AvalonBay: Renters Are Doubling Up

Includes: AIV, AVB, EQR, RWR
by: Judy Weil

Six key points from apartment REIT AvalonBay Communities Q408 conference call: (NYSE:AVB)

Urban cultural shifts from market trends:

I've been watching just for our portfolio's sake - am I seeing people double up? In the most recent quarter I did see that go up somewhat and it's something, while we don't keep a specific metric or statistic on people doubling up, as we're going into a more difficult economy, as people are becoming more price sensitive, it's something that I am watching. And it went from about 24% a year ago to about 29% this year, and it's something that we're just monitoring as we create strategies for operating the portfolio.


The unsecured debt market has improved in early 2009 and this market may become a viable alternative to secured debt later this year.

Last year we sourced $1.2 billion in new debt at attractive prices from a variety of sources, including the GSEs, but also tax-exempt debt, money center bank debt, and even a local bank for a long-term secured debt on a New York-based community. We used this capital to complete a significant volume of new development communities and refinanced higher cost debt and preferred stock.

We're anxious to return to the unsecured market and I think that you'd have to have the spread differential somewhere within 100 basis points before we'd take a serious look at it. I mean, with the GSE debt and this 10-year debt in the 6.25% range compared to an unsecured offering that could be done maybe around 9% today, we're still a pretty fair piece away from where it would need to align for us to do unsecured debt.

The interest rate and terms [on the local bank loan] were actually equal to or slightly better than the GSE financings. And it was about a $50 million financing.

No development plans:

We were very a active seller; however, we chose to stay out of the acquisition market and purchased no assets during the year.

We reduced our development starts by about 40%... We had written down a number of land parcels, write-off a number of development rights, and reduced our level of construction development staffing... Our future development pipeline was reduced by about 40% as well.

That doesn't mean that we're taking them to market today. It's not a good market to be selling land into and technically they're classified as held for investment as opposed to held for development or held for sale.

Of the ones AVB will develop in the future:

Q: Just how much further do these costs have to come down before you start taking a second look at some of the deals that you have on the back burner?

A: In terms of moderation in construction costs, I think probably another 10% or so would be my sense before you start seeing yields in a range that would be worth taking a look at starting the deals.

'Good' markets getting hit:

For AvalonBay's portfolio, we're expecting revenue declines of between 1.5% and 3.5%. The markets of most concern are New York and Southern California, both being driven by weakness on the job front. Mid-Atlantic and Seattle are areas of concern given continued high levels of completions from deals begun in '07 and early '08.

Unlike many other REITs:

We have no current plans to pay our recurring quarterly dividend in stock.


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