AvalonBay Communities, Inc. Q1 2010 Earnings Call Transcript

AvalonBay Communities, Inc. Q1 2010 Earnings Call Transcript
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AvalonBay Communities, Inc. (AVB)

Q1 2010 Earnings Call

April 29, 2010 1:00 pm ET

Executives

John Christie – Director IR

Bryce Blair – CEO

Thomas Sargeant – CFO

Tim Naughton – President

Leo Horey – EVP Operations

Analysts

Paul Morgan – Morgan Stanley

Alexander Goldfarb – Sandler O'Neill

Michelle Ko – Banc of America

[Eric Walsh] – Citigroup

Jay Haberman – Goldman Sachs

David Bragg – Unspecified Company

Rich Anderson – BMO Capital Markets

Jeffrey Donnelly – Wells Fargo

Michael Salinsky – RBC Capital Markets

Paula Poskon – Robert W. Baird

David Harris – Gleacher

Andrew McCulloch – Green Street Advisors

Presentation

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Good afternoon ladies and gentlemen and welcome to the AvalonBay Communities first quarter 2010 earnings conference call. (Operator instructions) I would now like to introduce your host for today's conference call, Mr. John Christie, Director of Investor Relations and Research. Mr. Christie, you may begin your conference.

John Christie

Welcome to AvalonBay Communities’ first 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 discussion.

The attachment is available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during your review of our operating results and financial performance.

And with that, I will turn the call over to Bryce Blair, Chairman, and CEO of AvalonBay Communities for his remarks.

Bryce Blair

Thanks, John. With me on the call today are Tim Naughton, our President; Leo Horey, our EVP of Operations; and Thomas Sargeant, our Chief Financial Officer. Leo and I will share some prepared remarks and then all four of us will available to answer any questions you may have.

Last evening we reported operating results that were stronger than our prior guidance. The stronger results were primarily attributable to improved portfolio performance. In our comments today we’ll be focusing on what is driving the improving fundamentals, and the implications to our portfolio and investment activity.

For the quarter we reported EPS of $0.88 which is up almost 50% from the same period last year, an increase that was driven primarily by the gains on two asset sales during the first quarter. FFO per share for the quarter was $0.96, which is down approximately 20% from the prior period after adjusting for non-routine items yet was above the previous guidance that we provided.

Now of the outperformance during the quarter the majority came from stronger portfolio performance with the balance coming from timing of various overhead expenses some of which will reverse themselves in the coming quarters.

In my comments last quarter I said we expected 2010 to be a year of transition, transition in the economy, from job losses to job gains, and transition in both apartment fundamentals and portfolio performance.

In our prior guidance we had expected this transition to begin around mid year, however recent economic data, corporate profits, and our first quarter results suggest that this transition is already underway.

So the transition we anticipated is happening a quarter or two earlier than expected. In terms of the economy the positive GDP growth that began in the second half of last year is now favorably impacting the employment picture.

The job market began to stabilize late last year, with essentially flat job growth from November through February and with the March job’s report, is now beginning to show positive growth. The current projections for job growth while still modest are ahead of prior forecasts used in our outlook at the beginning of the year.

And the current forecast of about 800,000 for the year is about double the original projection. Now the job growth in March while helpful is certainly not by itself sufficient to explain the recent improvement in apartment fundamentals.

The improvement is likely due to a combination of factors, first the household surveys of job growth suggested actual job growth may be stronger than is what has recently been reported. And this is likely true particularly in the younger age segment which disproportionately benefits renter demand.

Secondly, the improvement in fundamentals is undoubtedly driven in part by generally rising consumer confidence. The recent released consumer confidence index rose in April to its highest level since the beginning of the financial crisis in September of 2008.

I think its fair to say that most feel the worst is behind them and probably feel the job situation is likely stable. Many had delayed making a major housing decision over the last year or two because of the prior uncertainty regarding the economy and the security of the job market.

Historically this is particularly true in the younger age segments where household [formations] declined disproportionately during a recession. Now with the generally brighter outlook and the likely strained patience of their parents or roommates, the unbundling is likely beginning as the typical 25 year old recent college grad is deciding to finally leave mom and dad’s home or his friend’s couch and get his or her own apartment.

Now this factor is hard to quantify but is consistent with what we have experienced coming out of prior recessions and is even more likely now given the size of the GenY age cohort. Another reason for the increase in renter households is the continued weakness in the for sale market which is continuing to reduce homeownership rates and increasing renter households.

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