U.S. Markets closed

Edited Transcript of AVB earnings conference call or presentation 26-Apr-18 5:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 AvalonBay Communities Inc Earnings Call

ARLINGTON May 2, 2018 (Thomson StreetEvents) -- Edited Transcript of AvalonBay Communities Inc earnings conference call or presentation Thursday, April 26, 2018 at 5:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jason Reilley

AvalonBay Communities, Inc. - VP, IR

* Kevin P. O'Shea

AvalonBay Communities, Inc. - CFO

* Matthew H. Birenbaum

AvalonBay Communities, Inc. - CIO

* Sean J. Breslin

AvalonBay Communities, Inc. - COO

* Timothy J. Naughton

AvalonBay Communities, Inc. - Chairman, CEO & President

================================================================================

Conference Call Participants

================================================================================

* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Dennis Patrick McGill

Zelman & Associates LLC - Director of Research and Principal

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Senior Associate

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Richard Allen Hightower

Evercore ISI, Research Division - MD & Fundamental Research Analyst

* Richard Hill

Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS

* Vincent Chao

Deutsche Bank AG, Research Division - VP

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the AvalonBay Communities First Quarter 2018 Earnings Conference Call.(Operator Instructions)

Your host for today's conference call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may now begin your conference.

--------------------------------------------------------------------------------

Jason Reilley, AvalonBay Communities, Inc. - VP, IR [2]

--------------------------------------------------------------------------------

Thank you, Cassie, and welcome to AvalonBay Communities First Quarter 2018 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?

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Thanks, Jason, and welcome to our Q1 call. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. Sean, Kevin and I will provide some management commentary on the slides that we posted last night, and then all of us will be available for Q&A afterwards. Our comments will focus on providing an overview of the macro-environment and the impact on fundamentals, some color on our operating results this quarter and lastly, some thoughts related to development and funding activity.

Starting now on Slide 4. Highlights for the quarter include core FFO growth of 4.3%. Same-store revenue growth came in at 2.4%, or 2.3% when you include redevelopment. We completed $300 million of new development this quarter at an average initial projected yield of 6.5%, which is helping drive earnings and NAV growth per share. And lastly, we raised $300 million in external capital this quarter through a 30-year unsecured debt issuance with an effective rate of just under 4% for the first 10 years. This is the third time we've tapped the 30-year market over the last 2 years for almost $1 billion in total issuance. And as a result, we've extended our average maturity of outstanding debt to over 10 years.

Turning now to Slide 5, let's talk about the economy for a moment. The housing and the apartment markets are benefiting from a healthy economy, which appears to be gaining momentum early in 2018 and that shows few signs of slowing down 8 years into the current expansion. GDP is growing at a rate close to 3%, and we're seeing sustained job growth of roughly 200,000 per month. Over the last couple of years, a tightening labor market has pushed wage growth to a cyclical high, and household formation appears to be gaining momentum after growing modestly through much of this cycle.

Turning to Slide 6. Indications are that the expansion should continue through the foreseeable future as consumers and businesses are feeling good about their prospects. The emerging consensus among economists is that this expansion will ultimately become the longest in our lifetime. There's plenty to support this thesis, including consumer and corporate balance sheets that are very strong, and increasingly, both the consumer and businesses are putting dry powder to work in the form of higher consumption, greater capital investment and increased hiring. So the economy seems poised to maintain its momentum for the next couple of years, which should continue to support healthy demand in the apartment markets.

I want to turn now to Slide 7, and let's take a look at the supply side. As we discussed previously, supply is elevated in our markets versus historical averages but does appear to be approaching its cyclical peak this year. Over the next few quarters, we expect new deliveries in our markets to reach right around 25,000 per quarter before drifting down to just under 20,000 per quarter later next year.

And despite an uptick in multifamily starts nationally over the last quarter, starts have been relatively stable in our markets over the last few months due to increases in land and construction costs combined with higher interest rates. Construction costs, in particular, are now growing at a rate well above rents and in the mid to high single-digit range, which is putting pressure on the economics of new development. To be clear, we don't anticipate a significant decline in new supply over the next 2 to 3 years but rather, a leveling off and modest decline in new deliveries across our footprint, which should help markets stay roughly balanced late in the cycle. So overall, the macro-environment and new supply trends point to a relatively stable near-term outlook for the sector and for our markets, with rent growth settling in the 2% to 3% range, a level below the average so far this cycle but close to long-term trend.

I'll now turn it over to Sean, who will touch on some of the operating trends we're seeing in our markets.

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [4]

--------------------------------------------------------------------------------

Thanks, Tim. Turning to Slide 8. While we've experienced healthy demand this entire cycle, the introduction of elevated levels of supply, which Tim highlighted on the previous slide, has led to several quarters of below-trend rent growth in our markets.

And if you turn to Slide 9 in terms of regional performance, the Metro New York, New Jersey and mid-Atlantic regions continue to be the weakest performers, with effective rent growth that's flat to modestly positive. The mid-Atlantic continues to be plagued with heavy supply, which is expected to continue through 2019. In the New York, New Jersey region, the city continues to be very weak, but supply is expected to peak late this year and then fall off considerably in 2019. In Northern California, we continue to see signs of improved performance, particularly in San Jose, where deliveries are expected to be down about 1,500 units this year as compared to 2017.

The healthiest region in the portfolio is Southern California, which is currently producing effective rent growth of roughly 4% per year. Given deliveries are expected to decline from the 2% range this year to just above 1% next year, the outlook for Southern California is pretty healthy through 2019.

And turning to the Pacific Northwest, which is our strongest market for the past couple years, the combination of moderating job growth and elevated supply, which is expected to be roughly 4.5% of inventory this year, has resulted in a continued deceleration in effective rent growth. Year-over-year in March, effective rent growth was down to roughly 2% in Seattle.

Turning to Slide 10. Our same-store portfolio produced 2.4% rental revenue growth in Q1, which consisted of a 2.5% increase in rental rates and 10 basis points decline in occupancy. Our Q1 revenue growth was about 60 basis points above the effective rent growth in our markets, and we expect relatively stable rental revenue growth each quarter this year.

Shifting to Slide 11. As opposed to the relatively stable trend in same-store rental revenue growth, same-store operating expense growth is expected to be front-loaded this year and pretty choppy from quarter-to-quarter. While Q1 operating expense growth was slightly lower than budget, we expected it to be heavy and driven by 3 categories: first, property taxes, which is primarily related to successful property tax appeals in Southern California during Q1 2017 and an increase in assessments and rate in the Pacific Northwest; second, an increase in on-site wages and benefits costs in addition to normal merit adjustments, we had more occupied positions in Q1 as compared to last year, which was partially offset by reduced temporary help and repairs and maintenance, also the increase in benefit costs was expected to peak on a year-over-year basis in Q1; and then third, increased insurance premiums and the net change in claims activity, which can be volatile from quarter-to-quarter.

Turning to Slide 12 to address development. Our Q1 deliveries and NOI generated from our development portfolio were both pretty much in line with budget. Looking forward, we expect the volume of deliveries in Q2 to be roughly in line with our original plan.

Now I'll turn it over to Kevin to talk about our funding capacity and the balance sheet. Kevin?

--------------------------------------------------------------------------------

Kevin P. O'Shea, AvalonBay Communities, Inc. - CFO [5]

--------------------------------------------------------------------------------

Thanks, Sean. On Slide 13, we show how we have reduced development starts to a level that we believe we can fund on a roughly leverage neutral basis through a combination of annual growth in EBITDA, leveraged at 5x, cash flow from operations and retained capital from disposition activity and without needing to issue common equity.

Specifically, as you could see on the left-hand side of the slide, our development starts for 2017 and 2018 are expected to average about $900 million per year or about $500 million less than the average start volume of $1.4 billion per year in the preceding 4-year period. On the right side of the slide, we illustrate how the combination of EBITDA growth leveraged at 5x, cash from operations and dispositions currently enables us to fund a little over $1 billion of development spend and about $200 million of redevelopment spend on a roughly leverage neutral basis.

Thus, by reducing development starts in this way, we reduced our equity funding needs and have tailored our development activities to the current environment. In doing so, we are following an approach we applied in the 1999 to 2007 time frame when we generally funded the equity need for development by recycling capital through asset sales.

Additionally, on Slide 14, and as we've discussed before, another way in which we mitigate risk from development is by substantially match-funding long-term capital with development that is underway. This allows us to lock in development profit and substantially reduces the amount of remaining capital that is exposed to future changes in our cost of capital.

As you can see on the left side of the slide, we're approximately 80% match-funded against development underway at the end of the first quarter of 2018, consistent with our objective of being roughly 70% to 80% match-funded against this book of business.

On the right side of the slide, you can see how we control the land value at risk on the balance sheet by limiting the amount of land that we own for development. Over the past 2 years, we have kept our land inventory at multi-decade low levels. Of this land held for development, nearly all of it is associated with projects that are expected to start construction within the next 6 months.

On Slide 15, we show several key credit metrics and how they compare to the multifamily sector average as of year-end 2017. As you can see, our credit metrics remain strong and provide AvalonBay with continued financial flexibility. Specifically, at year-end, net debt-to-core EBITDA was low at 5.0x. Interest coverage was high at 6.9x, and the weighted average years to maturity on our fixed-rate debt remained high at 9.1 years.

Finally, as a result of our balance sheet management efforts over the past few years, we have been able to create a debt maturity schedule that enhances our financial flexibility by significantly reducing the capital needed to refinance existing debt for the next decade. In particular, we have substantially addressed our near-term debt maturities, and by having nearly 30% of our debt mature beyond 2027, average debt maturities over the next decade represent only $550 million per year, which is less than our current amount of dividends and only 2% of our total enterprise value.

With that, I'll turn it back to Tim for concluding remarks. Tim?

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [6]

--------------------------------------------------------------------------------

Yes. Thanks, Kevin. So in summary, Q1 was a solid quarter with performance in line with expectations. We expect fundamentals to stabilize over the next 2 to 3 years, leading to rent growth we believe in the 2% to 3% range. New development continues to contribute to earnings and NAV growth in a meaningful way. And then lastly, I would say a strong balance sheet and credit profile, combined with a disciplined approach to new development, provides us plenty of flexibility to continue to pursue our growth strategy while navigating the latter stages of the current economic expansion.

And with that, Cassie, we'd be glad to open up the line for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Okay, we'll go first to Nick Joseph with Citi.

--------------------------------------------------------------------------------

Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [2]

--------------------------------------------------------------------------------

How is April in the forward renewals trending relative to original expectations? And have you maintained the outperformance that you had in the first quarter?

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [3]

--------------------------------------------------------------------------------

Yes. Nick, it's Sean. In terms of April, we're basically seeing the seasonal trend that we would have expected in terms of the lift in rates. So to give you some perspective, in Q1, it moved up nicely through the quarter. So January blended rent change was about 60 basis points. It moved up to about 150 basis points in February, about 210 in March, and we're trending right now, about 2.6% in April and seeing steady improvement across the majority of the markets. In terms of renewal offers, renewal offers are going out around 5%. So I'd say generally where we are as we look at Q2 is basically in line with what we expected across the footprint. There's at least some variation from market-to-market and probably the 2 I'd point to are the mid-Atlantic and Pacific Northwest being a little bit softer than we would have anticipated, and the others are either flat to slightly up as compared to what we anticipated. So net-net, it's in the range.

--------------------------------------------------------------------------------

Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [4]

--------------------------------------------------------------------------------

And then just wondering if there's any progress or updates on the expansion into Denver and Southeast Florida.

--------------------------------------------------------------------------------

Matthew H. Birenbaum, AvalonBay Communities, Inc. - CIO [5]

--------------------------------------------------------------------------------

Sure. Nick, it's Matt. We are continuing to look hard at those markets, and there are assets for sale. We don't have anything under contract at this point, but we're making offers. And we're also talking to some folks who have deals ready to go where we might be able to provide capital in some kind of a structure-type transaction. So yes, hopefully we'll have more to report on that later in the year, but as of right now, nothing new.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

We'll go next to Juan Sanabria with Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [7]

--------------------------------------------------------------------------------

Just on the same-store revenue trends where you're expecting it to[stay] generally flat, is there any sort of level of conservatism or downside built into that? Because your previous expectation was for a modest uptick in the second and third quarter. And we think you have a higher kind of earn-in now from the rent deals you struck in the quarter. So just curious about how we should be thinking about same-store revenue over the course of the year and what's built into that upside or downside.

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [8]

--------------------------------------------------------------------------------

Yes. Juan, this is Sean. I mean, when we provide guidance, which we did back in January, we sort of called it a bull's-eye as you might say. So I wouldn't say there is necessarily conservatism built in. It's what we expected for the year. And in terms of any shift in that, we'll address those certainly midyear when we complete a full re-forecast when we're through about probably half of the leasing season. That's the best time to provide an update.

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [9]

--------------------------------------------------------------------------------

Juan, this is Tim. Maybe just to add to that a little bit. Same-store revenue, I think we projected it to be pretty flat, but historically, what we see is there is a seasonal variation in terms of the rent change, which is different, obviously, than same-store revenue growth. So as Sean mentioned, we are seeing a normal seasonal lift in the -- in like-term rent change, but that was anticipated in the budget.

--------------------------------------------------------------------------------

Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [10]

--------------------------------------------------------------------------------

Okay, great. And just a quick one for me. If you go through the new and renewal rates for the first quarter leasing across your major geographic areas like the MSAs, if you wouldn't mind.

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [11]

--------------------------------------------------------------------------------

Yes, Juan, why don't we take that offline? That's a fair amount of data, 3 data points across 6 markets. That's a fair amount. So why don't we take that offline, and we'll give that to you.

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [12]

--------------------------------------------------------------------------------

And Juan, you probably did see, we did add this quarter the blended rent change by the 6 regions in total, so we can break those out between new move-ins and renewals offline for you.

--------------------------------------------------------------------------------

Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [13]

--------------------------------------------------------------------------------

Okay, great. And then just while I have the floor, on Washington, D.C., what are you seeing there? Is that market, do you think, continuing to decelerate? Or do you think we're troughing here? What are your expectations going forward? Has there been any strengthening in the job market with higher defense spending? Or any anecdotes you could share?

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [14]

--------------------------------------------------------------------------------

Yes, Juan, this is Sean again. I mean, nothing material to report other than D.C.'s performing as I indicated. The D.C. Metro area, which includes the districts, suburban Virginia and suburban Maryland or Northern Virginia, I should say, yes, slightly weaker than expected. I'd say the district is weak. And we expected it to be weak based on the volume of supply being delivered in the district, which is heavier than what you're seeing in either Northern Virginia or in suburban Maryland as a percentage of stock. So I'm not sure we're going to see anything different as we move through the prime leasing season unless we start to see a material change in job growth in the district itself and are bleeding out in some of the outer suburbs. But for D.C. this year, we're talking about deliveries that are north of 5% of inventory, about the same level in 2019. It's about 6,000 units a year. It's concentrated in certain pockets, but unless we see a meaningful uptick in job growth, I don't think we're going to see improved performance in D.C. It's going to continue to be pretty weak.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

We'll go next to Vincent Chao with Deutsche Bank.

--------------------------------------------------------------------------------

Vincent Chao, Deutsche Bank AG, Research Division - VP [16]

--------------------------------------------------------------------------------

I just wanted to go back to the quarterly breakdown of the operating expenses, which obviously you put some pretty good detail in here. Is that really just driven by sort of year-over-year comparisons and maybe timing of some R&M spend? I was just curious, could you can provide some color on that trajectory?

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [17]

--------------------------------------------------------------------------------

Yes. Vincent, it's Sean. Yes, I mean, for instance, as we indicated in the slide and in my prepared remarks, we expected Q1 expense growth to be elevated. It actually came in lower than we anticipated. But the main drivers, as I indicated, are really the tough comp and property taxes given very successful appeals in Southern and Northern California, but particularly Southern California in Q1 of 2017 created a pretty tough comp there. Utilities, we've had some pretty good winters the last couple of years in '16, '17. Obviously, it was pretty extended cold winter this year. We had expected a more normal winter and budgeted accordingly. But that reflected an increase in utilities. And then certainly we expected the increases in insurance based on what we knew our premiums were going to be and volatility in claims activity, and then I mentioned the payroll. So I'd say in terms of the drivers, the same things that I mentioned, the taxes, the payroll fees, utilities, insurance and we expected Q1 to be high and then start to level off as we move through the year.

--------------------------------------------------------------------------------

Vincent Chao, Deutsche Bank AG, Research Division - VP [18]

--------------------------------------------------------------------------------

Yes, I think the question was more on the future quarters just being so much lower than the first quarter, and what's really causing the big decline particularly in the third and fourth quarters.

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [19]

--------------------------------------------------------------------------------

Yes. I mean, it's some of the things I mentioned. So on property taxes, we had significant appeals that hit the books in Q1 of '17. So it's just a comp issue. Yes, that's not going to be a recurring issue in terms of each of the quarters of 2018 given those appeals were booked in Q1 of '17. That created heavy pressure in this quarter. On payroll as an example, we expected Q1 to be the peak for benefits. It's up about 15% year-over-year in Q1, but then it levels off as we move through the year. So there's -- without going through every single category, there are a number of topics like that, that were peaking in Q1 that will not recur in subsequent quarters that will take the year-over-year growth rate for all of OpEx down.

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [20]

--------------------------------------------------------------------------------

This is(inaudible) Tim, for benefits, it actually goes down below average as you get into Q3 and Q4. So payroll actually comes down towards sort of an average run rate.

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [21]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [22]

--------------------------------------------------------------------------------

So I think some of that happening, Vincent, was a little bit of leveling off of the impact as you move through the year.

--------------------------------------------------------------------------------

Vincent Chao, Deutsche Bank AG, Research Division - VP [23]

--------------------------------------------------------------------------------

Okay, and just maybe one more in terms of Manhattan and New York in general, which you said is pretty tough still. Can you just comment on concession trends there?

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [24]

--------------------------------------------------------------------------------

Yes, as it relates to concessions, I mean, typically what you'd find in New York is heavy concessions on lease ups given the rent stabilization there and everybody trying to get the highest legal rent possible. In terms of concessions in our portfolio, and we're pretty consistent with most operators that are operating stabilized assets. And we don't use a lot of concessions. I mean, the average dollar concession per move in across the New York metro area for us is $40 in Q1. So it's pretty immaterial. Everybody pretty much prices on an effective rent basis as opposed to using concessions and lease-ups. So that's not unusual.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

We'll go next to Rich Hightower with Evercore ISI.

--------------------------------------------------------------------------------

Richard Allen Hightower, Evercore ISI, Research Division - MD & Fundamental Research Analyst [26]

--------------------------------------------------------------------------------

So I'm looking at the Development Rights pipeline on Page 15 of the supplemental. Can you remind us of the history there of how the different concentrations in the regions came together? How much of that was attributable to Archstone? And then other transactions since then? Just how that all came together, and what the strategic perspective there is.

--------------------------------------------------------------------------------

Matthew H. Birenbaum, AvalonBay Communities, Inc. - CIO [27]

--------------------------------------------------------------------------------

Sure, Rich. It's Matt. At this point, the Development Rights pipeline, I don't think there are any Archstone Development Rights left in there at this point. We had added a few back in early '13 when we closed that transaction, but we've moved most of those through the pipeline. There are a couple of deals that were Archstone assets we acquired where we have identified an opportunity to add density down the road. And so those are in there as Development Rights. Those are not conventional Development Rights in the sense that it's not land we're buying from a third party on any kind of fixed time frame. So we think those are great deals. These are jurisdictions in Mountain View and San Jose that understand the need for more housing, and so are supportive of us adding density. We're not taking down any existing assets. So there's a little bit of that, but it's mostly, it's honestly mostly bottom up, and these are mostly kind of one-off deals that our local teams have sourced. And they kind of go through a series of screens here in terms of the economics and the risk relative to the value creation. So you see it does tend to be concentrated a little more heavily in the New York region, and part of that's because we have multiple offices there. So we have a lot of bodies, and it does play to some of our competitive advantages in the suburbs if you look in places like New Jersey and Long Island that are highly supply-constrained where we have the ability to get entitlements. So those tend to be very accretive deals. But there isn't necessarily any particular top-down driver of that.

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [28]

--------------------------------------------------------------------------------

Yes, Rich, maybe just to add to that, as Matt mentioned, at this point in the cycle we normally would see a higher concentration in the Northeast. They just tend to be more stable, and it tends -- deals tend to underwrite kind of throughout the cycle. In California, we probably have more than we normally would expect to have at this point in the cycle, but as Matt mentioned, they're not really sort of normal kind of market rate land deals. In some cases, they're densifying existing assets. So I think there's 3 public-private new deals, which are negotiated-type deals, and there's probably at least one other that's kind of more of a venture deal that's on a negotiated basis. So now as those markets have been more volatile, you've got to be much more sensitive to market timing from a development standpoint. And if anything, it's probably a little higher than normal but for the reasons I mentioned.

--------------------------------------------------------------------------------

Richard Allen Hightower, Evercore ISI, Research Division - MD & Fundamental Research Analyst [29]

--------------------------------------------------------------------------------

All right. I appreciate the perspective there, guys. My second question here concerns Northern California. It seems like there's a -- I don't want to call it an inflection point maybe but an uptick maybe a little bit better than at least we were expecting as of a few months ago just in terms of rent trends across the board. I know you highlighted San Jose specifically with supply falling, but how quickly can that market change over the course of this year? And then how do you think about maybe some offsetting sort of elements where you've got VC funding in the area is up year-over-year, but you've got mature tech, which in some pockets is suffering. How do you think about the impact there on job growth and just the forward outlook?

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [30]

--------------------------------------------------------------------------------

Yes. Rich, it's Sean. I mean, it's a good question, probably not one that's easy to answer. It's sort of a mixed bag of things there. But I mean, there are specific pockets where supply is abating, that's certainly helping. And in a market like Northern California, you're still seeing pretty solid income growth. So even though job growth may not be as healthy as it was over the past couple of years, the jobs that are being created, for the most part, particularly in tech and information systems categories as you can go through, wage growth there is very strong. So it does support plenty of rent growth possibilities, let's just say. So to the extent that you see a less competitive environment from supply, things can move relatively quickly and up quickly in that market. We've seen it both in the up and the down over the course of this cycle. So I'm not expecting it to accelerate to what it was maybe 2 years or 3 years ago just given the volume of the supply that remains in that market, but it's probably healthier than it was at end of '16, '17, going into '17 where you'd sort of have floodgates opened in terms of new supply and the impact that it started to have on rent growth and stabilized assets. So Tim, you have any thoughts on that?

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [31]

--------------------------------------------------------------------------------

Yes. Richard, it's Tim. Just looking over the last 6 months, the strongest job growth has been in the technology market, Northern California, Seattle and Denver. And essentially, when you look at what's happening on the office absorption side, the tech markets real time are outperforming as well. I mean, you're probably seeing that from some of the public companies that are releasing earnings lately. So at least in terms of from a corporate standpoint, it seems like there's more -- there's probably more confidence and more optimism. They're taking down space. They're hiring. So that won't flip necessarily overnight, but as Sean mentioned, they are pretty volatile markets and can be a function sometimes of what's happening in the NASDAQ as sort of the capital punch bowl sometimes gets taken away quickly from upstart companies, in these markets. But right now, there's still -- it's still the strongest demand that we're seeing.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

We'll go next to Austin Wurschmidt with KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [33]

--------------------------------------------------------------------------------

Just wanted to touch a little on construction costs as we continue to hear about them increasing. So I'm curious, one, what have you seen with costs over the last 3 to 6 months and do you expect going forward? Two, how does it impact, I guess, your thoughts on new starts maybe by even region or submarket? And then third, what are the broader implications for supply as you look out over the next couple of years?

--------------------------------------------------------------------------------

Matthew H. Birenbaum, AvalonBay Communities, Inc. - CIO [34]

--------------------------------------------------------------------------------

Sure, Austin, this is Matt. As Tim mentioned in his opening remarks, hard costs are certainly growing faster than rents in all of our markets at this point. And so it is having an impact. What we're finding, that is one reason we're finding that kind of the lower density suburban product is the stuff that's still underwriting better. And if you look at our starts this year, what we're planning, 3 of them are wood frame garden deals. And while there is cost pressure there, it's maybe not as severe, and we do a lot of that business, and we're able to bundle our buying power. And so those numbers that have still been able to underwrite, tend to be in submarkets with less supply in the first place, which also helps. Four of our planned starts this year are kind of mid-rise kind of wrap deals, above grade parking with wood frame. And that's -- costs are probably growing 4%, 5%, 6% maybe a little more still in California and Seattle and, consequently, that's where less of our pipeline is because those deals are just having a harder time underwriting. And then we have maybe one high rise we might start this year but in Baltimore, which is not a market that seeing the kind of cost pressures. A lot of it is still -- I mean, you see a lot of stuff about commodities, and certainly steel and lumber tariffs don't help, but a lot of it ultimately, the main driver is labor availability and subcontractor margins. And in most of these markets, the subcontractors are still as busy as they want to be. So for them to return the call, it's going to cost you.

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [35]

--------------------------------------------------------------------------------

Maybe just to add to Matt. I think it's probably in the 6% to 7% range, but it's probably ranged from 3% or 4% on the low end on a year-over-year basis over the last 3, 6 months to high single digits, probably around 9% on the West Coast. The urban stuff, New York, is tough to underwrite. The Bay Area is tough, and it's one of the reasons we haven't put new land under contract there really for the last 3 years. It's always been either public-private type stuff or densification opportunities, but I think it could last for a little while. It's, as Matt said, it's a skilled labor issue. You're kind of late in the cycle. We tend to have these commodity booms as we get late in the cycle, and it's happening globally right now as we're seeing kind of mature economies growing basically at the rate we are at 3%, I think our expectation has to be over the next year or 2, the construction costs are going to continue to outpace rent growth. So it's going to continue to regulate. We think it regulates supply.

--------------------------------------------------------------------------------

Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [36]

--------------------------------------------------------------------------------

Right. And so as you said -- do you think it -- so you ultimately think supply comes down versus return expectation start to come down?

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [37]

--------------------------------------------------------------------------------

In my prepared remarks, I said modestly. So flat in our markets over the last 3 or 4 months. Essentially, when you look at the public guys, our expectations are for supply to come down as it relates to our business line. It's hard to know with the merchant builders. It's going to ultimately turn on capital, and capital is probably a little more free right now than it was 6 months ago, but that can change. That can change as we've mentioned in some other calls, there have been some banks that have sort of redlined multifamily but, on the other hand, there has been sort of nonbank lenders that seem to have materialized to fill the void and sort of how long they kind of keep the party going I think is going to be the test.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

We'll go next to Drew Babin with Baird.

--------------------------------------------------------------------------------

Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [39]

--------------------------------------------------------------------------------

The first question going through the development page in the supplemental, it looks like not a lot changed in terms of timing on most of the projects, but I did notice that Avalon Public Market in Emeryville -- sorry, Emeryville was delayed one quarter in terms of first occupancy as well as stabilization. I was just wondering if that's anything that might tangibly impact earnings or whether that's just a matter of a few weeks or if you could give some color on that, that'll be helpful.

--------------------------------------------------------------------------------

Matthew H. Birenbaum, AvalonBay Communities, Inc. - CIO [40]

--------------------------------------------------------------------------------

Sure, Drew. It's Matt. On average, we are kind of where we expected to be that, that one deal, which was not really expected to open until relatively late in the year. At any rate, we did push back the initial occupancy, I think, from the third quarter to the fourth quarter. So we weren't planning a lot of occupancy there at any rate this year. But you may have noticed also several of the other deals that are finishing this year, we actually pulled forward the completion date. So we will wind up getting a few more apartments than we expected in the second quarter, third quarter. So we think that probably offsets any of the earnings impact of that deal, and generally as Sean mentioned, things were tracking as we expected, on average.

--------------------------------------------------------------------------------

Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [41]

--------------------------------------------------------------------------------

Okay. That's good to know and, I guess, some more general question. We talked about an improvement in employment situation and better wage growth nationally. I guess my question is are you seeing the same kind of impact in some of your suburban markets that you're seeing and some of the urban centers where you're going to get some of your higher barrier to entry suburban markets where some of that demand kind of gets squeezed through and really causes some good rent growth. I was just wondering if you had any case studies or examples of where that might be happening.

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [42]

--------------------------------------------------------------------------------

Drew, just to make sure I understand the nature of the question, in terms of relative performance, the spread between suburban and urban is still relatively wide if you look at effective rent growth year-over-year. If you look at it from Axiometrics as an example, the spread is about 180 basis points right now, whereas suburban assets are outperforming urban. But every market is a little bit different, and it depends on whether you're at a high-priced point and a suburban environment versus a more moderate price point, and the same thing in the urban environment. So the spreads do change from market to market and depending on how you're positioning the asset, but in general across our footprint, suburban assets continue to outperform relative urban assets, which is mainly a function of 2 things, one just absolute price point being cheaper in the suburbs; but then two is the volume of deliveries in the urban markets are roughly twice the volume of the suburban environment in our market at this point. And so...

--------------------------------------------------------------------------------

Matthew H. Birenbaum, AvalonBay Communities, Inc. - CIO [43]

--------------------------------------------------------------------------------

Yes, I'll just add to that. One place we are seeing is, as Sean mentioned, we're certainly seeing in our stabilized portfolio. On the lease-ups, that's probably where we're also seeing it. On average, the lease-ups are running about $20 ahead of pro forma on rent compared to what we underwrote. But if you double-click through that, they're running probably ahead in the suburban assets and maybe a little behind in the urban assets. So that's where we're seeing some of these suburban assets and some of the ones we completed recently like Great Neck, which we completed last year or Rockville Centre Phase 2, where we did quite a bit better than we anticipated. So that's maybe where we're seeing it more.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

And we'll go next to Rich Hill with Morgan Stanley.

--------------------------------------------------------------------------------

Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS [45]

--------------------------------------------------------------------------------

Quick question for me. Look, I'm sort of thinking back on your foray into the Denver market a couple months ago. And I'm wondering if there's any markets that you're not in right now, where you're seeing sufficient migrations to those markets or maybe the development yields are a little bit more accretive. So said another way, are there any markets that you're keeping your eye on that maybe you're not in right now? Or are you comfortable with where you are in the so-called late cycle?

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [46]

--------------------------------------------------------------------------------

Rich, Tim here. I'd say we're comfortable with where we're at with the addition of those markets. It doesn't mean that there aren't other markets particularly in the Sunbelt where development isn't accretive, but one of the things we struggle with in some of those markets is, can we gain sort of a competitive advantage relatively quickly and sort of leverage some of our key sort of core competencies. And it's harder to make that argument, certainly in Dallas and Atlanta where there's a lot of really super talented merchant builders in those markets and even a REIT or two, that we can go in there and create sort of a winning position. Where we felt like we have that opportunity potentially in Denver and southeast Florida for a number of different reasons. But we feel pretty good about where we're at right now in terms of the revised footprint.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

We'll take our next question from John Pawlowski with Green Street Advisors.

--------------------------------------------------------------------------------

John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [48]

--------------------------------------------------------------------------------

Matt, of the $1.2 billion in capital costs yet to be spent on current pipeline, how much of this cost is exposed to rising construction expenses versus what's been locked in?

--------------------------------------------------------------------------------

Matthew H. Birenbaum, AvalonBay Communities, Inc. - CIO [49]

--------------------------------------------------------------------------------

Really almost none of it. When we start a deal, and we have what we call a Class 3 budget, at that point, we've already bought out probably between 60% and 70% of the major trades. And then the remaining piece generally gets bought out in the first 90 to 120 days of the deal. So the reality of it is everything that's under development that's on that schedule, it's already basically bought out now. Occasionally, you may have a situation where a subcontractor can't perform at that number because they didn't understand their labor cost structure, whatever and they may go under, and then we may have to replace them, and we have contingencies for that. But our history has been pretty impressive over a long period of time in our ability to deliver on budget. So we don't really view that as where the risk is. The risk is probably more in the deals that we have not yet started and whether they will actually -- when we go to start them where the cost will be versus where we think they are today.

--------------------------------------------------------------------------------

John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [50]

--------------------------------------------------------------------------------

Okay, makes sense. Second question is around Costa-Hawkins, Tim. I know it's nearly impossible to underwrite what the impact's going to be and nothing -- if it does -- a repeal passes, nothing may change on the ground overnight. But from a portfolio management perspective, I guess, as a REIT, how do you manage the risk of Costa-Hawkins over the next couple of years in terms of your California concentration and long-term growth you'd underwrite in California?

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [51]

--------------------------------------------------------------------------------

Yes. John, it's Sean. Maybe I'll make couple of comments, and then Tim can certainly chime in. But as you indicated given the nature of the issue, which is basically repealing something that limits the ability of local jurisdictions to enact rent control doesn't necessarily tell you what will actually happen. So it's very difficult to predict from a portfolio standpoint. What I'd say is we certainly know which jurisdictions could be more likely to enact rent control on post 95 buildings given their sort of public policy efforts to date and this glance at the councils and all the other things that we know about the local jurisdictions. Whether that actually happens or not, who knows? You can make bets jurisdiction by jurisdiction. So to the extent that we're thinking about our portfolio, we -- to the extent this was repealed, we'd certainly be thinking about those jurisdictions first in terms of what our exposure might be. I'd say most of those are in Northern California as opposed to Southern California. There are a few in Southern California that you'd probably be watching, but there's also other things you might consider doing in terms of what it might do to the housing shortages that already exist. It's only going to make it worse to the extent that rent control is enacted. You may be looking at some of those deals that you have maps on and converting some of them to condos in some of those jurisdictions where you think the risk is high and/or other potential opportunities. So we'll see where it goes. There's a lot more to come on this topic. But I mean, there's no question that rent control has proven to be bad public policy where it's been adopted. In this case, our expectation is only that it would exacerbate the housing shortage in California to the extent Costa-Hawkins was repealed and rent control was adopted fairly widespread across the state. We don't think that's likely in terms of widespread adoption, but it's something we certainly want to be mindful of in terms of strategy. But Tim, I don't know if you...

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [52]

--------------------------------------------------------------------------------

John, it also is a function, as you know, what form is it adopted in. I mean, to the extent it has a vacancy decontrol feature, that's not as harmful. In fact, you might argue that it could enhance the value of the asset depending upon whether it chills new construction. Certainly, we've seen that in some of the submarkets we do business in, whether it's in San Francisco or Santa Monica or some others. But I guess, it is a risk of our markets. I mean, we are in sort of the high cost-of-living blue states where every once in a while, these things are going to rear their head and no matter how well intended they are as Sean mentioned, they are bad public policy and you hope the outcomes of that ultimately get course corrected over time because ultimately, these economies need good market rate rental housing in order to continue to serve the kind of talent that they need to continue to grow. And if it's a contracting economy, that's probably worse than a growing economy with higher cost of housing.

--------------------------------------------------------------------------------

John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [53]

--------------------------------------------------------------------------------

That makes plenty of sense. But if the repeal does pass, do you think it's likely that you take your 40% of NOI concentration in California much lower?

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [54]

--------------------------------------------------------------------------------

Way too early to say on that again for the reasons I mentioned. Again if it's -- if we think the form is going to have some notion of vacancy decontrol passed by local jurisdiction, that's very different than something where it's a real taking of value, which may impact a lot of our portfolio decisions, including converting some to condominium. As Sean mentioned, a lot of our portfolio is mapped in California. So we do have some flexibility and some options. So that alone, will probably take down -- if they started that, we would probably take down our concentration.

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [55]

--------------------------------------------------------------------------------

And John, keep in mind, I think where I think you'd be most concerned in terms of the enactment of rent control is probably in Northern California given the activity the last several years. As compared to Southern California, there are a couple of places in Southern California that are kind of hotspots you'd have to watch, particularly in the L.A. market I'd say. But you're probably dealing really with half of that 40% in our case, more like 20% you'd be concerned about the specific jurisdictions where it could be problematic. But it very likely could result in just fewer deliveries overall. So it could be very attractive. And if you look of what's happened already just in response to JJJ in L.A., the volume of applications is down pretty dramatically and people can't seem to get anything done in L.A. right now as a result of it.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

And we'll go next to Dennis McGill with Zelman & Associates.

--------------------------------------------------------------------------------

Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [57]

--------------------------------------------------------------------------------

Appreciate the supply outlook that you provided on Slide 7 on the amount of work that you guys do to get there. If I look at the 2018 bars, they seem to be accelerating both in absolute terms as well as the year-over-year pressure versus '17. And I don't know if that's splitting it too closely, but seeing that type of trajectory and then same-store revenue being roughly stable through the year, can you just maybe connect the 2? And if you think there's something else that's going to be offsetting the supply to hold growth where it is?

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [58]

--------------------------------------------------------------------------------

Dennis, maybe I'll start, and others can chime in. I think it's a fair point you're making. I think our guess is some of the Q3, Q4 will get delayed until 2019. And probably why I said in my prepared remarks sort of really leveling off and maybe a modest decline in 2019. Our expectations today are basically I think around 2.3% additional supply in '18 and 1.8% in '19, but we suspect that, that will continue to sort of shift out and level off as we've seen over the last couple years, but these are our best estimates based upon what we know today. But as we mentioned in the past, you saw it last year with us. We had more delays I think than we've had in the history of the company, and a lot of it just comes down to as Matt mentioned, just the availability of skilled labor, subcontractors defaulting on their obligations at a rate more than they have in the past. So I think that's what -- explains it in part, but we're also seeing stronger wage growth. So while job growth may be relatively level, wage growth is stronger. That just provides more wallet share for housing. And then lastly on top of that, we think household formation is growing faster than new construction if you look at the total housing market, which has some ancillary benefits to the rental sector.

--------------------------------------------------------------------------------

Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [59]

--------------------------------------------------------------------------------

Okay, that makes sense. And to the degree some of that gets kicked into 2019 and call '19 sort of flattish to down a little bit, which markets would sit most extreme versus that, up or down?

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [60]

--------------------------------------------------------------------------------

Yes, Dennis, this is Sean. To provide a little bit of color on that. Maybe extend what Tim said, in terms of our footprint, '17 deliveries were 2.1% of inventory. '18, as Tim said, is projected to be 2.3%. But given delays and such, it's probably going to end up being about the same as 2017. And what really matters in terms of revenue performance is where that supply is concentrated. So it would help for us as an example, in 2018 supply is actually down about 100 basis points in the New England markets as compared to 2017 even though it might be up heavily in Seattle, which is only 5% to 6% of our portfolio. So the mix of it matters quite a bit. In terms of our overall projections, we have projected rent change to be down about 20 basis points relative to 2017 levels for the full year 2018. So there's some deceleration in there. But market mix certainly helps us. When you look forward to 2019, to give you some sense of the expected change based on what we know today, the markets that would have the most material reduction in deliveries are in the New York, New Jersey region, including the city, which is expected to decline from around 13,000 units being delivered this year to about 6,700 next year; and northern New Jersey, which goes from about 9,000 to about 7,000; and then in Southern California where we're talking about roughly 2% of inventory being delivered this year. It drops down to about 1.25% in 2019, which is spread across all 3 major markets in Southern California. L.A. goes from 14,000 to 10,000; Orange County, from 6,000 to 3,000; San Diego, from 5,000 to 3,000. So it's pretty widespread in Southern California. Those are the 2 markets where you see the most material reduction in deliveries. New England's down 30 basis points, and then the only region that you still remain concerned about, really 2 regions are the mid-Atlantic and the Pacific Northwest, which is still going to be in absolute numbers pretty high, 2019 about 2.7% in the mid-Atlantic and still roughly 4% in the Pacific Northwest. The other markets are starting to look better. Those 2 will continue to have some challenges through 2019 in terms of deliveries though.

--------------------------------------------------------------------------------

Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [61]

--------------------------------------------------------------------------------

Very helpful, and then just one last one on D.C. You mentioned that's another area for mid-Atlantic in general that's going to be elevated again next year and yet that's a market that just had low growth for quite some time. So what's your perspective on why this supply keeps coming there even though the fundamentals have been softer than other areas, construction costs I'm sure an issue there like elsewhere, capital probably similar as elsewhere, what's causing that to drag on so long?

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [62]

--------------------------------------------------------------------------------

Dennis, it's simply that there's been a lot of profit made by multifamily builders and it continues. So the deal we completed this quarter was a good example of that. It's been one of our better lease-ups. But yes, we built that for about 340 a door, 350 a door, and it's probably worth north of 500 a door. So people -- merchant builders continue to make money, it's been a good trading market. Cap rates continue to be in the 4s. We have an asset on the market right now, a 12-, 15-year-old asset, Matt, where it's got probably as much interest as any asset that we're selling this year. So it's been a good trading market. And if you talk to the office guys, they will say exactly the same thing, tough fundamentals but boy, there's still value there on the trade.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

(Operator Instructions) We'll go to Alexander Goldfarb with Sandler O'Neill.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [64]

--------------------------------------------------------------------------------

Just 2 quick ones for me. First, obviously, appreciate the comments on what's going on in California. Can you just talk about your thoughts, Tim, on New York with rent control? Clearly the Senate fight here, a lot of it was to try and rally and change the rent control loss here in New York. So can you just give your view. And if this affects newer construction? Or it is this really only for the sort of legacy buildings that already have rent control as part of it?

--------------------------------------------------------------------------------

Sean J. Breslin, AvalonBay Communities, Inc. - COO [65]

--------------------------------------------------------------------------------

Yes. Alex, that's a good question and probably a long-winded answer. Why don't we try to call you offline on that one in terms of the nuances associated with that because it's a pretty nuanced issue. If that's all right with you?

--------------------------------------------------------------------------------

Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [66]

--------------------------------------------------------------------------------

That works, and then the second question is, you talked about elevated supply for the next several years. And obviously, in the pipeline, your development yields have come down as costs have gone up, et cetera. Just based on where your yield, you're delivering in the sort of high 5s, and you're trading in that sort of mid implied 5% cap range, do you guys think about reducing the pipeline even more? You've already scaled it back about 1/3. Do you think about scaling it back even more just based on your comments that you expect elevated supply for the next 2 to 3 years?

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [67]

--------------------------------------------------------------------------------

Alex, it's Tim. We might. It's hopefully going to turn on the economics of those deals as they get prepared for starts. But yes, maybe just to put a little bit more numbers on it. I mean, we're delivering today call it in the 6 to 6.5 range, and I would tell those assets are probably worth in the -- probably no higher than a 4.5 cap what we're delivering versus we're probably trading in the 5.5 range on a portfolio that maybe is more like a 4.75 kind of portfolio. So today, it's still probably -- it makes sense to do some development but not as much as we've done in the past. And as Kevin mentioned, we're down, it's down 30%, 40% from kind of the '13 to '16 peak. But to the extent we continue to see more deterioration both in the yields and potentially in our stock price, you start to have different kind of capital allocation options that become more attractive. So I think it's certainly -- there's potential. The 900 could become 700 or 600 depending upon which deals still make sense as cost of capital and market conditions warrant.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

Okay. And we'll go next to Tayo Okusanya with Jefferies.

--------------------------------------------------------------------------------

Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [69]

--------------------------------------------------------------------------------

Just one quick one for me. Are you seeing any differences in behavior around tenants looking at your AVA -- or tenants in your AVA, eaves and AvalonBay assets just in regards to sensitivity to rent increases? So how aggressively they are looking for concessions when they're trying -- when they're thinking of moving in.

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [70]

--------------------------------------------------------------------------------

In D.C., specifically, you're talking about, Tayo?

--------------------------------------------------------------------------------

Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [71]

--------------------------------------------------------------------------------

Just kind of across all the markets, if you're kind of seeing anything that's really different across the 3 product types with regards to...

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [72]

--------------------------------------------------------------------------------

Yes, I would say by product type, it's more a function of the local dynamics of supply and demand in that environment and how strained people might be in terms of yes, you're looking at rent to income ratios and things like that, it's not all that different. To be honest, it's -- across the markets and the brands, it's really a function of what's happening in that local environment and how quickly rents are growing relative to incomes and right now, we've seen pretty good growth incomes across all kind of segments if we're going to describe it that way. And so far, there's no material difference across the brands.

--------------------------------------------------------------------------------

Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [73]

--------------------------------------------------------------------------------

Got you. What about specifically the -- in oversupplied markets?

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [74]

--------------------------------------------------------------------------------

I'm sorry. Say it again.

--------------------------------------------------------------------------------

Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [75]

--------------------------------------------------------------------------------

What about specifically in oversupplied markets as you were insinuating before anything...

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [76]

--------------------------------------------------------------------------------

Not necessarily pressure from, I can't afford that. I think that's sort of been constant across the brands. It's more a function of what can they get down the street. So if there's plenty of supply that we happen to have in submarket if we happen to have a high-end asset in a submarket, we still need to be pretty thoughtful about how we handle renewal offers and pricing in a very competitive environment as compared to one where it's not quite as competitive. So that certainly comes into play. It's less competitive in the suburban environment as I mentioned earlier relative to the urban submarkets, but that does really kind of what(inaudible).

--------------------------------------------------------------------------------

Operator [77]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Timothy J. Naughton, AvalonBay Communities, Inc. - Chairman, CEO & President [78]

--------------------------------------------------------------------------------

Yes. Thanks, Cassie, and thanks, everybody, for being on today, and we look forward to seeing many of you in, I guess, about 6 weeks at NAREIT. Take care.

--------------------------------------------------------------------------------

Operator [79]

--------------------------------------------------------------------------------

This does conclude today's call. We thank you for your participation. You may now disconnect.