AvalonBay Communities Earnings Call Insights: Occupancy Gains and Development Strategy
Jana Galan – Bank of America Merrill Lynch: You had very impressive occupancy gains across all your markets and I was just curious, if this was the result of stronger job growth and demand or is it part of your strategy to keep occupancy high as we see these first waves of new supply hit the market?
Sean J. Breslin – EVP, Investments and Asset Management: Yes. Jana this is Sean. Really two things, one; is typically run at a higher occupancy platform. Certainly that is fueled by healthy demand, the job numbers have been a little bit better than expectations, which have supported that. It also – there is a little bit of a seasonal component to it first off, so that we are typically building occupancy through the first quarter, end of the second quarter as we start to push rates harder, which is something that you saw in the second quarter. Then as we get into the back half of the year, we will also try to be building a little bit higher occupancy platform as we go into the slower season through the winter. As you are talking about supply, that is something that we consider more from a tactical point of view within specific sub-markets based on anticipated lease-up activity, and when those deliveries start to occur. It’s not necessarily a global strategy, if you want to call it that, it’s much more tactical in nature based on local conditions.
Jana Galan – Bank of America Merrill Lynch: Then just on the development pipeline and a big focus of the first quarter call was rising construction costs. Just curious in terms of kind of the new rights that you’re buying and land parcels, how are you thinking about future construction costs and yields?
Timothy J. Naughton – Chairman and CEO: Jana, this is Tim. In terms of construction costs they are basically back to the prior peak. So while they’d gone down between 20% and 25% depending upon the product type, they’re basically back to peak. It depends on whether you’re talking about concrete or wood-frame construction. They – it varies a little bit. But in terms of underwriting, we continue to underwrite the way that we always have. It’s a little difficult to project construction costs on something that may take three or four years to get through the entitlement process. So we do look at it as a, really on a current yield basis as if we’re building it today, and delivering it into the market today and leasing it up. To the extent we have a view about construction costs and the direction of the market, whether it’s rents or construction costs, and that, impacts maybe at the margin the kind of yields we might look for. But that’s more at an intuitive level, I would say, than an analytical level. It really – it probably helps shape more how we think about how aggressive we want to be as opposed to any particular deal.
David Toti – Cantor Fitzgerald: I just have a sort of high level question. You covered a lot of the detail on the call, but when you think about the acceleration in the development pipeline sort of higher volumes, a bigger investment, maybe it’s about supply or absorption or job creation that causes you to pause, maybe it’s a disruption of the capital markets potentially, higher cost of capital down the road. How do you weigh those two sort of macro factors relative to deciding to move forward and even higher volume of product deliveries?
Timothy J. Naughton – Chairman and CEO: Well David maybe I will start and Tom feel free to jump in. I guess where I had start, higher capital costs could impact not just – it just doesn’t impact development – development strategy, it impacts your stabilized portfolio. As Tom mentioned in his comments we are delivering new product for 280 a door versus our 17-year old stabilized portfolios worth 330, 340 a door. So if you get on the other side of those portfolios I think you prefer to own the one that’s 280 a door and brand new. While the fact is that at some level David it’s – I would say probably replacement cost is a bigger driver in terms of how we are thinking about – relative to current values how we think about overall level of development. But certainly it factors how we finance a development as we are starting and Tom maybe just touch on that a little bit in terms of some of the things we are doing from a matching standpoint.
Thomas J. Sargeant – CFO: Sure. Well David, as you have probably heard me speak to in the past we have something that we have dubbed integrated capital management, which generally requires – generally a guideline is that we match fund our starts as they happen through either equity and debt or dispositions or some mix of capital. If there were a disruption in the capital markets unless it’s a protracted disruption, it would really impact future starts. We think that this risk is substantially mitigated by this integrated capital management program or the concurrent funding of our development activity with new capital. So, I guess it is a concern. It’s one that we always raise and I think we’ve presented at our Investor Day. Our long-term look at liquidity as well as our short-term look, but we think the way we run the balance sheet in the way we have the structured program in place, really substantially mitigates the risk that could come from a disruptive capital market.
David Toti – Cantor Fitzgerald: The yield appear to have compressed a bit in the most recent – in the recent quarter and I guess, is this a sort of a spot compression, is this something we can kind of expect to continue into the end of the year as you sort of push more of this product and more of this development starts grow? Or can we start to expect to see that begin to widen out a bit towards year end?
Timothy J. Naughton – Chairman and CEO: Yeah. David. It is in a play of a few things happening there. First of all, I think as Tom mentioned in his remarks, more of the pipeline is West Coast oriented over the last two, three years was generally – is lower yielding, lower cap rate, lower yielding developments. Roughly East Coast deals, you underwrite the current yields of call it high 6s or 7%, West Coast closer to 6%. So, you are getting a little bit of that waiting, a little bit of a mix issue that’s driving the average projected yield, and then, we just don’t have that many deals in lease-up right now. I think I have the 27 that are listed on there. Those maybe – as I said, maybe seven, eight, 10; that are in lease-up. And so as deals start to come to market in terms of lease-up, just given the momentum and strength we’ve seen in the market, we actually would expect to see some of those yields come up. And I think we actually have six or seven starting lease-up in the third quarter alone. So, the combination of maybe a bit more West Coast coming in will certainly have lower yields and starting to ramp up the leasing activity in Q3 and Q4. I think you are going to see a little bit of inter-play between those factors that are maybe working in a little bit opposite direction.
David Toti – Cantor Fitzgerald: Then my last question, sorry to keep going. Are you guys seeing the change in the appetite at the municipal level when you go through the zoning permitting, staging. You are obviously trying to increase density and change some land parcel zones. Are you seeing any resistance at this point at that level to new supply for apartment product given a pretty big jump in construction levels sort of more broadly?
Timothy J. Naughton – Chairman and CEO: Well, I guess a few comments. A lot of the increase in production has been at urban submarkets, and generally the entitlement process is not as intense. You don’t have the same kind of level of an (embism) in the urban submarkets as you do in the suburban market. Then the other thing I’d say, a lot of the stuff that’s been produced or started to-date were deals that were already entitled that had partial entitlements in place before the downturn. So, they just weren’t as politically charged. Having said that, I mean there are some – I think we’ve mentioned in the last couple of quarters, we’re kind of refocusing back on the suburbs in many cases, our business back to usual, creating value through the entitlement process, and there are some projects that we’re involved with as well as, I’m sure, some of our peers that are kind of back to slugging through the entitlement process and working through that over two, three, four-year period. So, is it more charge than it was at the end of the last cycle; these things tend to be a little cyclical in nature, and there’s still a dearth of activity generally as it relates to construction, and in the Northeast where it tends to be more political. They’re in – most municipalities are in (search) ratables, and so, they’ve been a little bit more accommodating outside generally to a multi-family proposal.
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