AvalonBay Communities Earnings Call Nuggets: Revenue Management and Archstone Portfolio Performance
AvalonBay Communities Inc (NYSE:AVB) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Gaurav Mehta – Cantor Fitzgerald: First question that I have is on 2013 guidance. So your same-store revenue guidance of 3.5% to 5%, what’s the operating strategy behind achieving that in terms of are you planning to post – how much rents are you planning to post next year on the upper end and the lower end of the guidance?
Sean J. Breslin – EVP, Investments and Asset Management: Yes, Gaurav, this is Sean Breslin. We run revenue management similar to most of our peers and so it’s a blend of occupancy shifts and rental rate shifts that’s really pretty dynamic, and it gets down to not only the asset level but the unit type level in terms of whether one-bedroom, two-bedrooms or three bedrooms are performing better or town homes versus flats. So there’s not one precise answer other than we are trying to optimize revenue, which means potentially different strategies in different markets depending on supply/demand dynamics as well as the supply/demand dynamics at the asset in the submarket level. So there’s not one generic answer to that question unfortunately.
Gaurav Mehta – Cantor Fitzgerald: Then I want to go back to your initial comments on your three different brands. I think you mentioned that all the three brands are being very well received in the market. So I was wondering if you could talk about if you are seeing any difference in operating metrics among the three brands in terms of like your ability to push rents more on the Avalon side or AVA side or Eaves side.
Timothy J. Naughton – CEO: Gaurav, Tim Naughton here. It’s still too premature to talk about it in terms of those operating metrics. One of the things we have that I think John had mentioned AVA H Street in terms of how well received that’s been in the market where rents have outperformed our expectations there. I think that’s one of the things that we’ve been pretty consistent in saying as we think in many ways is benefits is going to be on the return on initial capital, as it relates to delivering a distinct product to a targeted segment, as opposed to trying to deliver a product that appeals to multiple segments where often times you over program the community. I think that was – that community is a really good example, it’s not trying to be all things to all people, really seem to hit a mark in that particular sub-market and we’re being rewarded with a very healthy yield relative to what you might normally expect in the Washington market.
Gaurav Mehta – Cantor Fitzgerald: Last question that I have is on Archstone acquisition and how that impacts your developing pipeline. Tim, on the last call, you mentioned that your development pipeline is running around 11% of market cap. So now that you are acquiring the Archstone portfolio, does that change your outlook on how big your development pipeline can be from organizational capacity or how much you want to grow?
Timothy J. Naughton – CEO: Gaurav, we were already planning on growing the pipeline next year. Without the Archstone acquisition the pipeline would have gone from about $1.8 billion to about $2.5 billion by the end of the year, with the acquisition it will go to about $3 billion by the end of the year. So it does grow the pipeline by about 20% if you will, which is about the same percentage if you just looked at the numbers I have mentioned before, we’re going to bring about 1 billion of new development in and including what’s under construction on top of a pipeline that is currently about of 4.6 billion. We are bringing some new development and construction folks along as well, so we are growing the capacity of the Group commensurate with the amount of production that we expect as a direct result of the Archstone deal. And we do think particularly as you look out for the next cycle, this allows us to scale up the development platform, maybe not exactly commensurate with the 35% to 40% growth that we’re bringing on, but pretty close in our sense. So next year we’re expecting $3 billion, peaking at around $3 billion. It will be about 13% of enterprise value, so it’s actually up from 11% right now. But (indiscernible) plan that would have been up into the 14% to 15% range anyway. So we’re maybe – it’s maybe dilutive by about 100 to 200 basis points from where we would have been in the event we hadn’t done the acquisition.
Gaurav Mehta – Cantor Fitzgerald: And a last follow-up question. On the last call you mentioned that you had been adding most resources on the development side in Southern California and that you could start two to three deals a year in that region. Now that you’ve acquired the Archstone portfolio, it’s going to increase your exposure to Southern California quite a bit compared to what you had earlier. So does your previous view still hold in terms of development in Southern California?
Timothy J. Naughton – CEO: It does. Even at that level, it’s not an over index, if you will. This transaction, one of things we liked about it was we thought it was market concentration. It gets us very close to where our long-term targets have been across different geographies, but Southern California we think is scaled appropriately relative to how we want to continue to grow our presence in that market relative to the overall portfolio.
Archstone Portfolio Performance
Ross Nussbaum – UBS: I’m here with Derek Bower. Couple of questions for you; first on Archstone can you give us any color on how that portfolio performed in the fourth quarter and what your expectations are for same-store growth from Archstone relative to what you think your existing portfolios may do in 2013.
Sean J. Breslin – EVP, Investments and Asset Management: This is Sean Breslin. One thing that we have looked at in completing this transaction is sort of the long-term growth rate of our existing portfolio relative to the Archstone portfolio of assets we are acquiring. And our expectation is that over the long run this is spread there, that’s probably in 30 to 50 basis point range. And based on what visibility we have today, I wouldn’t be surprised if that’s – what we would expect during 2013. And specific to Q4 it’s top of my head but that’s our expectations sort of long-term and sort of what we are seeing at least so far in 2013.
Ross Nussbaum – UBS: So, just to clarify you are saying Archstone will be a greater higher growth rate here.
Sean J. Breslin – EVP, Investments and Asset Management: Correct, it’s 40 to 50 basis points over the long run, that’s correct.
Ross Nussbaum – UBS: Second question on the Mid Atlantic, can you help breakout what was the new lease versus renewal growth in the fourth quarter. I’m trying to get a sense for just how precipitously the growth has been slowing there.
Sean J. Breslin – EVP, Investments and Asset Management: Sure. And it does vary by sub market. So to provide a little context there. I experienced recently it has been that Suburban Maryland and Baltimore regions have been a little bit software in terms of overall performance. And it’ has been holding up a little bit better in the Suburban Virginia market and in the core of D.C. the one things to keep in mind relative to D.C. at least for us is our same-store basket and D.C. home represents two assets. So, it’s a little bit skewed there and then in terms of rent change in the Mid Atlantic, we are closed to 4% on renewals in the fourth quarter, but slightly negative in terms of new move ins in the fourth quarter and again there is some asset noise in there that moves things around, but those are the numbers overall for the Mid Atlantic in the fourth quarter.
Ross Nussbaum – UBS: Third question is on the capital market side, $700 million to $900 million of activity you plan on doing this year since you’ve terminated the interest rate lock you had. Are you saying that that’s all going to be equity now?
Thomas J. Sargeant – CFO: Well, we have not terminated that hedge. So, I should probably emphasize that it’s still outstanding. We are still evaluating the hedge and our capital markets activity for the year. What we are trying to telegraph is that if you look at the capital raising activity, we’ve done over the last two years since we put that hedge in place. We’ve done over $10 billion of new capital in the last two years, through the Archstone transaction. In other words, if you take April of ‘11 through April of ‘13, we would have raised $10 billion of capital and this is a Company that normally would raise over two year period $1.5 billion. So, it’s 7.5 to 10 times what we normally would have done. And that is a very different obviously outcome than we thought we’d have in April when we did that hedge. So, it’s fair to say that we are reevaluating our need for debt capital in 2013 given the amount of capital activity we’ve had over a couple of years and I would say that debt-to-EBITDA levels which will be in the high 6% range upon closing is something we would like to work down and work that down, the quickest way to do is to grow your EBITDA and not issue a bunch of debt. So we have somewhat of a very focused intent to get that debt to EBITDA number down and that could impact our unwillingness to issue new debt in 2013 which would also therefore require us to break that hedge.
Ross Nussbaum – UBS: Last question from me. I want to make sure we have got the right numbers in FFO in terms of what the non-cash impact is of the mark on the Archstone debt? Are we looking at a number that’s somewhere in the $0.30 a share range that’s embedded in the guidance?
Thomas J. Sargeant – CFO: Yes. Embedded in the guidance for the year is about $0.22. If you stabilize that for a full year it would be about $0.26. Also that $6.15 it’s important to remember that that number is not a stabilized number. There is $0.15 of dilution in the first quarter because we are sitting on about $2.8 billion of capital and that’s – so if you think about that $6.15 and the $0.15 of dilution and then adjust for the full year if you will of that dilution of – or that accretion of $0.26 you get to an adjusted FFO number on a cash basis that’s about 10% higher than last year which approximates our dividend increase.