AvalonBay CEO Discusses Q3 2010 Results - Earnings Call Transcript

AvalonBay CEO Discusses Q3 2010 Results - Earnings Call Transcript
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AvalonBay Communities, Inc. (

AVB

)

Q3 2010 Earnings Call Transcript

October 28, 2010 1:00 pm ET

Executives

John Christie – Senior Director, IR and Research

Bryce Blair – Chairman and CEO

Tim Naughton – President

Leo Horey – EVP, Operations

Tom Sargeant – CFO

Analysts

Michael Salinsky – RBC

Alexander Goldfarb – Sandler O' Neill

Rob Stevenson – Macquarie

Jay Habermann – Goldman Sachs

Michelle Ko – Bank of America-Merrill Lynch

Eric Wolfe – Citigroup

Ross Nussbaum – UBS

David Harris – Gleacher & Company

Andrew McCulloch – Green Street Advisors

Tayo Okusanya – Jefferies & Co.

Karin Ford – KeyBanc

Paula Poskon – Robert W. Baird

Ralph Davies – JP Morgan

Haendel St. Juste – KBW

Presentation

Operator

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Previous Statements by AVB
» AvalonBay Communities, Inc. Q2 2010 Earnings Call Transcript
» AvalonBay Communities, Inc. Q1 2010 Earnings Call Transcript
» AvalonBay Communities, Inc. Q4 2009 Earnings Call Transcript
» AvalonBay Communities, Inc. Q3 2009 Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities third quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks by the company, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s call, Mr. John Christie, Director of Investor Relations and Research. Mr. Christie, you may begin your conference.

John Christie

Thank you, Sara, and welcome to AvalonBay Communities Third Quarter 2010 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 is 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, the 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 discussions and the attachment is available on our Web site at www.avalonbay.com/earnings. We encourage you to refer to this information during the review of our operating results and financial performance.

With that, I’ll turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities for his remarks. Bryce?

Bryce Blair

Well, thank you John. On the call today are, Tim Naughton our President; Tom Sargeant our Chief Financial Officer; and Leo Horey, our EVP of operations. Tim and I will share the prepared remarks and all four of us will be available for Q&A.

I’ll be addressing our quarterly results and then comment briefing on market fundamentals and trends in our portfolio, while Tim will provide some additional comments on our portfolio and then will be highlighting on investing activity during the quarter.

Despite concerns regarding the pace of the economic recovery, apartment fundamentals continue to improve in our markets. This continued strength led to stronger than expected results with regard to our portfolio performance and an active quarter with regard to our level of investment activity.

For the quarter EPS was $0.29 and FFO was $0.98, both above the range we’ve previously provided. These results were driven by better than expected revenue performance and savings and interest expense, which is partially offset by higher than expected property level expenses.

For our same-store sale portfolio, year-over-year revenues increased modestly. The first year-over-year increase since the fourth quarter ‘08 and sequentially, revenues increased at a rate similar to what we saw in the second quarter.

For the fourth quarter, we expect the rate of sequential revenue growth to be roughly similar to what we saw this quarter and year-over-year revenue to continue with positive trend.

As a reminder, our year-over-year revenue trended from negative 4% in the first quarter to about negative 2% in the second, with modestly positive this quarter and we expect it to be up around 3% in the fourth quarter.

Based upon the better than expected quarterly performance and our outlook for the fourth quarter, we have raised our full year outlook for FFO by $0.07 from the prior outlook in early June.

While the drivers of recovery in the apartment sector is fairly well understood by now, a few points are worth nothing. First, with regard to jobs, while private sector jobs growth remains weak, it is positive and with job growth there is disproportionately few, the younger age cohorts.

The pace of hiring among young adults goes under 30 has reportedly added strongest pace since the mid 80s. As this age group tends to be primarily runners, it does explain some of the unbundling the apartment sector is benefiting from. While the absorption of apartments during the first half of this year was at its highest in over 15 years.

Second, the declining homeownership rate which has been helping rental demand. Not surprisingly, in our portfolio we saw the percentage of move-outs due to home purchase drop to about 14% during the quarter.

Despite improved home affordability, this is at the very low end of the range of our historical experience and reflects continued weakness in for-sale segment, and the elimination of the homebuyer tax credit, which artificially stimulated demand in the first half of the year.

Third is demographics. Our sector continues to benefit from improving demographics as a result of the influx of the echo boomer segment. Today, there are now more U.S. residents aged 15 to 29 than 30 to 45 year olds. This is a significant change and the trend will become even more pronounced over the next five years.

Finally and, perhaps most importantly, is supply, where we’re just beginning to see the benefits of a sharp reduction. Over the last 10 years, the U.S. has added in average of about 225,000 new multifamily units per year.

This year that number will be less than half or about 100,000 units. 2011, the number completions were expected to fall again to about 70,000 units. This will be the lowest level of multifamily completion in the last 50 years.

Based upon the strength and demand combined with the sharp reductions in supply, we are projecting demand-supply rates in our markets over the next two years to be similar to what we experienced in the 2005 and 2006 time period, which is a period of strong rental growth.

With that I’ll turn it over to Tim, who’ll expand on the portfolio performance and highlight our activity for the quarter. Tim?

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