Avalonbay Communities Inc (AVB) — Q2 2015 Earnings Call Transcript

Thank you, Christine, and welcome to AvalonBay Communities' second quarter 2015 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K 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?

Yeah. Thanks, Jason, and welcome to our second quarter call. Joining me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. We'll each provide some comments on the slides that we posted earlier this morning, and then be available for Q&A afterwards. Our comments will include a summary of Q2 results and the revised outlook for the full year. We’ll provide an overview of fundamentals and portfolio performance, and lastly, we’ll touch on development activity and funding. Starting on Slide 4; overall results in Q2 were better than expected as apartment demand continued to strengthen. As a result of an improving macro-environment along with housing fundamentals that continued to favor rental housing. Highlights for the quarter include, core FFO growth of 10% or about 250 basis points higher than last quarter, as rent growth continued to improve to the peak leasing season. Year-over-year same store revenue growth was 4.7% for Q2, up about 40 basis points from Q1, and when you include redevelopment that came in at 4.9% on a year-over-year basis. Sequentially revenue growth came in at 2% or 2.1% when you include redevelopment from Q1, which was the strongest sequential growth in Q2s that we've seen since 2010 and one of our strongest second quarters ever. We completed three communities this quarter totaling $275 million at an average initial yield of 7.3% and started another four communities this quarter totaling about $400 million. Year-to-date starts are right around $0.5 billion, and from a funding perspective we are active in the second quarter as well, raising over $600 million through a combination of unsecured debt and asset sales. Much of the capital is going to pay off secured debt, which Kevin will touch on later. Turning to Slide 5, as a result of stronger fundamentals and increasing operating performance, we’ve updated our projections and outlook for the full year. Core FFO growth per share is now expected to increase 11.1% at the midpoint of our revised range or about 270 basis points above our original outlook from the midpoint. More than half of this increase is coming from our operations and the balance from a combination of favorable capital markets activity and lower interest expense. Same-store revenue growth is now expected to come in at 2.5% to 5% or about 75 basis points at the midpoint above our original outlook. NOI is expected to come in at about 5% to 5.75% or up over 100 basis points from our original outlook at the midpoint. Development starts are largely unchanged and more or less on track to start about $1.2 billion this year at share, and capital funding is up about $200 million from what we had originally anticipated, largely to refinance additional secured debt. Now moving on to Slide 6; this operating environment is benefiting from improved economic conditions. Jobs continue to grow at a pace of north of 200,000 per month with growth increasingly in the mid-to-higher wage jobs. Our job openings are now outstripping hiring as you see in Chart 2 in the upper right, which combined with our higher-quality jobs is leading to stronger wage growth. As you see in Chart 3 the employer cost from the employee compensation survey now reflects wage growth north of 4% nationally. When you combine the stronger job picture with lower debt burdens, as shown in Chart 4, this is driving consumer confidence and is providing a strong foundation for a healthy housing market, which is evident when you turn to Slide 7. Annual net household formations now appear to be recovering from prerecession levels – and are now running at about $1.5 million per year after having languished below $1 million really over the last several years. Meanwhile, housing starts are not keeping pace as you can see in the upper right coming in at just over 1 million per year as of late. And this balance is even more severe once you consider the impact of housing attrition around 300,000 to 400,000 homes annually. No surprise then that housing inventories continue to be depleted as evidenced by the following rental vacancy rates as you can see in chart 3 in the lower left, and for sale housing stock, which is now less than five months of inventory, a level that is considered to be quite tight for the for-sale market. Moving to Slide 8, the picture is even more favorable when you look at the apartment sector. Young adult job growth continues to outpace the rest of the population by about 100 basis points, which is leading to strong rental housing demands and is particularly tight with unemployment rates for college graduates of less than 3%, which we think bodes well for higher-end rental housing and new lease-up performance. Our homeownership rates continue to decline since the recession with reductions pronounced in young adults under 35, but also those ages 35 to 44, which is also a significant part of our rental rates. The one area that we are watching is new supply, as you can see in the lower right after multi-family starts had leveled off over the previous 18 months in the mid-300,000 range; we saw it increase to over 400,000 in Q2. Some of the increase can be explained by the potential expiration of the 421-a program in New York City as many developers have rushed to get deals permitted and started. But with real demand fundamentals still healthy and housing inventories falling, the market may simply be increasing production and strengthening demand. Any event it’s a trend worth watching, particularly in relation to total housing production and what’s happening in the single-family market. Turning to Slide 9, perhaps we ought to be looking at the rental housing market through a different lens this cycle than we have in past cycles. Here are just a couple of exercises from recent research published by Moody's and the Urban Institute that suggests one that the economic expansion may be far from reaching its end according to Moody’s, particularly when you consider that for the recession and the moderate level of growth we’ve experienced since then. In fact, Moody’s and many others believe that this cycle is far from over which we think will benefit cyclical industries like housing. And second, the researchers at the Urban Institute posit that rental housing demand is actually in the midst of a generational surge, that still has 15 years to run, a period when they anticipate that five out of every eight new households will be rental households. So we have been looking back over the last couple of cycles to draw a comparison as to how this cycle may play out for the industry, but maybe we need to start asking whether this cycle really has a precedent when you consider the confluence of trends that are positively driving rental housing demands. Indeed when you turn to Slide 10, you can see that the effect of rental rate growth has recently reaccelerated despite what is still a moderate economic expansion. If we are in the middle of a prolonged economic and housing cycle this decade, it may prove to be the best we’ve seen in our industry and our markets, even surpassing the 1990s when cumulative rent growth reached almost 60% over a 10-year period or more than twice what we've seen so far this cycle in our markets. And now I’ll turn it over to Sean who can provide some color in terms of how our portfolio is performing given this favorable environment.

Thanks, Tim. Turning to our portfolio results on Slide 11. We’re certainly experiencing the acceleration Tim highlighted in the previous slide. Same-unit rent change during the second quarter averaged 6.2%, about 80 basis points greater than the first quarter and 250 basis points greater than Q2 2014. All of our regions are experiencing greater rent change compared to last year including the mid-Atlantic, which is up about 100 basis points, roughly 1% as compared to basically flat last year. July is generally consistent with the second quarter with achieved rent change as of earlier this week as 6.4%. Turning to Slide 12; our results in the first half of the year combined with the current positive momentum in the portfolio supports our increased outlook for the full calendar year. We increased the midpoint of our same-store rental revenue outlook by 75 basis points to 4.75%, excluding our redevelopment activity. We expect better revenue growth from four of our six major regions; the exceptions are the greater New York and New Jersey and mid-Atlantic regions, which are expected to be within our original range. In the mid-Atlantic, better job growth is supporting the higher end of our original range; in New York and New Jersey, which is expected to be at the lower end of original expectations, New York City, Westchester County, and Northern New Jersey are performing as planned, but both Long Island and Central New Jersey are coming in below original expectations. New England, supported mainly by Boston, and the West Coast markets, especially Southern California, are expected to outperform our original expectations for the year. As we highlighted last quarter, momentum in Southern California remains quite positive. In the second quarter, rent change was about 7% in LA and San Diego and almost 8% in Orange County; and San Diego rent change is running about 200 basis points above last year, while in LA and Orange County, it’s between 300 basis points and 400 basis points greater than last year. Turning to Slide 13, we believe the positive momentum in our portfolio supported by our allocation to many supply-constrained infill suburban submarkets, this slide demonstrates the year-over-year effective rent growth in urban and suburban submarkets over the past several years, while urban submarkets certainly outperformed in the early part of the current cycle, new apartment supply, which takes longer to deliver in urban submarkets given the nature of the product is now beginning to keep pace with or has surpassed demand in many markets. As a result, urban growth rates have slowed, while the suburban submarkets have improved. Moving to Slide 14, I’d like to highlight a relatively recent shift in our operational strategy; one that we believe has improved our performance over the past year and will continue to do so. The two charts on this slide represent our lease expiration profile throughout the calendar year in 2014 and 2015 for both Boston and Seattle. While many of you are familiar with the seasonal nature of our business, the demand patterns in these two markets are much more seasonal than the rest of our footprint. In Boston, the seasonal weakness in the fall and winter is driven primarily by the weather. In Seattle, it somewhat relates to the use of contract workers in the high-tech industry, a percentage of which leave the country during the holiday season. And both regions experience greater demand in the summer from short-term rentals, corporate hires coming out of college, etc. Over the past year, we changed our inventory management strategy to better align our supply of available units with the highly seasonal demand patterns in these two markets. Specifically, we’re pushing a greater percentage of our lease expirations into the months for the best demand and highest rents. In New England, we had 20% more expirations in May through July compared to last year, while in Seattle it’s about 40% more. We reduced contracted inventory in the fall and winter months in both regions when demand softens and rents typically decline from their summer peak. By further reducing expirations in the fall and winter seasons when demand is lower, we’ll have less inventory to lease and therefore either higher rents for the units available to rent or fewer transactions and lower rents. We continue to identify opportunities to enhance our operational execution, including these refinements to revenue and inventory management practices and we believe they will produce dividends for us in the future. With that, I’ll turn it back over to Tim.

Thanks, Sean. I’ll now ask Matt and Kevin to take a few minutes to discuss development activity and funding, which together are helping to drive outsized core FFO and NAV growth in 2015, and we believe, over the next few years. So, Matt?

Alright great. Thanks, Tim. Turning to our development activity, you can see on Slide 16 that our lease-up communities continue to post impressive results. As a reminder, our general practice is to report rents on an untrended basis on our development communities until we open for business and at least enough apartments to get a good sense of where our current market rent levels are compared to where they were when the deal broke ground. This quarter we’ve marked rents to market on 10 of our 29 development communities, and the rents of those 10 communities are running $200 per month above the initial underwriting, which in turn is driving a 50 basis point increase in the yield on those deals to 7.1%. Importantly, we’re achieving those rents while getting absorption of an average of 29 leases per month in the second quarter, which is actually the strongest pace – lease-up pace we've seen so far this cycle. With cap rates wrestling in the mid-4% range across our markets, this provides significant NAV accretion as these developments come on line. Turning to Slide 17, we broke ground on four new development communities last quarter, representing approximately $400 million versus new investment. Many of our starts this year have been transit-oriented infill suburban locations, picking up on the theme Sean had mentioned as we’re seeing better rent growth in those submarkets due to less supply, but our largest start so far this year is actually the AVA NoMa community in the North of Massachusetts Avenue district in Washington, DC. This project should have a pretty compelling cost basis of less than $340,000 per unit, in addition to benefiting from a $7 million 10-year tax abatement provided by the District of Columbia, and it’s also a good example of our multi-brand platform providing us with a wider variety of products and service offerings to appeal to different customer segments. This community was originally acquired as part of the Archstone acquisition, designed to be the second phase kind of companion to the First & M community next quarter. We were able to reprogram it to provide, what we expect, will be a very different living experience with different price points, floor plans, amenities, and services, as well as the different style and sensibility that will reflect the contrast between our Avalon and AVA brands. This is similar to the approach we have taken at our downtown Brooklyn, West Chelsea, and Somerville sites where we diversified a concentrated investment in a single location by building multi-brand communities. On Slide 18, you can see that our local teams have also been busy backfilling the development pipeline and identifying new opportunities for future development. Our development rights pipeline, which represents sites we control mostly under option contracts, has expanded over the past few quarters after bottoming out late in 2014 and now stands at $3.7 billion. The pie charts on the lower part of the slide also show how the future development pipeline is migrating a bit towards suburban transit infill-oriented locations. That’s just a reflection of the fact that we’re finding better risk-adjusted returns in these submarkets at this point in the cycle, which is not surprising given the concentration of new supply in the urban cores and the higher cost basis of high-rise construction, which tends to make urban development more profitable in the early part of the cycle. And with that, I’ll turn it over to Kevin to talk about our activity on the right-hand side of the balance sheet.

Thanks, Matt. Turning to Slide 19, we highlight the company's funding position against both our updated capital plan and our development activity underway. As you can see on this slide, the company remains exceptionally well-funded in both areas. Specifically for our updated capital plan, we now contemplate raising $1.95 billion in external capital. Through June 30, we raised about $1.4 billion including $570 million in remaining proceeds under our forward equity contract. In the second half of the year, we expect to raise another $580 million in external capital through a combination of asset sales and the issuance of unsecured debt. As for our development activity, as of quarter-end our development underway of $3.8 billion was nearly 100% match-funded by a combination of $2.6 billion in capital spent to date, plus over $1 billion from cash on hand, projected free cash flow, and remaining proceeds under our equity forward. As a result, we’ve eliminated nearly all funding risk while locking in significant value creation as these communities are completed and stabilized. On Slide 20, we show the evolution of a few key credit metrics since 2010, in order to highlight how we have further improved our already strong credit profile through recent refinancing activity. During the second quarter, we raised $620 million in external capital including $520 million in 10-year unsecured debt at about 3.5%. We repaid $580 million of secured debt with a cash interest rate of 6.2% and a GAAP interest rate of 3.7%. As a result of this activity, our unencumbered NOI percentage is now 76%, up 700 basis points from year-end 2014 and the highest it’s been since before the financial crisis. In addition, the composition of our debt is significantly improved such that 56% of our debt is now unsecured, up 900 basis points from year-end. Further, since 2010 our weighted average GAAP interest rate has steadily declined by 130 basis points to 3.9% today, while we’ve reduced the amount of unamortized debt premium from the Archstone transaction down to $60 million today from about $150 million when we closed that transaction. The next two slides highlight the contribution that development provides both to our earnings growth and to our NAV growth and serve to underscore the merits of our time-tested development capabilities. In Slide 21, we depict the components of our projected growth in 2015 core FFO per share. Of the $0.75 in projected core FFO growth this year, $0.37 is projected to come from development and redevelopment activity net of financing costs. Of this $0.37, development is projected to contribute $0.34 while redevelopment is projected to contribute $0.03. Thus, development alone should add 500 basis points to our growth rate this year and account for nearly half of our overall earnings growth. In Slide 22, we highlight development's contribution from an NAV perspective and over a longer period of time, by estimating how much NAV per share we’ve created or expect to create through development thus far in the cycle. Specifically, development starts and completion since the beginning of 2011 totaled $6.1 billion; of this about $4 billion has been completed or is undergoing initial lease-up and has produced or is producing an initial stabilized yield of 7%. Applying this 7% initial yield to the $6 billion in starts and completions and then capitalizing the resulting NOI to the current market cap rate of 4.5% produces an implied value creation above our cost of $3.3 billion. This in turn equates to an estimate of $30 per share in NAV accretion from development starts and completions since early 2011. So in sum, through our development capabilities, AvalonBay has provided and continues to provide significant incremental earnings and NAV growth for our investors while also adding new and exciting apartment communities that enhance the quality of our portfolio and our product offering for our customers. With that, I’ll turn it over to Tim.

Well, thanks Kevin. So 2015 is shaping up to be another strong year. Core FFO growth is expected to come in at more than 11%, driven by strong same-store portfolio performance you heard from Sean, with same-store NOI expected to be north of 5%, healthy external growth from development as Kevin just touched on, and finally a strong and flexible balance sheet that supports this growth with attractively priced capital. And with that, we’d like to open the line for questions.

Hi, good morning. A couple of questions, I know you guys are not providing 2016 guidance and just revised the 2015, but if you just kind of look at the trajectory of rent growth that you've kind of seen over the course of the year, and you look at where you are sending out renewals, is it a fair assumption to think that absent the real occupancy change that revenue growth will next year at least equal to 2015 kind of from a directional standpoint? And I guess the other question would just be for I guess Kevin there was on Page 20 of the supplemental, there was a little change it said in expensed overhead and it almost sounded like that might have sort of retarded how much the FFO would've gone up this year. I'm just wondering if you could sort of expound on that and kind of quantify that for us.

Okay. Maybe I’ll take the first question, Steve, and certainly others can join in and maybe Kevin take the second question regarding overhead. As you saw on one of the slides, we’ve been saying like-term rent change north of 6% for the last few months. It's been positive in terms of its trajectory this year and that’s obviously a leading indicator in terms of our portfolio performance. And as Sean mentioned, we’re expecting to see same-store revenue growth you know north of 5% in July and just imply from our guidance based upon what we did in the first half of the year we’re expecting 5% range for the back half the year. We have said, we think we’ve got another two, three, or four years of – potentially above trend growth and the question is how much above trend then, it’s a little bit depending upon the ebb and flow of markets. We don't anticipate that Northern California will continue to grow at 10%, but on the other hand, we don't anticipate the DC area to continue to languish roughly flat rent growth. So Steve, it’s going to be a function ultimately of different markets, but when you look at just from a macro standpoint, particularly I guess the point I made about the end of production of housing and we think sort of a stronger employment picture in terms of the quality of the jobs, and we’re starting to see decent wage growth. We expect we’ll continue to see good healthy above trend growth and that fundamentals would continue to pay warehousing and specifically rental housing, you know whether that translates into 4%, 5% plus growth, more to come on that.

So Steve, this is Kevin. Just to answer your question on overhead and I guess to begin by providing a little bit of context for everyone on college, you referenced on Page 20 of our supplemental or our attachment 13 we provided our outlook for the year at the bottom of that, we indicate that our expectation now is for expensed overhead, which comprises corporate G&A, property management and investment management, we expect that that will increase year-over-year from initially 0% to 5% to now 6% to 8%. Just to give you a little more color there, we now project total overhead to increase by about 7% this year versus basically a 3% increase at the beginning of the year. This 4% increase represents about $4 million, of which about $1 million was recognized in the first half of the year and $3 million is expected to be recognized in the second half of the year. The majority of the increase is tied to increases in expected compensation based on anticipated performance to date and expected performance from the year. In terms of the underlying 3% growth that we initially expected for the year, about half of that was driven by legal settlement in 2014 that’s not present this year and the other half was driven by severance costs recognized in the first half of the year.

Thanks. For the lease expiration management, how do you think about the benefit from having more leases rolled in the peak leasing season versus the risk of being concentrated too much at one time, and then do you expect to keep tweaking from here as the portfolio currently optimized?

Yeah Nick, this is Sean. Just talking about it a little bit, we highlighted the two markets where it matters a lot, which are New England and Seattle, they tend to be the two more seasonal markets in our footprint. So we have applied the same basic strategy to the rest of the portfolio, and when you think about it in our portfolio typically what we've experienced is we’re optimizing revenue when occupancy is somewhere in the mid-95% to 96% range, every market is a little bit different by the way in terms of what sort of average market occupancy is, but that’s been our experience. So as we looked at what was happening with demand patterns across the portfolio we felt like we continue to push more expirations into the second quarter and through July, and to the extent that we could drive enough traffic to the portfolio to continue to push rents at the pace that we have actually experienced. We think we're in pretty good shape and it allows for us to – I guess if you want to call this growth, have an appropriate glide path as we go into the fall because expirations were up in the second quarter about 7%, 8% that actually peak in July, which is up about 14%, but then it comes down in August and September 7%, 8% and 4% or 5% in the fourth quarter. So we expect to be able to continue to maintain pricing power at a pretty healthy clip as we go into the fall and winter season, probably more so than we've experienced in the past, as a result of the expected lower supply of inventory that we’re going to have during those periods. And in terms of the balance between occupancy and rate growth, we think we’re in a pretty good position right now as it relates to what we did in the second quarter, what we expect in the third quarter, but it's always a little bit of a dance in terms of whether you experienced too much availability and you have pricing pressure or not, we did not experience that in the second quarter. And based on where we sit today, we think we’re in pretty good shape, our 30-day availability peaked around 6%, now it’s down about 50 basis points to 5.5%, physical occupancy is mid-95, going into a period where we’ll have low expirations. So I think we’re positioned pretty well and this strategy we pursued was the right one. In terms of whether we’re sort of done, you know, lease expiration management is something that is sort of a continuous activity, you have lease breaks, you have short-term rentals; a lot of things that occur in the portfolio and so you’re always adjusting what allowable leases you’ll offer to a customer, at what price points for those leases to make sure your profile stays optimized. So, that might be a little more detail than you like, but I thought maybe it would help in terms of providing context to everyone about our strategy.

Hey Sean, if I can just add to that too. Obviously, the model's dynamic is always responding to adjusting demand as we see it, but it’s also for understanding what the market is doing, what the rest of the market is doing in terms of expiration management, and so that alone is going to make us try to maneuver to optimize the opportunities. So for example, if the market is starting to smooth its expirations relative to where we think demand patterns are, then we’re going to benefit from concentrating more expirations in the peak leasing season, the opposite could be true as well. So it’s going to be a dynamic process in terms of how we manage through it, in part because there is always demand dynamic, but also supply in terms of how the rest of the market is using revenue management.

Thanks, that's very helpful. And then just in terms of capital needs looking out to 2016, it seems like the spend in terms of development will be similar to this year, so would you do another forward equity offering at this price?

Obviously Nick, we don’t comment a lot about future activity in the capital front. And I think we’ve been asked a number of times what our views are in the use of an equity forward, so I guess just to kind of provide everyone that answer again, I guess, you know, we’ve known about an equity forward as a tool in our toolkit for probably five or six years; we’ve used it only once. It takes sort of a special confluence of events to justify using it, it’s a good tool to have. And it really is a function of what one has elevated funding needs, what one’s capital position is at a given point in time and what one expects capital pricing might be as well as availability in the coming period. Given where we are now we feel like we’re in really great shape from a balance sheet point of view with net debt to EBITDA in the mid-five times range, and we’re potentially nearly 100% match funded against the development that is underway. So we feel good from a capital standpoint even if it might turn out that spend next year is roughly on par with this year, we haven’t gone through the budget process, so we don't have final visibility on what spend levels would be next year, but they’re likely to be meaningful, just given the level of start activity. But in terms of the capital choices we might make they often involve naturally what capital pricing is and at this point today, if I were to rank order or track – based on attractiveness the choices we have, asset sales are much more attractive as the source of equity than common equity at this point in time. So I would rank them asset sales, then unsecured debt, and then followed by common equity issuance. So as we stand here in July, it’s far too early to say what our capital spend might be for 2016.

Thanks.

Hey guys, good morning. Tim, you commented a little bit in your slides about the uptick in starts and permits over the last few months; obviously, the 421-a situation in New York has put some noise into the numbers, I guess I’m curious if you had to sit back and say on a scale of 1 to 10 how nervous are you that we're moving into a new threshold or new level of supply in the multifamily business. How would you sort of rank your level of concern compared to maybe where your head was six to 12 months ago?

Yeah, that’s obviously a question on everybody's mind, as I said I think bears watching. But you know, maybe to start with the demand side of the picture, I think as the industry – I think investors and honestly developers and sponsors are looking at the demand side of the picture as being stronger than they may have a year and two years ago, and the cycle may play out a little bit longer. So I think there's probably some truth that there is just more confidence, more investor confidence, more developer confidence and there's probably good reason for that, when you look at demand. So I think there is a decent probability that supply will move up from here. I think it needs to move up in order for the market to be anywhere close to being in balance. We’re seeing how it can get distorted in places like Northern California and Seattle, even Seattle where we’re delivering over 3% deploying it, you would continue to see 7% revenue growth. I think what’s interesting though, and probably my biggest concern is who would provide the supply, but if you just look at our kind of our outlook we’re looking in terms of constant dollar volume roughly in 2015 that we started in 2014 and 2013 and 2016 won’t be materially different. It’s actually a smaller unit count. And as you go around and you talk to some of the more experienced players, it’s kind of a similar story. You hear, so the additional supply I think will likely come from new entrants oftentimes who I think sometimes muddy up the market a little bit. So I think that's probably as worth watching as much as anything, Ross, where the supply is coming from, who is – where the net new kind of add is if you will. For the first time commercial and retail developers are doing this and have other objectives in terms of providing additional supply to the market. So, and that’s a little bit of a long-winded answer. I think it's a decent chance that it will occur. I think it’s, the market can absorb it when it probably needs it, just based upon household formation and just the balance of demand between rental and for sale.

Okay, thanks. And just a question on the second-quarter turnover ratio. I think you guys did a good job of explaining that; I think you intentionally had higher turnover because you accelerated where the lease expirations are. Were there any markets where the turnover surprised you, maybe as a sign that you might've pushed too hard on the rent gas pedal or was it all kind of intentional?

This is Sean. Good point about being somewhat intentional. Turnover rate was certainly up, but if you look at it as move outs as a percentage of expiring leases, it was actually down about 120 basis points year-over-year. All the markets were down with the exception of Northern California which was up about 120 basis points. I wouldn’t say it was necessarily surprising given the level of rent growth in that region, but Northern California is certainly the one outlier where there is continued pressure on rental rates driving more turnover in terms of the existing residents, but still being able to replace them with high-quality residents and higher incomes.

Good morning. Just a follow-up question on previous comments on where we are in the cycle, Tim, and your comments today just given the better first half of the year acceleration, expected to continue, do you think we're still in mid-cycle? I mean, do you feel that maybe obviously things are stronger than you were expecting that we're still in earlier stages or still mid-cycle, but longer? I just want to clarify those comments and how that ties into the increasing decision to increase the development pipeline.

Yeah, Jeff, thanks. I would say somewhere in mid-cycle. I don’t know if I could be more specific than that, as we said, we think it’s probably, both this economic expansion and this apartment cycle probably feel more like the 90s, when you just look at sort of the economic drivers that usually start to portent that maybe the expansion is starting to slow down, it’s just not present right now, and you know when they start becoming present, usually it often has another two, three, or four years before you see any kind of economic correction. So things could change, but just based upon sort of the underlying fundamental it just seems like this has a few years to play out from our perspective economically and from a real estate cycle standpoint. Now, how does that impact us in terms of this? I would say in certain markets, it’s probably a little bit more confident and in other markets we’re probably as gun-shy as maybe we’ve been over the last six to nine months. For example, in Southern California we bought a $100 million piece of land, a six-acre site in Hollywood where it’s kind of a unique opportunity to build 700 apartments on a dual-branded site, that we felt, you know we felt pretty confident about. On the other hand, if that opportunity had been infill Northern California where rents have already increased 50% this cycle, and when the auction you might have to assume they’re going to grow another 50%, we probably would've been bold enough to take down a piece of land in that side. So I think it’s going to be a little situational, and we’re probably going to be a little bit more aggressive in markets like Southern California or DC, just fundamentally a different part of its real estate and expansion cycle. Well we are expecting supply deliveries to go up in 2016 as you know. I think the big question is are all these permits going to translate into starts; you know last time we saw the threat of the 421-a expire, we did see a bit of spike a couple of years later, so that risk is out there. I think from a land market and a construction cost market you need to be extremely careful in New York City today. I think there's a chance that some of this will translate into starts, which is going to put additional pressure on construction costs. I think there's a chance that the land markets get a little noisy for a while, and that you might be, you might benefit from standing back a little bit and just kind of seeing where the dust settles and take advantage of opportunity that's permitted after a point at which markets, construction markets maybe have a chance to settle down or replace a little bit. So I think it's going to create – I think anytime you see uncertainty around regulation, that creates more distortions and uncertainty, and you know that will create its own set of opportunities; I just don't think it's today right now.

Just given the continued momentum that you guys have seen into August and September, and sort of that 8% range on the offers, should we expect that you guys are going to continue to run at that pace or would you anticipate you’d pull that back a little bit and look to rebuild occupancy as traffic could slow later this year?

Yes Austin, this is Sean. 8% is what we've got out there at this point. You know we haven't necessarily throttled-up what the offers are going to look like for the fourth quarter. I guess I’d just maybe refer back to the comment I made earlier, is that based on our lease expiration strategy with fewer expirations beginning in August through year-end, our expectation is that we'll be able to hold better pricing power potentially than we have in the past during that season. 8% is a pretty healthy level. And so our expectation is that as availability has come down, pricing power has remained healthy naturally just through lower expiration volume, we would expect fewer move outs and better occupancy. But how that plays out in terms of what the rent offers might look like going into the fourth quarter is hard to comment on at this point.

I think when you look at homeownership in our markets versus historical average, I think it's obviously lower because our markets have lower homeownership, but I think they're running at around 53. Right now for our market, if you look at the four-quarter average, it’s about 51% right now as compared to the previous peak it was 58%, so we’re down about 700 basis points in our market at this point.

The 58% wasn't the norm because nationally, the peak had gone up about 500 basis points from 64% to 69%. So I would guess that it was pretty consistent in terms of that trend.

Good morning, guys. It looks like the redevelopment numbers dropped in the supplement, can you guys just talk about how many projects are in there and what the additions to the pipeline and expected returns look like for the rest of the year?

Sure Rob, this is Sean. In terms of the redevelopment activity right now there's, as noted about $123 million underway at seven communities, it’s about 2,800 apartment homes. The mix does continue to shift. Our expectation will be as expressed in the past is we plan to start between $100 million to $150 million per year in redevelopment activity. And as you look at our track record, the track record has been quite healthy in terms of returns from that activity where if you think about redevelopment, there are two components to it; there's certainly some capital that does not earn a return that sort of end of useful life activity, whether you’re replacing roofs and things like that. But there's also the enhancement component, and the enhancement components for us we typically underwrite somewhere in the 10% to 12% range. We've actually been hitting more like mid-teens in that activity. So I think you’re going to expect it to be somewhere again running in the $100 million to $150 million range, and the kind of return profile that I expect, we don't expect to ramp it up dramatically unless we see some softness in the market over the next few quarters.

What is that $100 million to $150 million mean on a per-unit basis?

You know it varies a lot. We have deals that run anywhere from I’d say a low of 15,000 to 20,000 up to about 50,000 a unit. The average in the portfolio now is probably running somewhere in the neighborhood of about 40,000.

Great. Thanks.

Good or I guess good afternoon now. So a couple of quick ones here. I guess Kevin, one is for you looking at the debt maturity schedule, it looks like there's a couple of above-market unsecured tranches high five coupons set to mature in 2016 and 2017. Pretty well above the 3.5% you recently issued 10-year paper. So I'm curious as to what's your current thought here how are you weighing the opportunity to perhaps replace these slugs given the rate risk versus, I guess, that debt prepay penalties?

Sure Haendel. You know we've got about $250 million maturing next year, it's unsecured debt high five coupon. And it's something we'll take a look at as we roll forward here, nothing planned as yet in regard to that. But it's a relatively modest maturity for us. We have $6.4 billion of debt, probably about $5 billion of it is maturing over the next 10 years or so. So an average maturity year for us is about $500 million. So that makes 2016 actually a pretty light year with only about $250 million, probably the $280 million if you put some amortization on top of that maturing next year. But there may be an opportunity there for us to act on, but nothing that's in the plan as yet. In terms of 2017, that's a larger tower about $950 million. Most of that is represented by secured debt of about $700 million that is in a GSE pool that we assumed in connection with the Archstone transaction. Much of that is in place to help support some tax protection obligations that Archstone had made and that we inherited. That matures as we indicated in 2017 it has two extension options, so we can extend it for one or two years based on our election before that point in time. So we've got some financial flexibility about how we address that. But given that it's tethered to some tax protection obligations, it's less likely a candidate for early action for retiring that debt. I guess probably what's more germane right now is that within our guidance we do anticipate paying off additional debt about $200 million in total that we expected at the beginning of the year, and it’s driven by your comment, which was what’s the opportunity for refinancing and the prospect of facing rising rate environment. And we do see some opportunities in our debt portfolio if you will to pay off some debt here in the next quarter and do so on an accretive basis. From an interest rate perspective, just to clarify one thing, while the cash coupon on some of the debt maturing in 2016 and 2017 is attractive, it’s in the high fives; in the case of 2016 and the cash interest rate in the 2017 debt is also relatively high, the $700 million of debt that we inherited from Archstone, while it has a 6% cash pay interest rate, it has a GAAP interest rate of about 3.4%. That's just something to point out for modeling purposes. But from our point of view, if you could repay that secured debt in 2017 today, we’d likely reconsider ways of doing so because it would be certainly attractive to try to refinance that to a lower coupon, but that does have a prepayment penalty associated with it that makes an economically unattractive choice today.

Great. I appreciate the insightful comments. Next question maybe for Tim or Sean. A question on Seattle; the last couple of years we saw a meaningful uptick of supply in downtown Seattle, plus 6% more or less of supply as a percentage of stock. But the next two years, the supply picture really shifts out to Bellevue, we’re looking at about 15%, 16% expansion over the next two years, which is more where I believe your Seattle exposure and as well as some of your peers are. So I’m curious how you’re thinking about your Seattle exposure and price point positioning today can and should you be calling, and then is it inconceivable that your SoCal portfolio could surpass your Seattle portfolio this time next year in terms of same-store revenue growth?

Yeah, Haendel, this is Sean. I’ll make a couple of comments and Tim or Matt can jump in as it relates to development. Your comment is certainly accurate that the majority of the supply, high percentage has been focused in Downtown, Capitol Hill, Queen Anne, and if you go there today, I was there just a couple of weeks ago, there're cranes everywhere in those various submarkets. It’s certainly starting to accelerate in terms of the volume of the supply that is planned in the Eastside and North-end submarkets which is where most of our portfolio is concentrated. And we will continue to watch that carefully. At this point, you're talking about a market that's producing close to 4% job growth. There is some supply coming on line in Bellevue and North-end, that is meaningful as Downtown, but is being absorbed quickly, and we’re still producing 7% revenue growth. So, at this point what is planned there in terms of the level of supply at current rates of job growth, doesn’t probably concern us a lot that job growth is not likely to continue at that pace forever obviously, so we’ll have to continue to watch how it evolves on both sides. At this point what's in the pipeline though for Bellevue, Redmond, Riding etc. some of those submarkets isn't all that concerning. And we've got a pretty diversified portfolio in terms of our positioning. We have a lot of older product at reasonable price points, and we've been opportunistic on the development side and have some higher-end assets that we are underway with in Newcastle, Redmond, etc. that we think will do quite well in the environment. There should be early deliveries in those submarkets relative to the rest of what's in the planning cycle. So we think we’re pretty well-positioned, but certainly it’s going to have to be something we’re going to watch as supply starts to ramp up more on the Eastside.

Any thoughts on SoCal versus Seattle, as we move into next year?

Yeah, I mean it's a very good question. I mean historically, Southern Cal hasn't been nearly as volatile as Northern Cal and Seattle, just given the underlying kind of macroeconomic fundamentals in that market. But there certainly have been times in the past where it's produced numbers up in the call it 7% range. We'll call it roughly 6% now, demand is pretty healthy, still the lowest region of any region in terms of supply over the next two years. So while it's hard to predict where things are going, it's not unimaginable that if you had job growth slow a little bit in Seattle and it continues to move up in Southern Cal with the supply we have that it could get to that level.

Hey, good afternoon everyone. Just a few follow-up questions here. Just going back to the debt side of things, just curious if the recent treasury rate volatility has really significantly impacted your cost of debt here, do you think you'd still be close to that 3.5% that you recently issued at or is that somewhat higher today?

You know the quotes that we’re receiving today for issuing new 10-year unsecured debt for us range between 3.6% and 3.7% today, so a little bit back of the 3.47% yield to maturity that we achieved in May, but not a lot, call it on average about 20 bps back.

Okay. And just given the funding your need for next year as well as expected issuance here sometime in the second half, would you consider increasing that amount just to sort of pre-fund given the rising rates and also just again, lock-in some pre-funding?

Our approach to funding is not really necessarily to try to speculate on where rates might be tomorrow and mobilize capital as a result. It’s really much more driven by our uses and our development activity. And so what we’re much more inclined to do is to match fund capital, so as we make development commitments, we'll try to find the long-term capital with that. So given that we're nearly 100% match-funded today, I don't know it would be necessarily need to be more than that at any point going forward. So probably not highly inclined to try to issue new debt today in advance of the need next year.

Good afternoon. I was hoping you could talk about the New York Metro area; we’re seeing property revenue growth year-over-year has been relatively sticky around 3%. Is that primarily a product of new supply hitting, is rent fatigue real? If you can just kind of break that out and talk about the individual submarkets and where they fit in?

Sure Drew, this is Sean. I'm happy to talk about that. It depends on which markets you’re in, so maybe I’ll kind of walk you through some of them. If you’re looking at New York City generally speaking for our portfolio, for the most part what is keeping a lid on revenue growth is really supply and it’s probably most acute in Brooklyn and in Midtown West. As far as our performing assets that we have in the Greater New York City area, the two Avalon Riverview Towers which are in Long Island City, as well as our Morningside Heights deal up near Columbia — those two are the outperformers at this point. Midtown West has been a little bit on the weaker side, Brooklyn has been a little bit on the weaker side, and the Bowery had done okay. When you move outside of New York City, Northern New Jersey has actually been one of the stronger performing submarkets right along the Gold Coast we’ve been seeing 4% or 5% revenue growth. And then as you push out into Central New Jersey it tends to be weaker more in a 2%, 2.5% range. Long Island has done okay, but a little lower average. Long Island has been in the 2% to 3% as well. And then Westchester has been holding its own, but you know it’s kind of a market that is if you’re doing 3%, 3.5%, maybe 4% at the high end that’s sort of about what you expect in that market for those, when you think of Central New Jersey, Long Island, Westchester it’s not typically about supply that’s the issue, it’s more about just demand and where the choice – the choices that are people are making. So it’s typically about the demand side in those markets generally speaking.

Hey good morning guys. Looking at the expiration shifting, will this give you guys a new structural high for occupancy or is this more of a rate phenomenon for you guys?

Yeah Wes, this is Sean. I wouldn’t think of it as a structural high in terms of occupancy going forward, if that’s what you were talking about in terms of being high. I mean if anything in the second quarter through July probably, it would actually put a little bit of downward pressure on occupancy given the greater expression volume, greater move outs potentially, but also gives us more of a rate opportunity really in terms of more expirations at that point, more transactions when rents were at the highest point during the season. So that was the main reason to shift, it was to take advantage of that opportunity and give us a little more protection going into the fall and the winter in terms of continuing to hold pricing power with just fewer transactions.

Thank you guys. On the Hollywood deal that’s a fully entitled land site, how does that work from an Avalon AVA mix given that you target different unit sizes and mixes with AVA versus Avalon?

Sure Conor, this is Matt. Typically, the way it works is that the entitlement — and it’s true in this case as well — are more about the overall FAR parking count, unit count, building mass, and that site actually has five different buildings on it, four or five different buildings on it, and multiple street frontages. But the entitlements usually don't drill down specifically into this many one-bedrooms, this many two-bedrooms, this much average unit size. So we have the flexibility within what's been approved to kind of repack the building if you will and we may take one of the buildings and it’s the whole site been approved for 695 units, we may take one of the — it’s 300 on one side part, 400 on another, we may shift that around and put 380 up here and 320 down there, as long as we stay within the kind of the overall limit. So there is the flexibility to reprogram and we've done that in a number of places.

Great, thank you. And then earlier you guys alluded to a slight increase in debt cost this year versus where you could issue 10-year now versus earlier in the year, have you seen any movement in the debt cost influence cap rates in the dispositions that you are looking at?

It’s Matt again. No, not yet. We have not been as active in the last quarter as we were last year, but we do have some fund assets in the market or getting to come to market now and trying to kind of take advantage of it, we see it as a pretty compelling opportunity. But we just closed one fund asset in the second course, the only closing we had last quarter, and it was right around the four cap rate on an older asset in Southern California that was bought by a value-add buyer. So we're hearing the talk that maybe buyers are going down the duration, so they’ll — 7-year debt, instead of 10-year debt to make their numbers, but obviously they may be getting more bullish on rent growth or NOI to make up for it. So, so far it really hasn’t had an impact on the transactions.

Good afternoon. I was hoping you could talk about the New York Metro area; we’re seeing property revenue growth year-over-year has been relatively sticky around 3%. Is that primarily a product of new supply hitting, is rent fatigue real? If you can just kind of break that out and talk about kind of the individual submarkets and where they fit in?

Thanks, Christine. I think it’s been a long call. So I just want to thank everybody for attending today and I hope you’d have a great summer and we’ll see you in the fall.