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AvalonBay Communities, Inc. Q2 2010 Earnings Call Transcript

AvalonBay Communities, Inc. Q2 2010 Earnings Call Transcript

AvalonBay Communities, Inc. (AVB)

Q2 2010 Earnings Call Transcript

August 4, 2010 1:00 pm ET


John Christie – Senior Director, IR & Research

Bryce Blair – Chairman and CEO

Tim Naughton – President

Tom Sargeant – CFO

Leo Horey – EVP, Operations


Eric Wolfe – Citi

Jay Habermann – Goldman Sachs

David Harris – Broadpoint Gleacher

Alexander Goldfarb – Sandler O' Neill

Michelle Ko – Bank of America

Dave Bragg – ISI Group

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Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities second 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-answers session and instructions will follow at that time. As a reminder, this call is being recorded.

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

Thank you Lisa, and welcome to AvalonBay Communities second 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. The attachment is available on our website at, and we encourage you to refer to this information during the review of our operating results and financial performance.

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

Bryce Blair

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

In our remarks, I’ll be highlighting our results for the quarter and we’ll be discussing our outlook for the second half of the year as well as some thoughts on 2011 and ‘12. Tim will be addressing both our portfolio performance and our investment activity.

For the quarter, we reported EPS of $0.61 and FFO per share of $1.04. Both the EPS and FFO were above the updated financial outlook that we provided in early June, due primarily to better than expected performance on the expense side, both of which is timing related.

Our revenue performance both on a year-over-year and sequential basis continue to show significant improvement. Our same store sales portfolio showed sequential revenue growth of 1.3% for the quarter and four of our six regions showing positive growth. This is our first quarterly sequential growth in over a year and half and is consistent with our recently updated financial outlook.

In January, when we gave our original guidance we stated that we expected 2010 to be a year of transition. One, where we would see improvement in jobs, corporate fundamentals and same store sales performance. In June, we released an updated outlook raising our estimates of 2010 revenue, NOI and FFO performance, in response to the significant improvement we’re seeing in our portfolio.

Our second quarter results and early third quarter metrics continued to substantiate improving fundamentals and allow us to reaffirm the financial outlook that we provided in early June.

So what’s driving this improvement? There is number of factors which can be grouped into four product categories. First, an improving albeit bumpy economic recovery; second, a weak for-sale housing market, which is resulting in a decline in ownership rate; third, demographics that will continue to benefit rental demand; and finally, a significant reduction in the delivery of new apartment. I want to touch on a few of these factors.

First on the economy, the economy continues to grow, ye the pace of growth slowed during the second quarter, and it’s not unusual for an economic recovery to be bumpy during the first few quarters out in inflection point and this recovery is no exception.

This uneven recovery is likely to continue to the rest of the year with moderate growth in both GDP and job gains. Job gains both year-to-date and for the full year is expected to average about 100,000 a month, which is a welcome change to the average of over 400,000 jobs per month loss last year, but still not strong enough to bring the unemployment rate down.

It will likely be into 2011 before we begin to see the positive effects of the current trends of rising corporate profits, low interest rates and improved access to credit as these hopefully begin to translate into rising business and consumer confidence and ultimately stronger private sector hiring.

Turning to the housing markets, I think it’s time to overemphasize the positive impact that the weak for-sale housing market has and will likely continue to have on the rental market. The ownership rate fell again during the second quarter and is now just below 67%, the lowest rate in over ten years.

This decline is in spite the positive effect of the Federal home buying tax credit, which is still available during the second quarter. In terms of this tax credit, the homeownership rate would undoubtedly have fallen further. Many would be buyers remain on sidelines because of appropriately tighter lending requirements, fears that home prices may continue to fall and continued uncertainty over the strengths of the economic recovery.

The recent article in Barron’s provided a forecast that the homeownership rate would likely drop to 64% by 2015, a level somewhat what we experienced over the 35-year period from the early 1960s to the mid 1990s.

Another article earlier this week suggested that homeownership rates could fall to as low as 62%. Assuming the rates fall to just 64% will create additional 3.5 million rental households during next five years or about 700,000 per year from this catalyst alone.

Now, our jobs have been and will continue to be an important driver for apartment demand. It’s likely that changes in the for-sale market may have even larger impact in job growth on the strength of the apartment markets in the coming years.

Finally let me touch on new supply. In multifamily rental start so far for 2010, are running in an annualized rate for about 70,000 for the year. The global production is only about a third of the historical average, and is approximately equal to the annual loss due to obsolescence. Given that there was a similarly modest level of apartment starts in the second half of ‘09, it will be the equivalent of Net Zero deliveries of new multifamily products in the ‘11 and ‘12.

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