AvalonBay Communities, Inc. (AVB) Q4 2014 Earnings Report, Transcript and Summary

Jason Reilley - Director of Investor Relations Timothy J. Naughton - Chairman, Chief Executive Officer, President and Member of Investment & Finance Committee Sean J. Breslin - Chief Operating Officer and Member of Management Investment Committee Kevin P. O'Shea - Chief Financial Officer Matthew H. Birenbaum - Chief Investment Officer and Chairman of Management Investment Committee Sean M. Clark - Senior Vice President of Asset Management/Redevelopment

Nicholas Gregory Joseph - Citigroup Inc, Research Division Andrew Leonard Rosivach - Goldman Sachs Group Inc., Research Division Jana Galan - BofA Merrill Lynch, Research Division Derek Bower - ISI Group Inc., Research Division Nicholas Yulico - UBS Investment Bank, Research Division Richard C. Anderson - Mizuho Securities USA Inc., Research Division Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Dan Oppenheim Vincent Chao - Deutsche Bank AG, Research Division David Bragg - Green Street Advisors, Inc., Research Division Haendel Emmanuel St. Juste - Morgan Stanley, Research Division Omotayo T. Okusanya - Jefferies LLC, Research Division Neil Malkin - RBC Capital Markets, LLC, Research Division

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] Your host for today's conference is Jason Reilley, Director of Investor Relations. Mr. Reilley, you may begin your conference, sir.

Well, thank you, Alan, and welcome to AvalonBay Communities Fourth 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. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I'll turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities, for his remarks. Tim?

Oh, thanks, Jason, and welcome to our fourth quarter call. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. I'll provide management commentary on the slides that we posted this morning, and all of us will be available for Q&A afterward. Now my comments will focus primarily on a summary of Q4 and the full year 2014 results, a discussion of the outlook for 2015 and then also drill down on development and the earnings and NAV accretion coming from this platform. Before we get started, I'd like to take a moment to acknowledge the unfortunate event that occurred at our Edgewater, New Jersey, community last week. As you know, a fire broke out at this community late in the afternoon of January 21. One of the buildings containing 240 of the total 408 units was substantially destroyed. The other building containing 168 units was largely unaffected and reopened over the weekend for residents to return home. While we're relieved that there were only minor injuries to a handful of people, we are saddened by the displacement of over 200 households, including 3 of our own associates who are unable to return home. Along with others in the community, we are working to help them begin the process of putting their lives back in order. I'd like to just quickly acknowledge the extraordinary response of the firefighters and neighbors, state and local officials, the American Red Cross and many of our associates who together worked tirelessly with great bravery and care to help contain the fire and comfort those impacted by it. We're extremely grateful to them for their remarkable efforts. And lastly, I'd just like to thank the many of you that have reached out to us over the last few days expressing your sympathies and support. And so with that, I'd like to start on Slide 4 and provide some highlights for the quarter and the year. Core FFO for the quarter was at around 7.5% and almost 9% for the full year. Same-store revenue growth was -- came in at 4.1% for Q4 or 4.2% when you include the impact of redevelopment. We completed 4 communities in Q4 totaling $360 million at a 7.3% average projected yield, initial yield. And for the year, we completed $1.1 billion at an initial projected yield of 7.1%. We started another 3 communities in the quarter, bringing our full year to $1.3 billion. And lastly, we raised $400 million of capital -- of new capital in the quarter through unsecured debt and the sale of noncore assets. Turning to Slide 5. We ended the year on a strong note with year-over-year same-unit rent in Q4 up over 4%, well above the rate last year, more than 250 basis points above the same time last year. And the momentum is continuing into 2015 as January same-unit rents are growing around 5%, so getting us off to a solid start for the year. Turning to Slide 6. For the full year, as I mentioned before, we completed over $1.1 billion of new development. This development was actually completed at a basis of right around $275,000 a door or about 25% lower than the estimated value of our stabilized portfolio, which averages 19 years of age, and at rents that are 7% higher than our existing portfolio, resulting in an estimated value creation on the order of $500 million based upon current cap rates. Turning to Slide 7. The completions this year were geographically dispersed, both East and West Coast across most of our regions, represented really a mix of product from high rise to mid-rise to garden to townhome and a mix of brands between Avalon and AVA. A couple on this slide that are worth noting: our AVA 55 Ninth Street, which was a purpose-built AVA community, which is -- upon stabilization is worth about twice what our basis is, so it's worth well north of $200 million; and secondly, Avalon Mosaic, which is located in Fairfax of the D.C. metro area, which is yielding above 8% upon stabilization in the soft D.C. metro area. So both of those are really, I think, worth noting. Moving on to Slide 8. Despite what we think is outstanding development performance and a long track record of success in this area, it's not clear that the market is currently rewarding us for this capability. Since the downturn, just if you start on the left-hand side of this slide, portfolio performance is roughly in line or even a bit stronger than the sector when you look at same-store revenue and same-store NOI growth. And as you move over to the far right, that's translated into total shareholder return which is about equivalent to the sector. So those 2 facts make sense together. But then when you look at the core FFO growth since the downturn, we've outperformed by almost 2,400 basis points there, which has been driven by capital allocation and our accretive development in most part and importantly with significantly less leveraged. We think there's a bit of a disconnect between cash flow growth and total shareholder return. In effect, we've suffered multiple compression while outperforming. And it's a bit perplexing, but perhaps the market expects this pattern to reverse or maybe that the development cycle has fully played out at least for this cycle. We believe that the cycle has additional legs, as we've talked about on past calls, and we think there's a lot more value to come through this capability. So let's look forward to how we're viewing the year ahead, turning to Slide 9, and I'll start with the earnings outlook. In many ways, 2015 is expected to be a repeat or sequel to 2014, but we're off to a stronger start to the year as compared to 2014. We're projecting core FFO of around -- core FFO growth of around 8.5%, driven in part by same-store NOI growth at 4.25% at the midpoint or accounting for about half the projected core FFO growth, which in turn is being driven largely by same-store rent growth, which is projected to be 3.5% to 4.5%. In addition, external growth through the development platform primarily is driving the other half of core FFO growth of 8.5% with stabilizing development as we're expecting to occupy roughly 3,500 new units, which is expected to generate almost $70 million of additional NOI. Turning to Slide 10. In our release, we also announced a dividend increase last night of almost 8%, which has obviously been driven in part by the outlook that I just described and earnings. And since 2011, dividends are up 40%. So 40% in 4 years. And over the last 20-plus years, dividends have grown by 5.3% on a compounded basis. And it's easy to forget sometimes in market swings like we've experienced recently, but dividends have actually accounted for almost 2/3 of total -- our total return of 2,300% over the last 20 years. So roughly 1,500% of that 2,300% has come through dividends. And importantly, I think it underscores the incretion and growth embedded in our business model. Turning now to Slide 11. And I won't go through this whole slide to say but suffice -- this whole slide but suffice to say the key macro factors driving the economy are decidedly pointing up. The risks appear to be just contained at this point to the -- largely to the public sector on the fiscal side just in terms of continued deficits, although a bit more moderate. But we think more importantly just the potential impacts of shifts in monetary policy with any potential withdrawal or wind down of the fed stimulus introducing some uncertainty potentially to asset values or even the long-term prospects for economic growth. But other than that, we see all factors sort of pointing north. Turning to Slide 12. A big driver of our business, obviously, is job growth. And we're projecting to see additional strength in our markets over 2014 with projected job growth ranging 2% to 3% across regions and being more evenly distributed than we've seen over the last couple of years beyond the tech centers of Northern California and Seattle, which we think bodes well particularly for the Northeast and Southern California, which are more diverse economies. In addition, the job growth is expected to continue to be stronger in younger age cohorts, which bodes well for our business, particularly in the peak Millennials, which are ages 23 to 25 prime renters. Turning to Slide 13. We also expect the income growth to improve in 2015. We're expecting personal income to accelerate by about 200 basis points. Tightening labor market should result in leverage shifting to workers, particularly in knowledge-based jobs and for college-educated workforce. Looking now at supply on Slide 14. Completions are projected to increase in 2015 but are stabilizing and/or declining as we look into 2016. Multifamily starts, you can see in the upper right, have been leveling off over the last 12 to 18 months now. And overall, we're expecting to see completions average around 2% in our markets over the 2014 to '16 time period or roughly in line with job growth or housing demand. And then when you factor in apartment demand, should be further bolstered by favorable demographic growth, changing lifestyle patterns as delayed life cycle events extend the average age of first-time homeownership and any pent-up demand of -- which we estimate roughly 1 million households still that could begin to bundle -- unbundle -- I'm sorry -- we expect fundamentals in the apartment space to remain very strong in 2015. Shifting now to Slide 15. So how do these fundamentals translate into portfolio performance? As I mentioned earlier, we expect same-store revenue growth to average 3.5% to 4.5%, led once again by the West Coast in the 5% to 8% range with Northern California again setting the pace but -- with Southern California starting to come on strong. This past quarter Southern California actually saw the highest sequential growth in our same-store portfolio. The Northeast is expected to be more in the 3% range. And New York and New Jersey, we expect that to be pretty broad based across submarkets. Boston, we do expect suburbs to outperform as urban supply starts to come online. The Mid-Atlantic, as we've discussed, we do expect to lag again, although an improved job picture there may help to form a bottom in 2015. Now moving to Slide 16. Development under way is expected to stay in the $3 billion range as we roughly start and complete about $1.2 billion, $1.3 billion each year. Moving to Slide 17. The 2,000 pipeline should remain dispersed geographically or -- as we're expecting starts to occur in every region. It should be more infill suburban than urban this year. And many of the deals are -- in many of the ones shown here -- are tough to replicate in terms of opportunities or at our economics, including deals like the West Hollywood deal in L.A., in the top middle of the page; Great Neck in Long Island, just below that; and then just to the left of that, Dogpatch in San Francisco. So all unique sort of high-density infill suburban or urban communities. Moving on to Slide 18. Our $3.7 billion development pipeline is fully funded at this point, yet it's only delivered about $50 million of NOI on an annualized basis in Q4, which leaves roughly another $200 million of NOI or EBITDA to come. And you get a general sense of that as you look at the right-hand side of the page as those 3 boxes or stack bars to the right in that chart really reflect the NOI that's yet to still -- still to come. Moving on to Slide 19 where -- and as we look forward to our 2015 capital needs, over 50% of that capital is already in place. As a result, we only expect to have to raise net new capital of roughly $1.1 billion, which we expect to source primarily through unsecured debt and noncore assets sales, much like we did this past quarter when we raised $400 million through debt and asset sales. On Slide 20, we just thought it'd be helpful to take a look back since the start of this cycle and when we started and raised roughly about $5.5 billion worth of capital and invested that or committed that into new development. For deals that have had leasing to date, we've been achieving yields with average spreads over cap rates of roughly 250 basis points, which accounts for roughly about $22 per share in NAV growth, which is depicted on the right-hand side in that table. And then lastly on Slide 21, our options to capitalize new development starts going forward are varied and all remain attractive, with debt and asset sales being the most attractive relative to historical precedent in terms of being -- debt being more attractive only 2% of the time and asset sales 12% of the time. Although equity still is also attractive, but, frankly, not necessarily needed given our balance sheet and the growing EBITDA that we expect to come through from the development pipeline. As we discussed before, we'll continue to monitor and source capital depending upon relative cost, our balance sheet position and our overall outlook on the apartment and capital markets. So in summary, I guess I'd say 2014 was another solid year of growth for the company. As expected, the markets gained strength as the year progressed, generating solid earnings growth from the existing portfolio. And the development platform, as I've just mentioned, has generated outsized earnings and NAV accretion. And for 2015, we expect more of the same as we -- as we're here mid-cycle. And we're off to a solid start with strong demand supporting apartment market fundamentals. And we believe we're exceptionally well positioned in stable markets with a robust development pipeline that should deliver additional earnings and NAV growth. And with that, operator, ready to open up the call for Q&A.

[Operator Instructions] And we would take our first question from Nick Joseph from Citigroup.

Tim, you talked about the development pipeline and how much value creation you've had through the cycle so far and maybe did not rolling through to the multiple that the market may be pricing further into the development cycle. You mentioned in the management letter that were mid-cycle. So I'm wondering kind of how much longer do you think we'll be in mid-cycle? And when we can expect you maybe to take your foot off the gas in terms of development?

Yes, Nick, in terms of how long the cycle might play out, as we discussed in the past as we compared it to prior cycles, we think just given the underlying economic fundamentals, the depth of the correction and where the -- where we're currently stand relative to jobs -- the amount of job growth that we've seen, we think we're -- we -- as you mentioned, we think we're mid-cycle. If you look at cumulative rent growth so far this cycle, we've seen about 17%. In the '90s, by contrast, we saw about 53%, 40 quarters. We're about 19 quarters into this current up cycle. So we think just giving -- we think this could play out for a few more years. And then when you overlay just the demographic growth, which should say stay strong through 2020, we think there's some additional reasons why the apartment cycle in particular should be prolonged. And the second part of your question, Nick, was?

Well it was really that kind of...

Oh, in terms -- yes, in terms of -- I'm sorry, in terms of development pipeline, as we discussed in the past, we do expect it to start to drift down. While we're expecting to start about $1.5 billion this year and for it to stay in the $3 billion range over the next couple of years, the development right pipeline has started to -- is down about 15% on a year-over-year basis as we haven't really been replenishing it as quickly as we've been drawing it down from a start standpoint. So part of that is just in terms of how attractive deals look between land cost and construction cost inflation. The going-in yields on the average deal generally aren't as compelling as they were last year or the year before. And just given where we are in the cycle, we would expect that to continue such as it's going to -- as we get further and further into the cycle, just less and less deals we'll underwrite.

And then you mentioned Southern California coming on strong. So I was wondering if we can -- if you can give a couple more details in terms of what you're seeing on the ground there.

Sure. Why don't I let Sean address that?

Yes, Nick, it's Sean. In terms of the traction in Southern California, certainly the second half of 2014, I think, came on strong as job growth continued to accelerate in that region. Supply has and remains very well in check relative to the rest of the country. And so as you look through the different markets, we thought at some point we'd see that acceleration, as we've talked about over the past couple of years, has certainly kicked in. And it did kick in, in all 3 major regions: L.A., Orange County and San Diego. We were probably a little more surprised that it kicked in as fast as it did and as strong as it did in San Diego. But I'd say in the other 2 regions, you could see it starting to build, the momentum building. And rent change has really moved up pretty dramatically there. If you look at just where we're trending in January, as an example, we're in the 5% range, north of 5% on a blended basis in Southern California, which is only behind Northern Cal and where we're trending in Seattle right now. And if you look across the markets, it's generally pretty evenly distributed, slightly stronger in Orange County as compared to L.A. and San Diego. But all 3 markets are producing solid momentum at the moment. And as Tim pointed out, the sequential change was the strongest of any of the markets in the last quarter.

And we will go next to Andrew Rosivach with Goldman Sachs.

I apologize, this may not be the best format for this. But when I talk about our pitch -- I have a lot of clients -- I highlighted a ton of earnings growth outside of same store, particularly from development. And I got on my screen right now the last 20 years, just to give you some numbers. You were 7.6% NOI, 18% FFO for 2012. The year I could get closest to now was '05. You were 4.2% NOI growth. You were 12.12% in FFO. This year, you're calling for 4% on NOI but only 8% on FFO. And I guess the question is, is your business model no longer going to have the same kind of leverage to external FFO growth as it had in the past?

Yes, Andrew, this is Tim. It's hard to parse it in just any one year, to be honest. A lot of it has to do with sort of the ramp up and ramp down. Sometimes, you actually benefit when you starting to do one or the other just in terms of how capitalized interest works relative to expense interest. And conversely as you're starting to sort of draw down any extra inventories, you're starting to -- as you're starting to reduce overall development. But if you look at, as I mentioned in my remarks, at 8.5%, you call it roughly half of that, or 4%, 4.25%, attributable to NOI, we wouldn't expect on a steady-state basis to get 8% or 10% from -- 8% or 10% from the development platform. If you just kind of run the math on $1 billion or $1.2 billion that you get a couple of hundred, 200 to 300 basis points of accretion on, you might -- what you might be -- expect over time is to get 3% or 4%. And when -- but when you look at it over a long period of time, over a 20-year period, we've basically grown FFO at around 7%; and we've grown NOI just over 3%, 3.5%. You get the benefit of some free cash flow that you invest. But those are kind of the numbers. And as you get to mid-cycle, we would expect those numbers to more or less be in line with that. I guess the last thing I'd say is we have been a little bit more -- we have been more disciplined just around match-funding this cycle, which it does bring capital cost -- the full cost of permanent capital into the picture a little earlier than when you're funding it off the line. So that'd be the other factor I'd point out.

The challenge is -- and you kind of -- you guys kind of talked about it on Slide 8, you show your past growth. The problem is, the guidance that you're giving now, if the consensus is correct, Avalon is going to have about the same earnings growth as the rest of the REIT sector. And I appreciate you taking low risk. The problem is, if your own comment on being mid-cycle is right and we still have multiple years of revenue growth ahead of us, the companies that run with more leverage and a smaller development pipeline are still going to have very competitive growth rates relative to Avalon. I don't know if you guys have thought about that.

Yes, Andrew, this is Kevin. It is something we do think about, we talk about and are aware of. If you go back to the mid-2000s, there was a several-year period where those who had higher leverage experienced higher FFO growth. I guess that sort of dovetail with Tim's remarks. When we think about our development platform and how we want to fund it and how we want to fund the business, we do think about the full business cycle and trying to outperform over the full business cycle. And it's always easier to have leverage than to take it back down at a time when you're late in the cycle and capital costs are rising against you and can potentially rise against you pretty quickly. So there is a, call it if you will, a short-term cost, if you will, for being more match-funded. By over a full cycle, we think that it's actually an accretive funding strategy.

Right, I appreciate that. I would just say like, for example, Kevin, you and I have been back in your -- and forth on your cash balance for a long time. But you increased your cash balance by $200 million over last year. You've put a 4% cost on that. That's $0.07 a share. And $0.07 a share was literally the midpoint of your guidance versus The Street, and your stock is off today. And it's impacting your cost of capital. And I guess my question is, the $200 million of extra cash, is that really ruining the integrity of your balance sheet?

Well, I don't know that it's necessarily impacting our cost of capital across all the markets in which we fund because I don't think, number one, it impacts asset sales or unsecured debt. What you're suggesting is whether it impacts our cost of equity, and I think there's probably a number of different things that can bear upon that besides the one there that you're pointing out. $200 million in a liquid market is not a lot of money to go find. In a highly illiquid market, it can be hard to find and expensive to obtain. And you only have to consider some of the dilutive equity offerings that were done by a number of REITs in 2009 and the permanent impairment that, that brings to bear on your total returns and your ability to deliver outperformance over cycles to think about just what the implications are about getting a little bit out over your skis. In terms of -- and you're right, we've talked about the cash balance and so forth. As you can see in our outlook for this year, we do think we've reached the point where we can run with less cash. And actually, with unrestricted cash on hand of over $500 million, we anticipate drawing that down here rather briskly early in the year to the extent of $350 million with an implied year-end cash balance of around $150 million at the end of this year. So what's driving that is really the notion of we think we're more comfortable being -- right now, we're a little bit more than 100% match-funded if you bring in the effect of the equity forward. As we pull that down and roll through the year, we think we'll probably be more like 70% to 80% match-funded. And we're comfortable with having that level position and running with a little bit less cash because, as Tim pointed out, we've got a lot more NOI to come online with the construction that's under way and in the process of being leased up.

Yes, Andrew, maybe to...

I'm looking forward [indiscernible], but I have questions. But what'd really be helpful, Kevin -- and you've probably seen other REITs do this -- if you guys have ever thought about a 3-year plan. And if there's -- lack of a better word -- light at the end of the tunnel or there's a year where there's a lease up versus cap interest which is impacting numbers. Other apartment REITs have starting to put it out, and I think it actually would be more helpful for Avalon than anybody else.

All right, Andrew, thank you. Thanks for that comment. I guess the last thing I'd just say and then maybe just cut us off, I mean, we're obviously managing the business for the long term. And it's one of the reasons why we look back from 2010 to 2014. We have still outperformed on a cash flow basis by 2,400 basis points the sector. And then when you look at it over a 20-year period, it's about 400 basis points compounded annually in terms of outperformance on a cash flow growth standpoint. So when you're building FFO from $1.60 20 years ago to $7.35 20 years later, $0.07 isn't going to move the needle a whole lot in the long run. So I guess I'll just make that the last word. And did you have any other questions before we move on?

No, I appreciate your comments.

And we will go next to Jana Galan with Bank of America.

I was hoping you can provide more color on your metro New York outlook. The boroughs in New Jersey are expected to get a lot of supply in '15. Do you expect Manhattan to offset that? Or do you expect strong absorption metro-wide?

Yes, Jana, this is Sean. I'll make some comments and Matt or Tim can chime in as well. In terms of -- metro New York and New Jersey for us is an accumulation of a lot of a different markets. So certainly, in -- if you're putting New Jersey in that, we've got the Northern New Jersey market as well as us being in Central New Jersey. Northern New Jersey, we are expecting a fair amount of supply coming online, particularly as you get into Hudson County and right along the waterfront there, all the way across, the Gold Coast as they're referred to -- refer to it. So there's a fair amount coming in there. When you look at Long Island, it's a little more protected. And then as you get into Westchester, it's a little more protected as well. And as you get into the city and you start going across, really where we're expecting the most supply to come online is really in Brooklyn and then in the Midtown West submarket of Manhattan. Those are the 2 places where we're expecting it to be a little bit soft. If you're looking at kind of within the Greater New York market which submarkets are going to be a little bit softer, I'd say those 2 are going to be relatively soft compared to the other markets I just mentioned. But it's not dramatically different. We're talking about 50 basis points on one side or the other depending on which market you're looking at. So without providing specific details for every single market since it's a pretty large region, hopefully that general color makes some sense to you.

And then just quickly on development, do you get any benefit from lower oil and construction materials costs?

This is Matt. I wouldn't expect a lot. This is one of those things where -- when oil prices go up, the subleases refuse to raise pricing to us. And then when oil prices go down, we hear, well, it's mostly the labor. But the truth is it is -- by and large, what drives construction cost is the labor cost and the subcontractor margin. And that's really a function of how busy folks are. And folks are busy. In all of our regions other than metro D.C., they're busier now than they were last year. So I don't expect -- perhaps it keeps a little bit of pressure on the margin off of some of the commodities pricing, which ultimately eat into their cost basis a bit. But I don't think it's going to have a material impact.

And we will go next to Steve Sakwa with Evercore ISI.

It's actually Derek on for Steve. Just going back to the markets and touching on D.C. It seems like you guys are calling for slight improvement next year. Can you talk if that's driven by any particular market or region? And then maybe if you could talk about what the prime growth spread might be between Northern Virginia and inside the District this year.

Sure, Derek, this is Sean. In terms of the performance of D.C., I mean, I think the punchline is we're not expecting it to be materially different. Our outlook reflects maybe a slight improvement as it relates to what Tim alluded to earlier in terms of improved job growth in the region overall. And there are some nuances with very assets that really sort of make up the shift from '14 to '15. So I wouldn't say there is a significant either improvement or deterioration in any 1 specific submarket in '15 as it -- relative to '14 other than with the exception that as you look at NoMa and D.C., the inventory that's going to be delivered there in '15 is substantially more than '14. That's probably the one place that I would highlight. But as you look at Northern Virginia, Western Fairfax is still outperforming, Derby corridor is soft. If you go into suburban Maryland, North Bethesda, Rockville, Gaithersburg, it's all pretty soft. As you get further out into Columbia, it's performing a little bit better. So it's really a function of sort of where the assets are position within their submarket that really matters probably more at this point maybe with the exception of NoMa, where the supply is just sort of overwhelming at this point. But I think most all asset classes are impacted.

Got it. And then just going back to development funding. I appreciate your development needs for this year are fully funded. But as you kind of think about '16 starts, should we start to expect you to begin to prefund maybe some of those commitments later this year?

Derek, it's Kevin. It's premature to really think about how we're going to fund '16 activity at this point. And just as a minor clarification, while we're -- more than half of our capital needs are addressed and in place relative to development activity, we still do anticipate sourcing $1.1 billion of incremental capital either from the transaction markets or the capital markets over the course of the year. So at the point -- at this point, our focus is really on thinking through how to best source that capital over the balance of '15.

Okay, got it. And then just any projected yields or maybe yield today on the $1.5 billion of starts scheduled for this year?

Yes, this is Matt. It's pretty much holding in the mid-6s. I think that's where our pipeline has been averaging. Our development rights pipeline has been kind of running that level for the last couple of years, give or take. And it looks like the starts basket for '15, the way it's underwritten at least today, probably goes in at that same the mid-6s level.

And we will go on next to Nick Yulico with UBS.

Tim, as I read through the management letter, there's a lot of positive talk in there. And I'm trying to relate that back to your guidance because you talk about apartment fundamentals strengthening during 2014, yields on your pipeline continuing to get better, we have a stronger economy this year, you're projecting job growth to accelerate, be closer to U.S. average as far as your markets now catching up to U.S. average. And yet, your same-store revenue guidance calls for a modest increase over 2014. So what I'm wondering is if demand is improving so much, why isn't your same-store forecast even more bullish? Is supply the big problem here? Or are you just being conservative about certain markets picking up?

Yes, Nick, I think that's -- I think you hit it. We're looking -- as I mentioned in our remarks, we are looking at 2015 to be elevated in terms of supply but be roughly matched with demand. And so both years, both '14 and '15, we've talked about rising demand match -- I mean, rising supply matched by demand, and we see sort of the same thing playing out in 2015. So honestly, I guess I'd be surprised if our projections would be much different just based upon sort of those underlying fundamentals than what we experienced in '14.

So if we go back to what happened in 2014, I mean, you had the apartment REITs generally raising guidance, you had people's forecasts from Axiometrics and others get better throughout the year and most people pointed to job growth getting better. I mean, if job growth continues to pick up here, is that the biggest impact for how fundamentals could be even better for you guys or the industry this year?

I think job growth the biggest piece of it, yes. As I mentioned in my remarks, there's still -- we still think there's a lot of pent-up demand out there. It's just the last couple of years when you look at the number of young adults still living at home, that's flattened. But we do expect that at some point, as confidence rises and they start to move on with their lives, that they're going to start to form households. And that could create some additional demand that the economy and the housing market may not be able to address as quickly. So that -- I think those are the 2 areas that would lead to sort of potentially an upside surprise.

And we will go next to Rich Anderson with Mizuho Securities.

I just have 1 question. Most of mine have been asked. When you were formulating your outlook, did you take into account at all declining oil? I know it's been brought up about your development cost. But what about just disposable income, a quasi-tax cut that could arguably affect your entire portfolio since you don't have anything in Houston? Any comments on that? Or is that just gravy potential for the future?

Well, I'll start and maybe, Sean, you want to jump in. Personal income, that's why we pull it out, is a big driver of our models. It's not necessarily disposable income. It really speaks more to the changing balance in the job market more than anything else. But perhaps you do get a little bit of lift from additional disposable income relative to falling oil rates. But Sean, I don't know if you had anything.

Yes, Rich, the only thing else to add is certainly we've scrubbed that pretty hard as it relates to our utilities expense. But when you get down to it, I mean, oil really only drives about 2% of heating demand across our portfolio. Yes, most of it relates to natural gas, which had started to decline much earlier than oil did. And there are other factors influencing the price of natural gas independent of oil. And so that's 1 area we scrubbed pretty hard. And then certainly, we haven't seen it bleed through in terms of construction costs. As Matt mentioned earlier, there may be a small pickup there at some point, but we're not expecting that to be material in the current market environment.

I was just thinking more about someone who doesn't have to pay $3 to fill their tank but $1.75. And...

Yes, absolutely. I think, as Tim mentioned, yes, that's reflected in the personal income forecasts that we rely on. But to the extent that those forecasts are off, that certainly could be helpful. On the other side of the coin, to the extent that the rate of job growth slow as a result of reduced capital spending in that sector, it doesn't impact us as much as maybe some others given our market footprint. But there could be some ripple effects there that could go the other way.

And we will go next to Alex Goldfarb with Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just a few questions here. The 1 is just going -- yes, Tim, appreciate the total return analysis that you guys provided. But if we look on an NAV basis, you guys are trading at an implied cap of near, yes, similar to like a EQR or Essex, which I think you guys would consider certainly a peer group. You spoke about maintaining sort of a $3 billion development program for the next few years, which obviously requires additional incremental capital. Even if you guys are -- well, not even -- if you guys are good at developing and delivering the returns, perhaps the market is just pushing back on the capital it knows is coming. So is there consideration to maybe paring the pipeline down to maybe $2 billion in the next year or so, maybe just to kick out some of those projects that may not look as attractive right now and maybe let some of the in-place NOI and the development NOI deliver to the story to help the stock's performance? Is that something that you guys would consider?

Alex, not really. Not as long as the development we viewed is accretive to what the incremental cost of new capital is. I think that the alternative that we think about is just recycling more capital as opposed to raising additional external capital. As I mentioned in our remarks, we are looking to rely more on asset sales and that -- in part because where the balance sheet is positioned today, at 5.2 debt-to-EBITDA. And if you just -- you think about that $200 million of EBITDA that hadn't materialized yet, just the extra sort of borrowing power that gives, and assuming we are mid-cycle and underlying cash flows on a stabilized portfolio continues to grow, it does give us a lot of funding options without having to really lever the balance sheet in any material way. But then we always have the option of just recycling capital and selling more assets and recycling that back into development. So fair question. I think partly -- I think what's going to drive down the development pipeline is when we just don't think that business makes sense relative to our underlying cost of capital. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: True. But obviously, as you sell assets, you lose that NOI. So there's a net wash. But second question is, as far as the -- Edgewater is concerned, any implications? Obviously, the media has been abuzz, and there was some press down out of Princeton. Do you think that any -- what may happen could slow down or delay any projects? Or your experience in the past with dealing with tragic incidents like this is that -- obviously, a lot of thought goes into this code and, therefore, as people review them, everything, I guess, hopefully, what's there is fine?

Yes, this is Matt. I guess I can speak to that a little bit. I think you're right in the sense that we've been developing as a public company for 20 years and codes evolve. Codes change over time. The product changes and evolves over time. Technologies change. And so I think this is a very unfortunate incident. It is very fortunate that there was no loss of life. But nevertheless, there was an awful lot of property damage. And so, time will tell how it plays out, but it is certainly part of the overall process that codes evolve and change over time and continually refine and improve, and we're pretty adept at adapting to that.

And we will go next to Dan Oppenheim with Zelman & Associates.

I think good job highlighting the development portfolio and what you've been doing there. Wondering in terms of the AVA projects. Given they've come into well ahead of expectations, do you think you'll increase their share of future developments knowing that it's clearly difficult to get land for those? But how do you think about that?

Yes, Dan, this is Matt again. We are -- the -- AVA as a percentage of our portfolio it is growing. As we develop -- it's about, I think, 1/4 of our development pipeline. So we look out, in a couple of years, AVA should be about 10%, 11% of the total portfolio. I think it's about 7% today by value. So it is growing. But it really is a bottom-up opportunity set. So you have to go through market by market and see where the opportunities are. They do tend to be more urban product. And so I wouldn't expect their share of the development rights pipeline to necessarily grow dramatically from here because what we're seeing as we get more mid-cycle is that we are generally shifting our focus a little bit more to suburban assets and -- because the economics are getting tougher in the urban areas. That's where you seeing a lot more of the supply. Land prices have probably run up more aggressively in the urban submarkets than the suburban submarkets. So it's driven by -- more by the opportunity set. And the ones you're seeing now, like AVA 55 Ninth, those were started early cycle in submarkets that have seen a lot of rent growth and also delivered a product that was very unique and well received by the market and we think well positioned to outperform not just in the lease-up but over time because of the distinctive nature of the product. So we love the brand. We love to grow it more. But I think it's unlikely that it's going to become materially bigger part of our development pipeline in the next year or 2 than it has been.

Sure. And then in terms of operating expenses in the guidance, I guess you're looking for lower expense growth in '15 than in '14. Clearly, some of the taxes, repair and maintenance were a little bit high. If we look at during '14 and thinking it'll be better in '15, is it some key metric there is one of those issues that's going to be driving it lower? What are you thinking about turnover given that we're already low as more supply could lead to a bit more turnover there?

Yes, Dan, it's Sean. First, acknowledge '14. Definitely, there was a lot of noise in '14, particularly, you look at sort of a tale of 2 buckets where there was significant pressure on the Avalon portfolio as it relates to taxes, maintenance costs that was unexpected due to a number of different factors that occurred in the first quarter of the year and the fourth quarter of the year, et cetera, et cetera. So as we look forward to '15, a lot of those anomalies, our sense is it's certainly going to dissipate. But really, what's driving '15, if you look at it pretty basically, is property taxes. Our expectation is that for 2015, we're probably going to be in the mid-5% range for taxes. As -- that's 1 of the primary drivers. And then the second one I'd mentioned is payroll. We're basically in a cycle now where we think we're probably looking at wage growth that's in the 3% range, as an example. And that's about 90% of our total payroll cost. But we're getting pretty material upward pressure on benefits, which is only about 10% of our cost of payroll, but we're anticipating benefits to go up by about 10%. So you're adding 100 basis points there. So you're probably going to be in the high-3s on payroll by the time you consider the wage growth and the benefits burden, and then you've got taxes moving up. So you're talking about just those 2 components alone being north of 50% of what likely is our expense growth for 2015. The rest of it is pretty nominal in terms of growth. So those are kind of the 2 big drivers as we think about '15.

And we will go next to Vincent Chao with Deutsche Bank.

I just wanted to touch on the comment about some of the impacts to expenses in '14, one of which was in the first quarter in terms of just the weather and conditions like that. I'm just curious, relative to the full-year outlook, I mean, do you expect the first quarter same-store NOI growth to be significantly higher as we normalize those expenses and then moderate over the course of the year? I think it was about a 110 basis point hit to same-store NOI in the first quarter of last year.

Yes, this is Sean. In terms of the spread, what I'd probably comment on specifically is -- obviously, we're not through the first quarter, but we had elevated OpEx spend in the first quarter of last year as it relates to a couple of different things. One is related to the snow removal in the Mid-Atlantic, which is something that we don't necessarily contract for in bulk. It's more episodic in terms of how we purchase that as compared to the New England where it's sort of bought in bulk. And then utilities also was -- that put significant pressure on the first quarter of last year. So if you isolate those 2, I wouldn't expect to have inflated Q1 growth as it relates to those 2 components. And then the other piece that we identified last year for everyone is the expected '14 OpEx in total to be a little bit elevated as a result of the Archstone acquisition, where the 12 months you can capitalize certain things and then it's expensed. That expired midyear. So you're going to have some offsets from that. So I don't have the exact numbers right off the top of my head in terms of what those components add up to, but we can certainly talk you through that offline as well if you'd like.

Sure, that'd be helpful. And then just 1 other question, just going back to the sort of very positive economic outlook for the year in terms of improving job growth and the rising wage inflation. I'm sure you don't want to get into the habit of projecting interest rates, but just curious, given that positive view particularly around wage inflation, how are you expecting or thinking about interest rates trending over the balance of the year here?

Vince, it's Tim. It's -- I mean, honestly, just given the amount of -- just given the length of fed stimulus that we've seen and, I guess, sort of a shared belief in the markets that at some point that's going to have to reverse itself, that's part of the reason why we've stayed as match-funded as we have been. And so rather than try to predict rates, we really try to manage the business to try to isolate the impact of them as it relates to our open commitments, particularly through the development pipeline. So at some point, rates are going to go up. We don't -- we sort of stopped trying to predict when they might, but we're trying to manage our business to protect ourselves when they do.

And we will take our next question from David Bragg with Green Street Advisors.

Can you discuss your plans to use JV capital for development? I don't think that we've seen this from Avalon in some time. So is it part of a broader effort to do more JVs? Or is it a one-off, project-specific deal?

Yes, David, this is Matt. It's the latter. There's 2 deals in particular that we expect to start this year. One of them land that was kind of been promised, a legacy JV structure going back to the Archstone acquisition, and the other is just a very unique site that happens that the way we structured the deal was to leave the land seller in as JV partner. That's what they wanted, and we generally try to avoid that. But for special sites, we'll consider it. So it's more of a one-off.

Okay. And you happen to have several assets in Texas right now through the Archstone deal. Given all the focus that's being placed on the Texas transaction market and especially Houston, can you share your observations on your efforts to sell those assets?

Yes, it's Matt again. I -- assets in a couple of quarters? We sold -- we closed 1 in the fourth quarter that was contracted for in the third quarter where there was incredibly deep demand. That was kind of an early '90s era asset in the Memorial area, Memorial Heights. So we really -- we have 2 assets left in Houston. They were both deals that were under development when we closed the Archstone transaction. We completed both of those, and we are planning on bringing those to market. In fact, 1 of them, I believe, is just launching in the market now. So we'll have a much better sense in 3 or 4 months.

And have you seen any volatility just as you begin that process of launching that sale?

No, it's really too early to say.

I don't think there's really much on the market at this point, Dave. The most you get from brokers is, nothing has changed in the last 3 weeks. So I think we'll see as we start to see those assets brought to market in Q1. So it's a good question, but I don't think we have any visibility on it yet.

Okay, understood. The last question just relates to your acquisition appetite. You shared a lot regarding the returns that are available via development. But how does -- how do acquisitions stack up in your mind? And what sort of returns do you look for there relative to development to even get yourself interested?.

Dave, I guess the way I'd say, at this point in the cycle, we look at acquisitions really as portfolio management opportunities. So as we talked about it internally, it's about what would -- if we see an asset that we think is particularly attractive that might have a -- that might outperform other stabilized assets from a long-term perspective and would help us from a portfolio balance standpoint, we ask ourselves which assets would we sell in order to fund that. It's really -- if you just kind of look at our history, we've tried -- we try to be aggressive kind of early in the cycle where we think there's a lot of run with acquisitions and have tended to be more recyclers of capital, net recyclers of capital. And if you look over the history, x Archstone we've been a net seller over time and recycled that into development. So it's hard to separate it from our business model. So we don't necessarily look at it because we're trading at a premium to NAV we should be expanding the balance sheet aggressively to buy sort of mid-late cycle assets that may not have as much room to run. It's really more of a portfolio management exercise.

[Operator Instructions] At this time, we will take our next question from Haendel St. Juste with Morgan Stanley.

Tim, you mentioned rising supplies as a key risk as you look at 2015. I'm curious what else is on that list as you look ahead? And specifically how you're thinking about the prospects for a recovery in the single-family housing market as a risk? We've seen robust single-family housing starts estimates out there calling for a 20%-plus year-to-year starts. Homebuilders seem to be more willing to offer incentives. We're seeing slowly improving mortgage credit availability. So potentially, this paints a picture for a more competitive for-sale housing market if the headwinds [ph]. So curious, what you're thinking about that.

Yes, Haendel, sort of mixed feelings about single-family housing. I think our general view is if it gets -- if it starts to heat up, it creates sort of crosswinds for our business in a sense that it typically contributes to economic growth as the single-family housing industry sort of kicks up. As we've talked about in sort of past quarters, when you look at total housing production of 1 million against a backdrop of what we think is going to be closer to 1.5 million net household formation, and when you factor in all sorts of -- it's got to grow at some point here over the next few years. And we -- our underlying forecasts are really for more balanced housing demand. It's much like we saw from 1975 to 1995 where both businesses were very healthy for the most part and homeownership rates didn't changed that much. We are not look -- we don't anticipate. We just look at underlying demographics and how people are living. The -- I think you have single-person head of households now making up the majority of U.S. households. They're generally not looking for a single -- a 4-bedroom single-family home in suburbs. And so I just think there's a -- there are reasons other than the housing bust as to why what's happening right now with the single-family housing business. It's not going to reverse itself in 2015 and '16. And so while there might be some additional strength, we don't see it having a big impact on our business in any kind of negative way. So we don't see that as a risk. The risk that we worry about are the big geopolitical macro things that you can't do anything about that have a way of kind of creating shocks in the economy and impacting growth that ultimately just translates into job and income growth.

Appreciate that. Sean, maybe one for you. Curious on what you're seeing and thinking about L.A. Clearly, that market has lagged the Bay Area for must of the past -- almost the past decade really. And while we're seeing some green shoots of recovery with a pickup again seen in the recent quarter, job and wage growth there has materially lagged the Bay Area. So is it a reversion to the mean story and affordability perhaps on rental versus homebuying? Just I would appreciate some thoughts on the key drivers for the sort of L.A. recovery and how much more upside you think that, that area MSA has.

Sure. I'll make a few comments, and then Tim, Matt, or others can join in as well if you'd like. But, I mean, as it relates to L.A., I mean, it's -- L.A. is pretty highly correlated with the national economy, very broad-based, diversified economy. Think of all the different sectors as compared to the Bay Area you pointed out, much more highly concentrated in the tech space. There's certainly a substantial number of jobs in the tech space in Southern California. But as a percentage of the overall job market there, it's substantially smaller. And so it certainly has revved up as the national economy has revved up. And certainly, you would think it has a pretty good outlook, and we do just based on the volume of supply you can put on the ground there. It has and remains, as I mentioned earlier, the market or the region with the lowest amount of supply projected to come online again in 2015. And then the other benefit that it has, even though it's not as unaffordable as, say, San Francisco, as you go across Los Angeles and look at the median income relative to median home prices, it's still relatively unaffordable. And so I think all 3 regions, L.A., Orange County and San Diego, we feel pretty good about as we look forward over the next couple of years. And it relates to L.A. specifically, it's just a function of, I think, where you are. So if you're in Downtown Los Angeles, you're probably a little more nervous than you might to be if you're on the west side, as an example, or the South Bay or some of those other submarkets. So in general, the outlook is positive for us. It's never had the same kind of cycle as Northern California in terms of the volatility. It's more the tortoise versus the hare story. But it is coming back, and it's coming back pretty strong.

How do you think L.A. stacks up in '15 versus San Diego and Orange County?

Our outlook is -- for L.A. is more robust as it relates to San Diego and slightly behind Orange County. Orange County has had great momentum. We've got a lot of built-in growth in that market. There are a couple of pockets in Orange County that if you higher-end assets in Anaheim or Irvine you might be a little bit nervous given the volume of supply coming online in those 2 specific submarkets. But a lot of our portfolio in Orange County is more affordable assets in certain submarkets that are more protected, and they're performing quite well. So as we look at those particular assets and their performance, I think they're going to carry the day in Orange County. San Diego is a smaller portfolio for us but generally also consistent with Orange County, lower price point assets, and they continue to perform well also.

And we will go next to Tayo Okusanya with Jefferies.

Just a quick follow-up in regards to the discussion on operating expenses. Just curious in regards to 1Q '15 and the recent snowstorm, whether that changes your view in regards to what snow removal expenses could look like in 1Q '15 relative to 1Q '14? Or whether because it's just a one-off storm, that you still feel there will be some net benefits or positive variances between the 2 quarters.

Yes, Tayo, this is Sean. Based on what we know right now, I wouldn't expect -- based on what we know today, I wouldn't say that Q1 of '15 is going to look like Q1 of '14. Certainly, it's 1 storm. It's concentrated in the Northeast, which, as I mentioned, for the most part is under contract, fixed-price contracts as it relates to snow removal. Where we probably have more exposure is if we had a massive storm in the mid-Atlantic where that's more of a, call it, pay-as-you-go in terms of the snow removal strategy here. And then it just hasn't been as cool for as long. But obviously, we're talking about this on January 29, so we've got some time to run here to see how it comes out. But based on what I know today, just the current storm, I wouldn't be too worried about it.

Okay, and that's helpful. And then again on Edgewater and the unfortunate incident there, is there a sense yet of what the company ultimately plans to do? And the current residents that are displaced, are they being absorbed into nearby AvalonBay communities? Or what's the situation there with those tenants?

Yes, Tayo, this is Sean. I'll make a couple comments and then Kevin or Matt can chime in as well. But first, as it relates to the existing community and the residents, as Tim mentioned in his prepared remarks, one of the 2 buildings, the smaller building, has come back online and has reopened. That was certified by the city last week. So residents have reoccupied that building, which is the smaller of the 2 buildings. And as it relates to the residents who were displaced from their homes at the larger building, which is known as the Russell Building, they have dispersed to other communities, both ours and others. And some of those residents are also still in sort of temporary housing, whether that be a hotel or friends or family, et cetera. And then the last part of your question as it relates to our plans for Edgewater, we've not made any specific plans at this point as it relates to any kind of rebuilding. We're still working in the investigation and understanding mode. And then ultimately, we'll turn towards what those next steps are at some point down the road here.

We'll take our next question from Neil Malkin from RBC Capital Markets.

I was just wondering, as you look at your same-store portfolio and how that's constituted, what if any is the difference between what the non-same-store portfolio growth rate would look like for revenues in '15 versus same-store? Is there a big difference? Is it meaningful? And I don't know if you look at it that way. If you could talk about that?

Yes. We could probably get back to you with more detail. I mean, in general what you'd expect is that the REIT -- there are several different buckets out there. Same-store, obviously. Development is separate with a lot of different things happening in development in terms of when deals are coming online. So it's not a bucket that you at all really want to compare to same-store. There are 2 main buckets are redevelopment and other stabilized. Redevelopment is growing at a slightly faster rate than same-store. And I think when we've looked at it for 2015, the equivalent is it's up somewhere in -- it would add, say, 10 or 20 basis points to the same-store growth rate. So it's growing faster, but it's a relatively small bucket relative to the base in terms of the redevelopment contribution. And then the other stabilized, I don't have the detail right in front of me in terms of the growth rate on that specific bucket, but we can certainly send it to you.

Okay, great. And then as it goes for your revenue guidance for '15, what kind of new lease and renewals have you kind of baked into your assumptions? And what -- I don't know if you gave what new lease and renewals have been today in January and then what you're sending out in February and March are. But if I can get those, that'd be great as well.

Yes, why don't I give you just a few data points. That would probably help you in what you're trying to solve for. So we mentioned both in the management letter and in Tim's remarks the Q4 rent change was 4.3% on the same-store bucket, which is about 260 basis points above Q4 of last year. January it's trending into the low 5% range. Last time I looked, the last couple of days here, it's been around 5.2% or so. And then renewal offers for February and March are going out at around 7%, which is about 225 basis points greater than where we were at this time last year. And then in terms of thinking about rent change for the year, 1 comment to make is that we're not expecting '15 to be terribly different from '14. It's similar to for all the different sectors that are out there. We started the year, if you look at sort of January growth potential and what we're building, we started the year with sort of an embedded growth of 1.6% to 1.7%. So if nothing else changed in terms of rent growth through the year, that would be baked. So if you backed -- you could back into, based on the midpoint of our guidance, what the rent change would be implied throughout the year to get to the overall midpoint, if that makes sense.

It appears there are no further questions at this time. Mr. Naughton, I'd like to turn the conference back to you for any additional or closing remarks, sir.

Well, thank you. And thanks all of you for being on today, and we look forward to seeing you at some of the upcoming conferences this winter and spring.

And that does conclude today's conference. Ladies and gentlemen, we would like to thank you for your participation. You may now disconnect.