2015 pretty high levels here. We are talking about 4% or 5% supply coming on line and you are talking about jobs growth at for this year is projected to be less than 1%, that's not a formula for very positive outcomes so we have seen a pickup recently in this market but it's going to have to pick up much more significantly for adding -- to be in the positions to say that we have kind of bottomed down and we can start to see a line and then move up so when that's going to happen is function of a lot of different things but that's essentially what we need is more job growth out of this market.

Okay. Thank you.

And we will take our next question from Haendel St. Juste from Morgan Stanley go ahead your line is open.

Thanks. Good afternoon guys. So a couple of quick ones from me here. So first you have seen healthy trends over the last couple of quarters and we saw GAAP wide not a bit further to almost 200 basis points in for October. So my question is do you think you can maintain that 200 spread on new renewals through the weaker seasonal demand periods of 4Q, 1Q and also, can you give us some insight regional insight in some of your major regions on that new renewals that you have expect in October a spread of 200 basis points?

Sure this is Sean. As it relates to maintaining the spread that is a little hard to protect. We feel pretty good about the numbers that went out in terms of the offers being at the 6% range for November and December which is up about 150 basis points relative to last year. We did that based on few different things; one momentum we had and where we had in the third quarter where we were up about 50 basis points year-over-year and then in October in terms of where we are trending. In portfolio just well positioned right now. So physical occupancy is around 96%, availability is around 5% when you look at the volumes of contract of lease expirations in the fourth quarter it's down about 20% relative to last year. So you are starting to triangulate into how I feel about those renewal offers based on recent portfolio trends and in general we feel pretty good. We have also made a few adjustments in our revenue management parameters that to the extent that we are pushing too hard. Its kicks in a sooner if you want to think about it that way. But in general we feel good about the numbers we have sent out. As it relates to the individual regions, I will give you some numbers as it relates to what we did in the third quarter. I have an aggregate for the whole portfolios as it relates to the fourth quarter in terms of the offers that have been out that we are trending in October but just to give you some sense New England third quarter move in around 1% renewal in the mid fours, New York move in about 0.5 renewal just over 5 I mentioned Mid Atlantic earlier down about 2% on move-ins and up about mid 3 on renewals. And then as you move to the west coast obviously it jumps pretty dramatically as Tim mentioned earlier in the slide presentation. So specific North West move-ins around 6, renewal in the mid 8. Northern Cal move-in just over 9 it's actually a market where move-ins are actually ahead of renewals. Renewals are around 8 and in southern California base right on top of each other in the mid 5 and the renewals in the mid 5 as well.

Okay. I appreciate that. Couple of clarifications now, first one can you I guess the clarification on the mechanics of your ford equity contract. If you stop below $151.74 per share contract price of the equity forward by the time you settle the contract or before what September 2015, are you responsible to make up that difference or is the risk entirely to underwriters?

We are not responsible to make up the risk. It's a fixed share forward equity contracts and so we walked in a $151.74 as the initial forward price. Going forward can only be reduced fairly two things; one is the dividend that we pay between now and then and a minor adjustment for daily interest factor. So we are not exposed to changes in future common equity pricing in terms of funding proceeds under that offering.

I appreciate that and one more question I have just color or commentary on the land transaction market, I was just wondering given your activity, what are seeing out there the pricing environment for well-located land that meet your criteria or sellers pulling back a bit on pricing given some of that moderating growth sort of a forward outlook that you talked about earlier on your call.

This is Mat, I guess I will take a short of that one and – it varies by market. So the most extreme example would be New York City and Manhattan right now where land prices are so high that rental economics really don't work, almost all the land of trading in Manhattan, any of the other land that is trading in Brooklyn now trading at condo evaluations. You starting to see that a little bit in San Francisco as well where the land values have gotten to a level that is pretty hard to make rental economics work. In the market, I would say it's not quite that frenzy, Boston is probably flattish compared to may be what it was a year or two ago. There’s definitely been more activity in the suburbs and some of our (inaudible) starting to look more aggressively in the suburbs as we have been for last year or two I would say. So maybe shifting a little bit from the urban to suburban area in Boston. DC it probably is off a little bit and in terms more favorable deal that you have had to close right away before now, it will give you little more time, obviously there is little bit lesser buyers from DC but not as many fewer buyers that you might think. Southern California, Seattle that's probably pretty steady land value is increasing, probably as fast as rents, it’s not faster.

And we will take our next question from Rich Anderson from Mizuho Securities.

Thanks, good morning, good afternoon, excuse me. Tim, at the start of the call, you said to keep eye an eye on starts activity could have another leg up. Can you say how and where Avalonbay would be prepared to react in a situation like that and sort of order of priority, what would you do? I know you mentioned more of low-rise development, more suburban development, what else might Avalon do to react to rising a pace of supply growth in your markets?

Rich, couple of things, the point I was trying make, a lot of times it contained by capital, right amount while that you see in market and just given what’s happened public market as well as the private market we are seeing equity has to be more confident about a product fundamentals, there are a couple of things and may be couple of things that are off about to supply. It has been since the late 80s remarkably stable, but I think a big part of that has been really the required—number one equity requirements the two money equity requiring the sponsor to cover this which does limit the amount of anyone sponsor can do on our balance sheet right and that I think that has had a meaningful impact in terms of keeping it relatively stable. There was a lot of (inaudible) pretty much everybody there that you talked to, are expecting to do about the same that years they did this year and a year before, in terms of starts. So you are hearing a lot of people saying I am going to wrap way up or just cut it off. There are few people trying to get little concern about construction cost maybe not quite as same when on the market as they happen but overall just a picture of stabilizing, supply it feels like they expect the case from our prospective. As it relates to what we would do, in terms of potentially wrapping up. Again, it really comes back to, it happens in a more organic way, in terms of kind of a deal by deal basis. We can always increase our target return thresholds which would maybe choke off the amount of new deals we might see. Or we can lower them. In terms of what we call (inaudible). Lower you have to have a pretty different point of view about the trajectory of the economy and perhaps may be the view that thousand suppliers just talking (inaudible). So that’s not we will have today, that's not a point of view but I think that why would you have to believe in order to think about wrapping it up.

Okay, so sort of self-policing in a way but what about as a really kind of thinking also about just operationally, will you be trying to shift to a lesser aggressive rent growth policy and more protecting occupancy, I mean I assume that would be the case but how fast you think you could turn that around and do you think it will be necessary any time soon?

This is Sean. Let me mention a couple of things. One on average side but also on in terms of transactions, I just provide probably reasonable illustration here, the other thing I would think about is to the extent that you are talking about just more supply overall relative to say on supply goes in waves of different markets is probably being a little more nimble on the trading side of house which we were here in D.C. Over the last three years where we sold about $500 million or so of assets before the reported numbers you start to see, low, flat, negative and reallocating that capital elsewhere into the market that were ramping up, southern Cal development is an example and Northern Cal, so to the extent that you see that you see that sort of choppy from market to market, we might be more opportunistic as it relates to trading and then re-enter our market when we think things have become more fairly valued that's such one thing and then in terms of operations, I think there are number of different things we do, there is a longer list of sort of combat tactics if you want to call that that is quite too long sure on this call but one of the main things that we do is we do look at every lease duration and try to stretch that out by offering longer term leases, which we did here in the D.C. market starting about 18 months ago and so I think average lease duration for example, right now the mid-Atlantic I think is around 15 months to 16 months versus before we started that effort by prior average close to about 11. So you can always do so much of that in terms of what the customers willing to accept but you price it in a way that you try to get some penetration there and move that averaged lease duration out seeing get get through some of the big bulges and supply which we continue to refine in all of our markets but particularly when you are in little more combat mode, you work heavily on that, so that’s probably the main driver and then you always plan often terms of occupancy and rate and depending on the type of asset and where it is located and the impact on the customer base that shall be attracting, we are kind of walk a fine line there from asset to asset.

Great, and just one quick follow-up on somewhat unrelated but on Chrystie Place, I assume that you didn't think of the other strategy of buying out your partner, because you don’t want to kind of over-leverage yourself to New York but was that the only reason or was there something about the asset that you think topped out from a valuation perspective?

Rich this is Sean, just a couple of comment and Mat and Tim in as well. I think first of as you mentioned, yes we do have pretty big presence in New York and I guess about 28% of the portfolio right now. So adding an asset of that size in entirety would be a big chunk for us and consistent with the direction we have had from an overall prospective but the second factor is the joint venture situation, we owned two assets across the street, we talked about redevelop it, you have not redevelop it, things of that sort so you start to get inherent conflicts and sometimes adventures, that it's easier to clean up when you're not 100% clear about which direction which party wants to go and you might have different view based on the portfolio that you have versus your partner. So I think that probably had a little bit to do for both us as well as just your timing in New York and the cap rates there, if you feel like that you can trade that asset roughly 3% cap rate, that's pretty attractive capital overall.

Was there a condo? Is there a condo application for the buyer there that you know of?

Not to our knowledge at this point, no.

[Operator Instructions] And we will take our next question from Ryan Peterson, Sandler O'Neill go ahead sir your line is open.

Just one clarification question. You noted earlier in the call that during the forward issuance your price was above NAV. Were you talking about your internal calculation of NAV?

Ryan, we don’t publish our internal calculations and just to clarify that and give little more context. A little more context, the reference was true to consensus NAV which was in the higher 140 at the time. So we are not necessarily seeking to validate that NAV, but identify that as a reference point from where we are trying to look at the common equity market. We fundamentally are developing, the funding needs to be made and from an equity prospective where there are only two choices from which to meet them, one is in the transaction market, one is in the common equity market. And so we try to minimize them as best we can and so the reference to where we did the equity forward offering was about a $156 per share which would probably 5% or 6% above that consensus NAV number, and our discount was 2 and 5%. And so in doing so, we are able to source equity capital from the common equity market at about consensus NAV and net basis.

Okay, great, thanks. And then just one more question. It seems like in the back half of the year here, fundamentals accelerated but the economy, while it's doing well, seems to be on the same kind of track. Can you give us some more color as to why you think that might be the case?

Ryan, to tell I guess we have actually dispute over a few things, the economy is on the same track that has been, it just probably the function of, increase in job growth and income growth. We are seeing decent wage and a salary growth which was a key assumption in our guidance this year that we are going to start to see decent wage growth and like last few months, we are seeing wage and salary growth over 5%, (inaudible) convert over 4% which is roughly consistent with the kind of the rent growth that we are seeing on markets right now. So, we think it’s a good private sector, job growth, ERC and contraction of those job here, a little bit more waver towards the middle and higher income which we hadn’t seen early in the cycle and those things are all good for company that in terms of (inaudible) higher end of the price perspective.

Thank you.

And we will take our next question from Tayo Okusanya from Jefferies & Company. Tayo Okusanya - Jefferies & Company: Yes, good afternoon. Just two quick questions from my end. The land purchases that were made in 3Q, could you just let us know where those purchases were made?

I believe one of them was ability start was deal in Framingham and one of them was actually in suburban Maryland, a deal that might start next year, a smallish garden deal and third one would provide needed the new development right we added in the Riverside San Bernardino MSA. It's actually in Chino Hills. And that was just added that the new development right this quarter but about the way land trades in Southern California that has already got it’s first agent entitlement, you have to kind of land down and then finish your CDs and get your final building permit. So that would be an expected start next year likely. Tayo Okusanya - Jefferies & Company: Got it, that's helpful. And then in regards to the $200 million of asset sales on the contract, hoping to get a sense of, again, where you're selling assets and what pricing you're expecting?

We have two wholly owned assets on the contracts, one is actually one of the legacy assets in Houston, that was part of the auction transaction which is going to be close here very shortly and the other one is in the North East that would cause early in January. Cap rates on those assets, average is probably high fours. Tayo Okusanya - Jefferies & Company: Okay, great thank you very much.

And we will take our next question from Michael Salinsky from RBC Capital Markets. Go ahead sir your line is open.

Hey, guys, just two quick follow-ups. Sean, you gave a whole bunch of leasing statistics. What was the change in new leases and the change in renewals actually supporting the 4.3% rent change in the quarter?

Sure. Move ins were 3.1 and renewals were 5/4, blended to 4/3 during the Q3.

Okay that's helpful. And then second of all, Kevin, as we think about recycling for next year, I mean does the forward equity issuance take equity off the table next year and or will you need additional equity via asset sales? Or other means to fund the remaining portion there?

We are still early in the budget process. So we haven’t formulated our leases for next year but what we indicated was that we plan on starting $1 billion to $1.5 billion dollar of the developments. We also have the $ 600 million of debt that is coming due next year, most of that is in November and so we do have capital needs that likely to reach $ 2 billion in total, the $700 billion presented is obviously portion of that capital need for the next year. To what degree resource, the equity needs from other sources just remains to be seen, what fraction that comes in debt those questions will be working through here over the next few months. So I don’t really have at this point any inside as to what the remaining capital next year look like and whether it may include equity from the transaction market or otherwise but in our plan is that that $700 million is essentially earmarked for next year even though we potentially issue it now.

Okay, does the ATM, can you issue on the ATM without drawing down the forward equity? Or do you have to draw down the forward equity before you could issue on the ATM?

They're not linked, but the reality is we have got access to equity already today under the forward. So if we wanted fresh equity apart from the transaction market as a practical matter, we go to the four transactions.

Obviously Mike which is effectively an ATM.

I appreciate the color, thanks guys.

And we will take our last question from Karin Ford with KeyBanc Capital. Go ahead ma’am.

Hi, good afternoon. I wanted to ask about occupancy. It sounded like post quarter end, it had rebounded back up into the 96% range. Do you think you'll be able to, given the turnover trends and the acceptances of the rent increases you've seen, do you think you'll be able to hold that high occupancy level through the winter?

Based on where we are trending right now, October looks pretty good. But I will say they will probably in the high 95 to 96 range as we go through the fourth quarter, so it may not hold 96% and we are pushing the rents pretty hard and if we are going to get it, (inaudible) taken a little but after occupancy as we continue to move growth potential across the portfolio, particularly in the fourth quarter which is normally seasonally weaker. So I would say here, running the model somewhere between 95.6 to 95.7 and 96 in terms of overall economic occupancy that sort of relevant range we would be targeting.

Great. Thanks very much.

And we have no additional questions at this time.

Thank you, operator. I just want to thank everybody for being on the call today and I know we will see may be next week at NAREIT in Atlanta. Take care and have a good day. Thank you.

This concludes today’s program. Thank you for your participation, you may disconnect at any time.