CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page1of27
AvalonBayCommunities(AVB)EarningsReport:Q12015ConferenceCallTranscriptThefollowingAvalonBayCommunitiesconferencecalltookplaceonApril28,2015,11:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
JasonReilley;AvalonbayCommunities;SeniorDirectorofIRTimothyNaughton;AvalonbayCommunities;Chairman&CEOMattBirenbaum;AvalonbayCommunities;CIOSeanBreslin;AvalonbayCommunities;COOKevinO'Shea;AvalonbayCommunities;CFO
OtherPart icipants
NickJoseph;Citigroup;AnalystJanaGalan;BofAMerrillLynch;AnalystDanOppenheim;Zelman&Associates;AnalystNickYulico;UBS;AnalystHaendelSt.Juste;MorganStanley;AnalystRobStevenson;JanneyCapitalMarkets;AnalystJohnKim;BMOCapitalMarkets;AnalystVincentChao;DeutscheBank;AnalystDaveBragg;GreenStreetAdvisors;AnalystAlexGoldfarb;SandlerO 'Neill&Partners;AnalystTayoOkusanya;Jefferies;AnalystMichaelSalinsky;RBCCapitalMarkets;AnalystWilliamPho;CowenandCompany;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Goodafternoon,ladiesandgentlemen.WelcometoAvalonBayCommunities'FirstQuarter2015Earningsconferencecall.
(OperatorInstructions)
Yourhostfortoday'sconferencecallisMr.JasonReilley,SeniorDirectorofInvestorRelations.Mr.Reilley,youmaybeginyourconference.
JasonReilley(SeniorDirectorofIR):
Thankyou,[Augusta],andwelcometoAvalonBayCommunities'firstquarter2015earningsconferencecall.Beforewebegin,pleasenotethatforward-lookingstatementsmaybemadeduringthisdiscussion.Thereareavarietyofrisksanduncertaintiesassociatedwithforward-lookingstatements,andactualresultsmaydiffermaterially.Adiscussionoftheserisksanduncertaintiesinyesterdayafternoon'spressreleaseaswellasintheCompany'sform10-Kandform10-QfiledwiththeSEC.
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page2of27
Asusual,thispressreleasedoesincludeanattachmentwithdefinitionsandreconciliationsofnon-GAAPfinancialmeasuresandothertermswhichmaybeusedintoday'sdiscussion.Theattachmentisavailableonourwebsiteatwww.avalonbaycommunities.com/earnings,andweencourageyoutorefertothisinformationduringthereviewofouroperatingresultsandfinancialperformance.
Andwiththat,IwillturnthecallovertoTimNaughton,ChairmanandCEOofAvalonBayCommunities,forhisremarks.Tim?
T imothyNaughton (Chairman&CEO):
Thanks,Jason.Welcometoourfirstquartercall.WithmetodayareKevinO'Shea,SeanBreslinandMattBirenbaum.WewilleachprovidesomecommentsontheslidesthatwepostedthismorningandthenbeavailableforQ&Aafterward.
OurcommentswillincludeasummaryofQ1results.WewillhighlightafewareasoffocusthatwediscussedinconnectionwiththeArchstoneacquisitionthatclosedacoupleyearsagobutarenowstartingtopayofffortheCompany,includinganincreasedpresenceinSouthernCalifornia,greaterefficienciesfromincreasedscaleandexpansionenhancementofimportantstrategiccapabilities.Lastly,wewilltouchonthedevelopmentfundingandactivity.
Startingonslide4,overallresultsinQ1werelargelyasexpectedforourbusinessplan,andwe'reofftoastrongstartasweenterthepeakleasingseasonthisspringandsummer.HighlightsforthequarterincludeacoreFFOgrowthofaround7.5%,whichwasconsistentwithwhatwesawinQ4oflastyear.Same-storerevenuegrowthwasup4.3%overQ1oflastyearor4.4%whenyouincluderedevelopment,whicharebothabout20basispointshigherthanwesawinQ4.
Wecompletedthreecommunitiestotaling$450millionthispastquarterataninitialyieldofjustover6%.Andwhilethatyieldisabitlowerthanotherrecentcompletions,60%ofthatcapitalrepresentsWestChelseaandManhattanwherecaprateshavebeeninthelow3%range,andtheother40%areassetsinLAandSeattlewherecapratesarecurrentlyinthe4%to4.5%range.
Sowe'restillseeingasignificantlevelofNAVaccretionfromthesecompletionswithmarginsthathavebeenconsistentwithothercompletionsofthiscycle.WealsostartedtwocommunitiesinQ1totalingabout$100million,andwebackfilledthepipelinewithnewdevelopmentrightsofover$400millionorroughlyacouplehundredmilliononceyounetoutprojectswedecidedtoabandonattheendoflastyear.
Movingoninturningtoslide5,oursame-storeportfolioscontinuetoaccelerateinearly2015.Year-over-yearsameunitrentisup5%to6%inthefirstfourmonthsoftheyear.FasterpacethanwesawinQ4androughly250basispointsto350basispointshigherthanthesameperiodlastyear.
Thisisactuallythestrongestrentgrowthwe'veseeninthefirstquarteroftheyearoverthelastcoupleofcycles.SotheportfolioiswellpositionedgoingintothepeakleasingseasonwithrenewaloffersforMayandJuneactuallygoingoutinthemidtohigh7%range.
Clearlystrongportfolioperformanceisbeingdrivenbyhealthyapartmentfundamentals,whichtakesustoslide6.AsyouseeoverthelastseveralquartersandI'msureyouknow,jobgrowthhasbeennorthof2%nationallyorover260,000jobspermonth.Andit'sbeenevenstrongerintheyoungadult,the25-to34-year-olds,whoareourprimerentersasyoucanseethereontheupperrightonchart2.
Morerecently,householdformationappearstobereboundingasyouseeinchart3,theupperhalfshowingsignsofthereleaseofpent-updemandthatmanyhavebeenexpectingsincetherecoverybegan.Thestrongdemandagainstabackdropofstablehousingproductionoverthelastseveral
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page3of27
quartersatleastinthemultifamilysectorsyoucanseeinchart4isresultinginrentalvacanciesthatareapproaching30-yearlowsaschart5shows.Andeffectiverentalrategrowththatisatorabovewhatwesawearlyinthecycle,sowe'veseenareallyniceaccelerationreallygoingbacktoQ4of2013andeffectiverentgrowth.
Turningtoslide7,strongfundamentalsareexpectedtobemoreevenlyenjoyedacrossourfootprintoverthenextcoupleyearsofthecycle.Overthepastfouryearsasyouseeontheleft-handgraph,theWesthasoutperformedsignificantly,drivenbystrongjobandincomegrowthinthetechnologymarketsofnorthernCaliforniaandSeattlewhilesupply'sbeenmodestinmostmarkets,particularlyintheBayArea.
Overthenextcoupleyears,weexpectjobgrowthtobemoreevenlydistributedasmorepartsoftheeconomyjoininontheeconomicexpansion.Secondly,wedoexpectsupplytoincreaseinSeattleandnorthernCalifornia,andasaresult,performancedifferencesbetweenregionsshouldbegintonarrow,includingintheDCareawhereperformancehaslaggedoverthelastcoupleofyears.ConverselySouthernCaliforniaisprojectedtoenjoythelargestdisparityinfavorabledemandgreaterthannewsupplyoverthenextcoupleofyears.
Turningtoslide8,thisexpectationforregionalperformancetonarrowasthecyclematuresisconsistentwithwhatwe'veseenhistoricallywheretheWesthasgenerallyoutperformedearlyinthecycleduringtherecoveryandearlyexpansionperiods.AndthenperformanceoftenconvergeswithEastCoastmarketsasthecyclematures.Tobeclearwe'renotcallingthetoptotheWest.It'sjustthatweexpectperformancetrendstobegintonarrowbetweentheEastandWestaswemovefurtherintothecycle.
Inevitably,relativemarketperformancewillebbandflowandmarketleadershipwillrotate.AsImentionedbeforeforexample,theDCshouldbegintorisefromthebottomandnarrowtheperformancegapwe'veseenwithotherregions.AndSouthernCaliforniashouldbecomeatopperformerintheportfolio.
Andwiththat,that'sprobablyagoodseguetotalkalittlebitmoreaboutSouthernCalifornia.AndI'dliketoaskMatttotouchonoureffortsoverthelastcoupleyearsandhowweexpectthattobearfruitoverthenextfewyears.Matt?
MattBirenbaum(CIO):
ThanksTim.AswementionedatthetimethatweannouncedtheArchstonetransactionbackinlate2012,theArchstoneacquisitionreallyhelpsusachieveourlong-termportfolioallocationgoals.
Slide9showshowthegeographicdistributionofourNOIacrossoursixregionshaschangedoverthepastfewyears,primarilyasaresultoftheadditionoftheArchstoneassetbutalsoduetoalotoforganicgrowthfromthelegacyAVBplatformasourdevelopmentactivityrampsupearlyinthecycle.TheregionthathasseenthegreatestgrowthisSouthernCalifornia,whichgrewfrom14.5%to19.6%ofconsolidatedNOIoverthelastfewyears.
Wehavebeenunderallocatedtothisregionformanyyearsandhavealwaysbeenchallengedtoincreaseourexposuretothebroadlydiversifiedeconomyandconsistentlong-termperformancethatSouthernCaliforniahasdeliveredforusfordecades.Bygrowingourpresencehere,wewerealsoabletomoverelativeallocationintheEastfrom50%to38%ofourNOI,whichprovidesbetterlong-termbalance.
Turningtoslide10,youcanseehowmomentumhasreallybeenbuildinginourSouthernCaliforniaportfoliooverthepastfivequarterswithyear-over-yearrevenuegrowthincreasingeachquarter.Rightnow,we'reseeingmarketrentsinalloftheSouthernCaliforniasubregionsaccelerateintothe6%rangeonayear-over-yearbasis.We'rewellpositionedforanotherstrongyearofsame-storerevenuegrowthinSouthernCalifornia,andthatgrowthwillcontributemoretooverallrevenuegrowthfortheCompany
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page4of27
givenourincreasedallocationtothisregion.
Lookingmorecloselyatwhereourportfoliogrowthhasoccurredacrosstheregion,slide11showsthelocationsofourcommunitieswiththesizeofthedotsproportionaltothesizeofeachproperty.TherearealotofdistinctsubmarketswithinthesprawlinggeographyofSouthernCalifornia.We'veincreasedourpresenceinallthreeofthesubregions--LosAngeles,OrangeCountyandSanDiego--withparticularconcentrationsintheTri-CitiesareaofPasadena,Glendale,Burbankandthe101CorridorfromWoodlandHillsouttoThousandOaks.
Ofcourseforus,it'salotmoreexcitingtoseetheactualproductthantolookatdotsonamap,whichiswhyweincludedslide12togiveyouasenseofthevarietyandqualityofproductwe'readdingtotheportfoliointhisregion.ThetoprowshowssomeofourlargerstabilizedassetsincludingAvalonStudioCity,whichisan827-unitcommunityacquiredfromArchstonelocatedrightnextdoortomanyoftheproductionstudiosinBurbank.
ThemiddlerowfeaturessomeofourrecentredevelopmentincludingAVABurbankwhichisoneoftheoldestassetsintheportfolio.Thisassetwasoriginallyconstructedin1961buthasbeencompletelytransformedandenergizedbytheintroductionoftheAVAbrand.
Andthebottomrowincludesthreeofourcurrentdevelopmentcommunities,includingAvalonWestHollywoodwhichisarealflagshippropertywhichwillfeatureaTraderJoe'sgrocerystoreonthegroundfloorand294apartmentsaboverightonSantaMonicaBoulevard.Wewereaggressiveaboutgettingshovelsinthegroundearlyinthecycle,andallofthesedevelopmentcommunitieshaveatremendousbaseastocurrentcapratesandcurrentreplacementcosts.
T imothyNaughton (Chairman&CEO):
Thanks,Matt.AtthetimeoftheArchstoneacquisition,wetalkedaboutsomeofthebenefitsofthescale,namelyG&Aandoperatingefficienciesaswellastheexpansionandenhancementofimportantstrategiccapabilities.Sean'sgoingtotakeafewminutestoprovideafewexampleswe'vebeenabletoachieveintheseareas.Sean?
SeanBreslin (COO):
Thanks,Tim.Shiftinggearsnow,wethoughtitwouldbehelpfultotalkalittlebitabouttheefficiencyandeffectivenessofouroperatingplatform,andmaybealongthewayhighlightsomeinitiativesthatwillcontinuetoenhanceouroperatingperformanceinthefuture.
Sostartingwithslide13,thesemetricsreflectnotonlythebenefitsassociatedwithourlargerscale,butalsoourabilitytodelivermorecashflowperdollarofrevenuegeneratedfromtheportfolioovertime.Thechartontheleftreflectsouroperatingoverhead,whichincludesG&AasapercentageofNOIbothin2007andwhat'sexpectedfor2015.
WhileourportfolioNOIhasincreasedabout250%fromorganicgrowth,newdevelopmentandtheArchstoneacquisition,we'vebeenabletocontainoperatingoverheadgrowthtoabout20%oftherateofNOIexpansionoverthetotaleight-yearperiod.Thenetresultisthatoverheadisnowonly7%ofNOI,downabout500basispointsor40%from2007levels.
Thechartontherightreflectsoursame-storeNOImarginsin2007andwhat'sprojectedfor2015.Marginshaveexpandedbyabout200basispointsoverthelasteightyearsto70%,puttingusessentiallyatthetopofthemultifamilysector.
AndwhenyouthinkaboutourNOImargins,youreallyhavetoremembertwoimportantfacts.First,wehavenotenhancedourmarginsbysimplyreshapingtheportfolio,thatisexistinglower-rentmarketsand
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page5of27
acquiringassetsinthehigher-rentcoastalmarkets.
Andsecond,rentalratesdeclinedduringthefinancialcrisisandeconomicdownturnwhichputpressureonoperatingmargins.Infact,ifyoulookattherentlevelstodaycomparedtowheretheywerein2007,theCAGRoverthepasteightyearsisonlyabout3%,whichiswellbelowcurrentgrowthrates.
Movingnowtoslide14,IthoughtIwouldhighlightoneortwoinitiativesthathavemadeusmoreefficientandwillcontinuetopaydividendsinthefuture.Thisslidehighlightsacoupleofthebenefitsassociatedwithourrecentinvestmentsinproprietarytechnology,specificallyourprospectandresidentportals.Thesenewplatformscameonlinemidlastyearandhaveenhancednotonlytheefficiencyofouroperatingplatformbutalsoprovidedabetterproducttoourcustomers.
Leadsgeneratedthroughournewprospectportalhasincreasedby300basispointsto27%ofallleadstoday.Atthesametime,ourcostsassociatedwithotherformsofInternetadvertisinghasdeclinedbyabout28%.
Intermsofthenewresidentportal,enhancedfunctionalityhashelpedusbecomemoreefficientwithcertainback-officefunctions.Onlineresidentpaymentsarenowabout90%oftotalpayments,up12.5%since2013,andmaintenancerequestsorservicerequestsreceivedonlineareuptoabout50%ofallrequests,whichisanincreaseoftwothirdssince2013.
Ifyoumoveontoslide15,I'dliketoshareafewfactsaboutourcustomercarecenterlocatedinVirginiaBeach,Virginia,whichweviewasthebestinthebusinessandarealcompetitiveadvantageforus.Wehaveabout225associateslocatedatthecenter,andabout70%ofthemtakecustomerservicecallsandexecutetransactionsthatwould'vebeendoneonsiteatourcommunitiesinthepast.Forexample,postingrent,processingmoveouts,etcetera.
Thecostpertransactionislowerthanitwould'vebeenatthecommunitiesbecauseourhighlytrainedcustomercareassociatescanhandleamuchgreatervolumethananyoneindividualataproperty.Andtheseassociatesarecontinuouslymeasuredandmonitoredbasedontheirefficiencyandeffectivenessofprocessingtransactions.Theremainingassociateshandleothercorporatefunctions--accountspayable,cashmanagement,payroll,etcetera.
SoI'dhighlightthatwecontinuetoexpandourcapabilitiesatthecustomercarecenterwithauniquefocusonfunctionsthatarescalableandacentralizedenvironmentandforwhichwecanreducethecostpertransactionbybringingitin-house.Oneexampleofanewcapabilityisreflectedinthechartontherightsideoftheslidecollections.
Abouttwoyearsago,wedevelopedacollectionscapabilityatthecenterwhichisnoteasygiventheregulatoryconstraintsacrossallthestateswithinwhichweoperate.Webelieved,however,thatwecouldmateriallyreducethecostofcollectionsifwediditourselves.Andifyoufast-forwardtotoday,ourteamiscurrentlycollectingabout35%ofourtotalbaddebtin-house,whichhasresultedinanetbenefitofabout$2millionperyear.
Thebenefitreflectsthereducedthird-partycollectionfeesorcommissionsthatwewould'vepaid,offsetbytheoverheadassociatedwithourcollectionsteaminVirginiaBeach.Weexpecttorealizeanevengreaterbenefitaswetakeonmoreofourbaddebtcollectionsin-house.Andwealsothinkthereareadditionalopportunitiestoexpandourcapabilitiesatthecustomercarecenter,andwewillcontinuetoleverageittoouradvantageinthefuture.
Sohopefullythatprovidesanoverviewofsomeofouroperationalmetricsandinitiatives.AndnowIwillturnitbacktoTim.
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page6of27
T imothyNaughton (Chairman&CEO):
Thanks,Sean.AsSeanmentioned,we'vebeenabletoreducecostssignificantlyfromthesystemoverthelastcycle.Partofthat'sfromscale,butimportantlypartofit'sfromreengineeringhowweconductandoperateourbusiness.
Lastly,Ithoughtwe'djusttakeafewminutesandhighlightdevelopmentactivityandfundingwhichwebelievetogetherpositionusforoutsizedNAVandFFOgrowthinthenexttwoyearswhilebeingabletomaintainaverystrongfinancialposition.Kevin,doyouwanttotakethis?
KevinO'Shea(CFO):
Thanks,Tim.Turningtoslide16,wehighlightthecurrentperformanceofthefivecommunitiesunderconstructionthatareinlease-up.Asyoucanseefromtheslide,theperformanceofcommunitiesundergoinginitiallease-upisquitestrongandcontinuestoexceedouroriginalunderwritingexpectations.
Specificallyforthesefivecommunitieswhichrepresent$455millionintotalcapitalcost,thecurrentweightedaveragemonthlyrentperhomeis$215orabout9%aboveinitialexpectations.Intermsofyieldperformance,theweightedaverageinitialprojectedstabilizedyieldforthesecommunitiesisprojectedat6.9%or60basispointshigherthanouroriginalprojectionof6.3%forthesecommunities.
Turningtoslide17,ourdevelopmentactivityremainswell-fundedtoday.Infact,asofquarterend,ourdevelopmentunderwayof$3.6billionwascompletelymatchfundedbythecombinationof$2.5billionincapitalspenttodateplusover$1.1billionfromcashonhand,projectedfreecashflow,andourequity.Asaresult,fundingriskforthisinvestmentactivityisessentiallyeliminatedwhiletheopportunitytorealizeasubstantialamountofvaluecreationasthesecommunitiesarestabilizedhasbeenlockedinforourshareholders.
Turningtoslide18,thisslidedemonstratesmoreclearlyhowourbeingmatchfundedonthisinvestmentactivityleavesusexceptionallywellpositionedfromboththecashflowgrowthandcreditperspective.Inparticular,theprojectedNOIfromrecentlycompleteddevelopmentandfromdevelopmentunderconstructiontotalsabout$225milliononanannualizedbasisasshowninthechartontheleft.Thisrepresentsmorethana20%growthinourannualizedadjustedEBITDAforthelastquarter.
Moreover,togiveinsightonhowthisprojectedEBITDAgrowthenhancesourleveragemetricsparticularlygiventhatnoincrementalcapitalisneededtocompleteconstruction.ThechartontherightshowshowourratioofnetdebttoadjustedEBITDAforthefirstquarterwouldhavedeclinedfrom5.9timesto5.0timesassumingthisprojectedEBITDAfromourdevelopmentunderwayhadbeeninplaceduringthefirstquarter.
Ofcourse,ouractualnetdebttoadjustedEBITDAwillmoveupanddownabitovertimeaswestartnewprojectsandsourcenewcapitaltofundthesenewprojects.Therefore,thisslideisnotmeanttocommunicatethatourleverageisgoingtodecreasedto5timesorthatourtargetleverageis5times.Infact,ourtargetrangeforthismetricisbetween5and6times.
Instead,thepurposeinshowingthisslideistoconveythatunfundedcommitmentswhichhappentobezerotodaybutmoreoftenwillbepositiveinthefutureshouldbeevaluatedintandemwiththeprojectedEBITDAgrowthfromongoinginvestmentactivity.Andaswestandtoday,fundingriskisverylowondevelopmentunderway,andtheprofitopportunityisrelativelyhigh,reflectingtwoimportantattributesofourcombinedinvestmentoffundingstrategy.
First,thefactthatourinvestmentactivityisexpectedtobeaccretivebothtoearningsandbalancesheet
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page7of27
strength.Second,thatthiscyclecontinuestooffercompellingvaluecreationopportunitiesfordevelopment-focusedapartmentREITssuchasAvalonBay.
Andwiththat,IwillturnitbacktoTim.
T imothyNaughton (Chairman&CEO):
ThanksKevin.Obviouslywe'reofftoastrongstartinQ1totheyear.Asexpected,ourstabilizedportfoliocontinuedtostrengtheninthequarterpropelledbysomeofthestrongestapartmentmarketfundamentalswe'veseenoverthelastseveralcycles.Thedevelopmentportfolio'scontributingmeaningfullyasKevinjustspoketoinprovidingadditionalearningsandNAVgrowth.
Andimportantly,actionsthatwetookearlyinwhatwepredictedwouldbeastronganddurablecyclearepayingoff,includingthestartingandfundingofover$5billionofnewdevelopmentsince2010,acquiringanotherplusorminus$6billioninstabilizedanddevelopmentassetsintheArchstonetransactioninlate2012,early2013,andinvestinginimportantstrategiccapabilitieswhicharedrivingefficienciesandimprovingthescalabilityofouroperatingplatform.Alltheseactionsarepositioningustotakeadvantageofwhatwebelievecanbealongandsustainedexpansionperiodforthecurrentapartmentcycleandhelpusachieveoutsizedgrowth.
Andwiththat,Augusta,we'dbehappytoopenthelineforquestions.
QUESTIONS&ANSWERS
T imothyNaughton (Chairman&CEO):
Thankyou.(OperatorInstructions)OurfirstquestionwillcomefromNickJosephwithCiti.
NickJoseph (Analyst-Citigroup):
I'mtryingtoreconcile1Qsame-storerevenuegrowthat4.3%tothegrowthyousawinJanuaryandFebruary.IthinkinearlyMarchatourconference,year-to-datesame-storerevenuegrowthwas4.4%to4.5%.Andfromthepresentation,theMarchrentchangeactuallyacceleratedintermsofthespreadyearoveryearfromFebruary.SowhatdrovethereductionofgrowthforthequarterrelativetowhereyouwereinearlyMarch?
T imothyNaughton (Chairman&CEO):
HeyNick.ThisisTim.You'recorrect.WhenwemetattheCitigroupconference,wegaveamid-quarterupdateandwesaidourexpectationwouldbewe'dbeatthetopendoftherangefortheyearforthequarter,being4.4%to4.5%.Therealityisnumberslike[4.34%]andsomeofit'sonthenon-rentalrevenuesidethatgetsrolledupattheendofthequarter.SoreallynothingisdifferentthanwhatweexpectedandanticipatedinearlyMarchwhenwemetandspokewithinvestorsatyourconference.
NickJoseph (Analyst-Citigroup):
Okay,thanks.SointermsofDC,itlookslikethequarterlyyear-over-yeargrowthwasthestrongestyou'veseensincemid-2013.Canyoutalkmoreaboutwhatyou'reseeingonthegroundthereandexpectationsfortherestoftheyear?
SeanBreslin (COO):
SureNick,thisisSean.IntermsofDCfromabroaderperspective,it'scertainlystillaweakmarketrelativetoothermarkets.Andthere'sstillafairamountofsupplycomingonline.Expectationsfor2015arestillforsupplygrowthsomewhereinthemid3%range.Butwhathasimprovedcertainlyisjobgrowthisnow
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page8of27
runningcloserto1%.
Soit'sinapositionnowwherefromamacroperspectiveacrosstheregion,we'reseeingsomeimprovements.Andasyouthinkaboutitintermsofthethreemarkets,theDistrict,suburbanVirginia,suburbanMaryland,itdoesdependonthenatureofyourportfolio,whetherit'shigherpricepointorlowerpricepointandthedistributionwithinthesubmarketsofeachoneofthosemarkets.Butforusatleast,rightnowDCisperformingthebestandisproducingslightlypositiverevenuegrowthandrentchange.
ThetwoweakermarketsaresuburbanVirginiaandsuburbanMarylandwithsuburbanMarylandbeingtheweakestrightnowparticularlygivenallthedeliveriesthatarecomingthroughinRockville,Bethesda,ChevyChase,allinthatarea.Butifyoulookatintermsofmaybetrendsfromthefirstquarterandwhatwe'reseeinginthesecondquarter,thefirstquarterrentchangeacrosstheregionoverallwasbasicallyaroundflat.
Butasyoumoveintothesecondquarter,it'strendingslightlypositivetothetuneofabout100basispointsintermsofblendedrentchange.Sowe'reseeingthatsecondderivativemovepositivelybutatarelativelyslowpace,andI'dsaywithstillafairamountofriskgiventhesupplythat'sbeingdeliveredintheregionrelativetotheanticipatedjobgrowth.
NickJoseph (Analyst-Citigroup):
Great.Thanks.
Operator :
OurnextquestioncomesfromJanaGalanwithBankofAmericaMerrillLynch.
JanaGalan (Analyst-BofAMerrillLynch):
Thankyou,goodmorning.Yourturnovercontinuestodecline,andwesawthefirstquarterhomeownershipratedropbelow64%.Iwaswonderinghowlongdoyouthinkyouwillcontinuetoseeturnoverdeclineandhowthat'shelpingyourexpensesandthenanychangesinreasonsformoveouts.
SeanBreslin (COO):
Sure,Jana,thisisSean.Intermsofpredictingturnover,alittlebitdifficulttopredict.It'sreallyafunctionofI'dsayjobmobilityprobablyfirstandforemostaswellaschoicesintermsof--withinalocalmarketwhatchoicespeoplehave.Iftheyfeelliketheyhavemorechoicesattherightprice,itinfluencesturnover.
AndthereasonIsaythatisrelocationisstillthetopreasonformoveoutinourportfolioandrunsaround20.Ithinkthat'sconsistentwithmostREITs.Soifpeoplearerelocatingforjobreasons,etcetera,thatreallytendstoinfluencethetotalamountofturnover.
Andthenontheothertopics,homepurchasesstillrunningwellbelowlong-termaveragesintherangeof13%.Andhasbeenprettyflat,notreallymovedmuch.It'sdownalittlebityearoveryearbutnotreallymovingtheneedle.
Andthentheotherreasonsarereallyfinancialincludingrentincreasesaswellasintercommunitytransfers.Rentincreasestendstorunalittlebithigher,closerto16%to18%.Atthispointthecycle,youexpectittobetrendingupwards.
Butintermsofactuallypredictingwhatturnoverwillbe,it'safunctionofthemacrovariablesthatImentioned.Andsowe'renotyetatapointwherewe'repredictingit,butgivenwhatwe'reseeingacross
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page9of27
theportfolioaswelliswhat'shappeninginthesingle-familymarketandtheproductionlevels,it'snotfar-fetchedtoassumethatturnoverwillremainbelowhistoricalaveragesforthenextfewquartersforsure.
T imothyNaughton (Chairman&CEO):
Maybejustaddtothat,asSeanmentioned,moveoutsandhomepurchaseshavebeenrelativelystable,andit'sbeenourexpectationthathomeownershipratesaregoingtostabilizeroughlyinthisareainthe64%,65%range.Sowedon'treallyhaveaviewthathomeownershipratesaregoingdownmeaningfullyfromhere.It'sbeenourviewthatyouaregoingtoseemoreofabalancedhousingpictureoverthenextfewyearsasthehousingmarketscontinuetorecover.
Andalotofthat'sbeingdrivenbysomeofthethingswe'vebeentalkingabout,whichisdemographicsandlifestylebehaviorintermsofwhattypeofhousingchoicefitsbesttheneedoftheemergingpopulation.Sowedoexpectittobemorebalancedinthenextfewyears.
JanaGalan (Analyst-BofAMerrillLynch):
Thankyou.AndthenjustmaybeonthesouthernCalifornia,expensesavingsthisquarterseemedveryimpressive.Ithinksomeofthatmighthavebeenbenefitingfromtaxappeals,butmaybeifyoucouldtalktowhatelseisinthere.
SeanBreslin (COO):
ThisisSean.That'sexactlyright.ThemainbenefitthatcamethroughinthefirstquarterwasasuccessfulappealofanassetinSouthernCalifornia.Andthatrepresentedthemajorityofwhatyou'reseeingthereintermsoftheexpensechange.
JanaGalan (Analyst-BofAMerrillLynch):
Thankyou.
Operator :
We'llgonexttoDanOppenheimwithZelman&Associates.
DanOppenheim(Analyst-Zelman&Associates):
Justwonderingifyoucouldtalkalittlebitintermsofexpectationsforsomeofthepricingwhereyoutalkedaboutthebeststartintermsrentalgrowthatthestartoftheyearrelativetosomepriorcycles.Asyouthinkaboutthebalanceacrosstheregions,doyouthinkthisacceleratesfurtherasthemid-AtlanticandNortheastgraduallyimprove?Howareyouthinkingaboutthatoverallintermsoftherentalratepower?
SeanBreslin (COO):
Sure.ThisisSean.Justafewcommentsonthat.Fromamacroperspectivecertainlyacrossthemarket,pricingpowerisimprovingatthispoint.
Timalludedtotherentchangeinhispreparedremarksnotonlyforthefirstquarter,whichtrendedhigherineachmonthofthefirstquarter,butalsocontinuedtotrendhigherintoApril.We'reonablendedbasis,we'rerunningataboutthe6%range.
AndIguessthewayI'ddescribeitiswe'reseeingincreasedpricingpoweracrossallthemarkets,buttherateofaccelerationisslightlydifferent.TherateofaccelerationisprobablythestrongestrightnowinSouthernCaliforniaaswellasnorthernCalifornia.Thosetwomarkets.NorthernCaliforniaobviouslyhas
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page10of27
beenadiscussionpointforseveralquartersnowintermsofthemomentumthere.
Anditwillbeinterestingaswemovelaterintheyearandmoresupplycomesonline,particularlyinthesubmarketofSanFranciscoandNortheastSanJosewhetherthatstartstothrottlebackalittlebitofthepaceinnorthernCaliforniawhichwesawacoupleyearsagowhenwesawbulletedsupplycomethroughSanJose.SouthernCaliforniajobgrowthhascertainlyrampedup,andsupplyremainsprettymutedrelativetoothermarkets.AndifyoulookataplacelikeOrangeCounty,jobgrowthhasreallymadethedifferencetherewhereit'supcloserto2%overthelastsixmonths.
Andsowhilethere'sstillameaningfulamountofsupplycominginoncertainsubmarketsthere,HuntingtonBeach,Anaheim,etcetera,Irvine,thejobgrowthhasreallycaughtuptoapointwhereit'sprettyhealthy.SothemomentuminnorthernCaliforniaisstrong,SouthernCaliforniaisstrong.
OntheEastCoastmarket,themid-Atlanticiscertainlyhelpfultoseeapickup,andImentionedthatessentiallyrentchangewasflatinfirstquarter.It'spositiveabout100pointsfromthesecondquarter.
AndIthinkit'sjustgoingtobetouchandgointhemid-Atlanticoverthecourseofthenextyeardependingonhowjobgrowthcomesout.Butassumingwemaintainoraccelerateonthejobfrontinthemid-Atlanticmarkets,weknowwhatthesupplyisgoingtobelikelytoseepricingpowerconsistentwithwhatwe'reexperiencingnowtopotentiallyslightlybetterasyoumovethroughtheyear,particularasthehouseholdformationsstarttocomethroughconsistentwithwhat'sforecastedfor2015.
Soreallyasyoutalkthroughthemarkets,itdependsonwhereyou'relocated,whatyourexposureiswithincertainsubmarketstosupply,etcetera.Butingeneral,pricingpoweriscontinuingtoimproveatdifferentratesacrossthefootprint.
T imothyNaughton (Chairman&CEO):
Timhere,justtoaddalittlebittopartofyourquestionIthink.GenerallytheWestCoast--ifyoulookhistoricallyhasjustbeenmorevolatile,andtheEastCoasthasbeenmorestable.SoastheEastCoasthastendedtooutperformlaterinthecycle,it'sreallybeen--it'sbeenlessaboutitacceleratingpasttheWestCoastandmoreaboutitbeingastabilizerrelativetomorevolatileperformanceontheWestCoast.
Ithinkit'salittlebitofanopenquestionhowthingsmayplayoutthiscycle.Asyousawontheonechart,ifhouseholdformationreallydoesrecovertothe1.5millionplusrangeandhousingproductionlevelsreallyjustdon'trespondinamaterialwayquickly,we'realreadyseeingrentalvacancyrates,30-yearlows,you'reseeingownershipvacancyratesapproachinglonger-termnorms.Yougetanothercouplequartersofhouseholdformationwethinkwe'veseen,Ithinktherecouldbeashortage--anaccelerationinimpactpotentiallyallmarketfromapricingperspectivewhetherthat'sforsaleorontherentalside.
DanOppenheim(Analyst-Zelman&Associates):
Great.Andjustlookingatthechartwhereyou'reshowingthenewversusthemoveinonpage5,showingtheimprovementinthenewmove-inrentalrates,certainlypositivethere.JustthinkingabouttherenewalsespeciallyontheWestCoastwheretheoverallgrowthhasbeenthestrongest,howmuchareyoupushingtherenewals?Isthereanycautionaboutpushingtoomuchanddrivingturnoverhigherthere?
SeanBreslin (COO):
ThisisSean.Imeancertainlyaconversationwehaveallthetimeintermsofoptimizingtheperformanceoftheportfolio,butatthispoint,wefeelprettycomfortablethatwe'rehandlingitinawaythat'snotonlyoptimizingtheperformance,butalsoisbasedonwhatwethinkthecustomers'reactionwilllikelybegivenavailablechoiceswithintheirspecificsubmarketandgeneralgeography.
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page11of27
Inonethingtokeepinmindispeoplefocusalotontherenewalnumbersversusthemove-inrentchange.Youreallyhavetolookatitonablendedbasisbecauseitdependsonifyou'retalkingaboutthesameunitrentchangewhenthelastpersonmovediniftheymovedinfiveyearsago,it'sverydifferentpotentialrentifthey'recomingoutfiveyearslaterascomparedtosomeonewho'sbeentheretwoyears.Soifyoulookatitonablendedbasis,it'sprobablymoreappropriate.
Andtheotherthingwelookatishowwideisthegapgettingbetweentheabsoluterentthatacustomerispayingastheymoveintoanapartmentrelativetosomeonewhoisrenewinginthatsameapartmentinthesamecommunity,andthatspreadtodayonanabsolutebasisisonlyabout2%.Sowhenyouthinkaboutit,it'snotthatwideintermsofexistingcustomersgoingtoawebsiteandlookingatpricingfortheirparticularapartmenthomeforsomeonewhoismovingin.Andobviouslytheyhaveswitchingcostsintermsoftheirmoveandeverythingelse.
Sothat'sarelativelyreasonablespread,2%.We'dprobablybealittlemoreconcernedifthatnumberwasapproaching5%asanexample,butacrosstheportfolio,Ithinkwe'reinprettygoodshapeonthat.
Operator :
OurnextquestioncomesfromNickYulicoofUBS.
NickYulico (Analyst-UBS):
Thanks.Tim,Iwashopingtostartoffwiththeguidanceagain.Imean,youguysareatthehigh-endyear-to-dateonsame-storerevenue,aboveonsame-storeNOI.
YoutalkedaboutreallygoodtrendssofarandeveninApril.Sohowdowebalancethatagainstyouguysnotdecidingtoraiseguidance?Istheresomethinginthebackhalfoftheyearthatyou'reconcernedabout,orareyoujustwanttotakeawait-and-seeapproachforanotherquarter?
T imothyNaughton (Chairman&CEO):
Yes.Nick,firstofall,thefirstquartermoreorlessplayedoutthewaythatweexpected,particularlyasitrelatestothetopline.Thatalonewouldn'tdriveaneedtorethinkouroutlookatthispoint.
Andwearemovingintothepeakleasingseason,andwhilewe'rewell-positionedandwe'reofftoastrongstart,we'regoingtohavealotmorevisibilitymidyear.Andthat'stypicallywhenwedoamorerobustreforecastprocessandreopenthepropertybudgetsifyouwill.
Ifeellikewewillbeinamuchbetterpositiontogivetheinvestorandanalystcommunityasenseofwherewethinkwe'regoingtoendupfortheyear.Sowe'reneitherchangingnoraffirmingoutlookatthispoint,butwewouldlooktodosomidyear.
NickYulico (Analyst-UBS):
Okay.Andthenonthedevelopmentpipeline,twoquestions.Oneisshouldweassumetheforwardgetssettledallinthethirdquarter?Andthenhowareyouthinkingaboutfundingthenextwaveofdevelopment?
Ithinkyouguysweresayingyoucoulddo$1.4billioninstartsthisyear.Wouldyouconsideranotherforward?Howareyouthinkingaboutthatoverthenextcouplequartersfromafundingstandpoint?Thanks.
KevinO'Shea(CFO):
SureNick,thisisKevin.Iguessthere'safewquestionsinthere.Firstasitrelatestowhenwedrawcapital
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page12of27
downundertheequityforward,asIthinkweindicatedinthefourth-quartercall,ourexpectationisthatwedosointhesecondandthirdquarters.
Reallynonewnewsonthatfront.It'ssomewhatdependentonwhatwedointermsofincrementalcapitalactivitygoingforwardoverthenextcouplequarters.Otherwiseintermsofdispositionactivityandraisingdebtcapitalpursuanttoourcapitalplan,thatcouldaffectthetimingthere.
Ithinkit'sfairtoassumethatprobablyatleasttwothirdsofitwouldbeinthethirdquarter,andathirdorlesswouldbeinthesecondquarter,butthatnumberbouncesaroundquiteabit.Inthere,whatwe'relookingatisjusttryingtobalancecashonhandandminimizingourcostsunder--interestexpensecostsunderourlineacreditwithourotheractivityinthecapitalmarketfront.
Thesecondquestion,justtoanswerthat,itmightbehelpfuljusttogivearefreshonourcapitalplanfortheyear.Ifyoulookbackatourinitialoutlook,wehadtotalsourcingusesof$2.35billion,andintermsofthesources,wehadcashonhandandanexpecteddrawdownonunrestrictedcashaccountforabout$600millionofthat.
Asyouprobablynoticed,wedrewdowncashby$300millionduringthequartertofundColumbusCircle,sothathashappenedasplanned.Thatleftuswithabout$1.75billionofexternalcapitalinourcapitalplanfortheyear.About$650millionofthatrelatestoforwardwhichwejusttalkedabout,leaving$1.1billion.
Wesoldoneasset,StamfordHarbor,inthefirstquarter.Sothatleavesabout$1billionofnetincrementalcapitalwhichweexpecttosourcepredominantlyintheformofunsecureddebtandthebalanceinthesaleofassets.
Thoseareourthoughtsregardingthecapitalplanfortheyear.Iguessthefinalquestioniswhatisourphilosophyaroundtheuseoftheforward?Iknowweuseditforthefirsttimeattheendoflastyear.
Therealityiswe'vebeenawareoftheforwardforprobablymorethanfiveyearsasatoolthatwasinourtoolkitifyouwillthatwecouldpotentiallyusetofunddevelopment.Andaswetalkedaboutinthepast,youneedtohavetherightconfluenceoffactorsthatwouldjustifyonetouseitagain.Andcertainlyfirstandforemostistheexpectationofelevatedfundingneedsfordevelopment.
Wecertainlyhadthatthisyearorhavethatthisyear.Wesawthatbythemiddleoflastyearbeingsomethingwewantedtothinkabout.Aswedisclosedinourinitialoutlook,weexpecttospend$1.7billionondevelopmentandredevelopmentactivity.
That'sacyclicalhighforussofarthiscycleandameaningfulamountofcapital.Andthatreallyinformedourviewaboutwantingtobemorelike100%matchfundedratherthanbeingmorelikecallit75%matchfunded,whichiswherewe'vereallybeenforthemostpartthroughoutthiscycle.
Soit'ssomethingit'satoolinourtoolkit.It'ssomethingwecanpotentiallyuse,butit'snotsomethingwenecessarilyfeellikeweneedtouseallthetimebutreallyneedstobedrivenmorebyunusualconfluenceoffactorswithelevatedfundingneedsbeingthemostimportant.
NickYulico (Analyst-UBS):
Okay.Thanksguys.
Operator :
We'llgonexttoHaendelSt.JusteofMorganStanley.
HaendelSt.Juste (Analyst-MorganStanley):
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page13of27
Goodmorning.Acouplequestionshereondevelopment.Sofirst,youguysstartedacoupleprojects,twothatI'dcharacterizeasex-urbanorwelloutsidethecoreoftheMSAs,yourHuntChaseandLynnwoodprojects.Andyou'renotseeminglyslowingdownonyourdevelopmentpaceasmuchinatimeperiodwhereyourpeersareslowingmore.
Sospecifictothesetwoprojects,whatisitabouttheseprojectsthatmakesyouexcited,especiallyinlightofthesuburbanMarylandweaknesscomments?Areyougivingyourselftocapitalizeontheperceivedpent-updemandinthesuburbs,andifso,howmuchmoreofyournear-termdevelopmentstartscouldbemoresuburbaninnatureversusurban?
MattBirenbaum(CIO):
ThisisMatt.Icanspeaktothatone.Itwasactuallyalightquarterforusforstarts,$100million,andwe'reontracktostart$1.3billion,$1.5billionfortheyear.Thatisobviouslyaverysmallportionofourdevelopmentactivityplansfortheyear.
TheAlderwooddealwasjustasecondphaseofthedealthatactuallycompletedthisquarter,andthatdealcompletedatayieldofarounda[7%].AndagainSeattlemarket,eveninsuburbanSeattle,that'sprobablyamid[4s]cap.
Sothat'sincrediblycompellingvaluecreation,second-phaseincrementaleconomics.Wejustphasedthatdeal,phasedthelandtakedownwhichwasgreat.
Theotheronethatwestartedthisquarter,HuntValley,that'sabitofauniqueassetforus.Itisasuburbanlocation,butit'satransit-orientedsuburbanlocation.It'sactuallyattheendoftherailline,it'srightnexttoaWegmans,it'sanoldmallthathasbeenturnedintoatowncenter,andit'sasubmarketthathasseennonewsupplyforprobably30years.
Soinsomeways,it'salotlikeouroldernortheasternstuffwherewe'rebringingaluxuryproducttoasubmarketthathasveryhighhomeownershipcostsandveryhigh-endhomesupinthatareaaswellasadecentamountofemployment,alotofotheramenities,butjusthasn'tseenluxuryrentals.Sowe'reactuallycreatingabitofmarketthere,andwedon'tgetthatopportunityveryoften.ItalsoincreasesourexposurealittlebittotheBaltimoreMetropolitanarea,whichhasdonequitewellwithcycleandwherewe'reprobablyalittlebitunderallocatedinthelongterm.
Butmorebroadlyaswelookoutoverourstartsfortheyear,andwehavesaidoverthelastyearorsothatwearestartingtoseeoursuburbanassetsperformalittlebetterthanoururbanassets.AndIthinkyou'reseeingthatingeneraljustbecausethesupplyissoconcentratedintheurbanareas.Andalsotheurbanproducttendstobemorecompellingeconomicallyifitcanbedoneearlierinthecyclebecauseit'sgenerallyhighercapitalcostwhenyougetintoconcreteframe.
Sowhenyoulookatourpipelinegoingforward,what'scurrentlyunderconstructionisabout50%urbanversuswhat'sinthepipelineisprobablyabout25%urban.Soitismoresuburbanthanwhatwecurrentlyhaveunderway.
Butweactuallyhavesomenear-termstarts,wehavenear-termstartactuallyintheDistrictofColumbiathatweexpecttostarthereinthenextquarter.Sothere'sstilladecentmixofproduct,andagain,we'regenerallyjustdrivenbylookingforwherethebesttotalrisk-adjustedreturnsareinthemarket.Andatthispointinthecycle,that'swherewe'refindingit.
HaendelSt.Juste (Analyst-MorganStanley):
Iappreciatethat.Anotherdevelopmenttypeofquestion.Itlookslikewe'reseeingsomemoderationincertainkeyinputcosts,landpricecostsaregoingupbutmoderating,lumberandgypsumcostare
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page14of27
comingdown,wagegrowthismoderatingaswell.Iwonderwhatyou'reseeingonthatfrontandhowyoumightbefactoringthatinto--theselowercostsintoyourprospectiveprojectunderwritingandnewstarts.
MattBirenbaum(CIO):
Wewouldlovetoseesomeofthatcomethrough.Thesubcontractorshavebeenholdingontoitsofar.Generallyspeaking,whenweunderwriteourbusiness,weunderwriteeverythingonacurrentspotbasis,sowedon'ttrendrents,wedon'ttrendexpensesandwedon'ttrendcapitalcost.Wesay--whenwesignupanewdeal,wesay--ifwewerebuildingthisprojecttoday,here'swhatitwouldcostustobuilditandhere'stheNOIwewouldexpecttogetoutofthat.
Andgenerallyspeaking,dependingonwhereyouareinthecycle,wemaybelookingforahigherorlowerspreadbetweenwherethatyieldisandwherecapratesare.Ifwe'reinamarketwhereit'searlierinthecyclewherewethinkthere'sbetterrentgrowthaheadrelativetocostgrowth,wemightbewillingtogoinatleasttotheinitialduediligencewiththetightermarginthanifitwastheotherwayaround.
Butgenerallyspeaking,we'restillseeingcostsgrowataprettyrapidclipinmostofourmarkets,andagain,it'sdrivenmostlybysubcontractor,bylaboravailabilitywhichisgettingtighter,andbysubcontractormarginsandjustthevolumeofbusinessoutthere.There'salotofconstructionoutthere,thesubsarebusy,sotheycanaffordtobeprettyaggressiveinthepricingtheyoffer.AndotherthaninMetroDCwherethey'reprobablycomingoffofmoreproductionrampingintolessproductionandsotheyarealittlehungrier,otherthaninDC,prettymuchallofourothermarketsisgoingtheotherwaystill.
HaendelSt.Juste (Analyst-MorganStanley):
Okay,andthelastoneonEdgewater,Iknowyouhadachancetogothroughtheinsuranceassessmentandrecoveryprocess.The$793,000netlossfigureyouquoteinthepressrelease,isthatthefinalfigure?Couldtherebeadditionalcosts?
Andanyupdatedthoughtsonyourplanforthatprojectgoingforward.Ifyoudeterminedifyou'regoingtorebuild,sell,etcetera?
KevinO'Shea(CFO):
Yes.Haendel,thisisKevin.Iwillansweronthefirstpartwithrespecttosomeofthecosts.The$800,000ofcoststhatyouseeflowingthroughwithrespecttoEdgewaterwereessentiallyourinitialresponsecostswithtenantdisplacements,firewatch,etcetera.
Wewillseewhatrollsforwardthere,probablyaresomemodestcostsbutnothingverysignificantinthatregardgoingforwardsincewe'reclearingthesiteandtheotherbuildinghasbeenreoccupied.SonotmuchinthewayofEdgewater-relatedcoststhatweexpect.
Inthequarter,whatwedidinthefirstquarteriswewroteoffthenetbookvalueofthebuildingthatwasdestroyed,whichwas$22million.Itturnedoutthenetthird-partyinsuranceproceedsthatwe'dreceivedduringthequarterwas$22million,sothatwasanoffset.Sothatreallyhadnoimpactonourfinancialsforthequarter.
Goingforward,wecontinuetoworkwiththeinsurancecompaniesonsecuringthebalanceoftheinsuranceproceedsthatweexpect.Inourinitialoutlook,weindicatedthattheloss--thecasualtylosswaslikelytobewithrespecttothedestroyedbuildinggreaterthan$50millionwherewehave12%self-insuredexposureofabout$6million.
Sowe'restillworkingonthat,it'samatterofjustworkingthroughthedocumentationandobtainingfinal
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page15of27
signoff.Andgoingforward,aswenotedinourrelease,intheeventthatwereceiveadditionalinsuranceproceedsrelatedtothecasualtylossonEdgewater,thoseadditionalinsuranceproceedswouldbereflectedasacasualtygain,whichwouldflowthroughanincreaseFFObutwouldbepulledoutforcoreFFOpurposes.
T imothyNaughton (Chairman&CEO):
Haendel,Timhere.Justintermsofyoursecondquestion,reallyourfocusintermsofthesiteitselfhasreallybeenonclearingthesiteandcleaningthesitetodate,alsojustsomesalvageeffortsthathavebeenundergoingintermsoftryingtorecoversomeitemsforformerresidents.AsKevinmentioned,obviouslyinsuranceprocesswhichincludestryingtohelpfacilitatethesettlingofresidentclaims.
Wehavebeenevaluatingoptionsforthesiteaswellasitrelatestorebuilding.There'sobviouslyanumberofphysicalissuestobeconsideredthereintermsofthestructuralcapacityofthegaragethatremains.Butthere'salsopoliticalissuesthatweunderstandweneedtoworkthroughwiththetownintermsofwhatmightrightlybeabletoberebuiltthereintermsoftheformandstructure.
Andthenlastlythereisalenderonthesite.Itissubjecttoacreditpoolthatwouldneedtobeconsideredaspartofit.SoI'dsayit'sprematureyetintermsoftellingyouwhatexactlyourstrategyisandtimingaroundtheresolutionofthesite,butsomethingwe'reactivelyevaluatingatthemoment.
HaendelSt.Juste (Analyst-MorganStanley):
Okay.Thankyouverymuch.
Operator :
We'llgonexttoRobStevensonwithJanney.
RobStevenson (Analyst-JanneyCapitalMarkets):
Goodmorningguys.Tim,canyoutalkabouthowrobustthecondodevelopmentandcondoconversionprocessisinyourcoremarketstoday?
T imothyNaughton (Chairman&CEO):
Yes,Rob.Othersmaywanttojoininaswell.Iwouldn'tsayit'sallthatrobust.You'recertainlyseeingsomesignsofitinNewYorkandperhapsSanFrancisco.
There's--ifyoujustlookatapartmentvaluationsarerelativetocondovaluationsorforsalevaluations,itstillreallydoesn'tmakesenseinmostcasestoactuallyconvertanassettoacondominiumandtakethatmarketrisk.Andyou'rejustnotgoingtogetenoughcompensationinordertodothat.
Ithinkinsomecases,andDCmaybeanexamplewhereitactuallydoesmakesensetothinkaboutnewground-updevelopment,andcertainlyNewYorkandSanFrancisco,thatmakessomesense.Butwe'rejustnotseeingalotof--franklyalotofunsolicitedinterestinourassetslikewedidinthemid-2000topotentiallyconvert.
It'sprettyisolatedIwouldtellyouatthispoint.Anditjustmakessensewhenyougobackandyoutrackwhatapartmentvaluationshavedoneoverthelast10to15yearsversuswhatforsalecondominiumvalueshavedoneduringthatsametimeframe.It'sreallygoingtobeisolatedatleastoverthenextcoupleyearstoreallymicrolocationsandreallyone-offtypeopportunities.
RobStevenson (Analyst-JanneyCapitalMarkets):
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page16of27
Okay.Andthenwhenyoulookatyourredevelopmentpipelinetoday,what'stheexpectedreturnsonthat,andhowmuch--howmanymoreprojectsdoyouexpecttoaddtothepipelinethisyear?
SeanBreslin (COO):
YesRob,thisisSean.Intermsofredevelopment,thepipelineisprettyplentiful,particularlygivenwhatweacquiredfromArchstone.AndIthinkwhatwe'veindicatedinthepastisthatwewillprobablystartsomewhereintheneighborhoodof$100millionto$150millionyearroughlyintermsofredevelopmentactivity,somefromtheAvalonlegacyassetsbutalsoarelativelyhighpercentageoftheArchstoneassetswouldbeinthepool.
Intermsofthereturns,thereturnssofarthiscyclehavebeenactuallyveryhealthy.Andthewaythatwelookatitisifyoutaketheoverallinvestmentintotheenhancementsattheassets,we'retypicallylookingatreturnsthatareprobablyunderwritteninthe10%to12%range.
Butactualresultshavebeenmoreinthemid-teens,andthatexcludescomponentslikeifyouhavetoreplacetheroofaspartofadevelopmentorsomethingwhereyou'renotreallygettinganeconomicreturn.It'smorelikeCapEx.Butintermsoftheactualredevelopmentopportunity,kitchensandbathsandotherenhancementsincommonareas,underwrittenagain10%to12%andproducingmid-teensrecently.
RobStevenson (Analyst-JanneyCapitalMarkets):
Okay,andthenlastquestion,the35projectsonthedevelopmentsrightpage,howmanyofthoseareshovelreadytoday,andisthereanyissueorreasonwhyyouguysonlystartedtwothisquarter?Intermsofyourthinking,isthatthat'swhatwasavailableandthat'swheretheyieldswere?Isthereasituationwherethestartsare--andsomeofthestuffthatyou'replanningfortherestoftheyearbackendweightedtowardsmoreurbancomplexdeals,etcetera?Canyoutalkalittlebitaboutthat?
MattBirenbaum(CIO):
Sure,Rob,thisisMatt.No,prettymuchwhentheyareshovelready,wegenerallytendtostartthem.Sothereare--we'replanningafairnumberofstartsthisnextquarterhereinthesecondquarter.
Anditjusttendstoworkoutthatway.It'sasmuchtodowithweatherisanythingelse.Youwindupwithgenerallyspeakingthedealsinthepipeline.We'rebiddingthem,we'refinalizingtheplansandpermits.
Whenwegetthefinalbidnumbersandwefindtheeconomicssatisfactory,wetendtostartthem.SoIwouldn'treadanythingintothat.LikeIsaidthisnextquarter,weshouldhaveaprettyhealthyamountofstarts,andthereisn'treallyanythingintherethat'sreadytogothatwe'rejustsittingon.
RobStevenson (Analyst-JanneyCapitalMarkets):
Okay.Thanksguys.
Operator :
OurnextquestioncomesfromJohnKimwithBMOCapitalMarkets.
JohnKim(Analyst-BMOCapitalMarkets):
IhadacouplequestionsonyourassetsaleofStamfordHarbor.YouprovidedtheunleveredIRRof11.9%.Butcanyoualsoprovidetheleveragereturngiventhisonehadmortgagedebtandalsomaybesharesomeofthecharacteristicsofthebuyer?
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page17of27
MattBirenbaum(CIO):
Yes.ThisisMatt.Wegenerallyhaven'tprovidedthosenumbers.Thedealwasoriginallydevelopedoffthebalancesheet,itwasputintoapoolin2009.
Soit'shardtoisolatethat.AndthebuyerIthinkwasaprivatebuyer.Folksthatwe'vedoneotherbusinesswithbefore.Regionalplayer.
JohnKim(Analyst-BMOCapitalMarkets):
Wheredoyouthinkyourdispositionswillcomeinthisyearversusyouraveragerunrateof$380million?
MattBirenbaum(CIO):
Ithinkweprovidedsomeguidanceatthebeginningoftheyearwithouroutlookintermsofthetotaldispositionvolume.
KevinO'Shea(CFO):
ThisisKevin.AsImentionedinmyearlierremarks,Iwentthroughthecapitalplanthatweannouncedatthebeginningoftheyear,andmuchofthatcapitalatleastexternallyhasyettobeformedapartfromtheequityforwardandsaleofStamfordHarbor.Thatleavesabout$1billionofnetincrementalcapitalpursuanttoourinitialplanfortheyear.
Wedon'tbreakitoutfurtherthanthatotherthantosaythatthepredominantamountofthatcapitalweexpectwillcomeintheformofunsecureddebt,andthebalancewillbeinthissaleofassets,partlybecausewedon'treallywanttobeoverlyprecisewithrespecttoouranticipateddebtcapitalmarketsactivitybygivingspecificamounts,andplusbecausethecapitalmarketsconditionscanchangeandthepreciseamountmaychangethroughoutthecourseoftheyear.Butitwillbemostlyintheformofunsecureddebt,atleastthat'sourplanandhope,andthebalancewillbesaleofassets.
JohnKim(Analyst-BMOCapitalMarkets):
Okay.Justafollow-upquestiononEdgewater.Accordingtoyourdisclosure,thelenderofthemortgagedebtcandecidehowyouusetheinsuranceproceedswhetherornottorepaytheloanorredeveloptheasset.Soifthelenderchoosestoredevelop,doyouhaveachoice,andcanyoupotentiallychangethescopeoftheproject?
KevinO'Shea(CFO):
Yes.John,thisisKevinagain.AsTimnoted,wearestillindiscussionswithrespecttowhatthelenderandalsoevaluatingwhatourplansarefortheasset.Soit'salittlebitearlytosaywhat'sgoingtohappenwithrespecttowhetherwe'regoingtoredeveloprebuildEdgewaterandwhat'sgoingtohappenwithourdiscussionswiththelender.
JohnKim(Analyst-BMOCapitalMarkets):
Okay,andthenjustonefinalbigger-termquestion,butCaliforniacontinuestobeverystrong.Atwhatpointdoyoubecomeconcernedwiththestate'songoingdroughtandmaybethepotentialimpactontheeconomy?
T imothyNaughton (Chairman&CEO):
I'mnotsure.I'mnotsurehowtoanswerthatreallyjustintermsofthedrought'spotentialimpactontheeconomy.
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page18of27
Obviouslyit'saffectingourpropertiesintermsofwe'resubjecttothesameconstraintsthatotherhomeownersare.Sean,youmightwanttojusttalkaboutthat,butasitrelatestoitseconomicimpact,itwouldbetotalwildspeculationonourpart.
SeanBreslin (COO):
John,thisisSean.There'sbeenplentyofpressoutthereaboutstatemandatedreductionsinwaterusageandhigherratesasaresultofexceedingthe25%targetedreductionsforthestate.
SoIthinkpeoplearegettingtheirarmsaroundthatintermsofhowthatactuallyflowsthroughtothecommunitiesandtoresidentswhoultimatelypaythemajorityofthewaterbill.ButIthinkthatthegeneralexpectationiscertainlythattherewillbepotentiallyhigherutilitiescostacrosstheboardinthatmarketwhichwouldimpactchoicesintermsofresidentialdwellings,whetherit'smultifamily,,single-familywhateveryourchoicesare.
Intermsofourresponse,ourresponseisasyoumightimaginetryingtobeasefficientaswecan.Andbeforethisevencameout,wealreadystartedinitiativesrelatedtosmartirrigationsystemsandthingslikethattotrytobeasefficientaspossibleasitrelatestowaterusagebecausetherehadalreadybeenpressureonrates--waterratesinCaliforniaasaresultofthedrought.
JohnKim(Analyst-BMOCapitalMarkets):
There'sbeensomemarketreportsthatdevelopmentsareslowingdown.Areyouseeingthisatall?
T imothyNaughton (Chairman&CEO):
Developmentsareslowingdownasaresultofthewaterissue?
JohnKim(Analyst-BMOCapitalMarkets):
Yes.
T imothyNaughton (Chairman&CEO):
I'venotheardthat.
JohnKim(Analyst-BMOCapitalMarkets):
Okay.Thankyou.
Operator :
We'llgonexttoVincentChaowithDeutscheBank.
VincentChao (Analyst-DeutscheBank):
Goodmorningeveryone.Justaquickquestion.IntermsofNewEngland,yououtlinedthesnowremovalcosts'impactonexpenses.Justcuriouswhatimpactyousawontheleasingside.
Itseemslikethingsdidtrackalittlebithigherthanlastquarteronayear-over-yearbasis.Butjustcurioushowmuchimpactyousawintheleasingandifthere'sbeenanotableimprovementsincethingshavestartedtofillouthere.
SeanBreslin (COO):
Yes.ThisisSean.WedidquantifytheOpEximpactinNewEngland.Andifyouhadexcludedtheimpacts
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page19of27
ofthosestormsonOpEx,ouryear-over-yeargrowthrateinOpExwould'vebeenabout100basispointsless.
Intermsoftherevenueside,it'salittlebitdifficulttoquantify.Imeanyoucanlookattrafficandnetleasesandthingsofthatsorttotrytoquantifyitasbestyoucan.Wehadadifficultwintertherelastyear,it'sworsethisyear.Sothere'ssomeimpact,butit'sreallyhardtoquantifywhatthatisintermsofwhodidn'tshowup.
NewEnglandisamarketlikeSeattlethat'salittlemoreseasonalthantheaveragemarket.Sotypicallyitisrelativelysoftorquietinthefirstquarterintermsofwhatyoumightseeinmarketrentgrowth,anditrampsupmateriallyasyougetintoMarchandAprilthroughaboutJuly.
Andthat'sprettymuchthepatternwe'veseenthisyear,soit'snotterriblydifferentfromwhatwe'veseeninthepast.WestructureourleaseexpirationsinNewEnglandinthefirstquartertobeprettylow,lowerthanaverageportfoliointheregion.Excuseme,averageacrosstheportfolioforthefirstquarter,andthatdiminishesthelevelactivityintheregiontobeginwith.
VincentChao (Analyst-DeutscheBank):
Gotit.Okaythanks,andthenjustanotherquestion.LastquarterIthinktherewasaquestionabouttheremainingHoustonassetsthataregettingreadytobemarketed.Justcuriousifyouhadanycoloronwhatyou'reseeingintermsofdemandforthoseassetsandpricingandthatkindofthing.
MattBirenbaum(CIO):
Vincent,thisisMatt.Weare--wehavetwoassetsinHouston.Oneofthemwedidmarketinthelastseveralmonthsisundercontractnow,soIcan'treallycontractanyfurtherthat.
Icanletyouknowmorewhenitcloses.Andwehaveoneotherassettherethatwearepositioningforsalebutwehavenotbroughttothemarketyet.
VincentChao (Analyst-DeutscheBank):
ImeanIknowit'sundercontract,butanycommentonthedemandyousawforthatasset?Wasitbetter-than-expected,inline?
MattBirenbaum(CIO):
Ican'treallygetintothatwhenit'sapendingtransaction.
VincentChao (Analyst-DeutscheBank):
Okay.Thankyou.
Operator :
We'llgonexttoDaveBraggwithGreenStreetAdvisors.
DaveBragg (Analyst-GreenStreetAdvisors):
Thankyouforallofyourthoughtsearlieronyourportfolioallocationgoalsandaccomplishments.It'sbeenaverybusyperiod,butIwantedtorevisitonegoalorideathatyouhadsuggestedbackatyourInvestorDayin2010.
Atthetime,yousaidyourportfoliowas15%ClassB,buttheefficientfrontieranalysisindicatesthat25%wouldbeoptimal.Wheredoyoustandasitrelatestothat?
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page20of27
T imothyNaughton (Chairman&CEO):
Yes,Dave,thisisTim.Aswetalkedaboutmaybeonthelastfewcalls,wethinkreallymorefromabrandallocationstandpointatthispoint.ButyoucanthinkjustroughlyEavesasaClassB,generallysuburban,andAvalonandlargelyisClassA.AndAVAcanbeabitofamixbutprobablymoreClassAthanitisClassB.
Andwhatwesaidisit'slessaboutatargetallocationfortheentireportfoliothantryingtooptimizepositioningofassetswithintargetsubmarkets.Andthatsometimesisgoingtobeamoreaffordableassets,andothercases,it'sgoingtobemoreofaClassAornewerbuildtypeasset.
Andwewerejusttryingto--backinNovember2010,weweretryingtogiveanindicationwhatwethoughttheoutcomeofthatstrategymightlooklike.Butaswementionedinthelastfewcalls,we'reactivedevelopersrightnow,andwe'reallocatingmorecapitalthroughnewdevelopmentthanwearethroughacquisition.AndsoyoumightexpectthatthatwaitingtocontinuetobealittlemoreweightedtowardsAvalonthanEavesoverthenextcoupleyearsaswebuildouttheportfolio.
DaveBragg (Analyst-GreenStreetAdvisors):
Right.Thatmakessense,andIknowyou'vepublishedthismanytimesbutIdon'tseeitinfrontofme,what'sEavesasapercentageoftheportfolio?
T imothyNaughton (Chairman&CEO):
Eavestodayisabout17%,AVAisabout6%,andtheremaining75%,76%isAvalontoday.Andthat'sbyfairmarketvalueoftheassetsifyouwill.Soonaunitcount,itwouldbealittledifferentthanthat.
DaveBragg (Analyst-GreenStreetAdvisors):
Okay.Thanks,andanotherquestionrelatestotheAmericanBibleSocietydeal.Itseemsreallyinteresting,we'rehopingyoucanprovidealittlemoredetailonthatincludingyourexpectationsforstreetretailrentsinthatsubmarket.
MattBirenbaum(CIO):
HeyDave,thisisMatt.Weareactivelyworkingthatproject.ObviouslyasweclosedtheendofJanuary,weputthedesignteamtogetherworkingthroughtheconceptdesignsrightnow,movingitasquicklyaswecantowardshopefullyastartsometimeinthesecondhalfofnextyear.
Andaspartofthatprocess,wearetalkingtopotentialretailpartners,anditisquitepossiblethatwewillwindupdoingatransactiontheretobringinsomebodyeitheronaforwardsellbasisoronacurrentbasistotaketheretail.Wedohavesomeestimationsofwhatwethinkretailrentsarethere,butultimatelyweknowthatthatisamaterialpartofthevalueofthatassetandthatisnotourareaofexpertiseobviouslyasmuchastheresidential.Sowemaywellbringinapartnerthere.
It'sabout55,000feetofretaildividedbetweenthreelevels,thegroundfloor,thesecondfloorandsomesellerspace.Andobviouslytherentsareverydifferentdependingwhichofthosefloorsyou'reonandevenifyou'reontheBroadwayfrontageversusthe61stStreetfrontage.Butwe'relookingatintermsofwhatthetotalvalueoftheretailisandthereforewhatthetotalvalueofournetinvestmentwillbeafterthatassumingthatsomebodyelseultimatelyownsthat.
DaveBragg (Analyst-GreenStreetAdvisors):
Okay,soalotofmovingpieces,nothingelseyoucansharerightnow.
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page21of27
MattBirenbaum(CIO):
Right.
DaveBragg (Analyst-GreenStreetAdvisors):
Allright.Thankyou.
Operator :
We'llgonexttoIanWeissmanofCreditSuisse.
Unidentif iedPart icipant :
Heyguys,thisis[Chris]forIan.Inyourpreparedremarks,youtalkedalittlebitabouthowyoustrategicallyincreaseyourexposuretotheWestCoastoverthelast7to10years.
Whenyoulookatyour$3.3billionshadowpipeline,thevastmajorityofitcomesfromyourEastCoastmarkets.Socanyoutalkalittlebitaboutwhatyou'regoingtodointermsofdevelopthoseassetsorthoselandparcels,orareyougoingtobegoingouttobuymorelandinordertoincreaseyourexposuretotheWest?
MattBirenbaum(CIO):
It'safairquestion.ThisisMatt.Icangetintothatalittlebit.You're--obviouslyyou'reright,ourdevelopmentrightspipelineismoreheavilyweightedtotheEast.
Ithinkthat'safunctionofacouplethings.OneistheentitlementcycletendstobeveryextendedparticularlyintheNortheast,sosomeofthosedealsareinthereforalongperiodoftime--three,four,fiveyears.
Thatisn'tnecessarilyreflectiveofthebalanceofwherethestartswillbe.TheWestCoastdealshavetendedtocomeinandmoveoutmorequickly,particularlyearlyinthecyclewherewewerebuyingsitesthatmaybesomeoneelsehadentitled.
Sosomeofitisjustatimingmix.SomeofitismarkettimingthoughthattheWestCoastmarketsaremorevolatileasTimhadmentioned,andsowe'retryingtobeveryaggressiveaboutgettinginearlyintheWestCoastmarketswherethedevelopmentwindowcanbealittlenarrower.
SoIthinkwearemorecarefulaboutthat,buthavingsaidthat,wedo--wearelookingatsomeprettysignificantWestCoastlandopportunitiesrightnow,andwe'recontinuingtopursuethose.SoIthinkyoumayseethatmixchangealittlebitoverthenextcouplequarters.Butgenerallyspeaking,thedealsintheWestdoseemtocomeinandoutofthepipelinealittlemorequickly.
T imothyNaughton (Chairman&CEO):
AndChris,justonelastthingtoadd,aswefeellikewe'regettingoutofbalancebetweenEastandWest,wecanobviouslymanagethatthroughjustbuyingandsellingassetsaswell.Whilewe'renot--whileopportunitymaynotallowustodothatthroughdevelopmentbaseduponwhereyouareinthedevelopmentcycleinparticularmarkets.Wedohavelittlemoreflexibilityasitrelatestobuyingandsellingassets.
Unidentif iedPart icipant :
Great.That'sreallyhelpful.Iappreciateit.Justnowacouplequestionsaboutlikeimpairmentsandhowthosehittheincomestatement.
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page22of27
Itlookslikeyouhaveaboutroughly$5.8millionimpairmenthittingtheincomestatementwhere$4.2millioniscomingfromNortheastweatherandthenabout$800,000fromthelossonEdgewater.What'stheremaining$800,000?
KevinO'Shea(CFO):
Chris,thisisKevin.Theremaining$800,000isanimpairmentchargeonlandthatisdueundercontractforsalethatweexpecttocloseinthesecondquarter.
Unidentif iedPart icipant :
Gotyou.AndthenintermsoftheNortheaststormimpairment,it'sreversedaboveNAREITFFOs.Isthereanyreasonwhythat'sthecase?
KevinO'Shea(CFO):
It'sacasualtyondepreciablerealestatewhichundertheNAREITdefinitionofFFOisaddedbacktoFFO.
Unidentif iedPart icipant :
Okay.That'shelpful.Andthenlast,ofthe$3.2millionyouhaveaddedbacktocoreFFO,I'massumingthe$793,000isfortheactualimpairment.Andisthebalancetheopportunitycostoflostrents?AndoftheIthink$0.09to$0.11youhaveintheguidanceforthefullyear,isthatalsoamixofopportunitycostandactualcost?
KevinO'Shea(CFO):
Onthefirstpart,the$3.2millionthatisaddedbackinourattachment13ofourreleaseisaddedbacktocoreFFOfromFFO,itconsistsofabout$1.6millionoflostNOIfromEdgewater.Soweexpectroughlyspeakingthatthattorecurthroughoutthebalanceoftheyear.
$800,000asyoupointoutistiedtoEdgewater'stheincidentresponsecostthatweincurredduringthefirstquarter.Intheremaining$800,000isthelandimpairmentcostsforthewhollyownedparcelthatwejustmentionedamomentago.Canyourepeatthesecondquestionagain?
Unidentif iedPart icipant :
No.Ithinkyouprettymuchgotit,butitsoundslikethat'sgoingtoberecurringthroughouttheyearandthatthe$0.09to$0.11willbethenextofthosethreethings.
KevinO'Shea(CFO):
WellIthinkwecanfollowupafterwards,butbasicallytobeclearintermsofwhatIwasjustdescribing,ofthe$3.2million,$1.6millionrelatestolostNOIfromEdgewater.Thatwillrecurthroughoutthebalanceoftheyear.
Soyoujustmultiplythatbythree,andthat'swhatweexpecttoreceiveoverthenextthreequarters.Theothertwoitems,the$800,000inresponsecostfromEdgewaterand$800,000inlandimpairmentcost,thoseareone-timeitemsthatweexperienceinthequarteranddonotexpecttorecuroverthebalanceoftheyear.
Unidentif iedPart icipant :
Gotit.Thatmakessense.Thanksalotguys.
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page23of27
Operator :
We'llgonexttoAlexGaldfarbofSandlerO 'Neill.
AlexGoldfarb(Analyst-SandlerO 'Neill&Partners):
Goodafternoonandthankyoufortakingthequestions.Justtwothatarereallyquick,firstKevin,youtalkedaboutpotentialdebtissuance.Goingbackafewmonthsago,theratingagencieswere--seemtobeindicatingtheymaybelookingtoupgradeyouguysalthoughbasedontheconversations,thedebtmarketsalreadypriceyouguyslikeanAtypecredit.
Soasyouarethinkingaboutdebtissuanceorcapitalfortherestoftheyear,areyouobligatedtochangeanyofyourthoughts?Orthisisalltheratingagency'sdoing,youguysaren'taskingforanyofthisandthereforeyou'renotchangingthewayyouviewyourcapitalstructureordevelopmentspending,etcetera?
KevinO'Shea(CFO):
Alex,thisisKevin.Ourthoughtsaroundourcapitalstructurehaven'tchanged.Theratingagenciesaretakingtheirownactionoftheirownaccordbasedonwhateverthey'reseeingintermsofboththeevolutionofourbusinessandthecurrentcapitalmarketconditions.It'sasetofactionsthatarehappeningindependentlyofus.
Intermsofourcapitalplanfortheyear,ourdecisionsaroundhowmuchtoraiseisafunctionofhowmuchweexpecttoexpendondevelopmentandotheractivities,soit'sdrivenbyouruses.AndsoasImentionedearlier,weexpectaboutanother$1billioninincrementalactivityonasourcingfrontintheformofdispositionsanunsecureddebtissuance,reallybecauseoftheinvestmentactivitywehaveinourcapitalplan.
Intermsofourchoicesaroundwhattoraise,it'sreallyafunctionnotoftheratingagenciesbutratherwhatarethemostcosteffectivesourceofcapitalatanygivenpointintime.Andasthingsstandtoday,unsecureddebtpricingisrelativelyattractive.
Moreover,asyoucanseeinourinitialoutlookfromthefourthquarter,wehave$650millionofdebtthatweexpecttorefinance.Sothat'sause.Andonaleverage-neutralbasiswithNOIstabilizedportfoliogrowinganddevelopmentNOIcomingonline,wecanaddmorethanthatamountintheformofnewlyissuedunsecureddebtandstillgrowonaleverageneutralbasis.
Sothat'showwearoundtriangulatearoundourtotalincrementalneedsandhowmuchofitmightbeintheformofunsecureddebt.Butatthispointasyouknow,wehaven'tissuedanythingintermsofdebt,sowewilljusthavetowaitandseewhathappensasweprogressthroughtheyear.
AlexGoldfarb(Analyst-SandlerO 'Neill&Partners):
AndKevin,canyoureminduswhatcapratestheyuseforyourunsecureddebt?Fortheunencumberedpool,sorry.Whatcapratetheyuse.
KevinO'Shea(CFO):
I'mnotsureifI'mfollowingyourquestion.Wehavedisclosureinourpressreleasethattalksaboutthecapratesthatpertainstoourline,andIthinkthat'sthe60%caprateifI'mrecallingcorrectly,butyoucanseetheattachmentforthat.Butintermsofthecapratesthattheratingagenciesuse,Idon'thaveanyinformationandIdon'tknowthatitwouldbesomethingIwouldwanttoshareifIdid.
AlexGoldfarb(Analyst-SandlerO 'Neill&Partners):
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page24of27
Okay,that'scool.Andthenseparatequestion,areyounowdonewithanyofthelegacyArchstonedispositionsorgains,oristherestillpotentialformoretocome?
KevinO'Shea(CFO):
WellIguessonepointIwillmention,thisisKevinagainandothersmaywanttocomment.WeexpectpotentiallythesecondquarterandyouprobablysawthisintheJVincomelineitemtoreceivesomeadditionalsettlementproceedsrelatedtosomepreacquisitionthatwilllikelyfallthroughinthesecondquarterandbeincludedwithinreportedFFObutcarvedoutforcoreFFO.
AlexGoldfarb(Analyst-SandlerO 'Neill&Partners):
ButImeaninadditiontowhatyou'vealreadydisclosed,isthereanythingfuturebeyondthisorfirstandsecondquarterclearsthedeckandthat'sit.
MattBirenbaum(CIO):
Alex,thisisMatt.There'sonemoreasset.Thereweretwoparcelsoflandthatwoundupintheparkinglot,onesettledearlierthisyear.
There'soneotherparceloflandouttherethatwewilleventuallysell.Itmaysettlethisyear.Itmaynotsettleforawhilelonger.Wewillseehowthemarketplaysoutonthat,butthat'srelativelyminoratone-timeadjustmentifitclears.
KevinO'Shea(CFO):
It'sbeenactuallyreflectedinthefirstquarter.
AlexGoldfarb(Analyst-SandlerO 'Neill&Partners):
Perfect.Listen.Thankyou.
Operator :
We'llgonexttoTayoOkusanyaofJefferies.
T ayoOkusanya(Analyst-Jefferies):
JustalongAlex'slineofquestioning,canyoujusttalkalittlebitmoreaboutwhatyou'reexpectingfortherestoftheyearandjustinregardtoacquisitionsoverallandgenerallywhatpricingyou'reseeinginmostofyourkeymarkets?I'msorry--disposition,notacquisitions.
KevinO'Shea(CFO):
Tayo,thisisKevin.IthinkoverallasImentioned,there'sprobablyanincremental$1billionofcapitalweexpecttosourcepursuanttoourplanfortheyear.Mostofthatweexpecttosourceintheformofunsecureddebt.Thebalancewillbedispositions.
Intermsofthedispositionsthatwecontemplate,IthinkMattoutlinedthatamomentagothattwoofthemrelatetoHouston.OnewecompletedinStamfordHarborinthefirstquarter.Sothere'soverall,andyoustepback,there'snotanawfullotofdispositionactivitythat'santicipatedwithinourcapitalplan,andprobablythosetwosourcesrepresentthebulkofthat.
T ayoOkusanya(Analyst-Jefferies):
Okay.
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page25of27
T imothyNaughton (Chairman&CEO):
AndMatt,anythingyouwanttoaddjustintermsoftransactionmarketgenerally,whatwe'reseeingoutthere.
MattBirenbaum(CIO):
Transactionmarkethasbeenveryhigh.There'sclearlymoredemandfrombuyerstobuyhigh-qualitymultifamilyassetsthanthereareassetsonthemarketforsalegenerallyspeaking.Obviouslyitvariesalittlebitmarkettomarket.
SolikeKevinsaid,ourneedsarefairlymodest.We'realwayslookingtotransact.Onthemarginifwecanshapetheportfoliosowemaysellanadditionalassetifwe'reusingthosefundstobuyanassetthatmaybeinasubmarketwelikebetter.Butrightnowthemarketisveryactive,veryliquid.
T ayoOkusanya(Analyst-Jefferies):
Gotit.Thankyou.
Operator :
(OperatorInstructions)We'llgonexttoMichaelSalinskywithRBCCapitalMarkets.
MichaelSalinsky(Analyst-RBCCapitalMarkets):
Justinthenatureoftimeasthiscallisrunningalittlebitlong,justtheREITadditionsoverthelastcouplequartersseemstobealittlebitmoreofanurbanfocusparticularlywiththeNewYorkassetthere.Isthereanyshiftasyouthinkaboutstartsmaybetwo,threeyearsdowntheroadmovingmoreurbanbackintheurbancoreasopposedtothesuburban?
AndthenjustgiventhestartsinDC,youguysareamongthefirsttosellouttoreduceyourexposuretoDCaheadofthedownturn.CanyoujusttalkaboutyouroutlookforDCoverthenexttwotothreeyears?Istheworstalreadypast,anddoyouexpect2016and2017--wouldyouexpectDCtoperformmoreinlinewiththerestoftheportfolio,ordoyouthinkthere'sarecoverypotentialthere?
MattBirenbaum(CIO):
Michael,thisisMatt.IcanspeakalittlebittothefirstpartofthequestionandmaybeSeanorTimmightwanttoaddsomecoloraswellonDClonger-term.
Intermsofourdevelopmentrights,obviousthatColumbusCircledealisaverylargedeal,sothatdoesmovetheneedleintermsofwhenyoustartlookingatthenumbersandweightingitbyurban/suburbaninthosethings.ButasImentionedearliergenerallyspeaking,we'restillfindingjustwhenyoulookatoverallsupplydemandfundamentalsandyoulookatwherelandispricing,thecostofconstruction,we'refindingbetterrisk-adjustedreturnsgenerallyspeakingonnewlanddealsinsuburbanmarkets.Andagain,alotofthisisinfillsuburbantransitorientedinsuburbanjobcenters,someofitisfurther-outbedroomsevers,butmostofitisthatinner-ringsuburbs.
SoIwouldnotexpectourdevelopmentrightsmixtochangemateriallyonewayortheother,butit'sreallybottom-up.Wedon'tsithereandsaytothelocalteams--gofindusfivedealsinanurbanmarketandnowgofindusfivedealsinasuburbanmarket,it'sfindusthebestdealsinyourmarket.
Andtheyrespondtowhatthey'reseeingontheground,andsometimesthosearemoreurbandeals,sometimesthey'remoresuburbandeals.Butatthispointinthecycle,theyarestillmoresuburban,ColumbusCirclenotwithstanding.
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page26of27
AsitrelatestoDC,weareplanningacoupleofstartsinMetroDChereoverthenextcoupleofquarters.Someofthosearelegacypositions,oneofthemisalargedealintheDistrictthatwehadinheritedthelandfromArchstone.
Butasitrelatestothedevelopmentcycle,itisprobablyabettertimethanithasbeeninthelastcoupleyearsifyouthinkthatDC'shadseveralyearsofbasicallyflatrentgrowthunderperformancerelativetotherestofourfootprint,andifreplacementcostshaven'tmovedallthatmuch,it'sprobablyabettertimetobethinkingaboutthat.Intermsofwherefundamentalsareheadedandwhererentgrowthmightbetwoorthreeyearsfromnow,Idon'tknowthatwe'reinapositiontopredictthatotherthanweknowthere'sstillafairamountofsupplycomingnextyearortwo.
T imothyNaughton (Chairman&CEO):
Mike,maybejusttoaddontothat,tobeclear,IsaidinmyremarkswedoexpecttheperformancegapstostartnarrowingbetweenDCandourothermarkets.Butoverthenexttwoyears,wedoaskthattounderperform.
Whenyoujustlookatthesupplythat'sstillcoming,andwhilejobgrowthhaspickeduprecentlyinDC,wedoexpectitwillbeanunderperformerrelativeouraveragemarketsoverthenextseveralquarters.
ButtoMatt'spointasitrelatestodevelopment,you'rereallyfocusedonsecondderivativeaswellasthefirstderivative.Andthatoftentimeswherethere'sgoodlandopportunities.Andifyoucantimeitfromaconstructionstandpoint,whenthelabormarket'sstillrelativelysoft,thoseareoftentimesourbest-performingassetslongterm.
MichaelSalinsky(Analyst-RBCCapitalMarkets):
Appreciatethecolorguys.Thankyou.
Operator :
We'llgonextto[WilliamPho]ofCowenandCompany.
WilliamPho (Analyst-CowenandCompany):
Great.Thanksguys.Appreciatethecolorinthepresentationandtheadditionaldatapointsaroundthedevelopmentpipeline.Justlookingatpage16wherethefivecommunitiesunderconstructioninleaseup,wherethecurrentprojectedyieldis6.9%versusthe6.3%original,about10%higher.Givenyourviewoftheextendednatureofthecurrentcycleandcallittwoyearstodelivertherestofthepipelineonaverage,isthereanyreasontothinkthatthecurrentpipelinewhereifIestimatea6.2%yieldthatthatwon'tstabilizeat10%higheraswell.
T imothyNaughton (Chairman&CEO):
YesWilliam,it'sTim.Ifyoulookoverthelastthreeorfouryears,thedealsthatwecompletedhaveallstabilizedonaverageforeachvintageyearabovewhatwehadanticipateduponoriginalproduction.Andit'sreallyjustrentgrowth.
Ithinkit'sgoingtocomedowntohowyouunderwriterentgrowthoverthenextfourorfiveyears.Totheextentwecontinuetoseealongsustainedcyclewherewe'regettingtrendtoabovetrendrentgrowth,wewouldexpectstabilizedreturnstobeabovewhatwefirstreportinthereleasewhenitinitiallygoesontheseschedules.
WilliamPho (Analyst-CowenandCompany):
CompanyName:AvalonBayCommunit iesIncCompanyTicker:AVBSector:FinancialIndustry:RealEstate
EventDescription:Q12015EarningsCallMarketCapasofEventDate:22.68BPriceasofEventDate:171.19
©2014TheStreet,Inc.Al l R ightsReserved Page27of27
Okay.Thanks.AndthenjustquicklynowthatHighlineWestChelseais97%leased,canyoutalkabouttheperformanceofthetwodifferentsegmentsversusoriginalexpectationsandhowsplittingupthatintothetwosegmentshasperformed?
SeanBreslin (COO):
ThisisSean.Intermsofperformance,we'vebeenhappywithboththeAVAandtheAvalonproduct.AVAdeliveredfirstalittlebitbiggerbuilding,andAvalonfollowed.Butwhenyoulookatitjustfromaleaseupdateperspectiveandwhathappenedwithrentsthroughthecourseofthedifferentseasonsoftheleaseup,performancerelativetotheoriginalexpectationswasprettysimilarbetweenthetwobothAvalonandAVA.
WilliamPho (Analyst-CowenandCompany):
Okay.Thankssomuch.
Operator :
Wehavenofurtherquestionsatthistime.I'dliketoturntheconferencebacktoTimNaughtonforclosingremarks.
T imothyNaughton (Chairman&CEO):
Thankyou,Augusta.Thanksforbeingontoday.Iknowit'sbeenalongcallsowewon'ttakeanymoreofyourtime,butwedolookforwardtoseeingallofyouinJuneatNAREIT.
Operator :
Thatdoesconcludetoday'sconference.Thankyou,all,foryourparticipation.
Allrightsreserved(c)2014TheStreet,Inc.
Pleasefeelfreetoquoteupto200wordspertranscript.Anyquoteshouldbeaccompaniedby"ProvidedbyTheStreet"andalinktothecompletetranscriptandwww.thestreet.com.Anyotheruseormethodofdistributionisstrictlyprohibited.
THEINFORMATIONCONTAINEDINEACHWRITTENORAUDIOTRANSCRIPT(the"TRANSCRIPT")ISAREPRODUCTIONOFAPARTICULARCOMPANY'SCONFERENCECALL,CONFERENCEPRESENTATIONOROTHERAUDIOPRESENTATION.THETRANSCRIPTSAREPROVIDED"ASIS"AND"ASAVAILABLE"ANDTHESTREETISNOTRESPONSIBLEINANYWAYNORDOESITMAKEANYREPRESENTATIONORWARRANTYREGARDINGTHEACCURACYORCOMPLETENESSOFTHETRANSCRIPTSASPRODUCED,NORTHESUBSTANCEOFAPARTICULARCOMPANY'SINFORMATION.
THETRANSCRIPTSAREPROVIDEDFORINFORMATIONALPURPOSESONLY.THESTREETISNOTPROVIDINGANYINVESTMENTADVICEORENDORSINGANYPARTICULARCOMPANY.
Top Related