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AvalonBay Communities, Inc. (NYSE:AVB)

2013 Investor Day Conference

June 26, 2013 10:00 am ET

Executives

Timothy J. Naughton - Chairman, Chief Executive Officer, President and Member of Investment & Finance Committee

Sean J. Breslin - Executive Vice President of Investments & Asset Management

William M. McLaughlin - Executive Vice President of Development & Construction - Northeast

Stephen W. Wilson - Executive Vice President of Development & Construction

Thomas J. Sargeant - Chief Financial Officer and Executive Vice President

Leo S. Horey - Chief Administrative Officer, Executive Vice President and Member of Management Investment Committee

Matthew H. Birenbaum - Executive Vice President of Corporate Strategy

Kevin P. O'Shea - Executive Vice President of Capital Markets

Craig Thomas - Vice President of Market Research

Patrick Gniadek - Vice President of Investments

Kurt D. Conway - Senior Vice President of Brand Strategy & Marketing

Jonathan B. Cox - Senior Vice President of Development

Jong Chung - Vice President of Design

Sean M. Clark - Senior Vice President of Asset Management/Redevelopment

Timothy J. Naughton

Welcome to Washington D.C. in AvalonBay Investor Day 2013. This is -- I'm told this is sort of the hottest peak in the REIT world this week, maybe it's the hottest place in the REIT world this week as well, being here in D.C. with 95-degree weather.

So far, Investor Day is already paying off. I just looked at the market and we're up like 260, so I'm going to conclude my remarks right now and I had to lunch. But in any event -- I'm Tim Naughton, Chairman and CEO of AvalonBay, and I'll be serving as your host for today. I'm joined by a number of other execs here from AvalonBay, who will introduce at the appropriate time in the program the agenda.

We have provided a bios in the package and hopefully, everyone has the package at this point. In the back of the package is bios for each of the folks who will be talking in the order in which they're presenting on the agenda.

Our last investor event was 2.5 years ago, and I know a number of you were there. It's a NAREIT in November of 2010. And given all that happened over the last 2.5 years, we've had a CEO transition. We've rolled out 2 new brands, had the Archstone acquisition and we've been very active on investment front, particularly in the area of development where we started about $3.5 billion since the beginning of the cycle. We just thought it's an appropriate time to have another event, bring folks together and share with you a little more details in terms of how we're thinking about the business and some of the things that we've been investing in beyond just real estate itself.

For those of you that were here in November 2010, you may recall, our team at that meeting was appreciating value. And we talked about how the company, over its 2 decades of existence since it's been public in early '90s, had significantly outperformed and was in a great position coming out of the last cycle and moving into the -- coming out of correction and moving into the next cycle to outperform as well. And we certainly will be talking about some of the things we've done over the last 2.5 years to take advantage of what has turned out to be a great time to invest in apartments. We're also going to talk about the things that we're doing today that we think will continue to position the company to outperform in the future.

One area that we're going to really highlight is in the area of a number of strategic capabilities that we feel over the last 3 years or enhanced over the last 3 years, that we think are critical in terms of our position in the company, moving forward.

And as a result, the theme for this meeting is capability led, because we believe, really, true outperformance can only come not just from a sound strategy, but being able to execute upon that strategy by building out the capabilities, the investment platforms and strategic capabilities that are needed, frankly, to be able to deliver on that strategy.

Of course, there'll be some forward-looking statements today. As you would expect, our presentations include a number of forecasts and other forward-looking statements and for the information about these and other terms, please refer to the back of your package.

Maybe let's start with what has changed since 2010, since our last Investor Day. What we've grown on significantly across basically virtually every dimension, total market capitalization has grown by 80% from $13 billion to $23 billion, an increase of $10 billion. The number of apartments has grown by over 50%. We now have over 80,000 apartments. Our associate base has grown by 40% and were almost now 3,000 associates.

Our development pipeline is almost double since the end of 2010 and we are already starting to gear up, as you recall, starting maybe in late 2009. But it's almost double from just over $3 billion, including development -- construction and Development Rights, almost $6 billion today.

And importantly, FFO per share has grown by almost 60% since 2010, the midpoint of our guidance for 2013 for operating FFO or for FFO adjusted for non-routine items is largely around Archstone transaction.

And we think this growth has continued to contribute to our long-term outperformance on some important metrics. Obviously, first, current total shareholder return outperformed by almost 600 basis points over the last 10 years on a compounded annual basis. Similarly, net asset value has outperformed the sector by around 500 basis points and dividend growth, which I think sometimes has surprised the folks, has outperformed the sector by 600 basis points, again, on a compounded annual basis over the last 10 years.

And interestingly, it really hasn't been as a result of the performance of our same-store portfolio. In fact, over the last 10 years, same-store revenue has grown roughly in line with that of the sector and yet, FFO per share has grown by more than 300 basis points above the sector. And then looking into 2013, that becomes even more pronounced just based upon the midpoint of our guidance at about 3x or almost 1,000 basis points of projecting of the outperformance in terms of FFO growth in 2013. We believe that this is really about capital allocation, and it's really about how we raise, deploy, grow, manage capital over the investment cycle. And we think this is what explains the significant outperformance over the 10 years in particular for the company.

Look, conceptually, we add value in a number of different ways. I think we've gotten credit over the years for certainly, for being in high-barrier markets that gave us certain structural advantages that generally lead to outperformance.

Certainly, our development platform, we're there to create a significant value through the course of the cycle. And I think we've generally had credit for being a good steward of the balance sheet.

So we have other capabilities that we think are very important as well, and we think, maybe, I had to take on increasing importance even in the future. This includes our other investment platforms of acquisitions, dispositions and redevelopment. Afforded by important strategic capabilities that we'll talk quite a bit today, including capital management and market research, the customer insight and design.

And to us, the real power is when these capabilities are integrated and combined in such a way across functions and across geographies. That's what really leads -- that's what, we believe, leads to outperformance.

And this is what we mean by capability-led. We think the most durable winning strategy is ultimately your capability-led strategy as opposed opportunistic strategies that properly replicate and they tend to be more durable because it's hard to make all this happen.

So over the next few hours, we'll be describing how we're doing this today and how we're positioned the company to continue to do that in the future.

So let's talk about the day. I think we've got a great program for you. We're going to start with a -- the business overview. And I'll be joined by a number of execs here, sitting next to me. We're going to talk about how we're adding and harvesting value today in the cycle. At the end -- and also, we're going to attempt to answer a number of questions that a number of you have been posing to us over the last couple of years and, really, are central to the thesis -- the investment thesis for apartments in general and for AvalonBay specifically.

We'll follow that with a strategy overview with a focus on growth strategy, portfolio management and capital management. And then after lunch, we'll come back and we'll talk about some of the strategic capabilities I referred to earlier, describe what we've done, what we've been doing over the last couple of years and how those capabilities are being deployed to support the strategy.

And in addition to that, we're going to show some case studies on how those capabilities are being used across the various growth platforms to deliver outperformance.

After that, we'll be joined by our guest speaker, Dr. Richard Florida, who I think probably most of you are familiar with. He's a ULI [ph] fellow and noted author and has written several books on really dealing with a number of economic, social and cultural forces that are all combining to really influence the whole notion of place in the built environment.

These trends really have powerful implications, we think, for high-density housing or apartment housing, as well as markets that are detracting at a greater rate, what he calls the creative class. He refers to creative class. And these are markets that are the innovation centers for the economy and for the country and really drive growth in the economy. And as you might guess, many of these markets innovation centers are for AvalonBay's markets.

And then, after our short break, we're going to have a tour of AVA H Street, which is just here in the district, and is our -- actually, our first purposed designed and purpose built AVA community. And I think it's a really wonderful example of targeted offerings, designed and targeted to an attractive customer segment can really [indiscernible].

And then, we're going to go straight from that -- from AVA H Street to dinner for those of you that are staying for dinner at the Newseum, I don't know. A number of you either play with Newseum but it's not far from here. We're going to be on another rooftop with great views of the U.S. capital. And there's actually catered, I believe, by Wolfgang Puck, the restaurant which is just downstairs.

So our objective is to make this interesting and informative. But hopefully, it provides you greater insight, and we add value in how we believe we can in our delivering alpha not just today, but within the future.

And then one other thing I'll mention, along those lines, given sort of the purpose of the meeting, we have a survey that you will fill out that we'll leave on the tables at lunchtime, Jason, I think. And you can fill it out during the course of the day and hopefully, you'll turn it in some time after Richard Florida speaks, but it speaks to at least your views in terms of how our company is adding value. I think you'll have some fun with it and then, we'll try to compile as much of it as we can before our dinner and share some of the results with you.

But with that, at this point, I'd like to shift to the first session on the agenda, which is the business overview. And I'll be joined on this session with a number of execs here to the -- my left. And just by way of introduction, maybe starting nearest to me is Sean Breslin. Sean is EVP of Investments and Asset Management. Bill McLaughlin, AVP of Development and Construction for the Northeast. Next to Bill is Bill's counterpart on the West Coast and Mid-Atlantic, Steve Wilson as EVP of Development and Construction for those region. Tom Sargeant, who you all know, our CFO. And Leo Horey, our EVP and Chief Administrative Officer.

I'll start with an overview of a couple of points around apartment fundamentals. And then I'll moderate the Q&A with the rest of the executive team who has prepared 1 or 2 slides each as a response to my questions. And we are going to try to save some time here at the end for Q&A, so we ask that you'd hold questions to the end, best you can. And we'll try to respect your time and make sure that we've got some time left at the end to respond to your questions.

Let me start with where we are today in the cycle. We get this question a lot. Where are we in the cycle and how might the rest of the cycle shape up for apartments. And like previous cycles, ultimately, it'll depend part on the economic expansion itself.

If you just look back of the last 2 cycles, you might conclude that we're somewhere between 1/3 or halfway through this economic expansion, depending upon whether you went to the '90s or the 2000s.

And as we've been talking to a number of you over the last year or so, we've been asserting that we think and this cycle is more similar to the '90s than the more recent 2000s. And again, when you look at the fact that, that's really drive apartment performance, particularly the first 2 job growth and supply. It's almost a mirror image of 3 years into the expansion where job growth and supply, new apartment supplier, virtually on top of one another for the first 3 years.

And then we look at the third factor, demographics,, or growth rate of population of our primary rental cohort, those 25 to 34, it's decidedly more positive. So as we look at the first 3 years of the cycle and if you just kind of imagine for a second and kind of put, place your hand over sort of the 2/3 on the right-hand side of the graph and just look at the first third of that graph, and that's all you knew and you ask yourself, "Which cycle would you rather on apartments in right now?" I think just based upon these 3 factors, the answer, of course, would be this cycle, just based upon the relationship between demand and supply that we've seen thus far.

And then when you look at in terms of revenue growth, it has played out so far that this cycle has looked like the '90s. I think it's actually been better when you consider it's desirably lower inflation area environment. Our revenue growth has just been a little bit stronger. And in terms of the question, what about the rest of the cycle? I think there's reason to be very optimistic when you consider that demographic tailwind that will continue over the next 5 to 10 years, certainly. And then when you think about just the economy itself and you look at the strength of the balance sheets of consumers and corporations, the amount of liquidity out there, combined with the depth of the housing correction, I think there's a good argument we made that the housing cycle we're in right now will be strongest of the last 3 that we've seen.

And one thing that we think supports that case that maybe doesn't get enough attention in our view is -- this is what's happening on the production side, not just on apartments but all housing. When you look back at the 1990s, the 1990s were a great time to be invested in apartments despite demographic headwinds. And I think the simple reason is we didn't overbuild total housing and in fact, I think we probably underbuilt it a bit when you consider obsolescence.

And as we saw the '90s, despite that demographic headwind, housing stock adjust the demand oftentimes. So product that was single-family rental, multifamily rental, a lot of that converted to owner-occupied housing as you guided into the '90s and early 2000s.

As we got into 2000s, of course, we overbuilt housing. That's well known at this point. And like most industries that suffer from a boom-bust cycle, periods of overinvestment are often followed by periods of underinvestment. And we do think there has been a dislocation of capital as it relates to housing. Just anecdotally, when you talk to people in our business, there's just been a dearth of capital invested in entitlement and infrastructure that's going to have an impact. And indeed, when you fast forward to this decade and you look at really what's happened over the last 3 or 4 years, we will absorb all that excess housing that was built in the 2000s for about 2 million -- most people estimate about 2 million units despite a fair bit of housing consolidation that occurred during that period of time.

And yet now, we're here in 2013, generally, I think most people will agree, we're roughly imbalanced in terms of total demand and supply. But we're only producing at the level of around 1 million units, a little less than 1 million units a year compared to projected demand. Just based upon population and the demographic growth, that's around 600,000 higher than that for the balance of the decade. So the question is, can -- will the housing industry be able to respond to that quickly to make up that deficit? I think there is plenty of reason to be bullish on housing for this reason alone, whether that be rental housing or for sale. And it's our view that -- and frankly, while there are some markets that have just too much supply right now, we get that. That may be -- there's may be a too much focus on what's happening right now in supply in the apartment space versus what's happening in the broader housing industry.

Well, clearly, not all parts of the housing sector in every market is created equal. There are some outperformers and underperformers, and maybe at this point, I'd like to get Sean involved. And Sean, let me ask you, what are we seeing in our market? Which markets do you think are likely to outperform or underperform here over the next few years?

Sean J. Breslin

Sure. Basically, the way we're looking at the environment is there's probably 3 regions that are likely to outperform over the next few years, and that's New York and the Northern and Southern California regions. There's really 2 primary drivers of the expected outperformance. The first is, from tagging along to what Tim described that the expected level of housing production relative to average annual household growth. If you look at the chart that we've got on the screen here now, the blue bar represents 2013 housing starts and that's all starts, so it's single-family, multifamily, for rent, for sale, again, all starts.

The gold bar represents the average annual household growth expected in these regions for most of these analytics from 2014 through 2019. And if you look at 3 main regions, again, New York, Northern and Southern California, particularly California markets, some of the discrepancy is pretty significant. In these regions, housing production will have to increase anywhere from 50% to almost 200% to meet just the expected level of household growth over that period of time. And when you look at these specific markets as opposed to some of the other ones, i.e. the Pacific Northwest and Mid-Atlantic as an example, is incredibly difficult to get through the regulatory process through the entitlement process and be in a position where you can actually put land into production to deliver new product. And in some of these markets, given the nature of construction type, the delivery cycle can be relatively long. So the expectation for new production to ramp up quickly is to really diminish in those 3 regions.

The second reason why we think those 3 regions are likely to outperform is just the home affordability issues facing new households. These 3 regions, at least affordable of our markets, the homeownership rate in these regions is 51% to 52% as compared to average in our market footprint, which is about 56%, which is still well below even the national average which is at a 65% range. So as new households are being informed and they're looking at their housing options, our estimation is that renter ship rates will continue to be relatively higher in these regions relative to our footprint overall or even the national average.

Timothy J. Naughton

Sean, maybe -- well, thanks. Maybe shifting to transactional activity for a moment. Based upon your views of the market that you just outlined and maybe how that compares to broader market sentiment, how is that performing transactional activity for us right now. In terms of acquisitions and dispositions, where might we realize or harvest value in particular regions?

Sean J. Breslin

Sure, sure. As the first is, Tim, so how we think about acquisitions and dispositions, we really try to factor in buyer sentiment or market sentiment and try to play in those areas where we think we can make trades and create an AV along the way. So to give you a couple of thoughts, first, excluding Archstone transaction, we've not been in that buyer over the last couple of years. That's primarily a function of the macro environment where there's plenty of capital flows into the sector. When your capital is flowing quite well, the outlook for fundamentals has been healthy. And generally one-off asset trades have been fully priced and in many cases above replacement costs. So that's not been an attractive place for us to play. What we're trying to be playing is our strategy has been to identify those pockets or those markets where there is a disconnect between buyer sentiment and where we think fundamentals are and is typically a lag between fundamentals and a shift in buyer sentiment. And so just to give you some examples of what we've done over the last couple of years, we sold several assets in the Metro DC area, basically, in the $400 million range in terms of the balance sheet assets and fund assets, excluding our Archstone asset that we just sold. We take that number up to closer to $600 million. And we still got prices that for us when we look at replacement cost metrics, when we look forward IRR metrics based on the market disruption that's likely to occur as the supply was delivered, those are good trades for us. We also have been selling in Northern California and in Seattle based on our view that buyers were being relatively aggressive, primarily based on near-term rent growth. Those have been strong markets in terms of producing better than average revenue growth, well above average revenue growth, frankly. When you look at the longer-term trends for those markets and you look at the cap rates and the total returns and replacement cost metrics, people are probably a little out in front of themselves in terms of what the returns you're likely to be from those assets. That's been on the disposition side.

On the acquisition side where we've been playing, we've been playing in Southern California and in Boston. In Southern California, specifically, people have been wondering about the recovery for a couple of years. We felt pretty bullish about that region overall, and we were able to go in and acquire generally a larger suburban B assets, the discounts through replacement costs, cap rates in the 5%-plus range, as an example. And based on our expectations, of future demand in rent growth from those assets produced, returns that are highly accretive to our cost of capital, and what we're trying to do is stay out of the way of the buyer curve, which in that market for most part was focused on the core assets in the urban centers at very low cap rates. We're playing the suburban market, generally all their assets, B assets, discounts and replacement costs. If we look forward, we'll continue to try and find those, opportunity where we can make trades that are accretive to NAV and not just be making trades and try and improve same-store revenue growth rates, which other people have been trying to do. People are looking at strictly near-term fundamentals as a result of the way there's been underwriting. So that's sort of how we think about it.

Timothy J. Naughton

And Sean is also responsible for redevelopments and maybe just to share you, Sean, one last question. Maybe talk about -- we've been very active in terms of that platform over the last few years, given it's been early in the cycle. Where are you seeing the best opportunities to add value through redevelopment? And what factors you intend to drive the most attractive candidates in your view?

Sean J. Breslin

Sure. And there's a flood, I think at some pictures in there on the redevelopment. Some of our recent completions should drive -- and the flood, if you can push the button.

Redevelopment, we have been active. We've completed an average of about $100 million a year over the last 2 or 3 years. It's been a good business. Our return on total capital, the incremental capital we're investing in these assets has been at a 9% range as compared to trading cap rates that are, say, roughly in the 5% ballpark. So how the accretive business -

In terms of opportunities, the way we're thinking about it, typically, the most significant opportunity is typically older assets and suburban submarkets that are highly constrained -- supply-constrained. Just to give an example of that, we bought a lot of suburban assets from Archstone, particularly in the L.A. region, older assets, 2 or 3-story, walk-up products. We think there is plenty of opportunities in assets like that where there's not much supply if any is coming online at some of these submarkets. And there is demand to have slightly better product and those tend to be are more expensive redevelopments.

But there's always opportunities in couple of other categories, older high-rise in urban centers. To give you an example of that, we bought some assets from Archstone, Midtown West, which is in Manhattan. Older high-rise, great redevelopment opportunity there. And then we also find opportunities, probably on a smaller scale, in terms of just our core portfolio that's well positioned. And we're really putting capital into those assets to sort of not only defend our position, but provide some modest enhancements to the existing customers that they like the location. They like the school district. They like the floor plans. They like something that's being somewhat refreshed, maybe 15 years old. So the scale of those redevelopments is much smaller, but there's plenty of opportunities that can create value in those opportunities also.

Timothy J. Naughton

And the -- I guess, the photo in the upper left is Avalon Coast [ph], a good example of that, and Jersey City on the waterfront.

Rich, we'll share some examples that -- a little bit more detail later in our case studies, that Sean referred to in terms of some of the activities in terms of trading, buying and selling assets on sort of trading on market sentiment, if you will, as well as share the redevelopment case study that really profiles how we were able to capture value with that, through that activity.

But now, maybe we'll shift to Development and I'm going to turn to Bill. And Bill, may I ask you maybe to quantify -- I mentioned earlier that we've started $3 billion, $3.5 billion before the cycle. Maybe you can quantify what we've done so far in the cycle we've completed, and what's in front of us just in terms of lease-up, as well as Development Rights pipeline?

Unknown Executive

Good morning, everyone. The next slide -- this slide here will highlight the efforts -- the fruits of the efforts of our development and construction team thus far in this cycle. When we're last together in November of '10, many of the completions that are shown here for 2012 and '13 were recently added Development Rights or still under negotiation. So it does take a while to get the pipeline up and running. But all told, in the 2012 and '13 time frame, we will have completed over $1 billion worth of new developments with the fair market value of about $1.5 billion. If you include those assets, which are under construction today, in other words, they started, they've been bought out and will be delivering in 2014 and beyond, we will double the volume of what we've done this year and last to over $2.5 billion with a value creation of another $1 billion.

If you look at this early part of the cycle, call it the first third or the first half, we will put into place a fair market value of about $5 billion worth of new developments. If you were to include those future starts through the next couple of years, that number goes over $6 billion at cost, with over $8 billion worth of portfolio additions, with a value creation of over $2.25 million -- billion.

If you look at -- there are a couple of other metrics. As you can see, the fair market value of our existing portfolio is about $50,000 per home greater than those assets which are currently under construction today, even though the communities which we're building now have an average rental rate projected to be $300 per month greater than the current communities. Remember the current communities are, on average, about 17 years old, as opposed to the brand new portfolio. Tim, in the past, our volumes at this stage in the cycle were significantly lower by any measure. I think I'd accredit that to our preparedness this time. We kept in place in the regions, during the downturn, the development and construction leadership, and we're better prepared to jump start when the cycle begin to turn.

Timothy J. Naughton

Okay. Well, a lot of what you outlined were deals that we were securing options for in the 2009, 2010 time frame. Can you give us a sense, Bill, what are people doing today or maybe over the last 12 or 24 months? I mean, how are you directing your teams? Just based upon market dynamics and greater competition out there, certainly for land, maybe if you can just share a few thoughts there.

William M. McLaughlin

Sure. Well, most of the focus of the senior regional management is on restocking the pipeline. Obviously, we've got a lot of execution as well. But these charts will give you a little bit of a quantitative -- qualitative look at what we've been doing. The first thing to notice is that the pies are a lot bigger. In 2010, we probably had about $2 billion worth of Development Rights. Now, today, it's up, over $3.5 billion, $3.6 billion. One key takeaway from the pie charts really is that we have a very good balance of business, whether you look at it from a regional level, divide it among our operating regions or from urban versus suburban or our TOD portfolio of assets and in addition, by product type. I think we have a good mix of garden, mid-rise and high rise. We've always had a fairly balanced approach, even though the market may shift from suburbs to urban. We've been fairly steady in that. We now have an AVA community underway or completed in each and every region.

Of this $3.6 billion, roughly speaking, we -- in the last 2 years, we've added $2.8 billion of new Development Rights. In the last 12 months, that number is $1.7 billion. That outsized number takes into consideration over $700 million of mark-to-market Archstone Development Rights, which we acquired in that transaction. In the last year or so, Tim, I've seen the shift to the mid-Atlantic and to the West Coast. Some of that is the result of the Archstone transaction. But today, that last 12 months effort has been about 60% mid-Atlantic and West Coast, which is an inverse of what had been in the past versus the Northeast.

In addition, I guess, we've seen the shift back to the suburbs a little bit. The urban space has become very competitive, very crowded, not only for multifamily rental, but in some markets, condo development, hotel development, other competing land uses. And so we've recently refocused some of our efforts in the suburbs. Take Boston for example. In the early part of the cycle, we tied up 4 urban sites, a couple of which -- or 3 of which are under construction today. But in the most recent 12 months, we've tied up 3 very good suburban locations and sort of shifted our focus to some of the suburban wood-frame developments.

Timothy J. Naughton

And how much of that was based upon just projected economic difference between suburban versus urban in the Boston area?

William M. McLaughlin

Some of it was based on current yield being 50, 75 basis points lower on the urban stuff. Going forward, that market has become very competitive, some concerns about people stretching to do high rise downtown. And we have filled our place, and we're ready to execute what we have.

Timothy J. Naughton

Early in the cycle, we are more urban in Boston. And right now, we're kind of doubling back towards the suburbs. Just in terms of level of competition seen there versus -- relative to urban and [indiscernible] economic.

William M. McLaughlin

That's exactly right, Tim. I mean, there was a window early on in this cycle. We have been boxed out from a lot of urban opportunities in Boston based on competing uses, and we saw our window early on here with the condo players, the hotel players. Others were out of the marketplace, and we took advantage of that. Generally speaking though, yields this year have been somewhat compressed relative to the prior year, and we're probably down, in average, at 25 to 50 basis points ongoing in yield. But I'd say a lot of that really is a result of the mix between the markets and the products and some regional differences. Ultimately, I see additional risks there, Tim, as construction costs continue to rise at a pace that may very well outpace rent increases.

Timothy J. Naughton

Yes. Well, thanks, Bill. And maybe that's a good segue to Steve. Steve oversees markets where there's been more supply here, at least earlier-cycle supply, D.C., of course, and Seattle and parts of San Jose. Maybe, Steve, 2 things on investors' minds are what Bill just talked about, rising construction costs, but there's also rising supply, specifically within those markets and within the apartment sector. Can you give us a sense of where we are today, where we have been on those 2 indices and what might change the current trajectory?

Stephen W. Wilson

Thanks, Tim. No surprise that costs and construction costs have moved hand-in-hand since 2010. In general, costs are under varying regional pressures, but universally add on near prior peaks. And certainly, some markets exceed in that peaks. Now a lot of capacity that left the industry in the last 3 or 4 years are probably being rebuilt, and we're finding most of the pressure coming from the MEP trades in the urban course. I think it's great that we have the ability to track construction costs by region, by product type. And certainly, costs move much quicker on the West Coast and in wood-frame being the most volatile. Costs in the West Coast have moved somewhere between 7% and 12% over the last year or so and certainly, 2% or 3% in the last quarter.

What do we do to mitigate that? We certainly have our cost-containment strategies that include volume and bulk purchasing and buying. When you have a number of jobs going at the same time and the same market, you have the ability to connect them together. And certainly, standardizing many of the aspects and the components of the business give us greater predictability and certainly, reviewing the life cycle costs when we really understand the product.

The semi-good news about construction cost increases is, in some way, it acts as a governor in terms of new starts. And with the recovery of other real estate sectors, a lot of deals may not get billed because of the different pressures, offices coming back, certainly in San Francisco, and we're starting to see the condo market come back, too. In terms of supply, we certainly -- it's no secret we have increased level of supply in some of the markets, notably D.C., San Jose and Seattle, which, for the most part, have been offset by strong job growth, particularly in northern California and Seattle. Looking forward, we anticipate supply beginning to taper off somewhat in some of our markets as we move into '14 and '15 after a period of definitive capital buyers filling the deliveries, notably the mid-Atlantic.

Supply will remain consistent in the Northeast through 2015, but picking up steam in southern California as the fundamentals continue to improve. Not unlike the homebuilders, we've enjoyed some pretty low-hanging fruit in terms of shovel-ready opportunities early in this cycle. And these opportunities are virtually gone, and I think some of the returns that Bill alluded to would fall in that category. And I think now, we're going to get back our core competency of manufacturing sites through extensive entitlements, which take time.

In terms of new business, the terms about land control positions have not moved as quickly as the market, which is a good thing. And as a result, our land inventory as a percentage of our enterprise value, our Q3 will be the lowest it's been in a decade, a pretty important metric. Relatively, all of our new business will be via land options, which will provide us a clear line of sight to the construction start of most of our Development Rights.

One exception where we will entertain land positions or take in land inventory, probably not issue just as much, but it's certainly southern California. Certainly, it's because the nature of the market, the competitiveness and how we view the long-term potential of southern Cal. Quickly, as you move through a cycle of rising rents, land prices increase and term starts get squeezed down to the point risk escalates along rationalization.

Timothy J. Naughton

So Steve, the risk that we're seeing in the construction costs and that environment, we've been able to mitigate somewhat just through option strategy in part because we're kind of back to doing the entitlement deals, as opposed to kind of the sparse rush of supply, for the most part, where deals were ready to go or more or less just needed minor re-entitling. But we're kind of back to manufacturing entitlements, and that's allowed us to be a little bit more risk-measured in terms of, certainly, the land deal themselves.

Stephen W. Wilson

You can -- I mean, the land seller typically wants to sell full retail. But if you don't have the entitlements, you have a story, you can negotiate more time. And you certainly want to give yourself all the optionality that you can get within those contracts because you may say 2 years before you close on the land. But 2 years moves very quickly, and you just want to build in as much as you can upfront because there's nothing like closing date in 30 days and you just don't have your entitlements. And the more expenses paid and the better off you'll be.

Timothy J. Naughton

Okay. We'll let -- I mean, that's a good point maybe to shift to Mr. Sergeant here. You've been -- Tom, you've heard about the opportunity on the development side, how active we are and maybe some of the risks that are out there. How are we responding with respect to the balance sheet in terms of capitalizing that opportunity?

Thomas J. Sargeant

Tim, the headline risk is really pertaining to financing this business and maybe more land than I knew before I got up here. The headline risks were matching risks and finance -- funding risks. Kevin is going to talk about matching risk in his prepared remarks. As for funding risks, uncertain capital markets and volatile capital markets is probably the biggest headwind. We're seeing that recently with debt, interest rates moving up pretty rapidly and even volatility in the equity markets. We've seen our stock price move, in 1 day, $8. Sometime this week that happened, and that's something we haven't seen in 5 years.

So the best protection from uncertain capital markets and volatility is a strong balance sheet, with great financial flexibility. And you can see on the chart, we do have a balance sheet that is largely comprised of equity, modest use of leverage and credit metrics that are sector-leading. If you look at the fixed charge coverage at 3.6x, that's about 25% higher than the sector average. If you look at our leverage at 26%, that's about 1/3 less than the multifamily sector average. And these are sector-leading credit metrics that have, over time, provided a lot of financial flexibility to the company and certainly, mitigate the risk of uncertain capital markets. And they've also been proven to be effective in terms of mitigating the need and the ability to fund development.

But while we do have a strong balance sheet that provides good general protection against uncertain volatile capital markets, we've also taken some specific steps to address the funding risk. First, we did expand our credit facility to $1.3 billion. We prefunded the Archstone acquisition upon announcement, and then finally, we've match-funded, either concurrently or in advance, much of the development pipeline that we have underway. So we expect that the general protection from a strong balance sheet, combined with these specific steps, should allow us to pull this development pipeline through and allow us to create the value that's embedded in the pipeline and be really good stewards of capital and good risk managers.

Having said all that, there are a couple of concerns I wanted to mention. Now first, while we don't have a lot of debt, we do have a -- we do need to rebalance that debt. We have a very high composition of that debt as secured. You can see, on the chart, the secured and unsecured split. If the credit crisis taught us anything, it taught us that we want to have a very large pool of unencumbered assets that we can draw from in the event that the credit markets shut down and we use that pool during the downturn and importantly, avoided going to the capital markets when our equity pricing was an all-time low. If we learned anything, we learned that. So this is a focal point for the company, restore that relative balance.

The other focal point is we do have some medium-term maturities, and you can see from the chart, there's 2 towers, 15 and 17. Those towers were created by the Archstone transaction. We've done a pretty good job of balancing our maturities, as you can see, before the Archstone transaction. And although we have negotiated a couple of great extension options, we're looking at other means to mitigate that financing risk or the refinancing risk, including maybe switching out some of that secured debt for unsecured. So Tim, these are some of the ways that we're addressing the headline risk related to funding the portfolio, the elevated portfolio and development.

Timothy J. Naughton

Yes. Well, thanks, Tom. Tom mentioned those 2 towers, 15 and 17, which is really Archstone debt pools, and as he mentioned, we do have extension options, where, effectively, some of those can be toppled over to the next year, '16 and '18, where we don't have much maturing. So when you really average it out, it's looks like it's around $500 million a year, roughly, Tom, against a $23 billion balance sheet. Obviously, we've got a lot of flexibility, as you talked about, Tom. I mean, how would you rank the various alternatives available to us today? And what would keep you from sourcing the most attractive or most attractively priced capital?

Thomas J. Sargeant

Yes. Well, as you can see from this chart, there's a lot of options the company has and demonstrates our financial flexibility. Really, debt, even at 4%, it's pretty attractively priced. What I would say about that is that the large amount of secured debt we assume from Archstone makes us less interested in using debt to fund incremental investment activity. It makes us more interested in using unsecured to switch out some of that secure debt. As for equity, we continue to favor recycling capital from dispositions over issuing equity for new development. It's driven by this discount between the public-market pricing and the private-market pricing of our assets, and that's been prevalent for much of the year.

Overall, you can see these options and a couple of others that are not listed, preferreds and converts. It's very a accommodative capital markets environment to meet our current funding needs. So Tim, just a couple of closing comments. First, it's very hard to assign a value to financial flexibility until you've went through what we went through in 2008 and 2009. And looking back, we were able to get the very lowest cost of capital that we could by not going into the equity markets at the depths of the market and by having the options that we do have available to us and make sure that we're not forced to do an untimely capital market execution. So that's really, Tim, a summary of the options that we have in front of us in terms of capital markets.

Timothy J. Naughton

Well, thanks, Tom. And certainly, by having a full menu of options, we can always source. Being able to always source the most attractive price, ultimately, leads to lower cost of capital over time, if properly executed. Maybe just lastly, I'll turn to Leo. Leo, with the closing of Archstone transaction and investment in new development that we've been talking about, we're now over $23 billion in market cap and 80,000 apartments, up over 50% over the last 2.5 alone. How has that growth enhanced efficiencies? And how will we use scale and our capabilities to reduce costs or improve margins, either at the overhead or the property level?

Leo S. Horey

Tim, this is an area where we have been focused and as the chart will show, where we've achieved pretty meaningful results. If you look at the upper left-hand corner, you will get expense overhead as a percentage of NOI. Since 2006, that's come down about 360 basis points; since 2010, about 270 basis points. And how, do we say, that occur? I think there are really 2 areas. Number one, we have had a lot of growth, and the organizations got more complex. We haven't had a lot of senior leadership. We've been able to accomplish this, we've been able to digest it with the leadership team that's been in place. Secondly, over this period, we have been making investments in some of our centralized functions, whether that's IT, HR, revenue management or other functions and what we've learned is they are definitely very scalable and have produced results that have been meaningful.

Another equally as important factor when you talk about expense overhead is that we've expanded our capabilities. Tim has alluded to that, later in the day, you're going to hear from our market research group, you're going to hear from our customer insights group. I'll tell you, in addition, we've invested in things like property tax function, risk management, et cetera. So not only have we gotten more efficient, we've expanded our capabilities.

Now how does that also manifest itself? That gets to the charts on the bottom of the page. We've -- this work that we've done has really allowed us or facilitated some of the results you see at the bottom of the page. So between 2006 and 2013, you've seen our same-store NOI margin grow from 67% to almost 70%. An important fact to consider when we talk about that is we've done it without transitioning our portfolio in any way. It stayed in the same markets. We haven't shifted markets. So we've really been able to expand this operating margin through the way that we've been investing. Also supporting that, if you go to the left side of this slide, you'll see that we've really been able to contain expenses. On a compounded annual basis, whether it's controlled expenses or total expenses, we remain below 2%, which we believe are really good results.

Shifting from the expense side, the capitalized side. In the upper right-hand corner, you'll see a chart that talks about development and construction overhead as a percentage of development underway. Now between 2006 and 2013, getting underneath these numbers, I will tell you that our construction and development overhead did expand. It expanded by about 40%. In that same period, our development underway increased by about 125%. So we went from 1.8%, down to 1%, a decrease of greater than 40%, which we really feel good about. And when we look at a 1% number, that's a very solid result and actually supports delivering these assets as cost effectively as possible.

Now how did we get there in these categories? First, I'd tell you that we stayed true to our markets. We've always been in the same markets. We know those markets, and we can function effectively in those markets. Secondly, similar to the expense side, we've just been able to leverage our existing staffing. On both sides, we've added at the more junior levels, but we've just leveraged the most senior levels.

The last point I'd like to make is you can see on the capitalized side that we did spike up in 2010 to 2.4%. As Bill and Steve have alluded to, to some degree, during that period, we did reduce our development and construction overhead by about 40%. But we maintained the core capacity. And that allowed us to start earlier than everybody else. It allowed us to secure profitable deals early in this business cycle. And frankly, it's allowed us to rebuild and to replenish our pipeline.

Timothy J. Naughton

Well, thanks, Leo. So as we've invested in overhead and these -- and a number of capabilities, we still have been able to scale that overhead. And I think, in part, some of that has panned off in being able to contain the scale of the development organization, as well as through the NOI margins.

I'm going to -- I think maybe this is a good point maybe to break and see if there are some questions from the audience. Obviously, we try to give you a sense of how we're reading the economy and the markets today and how -- and where we think there's value to be added either through our platform or based upon market opportunities.

But let me open the floor now for some questions for a few minutes. Nora?

Question-and-Answer Session

Unknown Analyst

[indiscernible]

Timothy J. Naughton

Yes, I mean, it relates to the peers. I mean, there is a question about the markets that we're expecting to outperform, and I think if I'm capturing it correctly, why our particular portfolio, the same-store portfolio, hasn't been outperforming all of our peers as an example.

There's a lot of layers that you can sort of work through to get to an answer. There's a lot of different issues as it relates to, certainly, market footprint in terms of your market allocation, your submarket allocation, how people are reporting things in terms of what's in same store and what's not. So we do -- we look at benchmarks relative to not only our peers, but probably even more importantly, Craig Thomas will talk about this a little bit later, our market research person, is really try to benchmark against the product types that we have within the submarket that we're in. So if you say, "What's happening in San Jose?" We look at specific assets in northeast San Jose or the core of central San Jose to determine if we have the appropriate revenue growth benchmark. That's one thing we look at. The other thing that, just as importantly, I was talking about it earlier, is not just the revenue growth rate. So we may buy assets that -- or develop assets that we think the revenue growth rate might be actually a little bit lower than the market average. If we're building assets to a 6.5% or a 7% going in, and we think we're going to get 2% [ph] instead of something that make it 2.5% [ph] overall San Jose, that's a great investment option for us, as opposed to just trying to optimize having growth from the same-store portfolio, which is part of the message we're trying to deliver. So implicit in your question, Nora, when you say outperform, you're speaking to same-store growth performance as opposed to maybe total return, and I think that's an important distinction that we will get into a little bit later this afternoon as well. But I think it has -- that has weighed on investors' and analysts' mind, if you don't get to NAV outperformance without total asset return outperformance. So we're going to show -- I think were going to demonstrate how we're doing that.

Questions? Back here?

Unknown Analyst

[indiscernible]

Timothy J. Naughton

That was illustrative, but yes, yes, okay.

Unknown Analyst

[indiscernible]

Timothy J. Naughton

It's an awesome question, and that's what your survey is going to be about. So you guys are going to tell us and then we'll to tell you, all right? We don't want to buy us your responses. But as I said, I think we've gotten a lot of credit in terms of being able to create value through development franchise, and I think that's part of the big one that's out there. But we think we'll be able to add value through these other capabilities as well. But yes, I'd put development at the top, but we want to hear from you all, too, on that.

Unknown Analyst

Just a follow-up maybe for Tom. Just trying to understand a little bit better. When you had your cost of capital for short-term and long-term, for public the equity and private equity, just so I'm understanding it, how are those derived. And the leveraged returns, unlevered returns [indiscernible]

Thomas J. Sargeant

Yes, private equity is more of a survey of the market. But the question is, how do you calculate your public and private cost of equity capital. On the private side, it's -- that's a little bit more nuanced because you have different investors competing for opportunities. On the -- on our public side, we -- essentially, it's a cap-in model on a long-term. And on the short-term basis, it's been more of an AFFO yield.

Timothy J. Naughton

So it's levered, I mean.

Thomas J. Sargeant

Yes.

Timothy J. Naughton

So it's levered. In both cases, levered. Obviously, in the case of private equity, they'll be higher because, certainly, you're going to have higher leverage and then in case of private equity in terms of the levered returns.

More questions? It's right here.

Unknown Analyst

How are you guys thinking about D.C. [indiscernible] right now? So are you guys probably looking to the years ahead and you can actually grow in D.C. [indiscernible]? Where can you see Avalon go in D.C. during the next 5 years [indiscernible]?

Timothy J. Naughton

Yes, it's a great question, Rich. And maybe I'll respond, and Steve, if you want to add to it. It's actually -- you'll see later, D.C. is actually the 1 region where we're actually under-allocated relative to our long-term target and our views in terms of its long-term potential. Probably for reasons, we think it makes sense to be under-allocated. But we're not giving up on D.C. If you looked at the total performance today and over the last -- over the 20 years as a public company, D.C. has, by far, delivered the most NAV per dollar invested relative to the other regions. So we haven't forgotten that. We're talking about trading our market sentiment before a lot of people are down on D.C., and we are actually trying to take advantage of that on -- even on some sort of early cycle development opportunities and trying to leverage that into what we think are attractive options. I don't -- Steve, I don't know if you have anything to offer, maybe use -- give an example.

Stephen W. Wilson

Yes. We've been able to secure some new opportunities just recently. In some ways, development probably is a loose favor, so to speak. And I suspect that we will continue to and then maybe some entitlements. But there may be some opportunities to break ground at some pretty cost-effective terms going forward. But committed for the long term, for sure.

Unknown Analyst

[indiscernible] preferred model and talk about [indiscernible]

Stephen W. Wilson

Obviously, some of each. I mean, I think we've gone as far as almost to [indiscernible]. I would say we're open.

Timothy J. Naughton

There's usually a product advantage, Rich. I mean, for instance, you have wood-frame inside the beltway. It's -- usually, that's a good term -- good long-term solution for D.C. But it seems not a lot of development on acquisition side. Our sense today is that your market sentiment hasn't fully caught up yet in terms of -- and the opportunities aren't compelling yet. To the extent market sentiment catches up with what maybe is likely to be fairly significant underperformance, then we'll try to think of an answer to that.

Maybe we have time for 1 or 2 more questions. In the back there? Jeff, right?

Unknown Analyst

It looks like your Development Rights is about 70% East Coast, 30% West Coast. Is that -- would you expect that to be matched by dispositions? Or would you expect concentration to increasing this?

Timothy J. Naughton

Good question. Put in perspective, it's probably 85-15 in November 2010. I think Bill mentioned in the last year alone it's been more like 60-40, I think you're putting mid-Atlantic and then maybe closer to a 50-50 when you consider the East-West. So the cycles tend to be deeper on the West and so we have to be a little more mindful in terms of when we step in the land positions in the West Coast than we do on the East Coast. And frankly, and [indiscernible] on some of the suburban Northeastern markets tend to be -- entitlements tend to be a little more uncertain and the going in economics tend to be a little more attractive, maybe not long-term but going in economics -- we like -- we want to grow more through development on the East Coast and our approach has been more of a balanced approach in the West Coast and that informed in parts on our draft strategy with respect to the Archstone acquisition as well.

You were asking about dispositions as well, I think, in terms of the funding event. In terms of dispositions, and Matt will talk about this a little bit later today, but we do have some target allocations for each one of the markets which will influence as obviously the whole base business is growing, but if we're growing faster in certain markets, they're more likely to trade out of some of the assets in the less attractive submarkets within those markets and reallocate that capital to some of the other markets.

Stephen W. Wilson

Okay. Maybe one more question and we'll move onto the next session and obviously, we've got a lot of time between breaks and lunches as well. These people can approach different folks in management. Mike?

Unknown Analyst

Just a question on development. You talked a bit about seeing more interest from condos. How much are you competing against condo developers right now for the land? And you also referenced the 50 to 75 basis point differential between suburban and urban. How does that compare historically? So basically, around that and also, just on the kind of convergent, are you seeing more interest from other sectors coming in for urban and [indiscernible] land as well?

William M. McLaughlin

I'll take the first part of that. The question was related to condo and the second half of that was about the yield differential. Condos are active in the main urban location, New York, Boston, certainly Steve mentioned, San Francisco. Haven't seen much of it in the suburbs yet, but in the bigger urban areas, the condo markets are back. And I say that hesitantly only because the scale at which someone is willing to do a condominium is typically smaller, the new development of condominiums is typically smaller than the scale at which we're willing to invest or looking to invest in our sweet spot. So it has been more on the fringes. The net result is that it is driving up the land price on particular sites. If it has the ability to go either -- a smaller site typically, go either rental or for condominium development. In terms of the yield differential between suburbs and the urban setting, that fluctuates over time, really driven as much by construction costs in land. Today, it is definitely, there has been a bias of capital in the urban core for a few years now and that is really playing itself out in the lower returns. People have more or less ignored the suburbs at some levels for the last 2 or 3 years and that's where we found some pretty rich opportunities. Overtime, Bill, typically there will be a spread of 50 to 75 basis points, probably the right number over the long term and that will have a little bit of a beta to it.

Timothy J. Naughton

Mike, I might add something to that. I think if you look over the last 5 or 10 years, and you'll hear this from Matt, urban has outperformed suburban and I think that has been getting priced into land and the projected economics on urban versus suburban. We question whether that may be true going forward, that doesn't form some of our strategy that starts sort of back tracking towards the suburbs in some of these markets, particularly markets like New York and San Francisco. But we'll talk more about that. I think it's a great question and a source of debate within the industry. Yes?

Unknown Analyst

A [indiscernible] of question [indiscernible]

William M. McLaughlin

I have yet -- in the development world, I have yet to see a condo conversion or a building under construction and convert the use to condominium. You may have seen something...

Thomas J. Sargeant

Yes. There's one -- smaller ones here in D.C. So they're starting to be more chattered about it. There hasn't been many transactions, but if you think about just the environment that we're in and the [indiscernible] of fiscal products that's been delivered over the last few years, declinement is such that at some point, it probably will make sense. But actual transactions have not yet occurred except for the one that I mentioned. So I wouldn't be surprised to see sub start to kick in over the next 18 months or so, to be honest.

Timothy J. Naughton

Yes. And if you believe the numbers that we've shown before, there's a 600,000 shortfall and the industry can't respond quickly enough, and the natural outcome in what we're producing or the number of apartments are that some of those do convert to pre-selling. We do have what [indiscernible] numbers. Yesterday people are sort of questioning how can we handle 12%, appreciation with mortgage rates are going up. And a lot of this is just demand that's [indiscernible] at the end of the day. But I think that in the interest of time, we're going to go ahead and shift to the next session. I want to thank the panelist for the session. Thanks, guys. And we're going to move right into the next session and I'd like to invite Matt Birenbaum and Kevin O'Shea up to the podium who are going to provide a strategy overview.

Matt is our EVP of Corporate Strategy, has a deep background in multifamily development and investments, and also oversees many of the strategic capabilities that we're going to be talking about later. He will speak about growth strategies and portfolio management.

Kevin O'Shea, the EVP of Capital Markets. Kevin is overseeing our fund platform since its inception and now receives all the capital markets, reporting to Tom, and he will speak about capital management strategies. Again, we'll leave some time for Q&A at the end, so we actually will let the 2 speakers sort of get through their prepared remarks. And we'll have a moderated Q&A after that before lunch. So, Matt?

Matthew H. Birenbaum

All right, great. Thanks, Tim. And as Tim mentioned, I'm going to focus my remarks on the external growth platforms that we used to drive the external portion of our long-term growth. And also, a little bit on our approach to managing the portfolio and how we think about structuring the portfolio to optimize its long-term performance.

Within the chart, which has already been referenced once, we're not trying to size the bars yet, but this would be kind of the third and fourth components there that are boxed out in blue and then Kevin's going to speak about capital management at the bottom box there.

Now, just to remind, starting with a -- just briefly touching on market selection. We do think we are in the best markets in the country. They do have long-term structural advantages. We've said this many times. There are significant constraints on new supply. Our markets tend to see less supply over long periods of time. Home ownership cost more in our markets and folks have higher incomes which support higher rents and better rent growth. I think it's not just that the markets lead necessarily to better rent growth although they have over time, it's also that there are better markets in which to develop, if you have the capability to develop, which of course, we've had for many years.

But we're aware that, this is no secret, our markets are great markets and it's kind of interesting as we look back and see how the competitive landscape has changed among our public REIT peers over the last 7 years or so. They've noticed and we welcome them, we're happy to have the competition. This chart just kind of shows some of the key public competitors, what percentage of their NOI comes out of our footprint and how they've kind of been coming into our markets over time. Now of course, that's come at a cost. They generally haven't been developing and our markets haven't been here for 20, 25 years. They've had to buy their way in, so they're not necessarily enjoying the assets they have at the same basis. But nevertheless, we have to knowledge that they're here. Of course, Archstone is not a factor anymore. But they're here and we -- it causes us a lot of -- really, the theme for today is how we're different beyond the market. And we think we are different and there's a lot of things we do better beyond just having better markets and really a lot of this is what we're going to talk about for the rest of the day, but this is just a conceptual framework maybe to think about it, the development franchise we've talked a lot about, we'll talk a little bit more about. But it's not just the development franchise. We have multiple growth platforms and acquisitions and redevelopment, which we've had a lot of success with. The way we think about segmenting our portfolio and our multibrand strategy, we think sets us apart. Our capital management, which long-standing, is success in that arena. The operating platform, which Leo touched on briefly, and then really these are almost separate boxes, but overwriting it all, the corporate culture and culture is probably the hardest thing for competitors to duplicate. And I think this brings it all the way back to the development franchise. One of the key reasons we've been so successful over the years has been that we understand that it's a local business and we have long-standing track records in these markets. We have folks who have been on the ground that have the political intelligence, know what it takes to get things done, know how to underwrite those risks and have had a long period, track record of success so we can go to jurisdictions they may know we're going to deliver on our promises.

And so -- but to do that requires a true commitment to a decentralized operating structure. We have multiple regional offices. We have 4 regional offices just in the New York region alone. One in New Jersey, one in Manhattan, one in Long Island, one in Connecticut. And it takes that kind of fine-grained local knowledge and local resources to be successful in these markets. But we have to balance that with great oversight and strategic vision in the corporate headquarters and that's a lot of what we're going to see this afternoon when we talk about the strategic capabilities.

So we've already talked a little bit about development, but just to give you a perspective on our development. Proportionately, this chart shows our kind of whole dollar construction underway as of year-end, going back all the way back to 1999 and also as a percentage of our total enterprise value which is the line across the top. We're going to be exceeding our prior peak on a whole dollar basis by the end of this year, pushing up around $3 billion. As a percentage of total enterprise value, you think that the appropriate target range for the company is going to be around in the 10% to 15% range, which is what those dash lines represent. And on that basis, we're going to be pushing 14 percent-ish by the end of this year, just towards the high end of our target range, but certainly something we're very comfortable with, particularly at this point of the cycle.

We did hear a number of questions when we announced the Archstone transaction from some of you about whether the Archstone transaction might be diluting our development franchise and whether by growing the denominator by 35% or 40%, we were going to be able to continue to add value at the same proportion on the numerator side with our development franchise. And I think despite this is me some comfort that we are going to be able to continue to do that. We did out of $1 billion of development pipeline between under construction and development rights through the Archstone transaction itself, but we've also been able to restart the pipeline very successfully, as Bill and Steve are demonstrating, and we're committed to human resources in all of our regions to continue to run in this 10% to 15% range for an extended period of time.

Another way to think about it or kind of how that manifests itself is through the long-standing history over multiple cycles. This chart also goes all the way back to 1999. Blue line shows our development yields by year of completion and the gold line shows cap rates on stuff that we bought and sold in that same year. So that's not necessarily the cap rates that the assets we developed, would it be worth it at that time. In fact, if anything, typically they would've been lower because we're not usually buying and selling kind of the brand new crown jewel. But it shows that over the course of multiple cycles, there's a spread there with the one exception of the 2009, 2010 kind of low watermark which hopefully is a once in a generation type event. There's been great value creation consistently over multiple cycles and when you look at it the right, where we are today, we're seeing margins, about as good as we've seen them through all this time.

There are times when acquisitions can be a compelling engine for growth and this chart kind of shows our acquisitions track record over really even longer period of time going all the way back to when we went public in 1994. And you could see that blue means what we were buying, gold is what we're selling and the green line is the cap rates at that time. And the key, I think, that this reflects is the capital allocation of knowing which growth platform to allocate capital to at which point in the cycle. So in the mid-90s, kind of mid-to-late '90s, when cap rates were high and there was pretty compelling opportunities to buy and many cases below replacement costs, we're pretty aggressive buyers. Then in the late '90s, we became that sellers and started recycling that capital into development. And then in 2000s, we bought on our fund platform, so we're buying with that vehicle and selling off the balance sheet. And more recently, after brief kind of [indiscernible] opportunity at the bottom of the downturn, we've become mostly using acquisitions and dispositions in a net neutral way to reshape the portfolio but most recently, just in the last quarter or 2, looking to be net sellers again as we see that as a pretty compelling source of capital.

Across all of these ups and downs, all of this, the chart represents $4.5 billion worth of activity, we've achieved an IRR of close to 13%.

And then as Sean have mentioned, we also have redevelopment as a growth platform and we've really invested in this area recently. We're now up to running $100 million to $120 million a year in redevelopment and that's an opportunity to invest incremental capital, a great incremental return and really improve the growth profile of the portfolio, one asset at a time. And it does -- I think, the important thing is we acknowledge and we've learned that this does takes specialized resources and we have a dedicated redevelopment group now, a dedicated redevelopment asset managers, redevelopment construction managers and systems to track this. And I've pioneered actually an occupied term process where we're doing a lot of these redevelopments. Even kitchen and bath fairly complete renovations with the residents in place, which allows us the ability to not suffer the occupancy decline during the period of redevelopment.

turning over from our growth platforms to how we think about positioning the portfolio, our portfolio management strategy. We do segment or allocate our portfolio across multiple dimensions. It's not as simple as saying, "We want to be in As in San Francisco and Bs in L.A." It really -- we have to take it all the way down to the submarket and even the asset level to think about how can we position the portfolio for the best long-term growth with the least volatility. Now, we tend to segment both by market, by submarket and by customer segment, which we think of through our 3 brand framework. And I'll just walk through that a little bit.

First, at the broadest level, at the market level, and I think there's question about this earlier this morning. The Archstone acquisition really accomplished a lot of our market allocation objectives and is putting us -- put us right on target, really, for the first time ever since we've established these objectives. We grew everywhere, but we grew most significantly in Southern California and in Metro DC, which were the 2 areas where we were probably the most significantly under allocated. But given the depth of our development pipeline, we always have to think about market allocation, really all asset allocation, both in terms of their current allocation, what it looks like today, and also what it's going to look like tomorrow after we pull through the development that's currently under construction and the stuff that we have the visibility that we feel confident we're going to be able to start in the next 12 to 24 months.

On that basis, we're still pretty balanced as we look out over the future, with the one exception, as Tim mentioned, of Metro DC where we expect we actually will be under allocated there, if you look out 3 or 4 years. Some of that is because of opportunistic selling we've been doing in the DC market over the last couple of years. But given current dynamics, we're okay to wait a little while to correct that and to rebalance when the time is right. And you know we're hopeful opportunities will emerge there as the cycle plays itself out in D.C.

Moving from markets to submarkets. Submarkets matter and submarkets matter maybe 50% to 75% as much as markets if you look back at historical kind of portfolio performance based on allocation. We kind of think about it in tiers. If you take within any particular MSA, and you divided up and you say, "Here's the top third submarkets, the middle third and bottom third, you divided into 3 tiers." What we found is historically, an average submarket in the top tier is going to perform about 75 basis points better per year than an average submarkets in the middle tier and similarly from the middle to the bottom. So you get about 150 basis points swing between having an asset in the bottom tier and the top-tier and that's just the average asset. Obviously, individual assets in submarket are more than that. So we've been keeping an eye on this as we pursue portfolio allocation objectives, both -- some of the kind of one-off buying and selling we've been doing. And more significantly, through the Archstone transaction, this chart kind of compares the blue bar where we think our submarket allocation was based on our expectations for future rent growth about a year ago and where we think it is today. And you can see that we've been able to get greater exposure to the top-tier submarkets and this continues to be a goal of ours.

Pat Gniadek and our afternoon session on capabilities is actually going to highlight one of the case studies where we did such a trade. We actually sold an asset in what we perceived to be a low tier submarket, bought an asset in the high tier submarket, basically at similar cap rates, but obviously a very different total return profile.

Now despite some discussion about the issue of urban-suburban and I think this is an interesting hot topic. I'm sure Richard Florida may have some thoughts on this as well. The chart on the left shows the long-term average of supply in our markets, in urban versus suburban submarkets. And basically, over the last 20 years or so, they've both seen about the same amount of supply relative to their preexisting stock. But over the next 3 years, urban submarkets are going to get almost twice as much supply relative to suburban submarkets. Now, I think, as Tim mentioned, I think we all believe that there has been somewhat of a secular demand shift in favor of more infill living, more urban type of environment. But It doesn't mean that the supply response maybe hasn't been a little bit overstated relative to the demand shift. So I think our view has been to try to be more balanced about it. Again, it goes back to the first chart, that Rubik's Cube, we call the granularity of growth. It really does depend on the market, the submarket, the individual dynamics going on there. If you can see our portfolio, we characterize it today as about 65% suburban, 35% urban, whereas what's under construction in the pipeline is more like 55-45. So we are shifting a bit more urban, but we're developing in both places and then it's not quite that simple of course because suburban includes a lot of infill suburban and suburban transit locations as well.

Now finally, we go to market submarket customer segment. When you get down to the customer segment level, we think, of course, this really starts with a demographic and I think just a couple of observations on this chart, many of you have probably seen these types of numbers before. There's been a lot of folks in the industry on the 25 to 34 year-old age cohort, that is our core customer demographic. We've developed a whole brand specifically targeting the needs and preferences of that demographic in AVA, which are going to hear more of later today. It's had good growth over the last decade and they're going to grow even a little bit more over the next decade.

What maybe a little less more appreciated, the next box over to the right there, that's the 35 to 44 year-old. You can see over the last 10 years, we saw a very significant decline in the number of 35 to 44 year-old households. And over the next 10 years, that significant decline is going to change to significant increase. Now these folks obviously have a bit of a lower propensity to rent in the 25 to 34 year olds, but we still do over index and that's shown below. If 13% of the total population, but 20% of our customer base. We think this bodes well for our core Avalon brand. And perhaps supports the thesis that demand may be a little more balanced between urban and suburban than what some other folks are thinking.

I'm not going to spend a lot of time on this chart here because Kurt Conway is going to go through this in more detail this afternoon. But when we talk about customer segmentation, it starts with demographics, but we take it beyond that into customer needs and psychographics. Now on this basis, we have been working with some outside consultant that have kind of segmented the market into 5 different segments and we've developed brands against 3 of those segments, Avalon will be the comfort creatures, Eaves by Avalon, the value thinkers and AVA, the youthful urban socials.

And just to give you a little bit of a flavor of how the portfolio breaks down along some of those metrics by brand. There's a lot of data on this chart, but now that we have 3 brands, it does allow us to do 2 things: One, be more focused in the product we deliver and try and deliver things that, that particular customer segment will value and just as importantly, not spend money on things they won't value and also just increase our market share, increase our penetration in our chosen markets. As we said earlier, we love our markets, we've been here forever. This isn't about shifting markets, but getting more deep within our market.

You can see here just a few kind of high-level highlights, the Avalon being the flagship luxury brand has the youngest asset age of 12 years, the largest average square footage and the highest whole dollar rent. AVA, interestingly, has actually higher rents per foot, but because the apartments on average are significantly smaller, the whole dollar rents are less than Avalon and has more urban locations and more high-rise. And Eaves by Avalon, more suburban, more garden, and has the most affordable rents. Now the AVA numbers here reflect what we have today, which is mostly AVAs that we've repositioned through redevelopment, so those numbers are going to change significantly as we bring on more new construction AVAs and we'd expect the average unit size to come down more and frankly the propensity to roommate which you see on there to go up.

And then finally, just on the bottom there, you can see another way we think about the rent, probably even more important than the whole dollars or the rent per foot is the rent as a percentage of the market and particularly of the submarket. What that really tells us is how the asset is positioned relative to its competitive set within that particular neighborhood. And as you expect, again, Eaves, 109% of median, better than basic, but basically kind of mid-priced point product. Avalon at the high-end, the luxury product at 136%. And AVA is somewhere in the middle. So now I'm going to turn it over to Kevin to talk about capital management.

Kevin P. O'Shea

Well, thanks, Matt. As many of you know, Avalon Bay has always had a conservative approach to funding our business, which is unique because of our development focus. Our approach has always been to emphasize a less levered balance sheet that will support our ability to access multiple performance of capital in a capital constrained environment. Coming out of the downturn, whether is this dislocation in the capital market, we chose to enhance our approach to funding our business by applying greater emphasis to the principles that you see here on the slide which already increased piece emphasis on permanent apostolic, commitments, increased emphasis and closely matching our liquidity in relation to our planned investment activity. We're monitoring our pricing of our capital alternatives, comparing current pricing to historical pricing, to able to spot unusual trends in pricing. They could to get the study supports or what when we talk about integrated capital management.

In support of our internal analysis of funding needs and capital choices, these prints will guide our ultimate decision for sourcing capital as we move through the investment and capital markets environment. In the next few slides, I'll tend to provide further in flight preferred insulate how we applied ICM over the past couple of years. One of the most notable principles of ICM is an emphasis on match funding or to mitigate the risk of sourcing capital, as well to lock in profits on investments by pricing both investments in capital and similar environments. And this slide clearly provide a few examples of that. Example on the left, shows our $725 million equity offering executed in August of 2011. It funded 8 development starts that were concentrated in a several month period during the second half of 2011. As you will recall of course, the summer of 2011, with the period of elevated volatility and reduced capital market access, primarily due to the U.S. debt ceiling debate that was going on at that time. This particular offering was executed during a short window when volatility had subsided and essentially eliminated the funding risk on this basket of development opportunities, as well as keeping our powder dry to pursue future opportunities as we move ahead in the cycle.

Well, recently, we match funded our recent purchase, of 40% of Archstone, which we announced in November 2012 and closed on in February 2013. For the Archstone acquisition, as you know, we sourced over $4 billion in equity overall with just over $2 billion in the largest REIT follow-on equity offering ever and by issuing $2 billion of stock to Lehman Brothers.

We also took on $2 billion a secured debt as Tom mentioned earlier, and with historically attractive pricing in the unsecured debt market, we also chose to issue $250 million of 10-year unsecured debt, a coupon of 2.85%, at that time was the lowest ever coupon on the tenure refund offering.

So overall, we funded Archstone with just over 60% in equity and eliminated funding risk going forward on development.

And turning to the one -- last one here, just to continue on. Sorry?

Unknown Executive

You guys are going to talk about [indiscernible].

Matthew H. Birenbaum

As we addressed, I guess, the monitor issue. As maybe you know from our earnings call in 2013, with pricing, the transaction market being more attractive than it has been in the public equity market. We've shifted our focus toward dispositions to fund ongoing development activity and our doing so also had the added benefit of [indiscernible] more open market environment in which we mean to pursue exiting it's position in Avalonbay stock, which over a little more than a month ago, it began to do by selling more than half its position.

Okay. Thank you.

Unknown Executive

[indiscernible]

Matthew H. Birenbaum

A second principle [indiscernible] is managing investment and funding activities in a more integrated way. And on this slide, what we've shown here is our 2 analyses that we take a close look at and then perform our discussion around liquidity. The chart on the right shows our existing liquidity represented the sum of unrestricted cash on hand, as well as availability under our line of credit. We compare this against our outstanding investment commitments, which are represented by the sum of our remaining despend on development and redevelopment. The chart on the left shows our historical liquidity excess or deficiency since 2000, both on an absolute dollar basis and as a multiple of our EBITDA. The shaded lines at positive 0.5x EBITDA and negative 0.5x EBITDA reflect our rough target range for liquidity. As you'd expect, we generally would strive to maintain an excess liquidity position. However, even our significant borrowing capacity of our unencumbered asset pool, from time to time, we are comfortable maintaining a moderate liquidity deficiency as capital market conditions warrant. Here, as you can see, as of the end of the first quarter, our liquidity position was quite strong with $500 million in terms of excess liquidity or about 0.5x EBITDA.

In addition to our liquidity analysis, we also have a borrowing capacity analysis. We will walk you through that here today, but just to give you a flavor of it, in short, what we do in that instance is, we look out over the next 2 years and really add up the sum of all the capital sources of the business, including cash flow from operations, plus our borrowing capacity on the one hand. We compare that against all of our committed users of the business including construction underway, debt maturities, dividends and the like, as well as dropping in all of our shadow pipeline, the development and redevelopment opportunities, and to assess where we stand and address the shortfall.

And clearly, that's not a capital plan to be sure, but it is a way of stress testing our business plan over the next few years that we have against our balance sheet to gauge the margin of safety in our business as we move forward in the capital market firm and to pursue additional development activity.

In terms of where that stands today, our margin of safety in funding our business is at both a cyclical and all-time high, which is really about where we wanted to be at this point in the cycle.

Yes the third ICM principle involves closely monitoring the cost of capital for AvalonBay in the asset, debt and equity markets, drawing upon analysis that compare current and historical pricing. And as I mentioned earlier, the process in doing this is really intended to help us identify unusual pricing trends and then form our own tactical approach to raising capital for the company.

Heat map on the left provides a temperature reading for the asset, debt and equity markets as of the first quarter in which we compare current pricing against historical pricing. For example, at the end of the first quarter, our spot equity pricing on our stock is better than 54% of the historical observations going all the way back to 1998, just after we completed the merger with Bay. As determined by the relative extensiveness of our stock, based on its relationships with bonds that brought our stock market, our own NAV, and our own FFO yield.

We weighed that to come up with the composite scoring for our equity pricing. And we undertake a similar analysis for debt and asset and you can actually see the asset reading of 84% is really mapped against what you see on the right-hand side of the page, which is really at the tracking of the commercial property index against our aggression mean line to see what the deviation in terms of current pricing in the asset market is, relative to the mean trend line and how much we deviate from that.

Whereas I think Tom pointed out earlier in terms of where we look at sourcing equity capital, the asset market does look to us to be more attractive, at least as of the end of the first quarter and probably still true today.

Essentially, this gives you a snapshot of some of the internal analyses we do, to creatively [ph] we've done these over the years at Avalonbay, but since the downturn, we really try to take it to the next level in terms of advising these analyses that really attract what we see in terms of our pricing in different capital markets today, against what our historical experience to totally capture the trends and use these analyses to ground our discussion in sort of objective facts and help give us a new insight of the capital markets and our choices, so we can inform our discussion of how we want to fund our capital needs, kind of investment plans that we want to pursue, how do we want to manage the credit profile of the company as we move through the capital markets cycle and our hope is that by drawing upon ICM in this way, it will help us better manage funding risks and hopefully, in theory, lock in profit initially when we fund the investment activity. At the end of the day, enhance our capital allocation skill. And if it works, as we hope it will be, it will enhance shareholder returns over the entire business cycle.

So with that, I'll turn it over to Tim.

Timothy J. Naughton

All right. Thanks, Kevin, and thanks, Matt. I think Matt and Kevin did a great job just in terms of providing some of the strategic rationale behind our investment and capital management activity strictly over the last 2 or 3 years and where we stand right now in the cycle and certainly the importance of the interplay between the left-hand side and the right-hand side of the balance sheet, particularly with a company that has our business model as aggressive as we are with respect to redevelopment and making commitments so that'd be funded and pull through at various points in the cycle.

But obviously, in order to execute on this strategy, we need strong and healthy platforms and other corporate strategic capabilities to support these platforms and you will be hearing more about that after lunch. But for now, I thought we take a few minutes and just open it up to Q&A before lunch.

Unknown Attendee

[indiscernible]

Timothy J. Naughton

I think all things being equal, we'd rather be in the top third than the bottom third, but I mean the growth is just one piece of total return. So to the extent you're in the bottom third submarket and cap rates trade the same as the top third or middle third submarket, that's when you want to act from a portfolio allocation standpoint. And I'm going to show you some examples where we think sometimes the market does differentiate enough on some market and that's when you trade on it. But to the extent that the market's view is in line with our view in terms of intrinsic value, we might be happy keeping assets in that lower third, if we're getting the right total return, ultimately. Ralph?

Unknown Attendee

[indiscernible]

Kevin P. O'Shea

I'm not sure we have really good statistics on income by brand. I think the rent income ratios are pretty similar so that would indicate that it would follow the rents, which I think it does. So clearly, you're just going to have the lowest income. between AVA and Avalon, I would have to look, I don't have those numbers right off the top, but I think it's a little less also with AVA tend to have folks that may have different sources of income that may not be shown on the younger folks. In terms of the operating margin, I think it's too early to tell. But we're trying to be thoughtful about it and the case study this afternoon is going to really highlight some of the ways that really stayed. The H Street has a better operating margin than Archstone, first and then [ph] for example which is more like an Avalon type of community. But I don't think we expect necessarily huge differences in the operating margin by brand. I think it's more about getting that initial return by having the right product positioned in the right way and that will position the best initial return and potentially longer-term performance as well.

Unknown Attendee

[indiscernible]

Kevin P. O'Shea

Our turnover tends to be 45%, 50%.

Timothy J. Naughton

Well, yes, we've been running in the 50%, 55% range. If anything, urban has tended to trend a little lower, so I don't know, at that age cohort whether that will continue the whole through. Generally, they tend to be more mobile, right. AVA targets more under 40 crowd for sure. So I would expect the turnover at least within an urban environment to be more than Avalon but relative to the overall performance, I'm not sure how that would -- how that would be offset just generally they tend to be a little bit lower urban versus suburban.

Unknown Attendee

You exited markets over the years including 3 in Chicago, are there any markets you're not in today that you want to be in and Philadelphia's one that comes to mind?

Timothy J. Naughton

We're sort of in Philadelphia. We have, in 2 ways, we picked up 1 asset with the Archstone transaction, small, it's less than 100 apartments and it's subject to corporate lease with Oakwood at the moment. We actually have a pretty big presence in Central New Jersey, which is pretty close to Philadelphia and it's a market that I think exhibits a lot of the same characteristics as the rest of New Jersey. So we are actually looking at opportunities in Philadelphia, but in some ways we just consider it sort of an extension or expansion of Central New Jersey where we've been for a long time. But other than Philadelphia, Scott, that's probably the only one that I might have mentioned. The purpose really is, and we talked about this last Investor Day, still our market share within our market is still so small and the opportunity, in fact, there are competitive advantage in those markets, we think the right strategy is to figure out how to continue to penetrate these markets whether it's through across multiple growth platforms or through our brand framework that Matt have mentioned.

Unknown Attendee

On the capital sources heat map, there's a 30 point difference between equity and asset. Could you put that into some historical context, like comparative, the history and then second question, within the volatility of the bond markets recently, it's too soon for the cap rates but wondering what's causing you to accelerate your disposition?

Timothy J. Naughton

Kevin, just real quick, to be clear, this isn't the basis points, it's percentile, right. So it is relative to history in a sense, right. The 84 percentile versus the 54 percentile.

Kevin P. O'Shea

Sure. So just as I mentioned before, what we do is over a given data set, we take equity for example where we have data going back to 1998 following our merger with Bay, where we can observe our stock price and how it's performed to really 4 things that we track to which are sort of external, one is sort of against the other metrics internally. In the case of equity, sort of 1/2 the weighting is derived based on how our stock price has performed relative to S&P 500, that's about 25% weighting, about 25% weighting as to how our stock is performing. It's BAA bond, the relative spread differential on yields. The other 1/2 we try to focus on internal metrics and really we emphasize NAV far more than AFFO yields but those are the 2 other things we track, how does our stock price perform relative to NAV, the development blow and how does our AFFO yield compare -- our current AFFO yield compared to historical AFFO yields. So try to bring all those data points together into a weighted pricing index here, if you will, and compare how our current pricing compares to all prior observations over the preceding, call it, 15 years in this case. So on that basis, as of the end of the first quarter where our stock was in the mid-120s, our pricing at that time was better than 54% of the preceding 15 years worth of historical observations. In the case of unsecured debt, what you've got there is not so much our own individual AvalonBay yields in our bonds, but rather we track the pricing on an index of BBB-rated REIT bonds. And clearly, as we know, probably speaking for some of the lower rate of credits pricing has come in over the past year. So we certainly enjoyed good pricing over the past couple of years. BBB pricing has even improved a little bit more over the last, up until the recent repricing into the last 9 months. So that's how we look at those metrics and how we look at the relative pricing trends. And it's really, again, not an absolute measure of our expected profitability, but just a sense of from a tactical perspective, where is pricing potentially most attractive relative to historical precedent. That's one of the many factors we bring in to the mix.

Timothy J. Naughton

And obviously it's not a perfect algorithm when you're looking at the cost of capital. I think the greater point here is that we triangulate through looking at a number of different means and then obviously apply some judgment against it as well. It's not entirely mechanical in terms of just sort of picking off the chart with [indiscernible] at any point in time, but this certainly informs the capital management decisions are making at different points in the cycle and that's where particularly as we're funding the development platform.

Unknown Attendee

[indiscernible]

Timothy J. Naughton

I'm sorry, could you repeat the question?

Unknown Attendee

[indiscernible]

Timothy J. Naughton

Yes, I'm sorry [indiscernible] -- great question, given the backup we've seen at least in the 10-year here of 90 basis points or so in the last few weeks. We do have a number of deals out in the market and we are trying to push them. Our sense is that, first 50 to 75 basis points is probably not going to impact asset pricing a whole lot just given what people have embedded in their pro formas and I'm not sure anyone ever believed the 1.6% 10-year treasury, certainly we're underwriting an asset value based upon that kind of break. But it makes us, at the margin, I'd say, feel a little bit more sense of urgency just in terms of bringing assets to market and pushing along the market in the process.

Unknown Attendee

I just was curious, how do you build on your dividend policy with all of these, like 3 months ago, dividend was the most important thing and now it's a four-letter word, just curious what, how you look at your policy there?

Timothy J. Naughton

Well, we want to cover our dividend, we've been able to do that through our life as a public company and have enough coverage to sort of say if the coverage has given the cyclical nature of our business, but we want to grow the dividend, too. And certainly you can only grow it when you've got a business model that is growing cash flow and creating value. So we want to have enough margin of safety in terms of making that dividend safe, but we also have the use of proceeds as it relates to retained earnings to fall back into very accretive development change. But that's still small. If we have $150 million or $200 million of retained earnings today, it's only funding a small piece of our investment appetite at the moment. Maybe one more question after this to the extent there is one.

Unknown Attendee

On Slide 34, the disposition volume for 2013 looks like it's a little bit over $1 billion there. And that's a reflection that's a little bit above guidance. Is that a change or what?

Timothy J. Naughton

Well I'm sorry, yes it's the fund asset adjusted. It doesn't differentiate between -- I'm not there yet what slide, with the 33 -- so it doesn't differentiate between balance sheet and fund assets. And so as you call it Fund I, we're towards the end of the investment period there and we're really harvesting or liquidating, if anything, maybe accelerating that process with respect to those assets. I think that's the difference between what we announced at our outlook, which was really more focused on balance sheet assets than what we're trying [ph] to fix.

Unknown Attendee

So the breakout there is roughly about $900 million of AvalonBay assets including the Archstone disposition that happened post-closing and about $300 million of fund disposition.

Timothy J. Naughton

All right. One more question and we'll break for lunch. And we'll have time later as well.

Unknown Attendee

Slide 36, your Rubik's Cube, which by the way doesn't appear solved, I noticed. There are 4 columns for brands. I don't know if that was intentional or is there anything -- it's just an act because you made it cute, if that's it. I mean I don't remember what the tagline was relative to Archstone brand?

Timothy J. Naughton

Well, when we've talked about Archstone, we expect it to be going away between us and equity, but this is merely illustrative. It doesn't mean that we can't have additional brands, but the intent was not to have an Archstone brand, which we think we're bringing some of customers of Avalon, I'm sure we'll an Avalon [indiscernible] and in our sub-brands in particular case and the equity can speak for itself, obviously with the brands.

Anything else? Any other questions? So I think it's a good time to maybe break for lunch. We have lunch outside or indoors, depending upon your preference, I recognize it's a bit hot today but the views are spectacular out on the porch. So if you haven't had a chance to enjoy those, maybe at least spend a few minutes enjoying your lunch outside. So we're going to reconvene here at 12:45 sharp. We really need people in their seats by 12:45 and to restart the webcast and the balance of the day. Thanks a lot.

[Break]

Unknown Executive

All right. Terrific. Thank you. Welcome back. What a view out there, huh? That is quite a room. People can be down on D.C., but that is one of the world's great demand drivers right out the window there. It's not going anywhere. So it is impressive. So we set up this afternoon session as a panel discussion, and really what we're trying to do here is highlight some of the strategic capabilities that we have been investing in, in our corporate headquarters office here in Arlington over the last couple of years. And in particular, how we -- how those capabilities work to leverage our growth platforms and development acquisitions, dispositions and redevelopment. And how -- essentially, how we're applying some of the insights and the business intelligence that we're getting out of the capabilities, groups that sit in Arlington and see across the whole company and the whole sector to be even better developers and redevelopers and acquirers than we have always been in the past. So we're going to start off with Craig Thomas, here to my to my left. He's our Vice President of Market Research. Craig has been with us for about 3 years and he's an economist, came from PNC and was with some econometric firms before that. And Craig builds all of our econometric models and will walk you through a number of different output product that his group generates that we use, in all kind of ways, across the company. After Craig, Pat Gniadek, who's just won over from Kurt there, is going to present a case study on an acquisition and a disposition where he was able to really trade on some of the insights out of Craig's group to improve the growth profile of the portfolio and create value. Kurt Conway is our -- Pat, I'm sorry, has been with us for 7 years and manages...

Unknown Executive

[indiscernible]

Unknown Executive

Yes. Okay, 6 years, and manages all of our acquisition and disposition activity on the East Coast. Kurt Conway is our Senior Vice President of Brand Strategy & Marketing, and Kurt kind of runs our branding initiatives as well. Kurt comes from Sunrise Senior Living, and also had stint with Marriott before that, and had a lot of experience, also been with the company about 3 years and really brought to us a whole new level of customer insight, customer segmentation, and we'll explain how it's really permeating all aspects of our business. And then Jon Cox, who's sitting next to Pat there. Jon's been with the company since 2003. He runs our development operation in the D.C. region, and has 25 years of experience, plus as a developer, he's going to walk you through the case study of AVA H Street, which then you're going to get to see a little bit later on. Jong Chung, who runs our in-house design group, is a licensed architect, manages all of our internal design efforts, works very closely with the asset teams in all of our regional offices. Jong has been with the company for 10 years. And then Sean Clark, who's been with the company since '05, and he runs our Asset Management and Redevelopment group nationally, and has experienced both doing redevelopment directly and new development directly. He's going to walk through a case study of a redevelopment of an Eaves asset in the West coast.

So with that, I'll turn it over to Craig to get started. And we'll have a couple of opportunities for Q&A along the way, one, and after Pat, and then after Sean.

Craig Thomas

Okay. Let's talk market research. All right, market research. Now I get off on a bad foot because I don't mean to sound like I take this lightly. We actually have a mission statement, and that mission statement is, "To synthesize the best sources of information using a proprietary platform to create unique insights and practical applications to be leveraged throughout AvalonBay." We stress and analyze the -- the platform itself is built on historical data series and we concentrate entirely on that. The reason being is that AvalonBay has such a deep bench of folks knowledgeable in investment, development, construction, you name it, that we concentrate on where we are best, and that is handling the large streams of increasingly better quality and more transparent data from various data vendors. This is how we relate to the rest of the company. We have direct reports and conversations with development: redevelopment, operations, revenue management, investments, investor relations and then management investment committee. These arrows are double-sided for a reason. This is, that we are not just pushing out information to the company but we're also bringing it back in. One of the great things about AvalonBay is that we have such deep history and knowledge of our own market that as a market research platform, we're not only just taking in vendor data, third-party data, economic data. We're taking in the insights and the data that AvalonBay itself produces. And this is where we live. This is home. This is the market research platform. It is, in essence, a statistical platform. We track about 40,000 communities on a quarterly basis. We have hundreds of thousands of economic time series. We have a GIS platform. We have econometric models. Now the sources of the information that we use are vendor data, but we don't go query a database, we don't read a lot of reports, we don't take in a lot of canned things. We get very little in the way of custom information or customized on the part of vendors bringing it to us. Rather we take in flat bios of raw data. Everything that they have that we can get out of them, we take it in and we upload it into our platform. In many instances, we have better access to our vendors' data than they themselves do. Unfortunately, what that means is I'm doing a lot of data quality checks for them as well. But all the better because we can see it better than they can. Flat files from all of our vendors and then we add that the secret sauce, which is AvalonBay's 25-plus years of performance information that we can combine with the vendor data, with our own data, with the economics data and find correlation and insights that other platforms frankly can't do because they're reading market reports and printing them out and stapling them and putting them in packages.

Our supply pipeline, second to none, I believe. We start with all the best vendor data that we can find. We then go to our developers and we say, "What's real here? What's going to happen? What has financing? What's the likelihood of this community starting? That community starting?" We put that together. We put it in the platform, out comes standard reporting that goes to the management investment committee for every single project that we undertake, topical analysis. There are -- everyday, there are questions. Questions that you all ask of us to understand what's going to happen if this variable changes or that variable changes? We undertake that topical analysis not because we're supersmart, but because we maintain this flexible and deep platform that allows us to quickly and correctly analyze trends, whether it be what's going on in Washington, D.C., what the effects might be of defense cutbacks in certain markets, where to get the supply is, you name it. It's on the platform. It's flexible, it's proprietary and it creates unique insights.

Here's some output that we put out. And this is just a day in the life sort of things that we produced to make AvalonBay, we hope, smarter than the competitors. In this case, these are maps of San Jose. I believe these were made out last year for business planning purposes. The left one with the green and yellow, we put a green, yellow or red traffic light-inspired rating on every submarket, and you'll see that Northeast San Jose has a yellow and you may say, why? San Jose is such a great market. The truth is that we're worried about supply. On the right-hand side, you'll see our supply pipeline. This is every community under construction, under planning and proposed by submarket, and we take special notice as to which projects are closed or potentially impactful to our own communities. The reason that Northeast San Jose is yellow is because of that supply.

This is an example of some of the pages of our research inserts. Every single thing that goes to MIC [ph] gets a standardized report as deep as we can get that it hits economics, fundamentals, transactions, demographics, psychographics, our own experiences in these submarkets, and we summarize everything at the top with, again, a green, yellow and red such that not that market research is the same good, bad or otherwise. It's telling the investment community you don't need to worry about these variables but let's ask some questions about this variable or this concept, whether it be for sale housing, fundamentals or revenue projections. Everything is standard, everything goes with every project. This is a really, I think, neat example of something that we do for our development, which is what we call our Right Fit report. This is just one table from a much larger report. But it tries to answer the question, what should our layouts be? Where should we have more studios, more 1-bedrooms, more 2-bedrooms? We look at the project's rent. We go down to the zip code level in a developer-defined area. I go to the developer, I say, "Where are your customers?" They draw a circle around. It's not usually circle, it's a polygram, it's a bit polygon, not polygram, and sometimes it is a polygram but -- and we look to see who's in there? What renter households are in that area? How much rent can they afford? Moreover, we're so deep in some these markets, of our residents in these submarkets, how do they like to live? What layout do they like? We put those together and we find renters that fit the profile for income, size and preferences, add them all up and give them optimal mix for our potential development. But not only that, we look at the competitive set within that polygram and say, I know it's not polygram, I just -- you're supposed to laugh when I said polygram. [indiscernible] We look to see what their layouts are and decide where people will be underserved or overserved. [indiscernible] so in this case, this community, I forgot which one is it to tell you the truth, but we are proposing it must be a suburban one because it's heavier in the 2-bedrooms, but we can see that the 1-bedrooms, not only should we go lighter in the 1-bedrooms but they are -- but the existing concept in this case is 45% single-family. We think the demographics in that area are overserved by 1-bedrooms. And quite frequently, the different rents reflect the fact that some layouts are oversampled, oversampled.

This is what we can do in that, if we have all those detailed information on a platform and people who understand how to use it, we can ask these questions in a standardized, quick and thoughtful and actionable way such that we can use it to make decisions. It's not pie in the sky, it's in many cases, pushing a button.

This is just a little snapshot of some of our underwriting. Market research provides both revenue growth projections and exit cap rates for all of our projects going forward. It is said that developers own the present but market research owns the future. So unfortunately, the future never arrives, so I don't have much to show for it, but that's what it is.

In this case, this is a map of psychographics. We have 3 brands: AVA, AvalonBay and Eaves. And we have different target groups, the psychographic groups that we identified as being the customer that is most likely to like one of those brands. In this case, blue is AVA, red is Avalon, yellow is Eaves. And this map is, actually, that we did for the Mark Pasadena, which is right now being redeveloped as an AVA brand. And here you can see blue means AVA. So if you follow where I'm going here, I'm making this incredibly easy for everybody else by simply color coding all of the world and telling them where to go. It's a quite a service that I provide, but...

Unknown Executive

It's the only thing I understand, Craig.

Craig Thomas

Red, yellow, green. Blue, yellow, red. It's easy, right? If only that were the case. This is -- market research is one voice among 4, 5, 6 voices that are as thoughtful and knowledgeable as this market research. And my challenge is to make market research as well-informed and as useful as all those other voices are. In this case, we're not just looking at long-term developments and acquisitions. We're looking at near term as well. This is example of a few of our market research tactical snapshots that we provide to revenue management that doesn't measure what revenue growth is going to be a year or 2, 3 years, 5 years out. Rather try to measure which submarkets are about to turn a corner in terms of seeing a demand surge or a surge in supply, and trying to inform our folks that are running our revenue management platform of whether or not we need to lean in or lean back before other people know it. Before it is evident in the market, we can use these statistics and these tools that we've developed to make decisions ahead of our competitors. And it's not just on the revenue side. It's not just the demand side that we do these things for. Anywhere that we're needed, we're like the Marines. We'll go wherever we're needed. In this case, construction cost. We're looking at construction costs over time. We know what goes into our communities. We know what drives our costs. We, as a market research group, have the ability to keep track of the statistics and the commodities and the services and the wages by region, by property type, so we can see where our construction costs are going, and plan accordingly. In this case, I've just plotted out garden, mid-rise and high-rise. And you'll notice that garden has been well above trend, but frankly in the long run, it's been a high-rise product that has been trending higher and has actually taken a bit of a reprieve because of lower steel prices.

So we're doing a lot of these standardized reports, right? You want -- and it's part of the fabric, it's part of the way that we do business. But then there are all of these topical things that we need to look at, as well. Things that are interesting because there are new trends in the industry or a new phenomenon. And because we have this platform, we're able to look at it. For instance, this was the paper that we did a while ago on TOD premiums. In this instance, we looked at every community that we attract in California, that's 1,600 different communities over time, 500 of which were within a 10-minute walk of a TOD station. And we're able to look at how TOD premiums behave over time in different situations. What does -- in this case, if you want $0.012 more per square foot, just move your building 500 feet closer to the station. Now that's not easy to do if your building already exists. But if you're going to build a new one, you take that to the bank. Not only that but just understanding what TOD premium is, you think that it is always the same or it's always right. Rather it is correlated with gas prices. It acts as an amenity, a luxury. So that TOD premium changes in time. Those are things that we are able to figure out because we've taken the time to create a platform.

Another thing that we -- the insight that frankly I'm-- it speaks to what we were talking about earlier is what we are able to communicate with the company with regard to Washington, D.C. This is a few exhibits from a report that we wrote in April 2011, which says we know that supply is rising. We believe that the local economy is decelerating. We culled D.C., I think, ahead of anybody I know, and it's not because we're smart, and it's not because the muse came and touched us on the head. Rather, we sit there day in and day out and looked at supply. We build that supply pipeline. John and I sat down there and we counted each community, and we knew it was coming before others did, and we looked at -- yes, folks say the government never cuts back in Washington. Yes, it does. Well, if they do cut back, then rents always keep rising. No, they don't. Well, they never did -- jobs never slowed down in Washington. Well, yes, they kind of do. And if you have the platform that you can look into it, and not just speak in platitudes about don't worry, you can make some decisions. In this case, we sold 6 assets totaling $600 million because we saw this coming. We didn't build things we would have otherwise built. And we understood the markets, such that when it came time to drop Archstone communities in our portfolio, we bought them with the knowledge of which submarkets we're going to withstand this, and what types of assets can withstand this situation that we're in now. And we are comfortable continuing to invest in Washington, because we also have 20-odd years of history in this market. I understand that over the long run, this market has great attributes. And we do the serve analysis for every community on a regular basis. In this case, we have put together a checkerboard, if you will, of future IRR based on our revenue projections by submarkets, by class and exit cap rates.

Unknown Executive

This one just is not in your packet. This one we thought we shouldn't hand out. So if you're looking for it, that's why. But it's an example of another tool. Go ahead, Craig.

Craig Thomas

And it is -- this sort of thing that allows us to make educated portfolio decisions on what to sell and when to sell it and which are the -- when is the time to recycle capital in some of these communities. And something very similar to this is what we used in the process of drafting the Archstone communities. So with that, I am going to pass it on to Pat. And Pat is going to tell us about a couple of transactions that he made using these sorts of tools and insights to achieve our portfolio goals.

Patrick Gniadek

Thanks, Craig. Before we get into the actual case study, I just want to mention a few things that sort of set the table for the conversation. One, as Craig alluded to, we do use these market research tools to inform our investment decision, but not the only thing we look at. We do look to our insights and our worldwide experience and our collective knowledge throughout the organization, but market research is one of those tools that we do look at. And this informs our decisions on both the buy side, as well as the sell side, what to sell, when to sell as importantly as the buy side equation. The case study we're going to go into illustrates how the Investments group applies this market research tools to actual transactions.

One of the things I would say, as alluded to earlier this morning by Sean, is that while there are times in the business cycles where we're going to be net buyers, this is not one of those times. Frankly, this particular point in the cycle development is the main value creation in general of AvalonBay. That's not to say we're not active in the transaction market at the margin but it's not a vehicle for net growth. And we're really using it at the margin to shape the portfolio and also look for certain arbitrage opportunities where we can buy smarter, we can sell and create value at that margin.

And we do that by trading out of markets where there are slower growth projections into markets where there are stronger market rent growth projections, despite the fact there may not be that much of a difference in cap rate. And this is especially effective when the transaction market doesn't value those perceived differences in growth appropriately, and it's one of the phenomena of the transaction market in general that within a metro across submarkets or even across metros, the band of cap rate in the markets that we're in, with the exception of New York City and California, which are sort of their own universe, but if you took the rest of the markets, there is really not that much differentiation in cap rate and certainly not enough to account for perceived differences. When I say perceived, proprietary insights that we have into the future growth.

So we look for these arbitrage opportunities, both when in a particular MSA by going from one submarket to the other, and then also across different MSAs.

The last thing I'll point out before we get into the different transactions -- or the 2 different transactions we're going to highlight here, is that there are transaction costs associated with doing this. Sometimes they can be significant as much as 2% to 3% of the asset value. So you really have to use the strategy selectively and have to have a really strong conviction in the signals that you're getting from internal models before you act on them.

So moving into the first part of the case study, we are looking at the sale side first, and the asset we're going to discuss here is Avalon Decoverly, which is in the submarket called Rockville/Gaithersburg, which is in suburban Maryland, partly D.C. MSA. And this happens to be a submarket where there is significant new supply and there also are assets that we own and still own near the community. We had a concentration of assets in this particular location. It's going to be particularly affected by new supply going forward. And really what was driving the new supply, in this particular instance, was a change in the master plan and the local attitudes, where historically, it really been a restrictive development environment. And over a 2- or 3-year period became much more permissive, and then there was a lot of new projects planned and are actually in progress or being delivered. As I pointed out -- go back to the slide real quick. As I pointed out, we do still own several assets in the market and one of one of those, frankly, is almost immediately adjacent to Decoverly. So while we look to sell one of the assets it wasn't like a signal to sell everything in that submarket.

We did want to lighten our exposure by selling one asset, going to the next slide now, which would be an example of taking advantage of favorable market timing and going back to some of the conversations this morning when you're talking about the top third or the bottom third, one of the things I would point out there is that those aren't necessarily permanent designations. This isn't Montgomery County or Rockville that's permanently bad or permanently good. This really a tactical tool that we use at the margin. What we're seller in this market today, we may be a buyer at different points in the market cycle.

One thing I would note here is that this asset was widely marketed in 2011. We didn't get the response from the market that we'd hope for. The pricing was weaker than we thought it should be. And so while we sold the 4 assets at the time or right around that time and brought our Metro D.C., we decided not to transact on this one because at the returns, we could -- we expected to get over the perspective 10-year period at the price of call it $120 million to $125 million. That wasn't very compelling. But we continued to softly mark the assets after that and entertain unsolicited offers and at $135 million, the case for sale became quite compelling.

So just to talk about the economics real briefly before we transition to the buy side of the equation. We did realize a 14.5% -- or excuse me, a 14% plus IRR on this. One thing I would point out is that this is a good example of 3 different platforms creating value and contributing to the 14% return. We bought the original phase. We developed the second phase, and then we redeveloped the entire property in 2010, 2011, where we did interior improvements on the first phase and made improvements to the common areas in the entire property to contribute to that 14% return. And what I would point to, then going forward, is we expected a forward 10-year return of less than 5%. So one of the things we accomplished by selling out at this point in the cycle was to not dilute that 14% return by holding it for another 10 years, mixing into 5 and then bringing down the realized gains we have worked so hard to attain. One of the things contributing to the forward IRR of 5% was the fact that we have an expected growth rate on rent on a compounded basis in the low 2% range on this asset going forward, which is low in a vacuum. But also another thing I would mention there is that we expect negative rent growth possibly in the very near term over the next couple of years and positive rent growth thereafter. But we didn't want to live through the negative rent growth cycle.

So switching over now to the acquired assets. Contrary to the Rockville/Gaithersburg submarket, the Route 128 North submarket is a submarket that has a very little new supply expected in the aggregate. And specifically, in the town of Burlington, there is virtually no supply. Coupled with that, we don't own any assets nearby. The closest asset we own is within 5 miles of this asset. And also, we don't have a development capability right now in this market. So it's a low supply submarket. It's a desirable submarket, it's within the 128 employment corridor, which is one of the most desirable suburban employment corridors in all of Boston, and we had a hard time penetrating it through development so, therefore, we bought the asset instead of developing there.

So just talking about the economics here real quick. We bought this for almost an equivalent cap rate of 5%. There was a little bit of a boost to the yield through a modest redevelopment play that [indiscernible] closer to 5.5%, but sold one asset of 5.3%, bought this one and effectively lead to 5.5%. But we generated a 250-basis-point difference on the IRR expectation going forward, 7.5% versus less than 5%, because of 3 factors. One of those factors being the CAGR in this submarket due to the low supply environment and healthier demand characteristics coupled with that is about 100 basis points higher than what we expect in the Decoverly situation. In addition, this is a submarket where we expect consistently positive rent growth going forward, not negative followed by positive which has a huge impact on the IRR as well. And then thirdly, you had the small boost from redevelopment. So -- and incidentally, this is also an Eaves community, so one of the secondary accomplishments by doing this trade was we were able to increase our Eaves presence in the portfolio, which is a larger portfolio of goal. So in conclusion, we would like to do more of these. We need to be selective because of transaction cost. But we look for these opportunities wherever we can and act on them when we have a strong conviction on our beliefs.

Unknown Executive

Great. Thanks, Craig and Pat. I think we'll pause here for a couple of questions. Let me just point out one thing Pat failed to mentioned is that he actually lives in the Rockville/Gaithersburg submarket, and we're disappointed you weren't able to keep those various supplies up by stopping that master plan change happen. But I'm pleased [indiscernible] in his personal portfolio.

Craig Thomas

A part of that [indiscernible] on the management team living in the area.

Unknown Executive

So questions for either Craig or Pat on the market research tools or this particular case study?

Unknown Executive

Great execution both on the sell side. I think we're really able to get honestly probably above market price based on the fact that we had a highly motivated kind of off-market buyer after our marketing process which we don't get to see very often and then understand a great buy, great long-term asset. Yes?

Unknown Analyst

Can you talk about the buyer [indiscernible] buyer not by name but by [indiscernible]

Craig Thomas

It was an institutional buyer. I won't mention it by name, but it was somebody that you guys will all recognize. And I would mention that a period of time had passed, so we had a traditional marketing with a broker involved in late '11, Didn't get the result that we expected. We kind of hung around the rim a year past. We did have one offer prior to this at $130 million that we considered strongly. But said, no, it's better than we achieved a year ago but still didn't act on it. It really when it got to $135 million, was the point that we pulled the trigger. We don't typically sell in this situation where it's off-market, but having done a full market situation prior, you had comfort in where you thought pricing was. And we do, obviously, get a lot of unsolicited calls, do you have anything off market, do you have anything up market. And if you put the bait in the water often enough, in this case, somebody took the bait.

Unknown Analyst

[indiscernible] Why do you think they were thinking only [indiscernible]?

Craig Thomas

One thing I would point out, I think, is true, is we do have, legitimately, a more sophisticated approach to market research than a lot of our competition, which some of the competition is catching up. It may be a temporary advantage, but other groups may look at third-party market reports, but everything is sort of in that 3% to 4% range. And I think that's one of those examples where you can take advantage of that perception difference where other people underwrite differently and don't pretend they know better than market consensus and we can take advantage of that sentimental arbitrage.

Unknown Analyst

Just a little more color on the buyer group. By the way, was it a combination of a local sponsor and a sovereign wealth fund?

Craig Thomas

Yes.

Unknown Executive

[indiscernible] This is going to take the long-term rent growth average in a straight-line.

Unknown Executive

Any other questions? Yes?

Unknown Analyst

Why not sell more in that [indiscernible]

Unknown Executive

Yes. The question was, why not sell more in the submarket and...

Craig Thomas

Well, we did saw a lot in D.C. over the past 2 to 3 years. And in some cases there may be property-specific circumstances where you don't want to sell an individual asset or not. It was one of the larger assets we owned in the submarket, I mean, $135 million, that was a big asset. So --

Unknown Executive

And we did sell a Fund II asset in that submarket also recently.

Craig Thomas

There was an opportunistic sale in Fund II. But again, I mean, the pricing. I mean, at $125 million or $130 million, we weren't even selling this asset. So if we could find buyers that overpay from more assets in this submarket, it might want to retain it, maybe. But this was a tactical decision on this one asset.

Unknown Analyst

But can you talk little bit more about transaction costs and how they impact the spread in IRRs? And what sort of spread in IRRs do you need the [indiscernible] like that?

Craig Thomas

Well, if you are going to -- transaction cost can be between 2% and 3%. I mean, in Montgomery County, you have like a 2.5% transaction cost that the buyer and seller share. So you couple that with a buy, now, you're at 4% to 6% on the transaction cost, which can be absorbed over time. But isn't something you would want to do on a whim. You would really want to have conviction just treading your own stock portfolio -- whatever, you don't want to do that lightly, given there are certain transaction costs that have to be absorbed.

Unknown Executive

Yes. I think there's an art to this. And this is -- these are not trading stocks and bonds. These are hard assets, with sticky asset values. And so we have the constantly appraise that. And it's also true that some assets, real estate taxes are worth -- some assets are worth more to us than they are to a third-party buyer because of the real estate taxes, too. So that's another factor.

Unknown Attendee

[indiscernible]

Craig Thomas

We don't have a hard and fast rule on that, I mean, I'd like to be able to blow it down to something simple for you, but it's really -- we're always in the market selling stuff, buying stuff. So we're looking to sell stuff which we think has a lower -- is on the left-hand of that draft board chart, if you will, that we showed you, and in the buying opportunities they're really get driven by what's available on the market. So it's not necessarily a fair trade all the time. One more? Yes? Yes, sure.

Unknown Analyst

[indiscernible] California, we're different animals that you're seeing the same -- there's more differentiation than before?

Craig Thomas

Yes. I mean, most of the markets with the exception of California and New York, you might have a cap rate range between 4.5% and 6%, which is maybe a wide range, but you have urban high-rise at the lower end of the range, you have suburban garden at a higher end. All of the suburban garden pretty renovated at the higher end of the range, but at all their suburban garden deal in Boston isn't going to trade at that much of the difference cap rate that it would in submarkets within that same metro, or even between D.C. and Boston. New York has always been a special animal. I mean, it's not unusual for deals to trade sub-3%, in some cases. And California is a more aggressive buying environment as well because they have a generally speaking, a higher percentage of future growth. So most markets we operate in are in that consistent 4.5% to 6% range but you have to carve out California and D.C. when you talk about those submarkets.

Unknown Attendee

Because that range will just move down, but would still be a whole wide ranges and also tighter.

Unknown Attendee

It's still tight within those markets [indiscernible]

Unknown Executive

Yes.

Unknown Executive

And when you think about it, particularly for a leverage buyer, more of their capital is debt than equity. The debt pricing is the same. That's more or less of a commodity, particularly, from the agencies or back when it was CMBS days, which we know is not as much of a factor anymore. But [indiscernible] it's just, in general, it's somewhat surprising how, within an MSA, cap rates don't vary as much across different submarkets as you might think or as we would have thought. Okay? And there'll be opportunity for more Q&A after the next set of presentations. So at this point, I think we're going to move on to Kurt, who's going to talk about our customer insight function.

Kurt D. Conway

Great. Thanks, Matt. I'm going to spend the next 15 minutes reviewing what customer insight is at AvalonBay. And you may be wondering, what is customer insight? So I will propose a definition here. You'll see that it's a number with chart-list slide here, a little reprieve. So I'd throw this definition up there, which is really seeing our business through the eyes of the customer. And you can be sitting back in your chair and saying, "Hey, that sounds like corporate speak. Does that really happen?" And it's an easy thing to say. Yes, it's an easy thing to say, but it's much more difficult thing to do. So hopefully over the next 15 minutes or so we'll be able to share how we're doing it, actually, at AvalonBay.

So what does it mean in AvalonBay? It's really about a philosophy, and it's how we incorporate the customer and what they think and what they feel. Yes, I used the feeling word. What they think and feel about living in apartments. And it's permeating throughout the organization. So we try to apply it to decisions, whether it's strategy, whether it's in development, construction, redevelopment or in our day-to-day operation. It's very intentional. What does our target customer wants? What do they think about the products they -- we offer, what do they feel deal about the products and services that we offer? It's not asking how did the decisions that we make affect the customer, rather it's really starting from the perspective of what decisions should we make in order to attract, retain and delight customers profitably. So it's really a shift in the way we've been thinking as a company, and it's becoming more and more part of our DNA everyday. So how do we do this? Well, we do it through data and what this chart illustrates is really just some of the sources of data that we get information about customers from.

I'll start in the upper left-hand chart of the chart here, and really, we start with our own customer data, whether it's through our property management system or through our CRM system, or use our sales force, those are both databases that have a lot of information about our customers, who they are from a profile standpoint, what apartment they're living in, how much rent they're paying, how long they've lived there, have they renewed, at what rates, how many service request did they put in. All kinds of information about that experience that a customer had at one of our communities. With sales force, we have lots of information on the sales side, as well as information about that customer in terms of concerns and compliments that they might have about their experience with us.

We also do a fair amount of customer research, in the upper right-hand side of this chart. And that ranges from a variety of ad hoc surveys to address specific questions, whether those are surveys, focus groups, online discussion forums. And then we also have ongoing tracking studies with our residents to understand how satisfied they are with their experience with us.

In the lower left-hand side of the chart is a source of data which is growing as we speak. Social media. Lot of conversations out there about apartment living on your ratings and review sites. They tend to skew negatively for every provider, but I firmly believe that within every complaint, there's some kernel of truth and something to learn from, so we really mine through that data, whether it's on Yelp, apartmentratings.com, Google+, lots of conversations on Facebook, Twitter, blog posts. So we have software that helps us mine all that information and access that information so we know what conversations are going on out there.

And then, finally, we use third-party data. As Craig alluded to, whether that's census data or we do look at other third-party surveys that are done to understand what customers are thinking about apartment living.

So we got started with customer insight really back in 2009. That's when we started building a stronger framework. And we did this, Matt alluded to this earlier this morning, by first starting out understanding kind of the structure of the market from a customer's standpoint. So we did a large segmentation study where we talked to thousands of renters living in apartment communities in our footprint. So we didn't talk to renters across the world or across the U.S., so it was really focused in our footprint and where we were going to grow as a company. We asked them lots of questions about what it's like to live in an apartment, what their experiences are, what their needs are, what their preferences are, how they think and feel about apartment living. And taking all of that information came up with the segmentation scheme. So this is really a needs and wants segmentation, it's not a demographics segmentation. The demographics kind of just fall out of it. It's really what people are looking for in an apartment-living experience.

We came up with a 5-segment solution, that's how we define the structure of the market. And then, as a company, in order to help drive our growth strategy, we narrowed in on 3 target segments that is really part of our growth strategy. The largest segment is the comfort creature segment. They're looking for more of that luxury, high-end apartment-living experience and are able and willing to pay for that kind of experience. A segment that we hadn't really been targeting very aggressively is what we call the value seeker segment. You can see that it's also a large segment. Again, they're willing to trade off a fair amount of things in terms of the apartment features, finishes, amenities, for a more modern right price point. They're willing to live in older communities. They want different kinds of programs. That's a segment that we wanted to target to help drive our growth strategy, which is bringing a little different balance to our A and B mix of communities.

And then, finally, the third segment that we are targeting is what we call the youthful urban social. It's more of a niche segment. By definition, they're looking to live in an urban neighborhood. By definition, they are actually young, about 80% or under 34. But anybody can live there. It's a youthful attitude more. And they're willing to trade off certain things in order to live in those more expensive urban neighborhoods, and we're going to talk a little bit about that.

This segmentation scheme really led to our multi-brand strategy. AvalonBay has always been a branded apartment company. We've always had our core Avalon brand. Now what we've done is really expanded our platform because we've identified these different segments of renters in the marketplace, and we believe, as a company, that our ability to outperform in the markets that we choose to operate in is really by delivering a differentiated product that really focuses on needs of specific targets versus trying to be everything to everyone. Our core brand is and remains to be the Avalon brand. And again, this is a brand that really focuses more on that comfort creature segment and it offers high-end amenities and services, larger apartments, typically located in great urban and suburban markets. And it's a market that really has high expectations and it's kind of a statusy kind of segment they want to kind of show people where they live. So they want that apartment community experience to really kind of represent who they are.

When we look outside of the industry, some of the reference points could be Westin hotels or Whole Foods. So kind of that high-quality experience, little bit more status-oriented. And over the long term, we expect this brand to be about 60% of our portfolio.

In the middle, we've got Eaves by Avalon. That's going after that value-seeking segment. And again, they're looking for a good quality apartment-living experience, more practical in terms of what their needs are. They don't need all the bells and whistles. They're willing to trade off some of the finishes and features and amenities to get a more moderate price points. Our goal and the way we're going to position ourselves against that value-seeking segment is really being better than basic. So we're not going after the lowest common denominator of the lowest rents. I mean, that's not in AvalonBay's DNA. That's not where we play. So if you think of like a retail analogy, Target and Walmart both go after value-seeking segments, our goal is to be more like Target than it is to be like Walmart, if it helps.

Over time, we expect this to be about 25% of our portfolio and it's really going to grow through primarily through acquisitions and some redevelopment of current assets.

And then, finally, we have AVA, which is going after that young, urban social segments. They are -- they want to live in an urban kind of cool neighborhood. You can determine whether you think H Street is cool when we visit it later today. But in order to live in that kind of that happening area, they're willing to make trade-offs. And that trade-off is typically in the size of the apartment that they live in. So in our prototype AVA apartments that we're building, about 25% smaller than a typical Avalon. And then, we also know that this segment is more prone to live with roommates. Again, that's the way for them to afford to live in that neighborhood. So our 2 bedroom mix is going to look a little bit different in an AVA community that an Avalon community. They don't need the glitziest finishes but they want a place that they can kind of personalize and make their own. And it's much about an attitude and something that can help activate their social lives, so the amenity spaces are designed to do that. Programmatically, we have things that get people together basically, and at AVA H Street, just in May, we had a countdown to summer music series over the course -- one every Thursday during the week of May, where we had local musicians come in, say, utilize our space, it's a way to bring both the community in, as well as residents. We've had food tastings, all kinds of whatever your choice of liquor tastings, anything to kind of bring in those local merchants and bring that neighborhood into the community.

So it's much about the attitude as it is about the physical product. And in the hotel segment, you may think of a Lost Airline, you can of Virgin Air. Retail, maybe Urban Outfitters are kind of good analogies or role models for the AVA brand. Over time, it's going to be a niche portion of our business, about 15% of our portfolio and that's primarily going to occur through new developments and redevelopment of select assets.

Now I thought I'd give a couple of examples of how we've used customer insights in a more detailed way to help frame up decisions that we make in the company, and a really good example is inventing the AVA apartment. And it really started with identifying who that target market was. So it's that young, urban social. So our segmentation research really helped frame the product that we were going to be designing. So smaller apartments, more roommate-focused, these concepts of self-expression and personalization, how does that translate into an apartment. Also this segment lives online, wirelessly. So let's make sure we're smart about how we deploy technology from a community standpoint to program standpoint.

With those broad concepts defined, both our internal design group, Jong Chung is going to come up later and talk about those capabilities, as well as some external designers to come in and come up with some concepts. What should this new kind of prototype apartment look like?

We landed on kind of a design that we were interested in, and we took it to the next phase, which was really building a prototype. So we actually had our office building in Arlington, Virginia. We built out a couple of prototype apartments. If you walk into the apartment, you could think you'd be living in an apartment building, not in an office building, except if you try to flush the toilet, you'd run into some problems. But -- so we really wanted people to experience that product, so we brought customers through that, just like they were going on a tour, and we spent about 90 minutes with each customer, so understanding what they thought about the apartments, what they liked about it, what they didn't like about it, how they could see themselves living there or not living there, how could they help us really design that product. And a couple of things came out of that. One, it's a small example but I think it's kind of illustrative of where customer insights comes into play, when -- and you'll see this at AVA H Street later. What we thought was basically the closet of the bedroom was described more by a lot of these potential customers as really like a dressing room. And you'll see that. It's very -- it's not -- it doesn't look like a closet in any other apartments. I'm kind of whetting your appetite here. And they really described it as a dressing area. And comments from a number of women who we interviewed, which represented at least 50% of our residents, thought it was so great that they could set up their ironing board in that dressing every morning, iron their clothes, blah, blah, blah, but then they looked around, where's the outlet? So there was no outlet in our prototype unit. So obviously, when we built these real live, we modified the product to put that outlet in.

Now that may seem like, big deal, it's an outlet. And it's not glitzy, glam finishes or anything like that, but in terms of everyday life, when you want your clothes pressed, you want to set up your ironing board, no place to plug it in, it's a problem. So it's little things that's been nuisances that really can help differentiate us and make that living experience better and it's more about thoughtful design than it is necessarily kind of glitzy design.

So that's just one what example of how that prototype research helped us. It also helped us refine how we were designing apartment homes for roommates, really focusing a lot more on privacy issues, noise issues and kind of egalitarian use of space.

So now we're in market. You'll see it today. We have AVA communities, new developments also on the West Coast. And actually, last week, at AVA H Street, we conducted some post lease-up research, so we went back in and conducted some research with residents living there, and so what's it like living there on an ongoing basis and we're in the process of analyzing that information now, and that's going to help us -- help inform us on the next round of AVA communities.

So hopefully, this gives you an illustration of how we involve the customer in that decision-making process through that whole product design process. Here's a couple of pictures of AVA H Street. It doesn't do justice to the dressing area but you'll see some fun features about personalization like the gear wall, the chalkboard walls, other ways that we kind of brought some of these concepts to life in an actual experience.

Another area of the business which is important to our growth is redevelopment, and that was touched on earlier today. And the way we approach redevelopment is unique relative to a lot of other providers because we actually redevelop your apartment while you're living in it. So obviously, that comes with customer issues potentially. So we want to make sure that we understand what customers are thinking while we kind of take over their apartment for 2 to 5 days to make it better. But before that even starts, we involve the customer in scoping out the redevelopment project. So we typically do survey research at a community before we start the redevelopment to understand, from the customer's perspective, where they'd like to see the investments made. That helps us, as an asset team, set priorities in terms of where we're going to spend the investment dollars.

Now everything the customer says doesn't necessarily happen but at least it's part of the decision-making process. Once we've scoped out the project in redevelopments, then we go back in and talk to the customers basically a week after we've invaded their apartment and get their feedback, both from a process standpoint, so how well did we set expectations, how well did we communicate with the customers throughout the process, what was the workmanship like and what's your evaluation of the final product. And that information is done on a continuous basis, some redevelopments are done in 3 months, some take up to 1 year. That asset team gets that data on a realtime basis so they can address any customer concerns. And then, on a weekly basis, they get a summary that looks more at systemic issues or that may be occurring in that redevelopment process. And it's a part of every meeting, asset team meeting to review customer comments again so that they can use that information to change direction midway or to improve their processes along the way. So that's an example of how we use customer insights in the redevelopment process.

And then, finally, as a last example to support our notion of continuous improvements of our product and service standards, we've employed this method called online discussion forums, and essentially, probably everybody in the room or somebody with a focus group or you get 10 people sitting in a room, everybody's laughing at them behind a two-way mirror, we've taken the focus group out of the focus group facility and really put it online. It allows us to talk to a lot more people and get a better cross-section of data but also get the voice of the customer. So it's not about checking off boxes or circling responses. It's more asking broad questions to get a discussion going and then getting feedback direct from the voice of the customer.

So new developments, as an example, at the end of a lease-up, residents are invited to participate in a 2-day discussion forum. And day 1 has one set of questions, day 2 has a second set of questions, they're asked to participate in both days. They can be sitting in their bed, on their computer at 2:00 in the morning completing it or they can be blowing off their work at the office and completing our discussion forum as well. It's a process which allows us to go in and facilitate, so if somebody makes a comment, we can probe and say, "What makes you say that?" Or "Why did you say that?" Why do you feel that way?" And it also allows people who are participating in that online discussion forum to react to other people's comments. So it's a very robust discussion that occurs online and teases out a lot of things that you might not otherwise thought of asking people about living in an apartment.

So as an example on here, I'd just show one of the forums, there's a good comment and a not so good comment. So people write a lot of stuff, it's amazing what they share. And they also have the ability to post photos on there or we ask people about their ideal apartment, some people actually draw out floor plans and post them. So it allows both kind of that verbal exchange, as well as kind of a visual exchange.

So in summary, that's really some examples of what our customer insight capability does. We translated sort of this philosophy of seeing our business through the eyes of the customer into a capability that really directly brings the customer to the decision-making table. We do it with data, we do it with the voice of the customer. it helps us, we believe, make well-informed, more balanced decisions to drive our growth and it's a philosophy that's permeating throughout the organization everyday.

So with that, I'm going to turn it over to John Cox, who's our SVP of development in the mid-Atlantic, who's going to talk about how we brought AVA to life in the DC market.

Jonathan B. Cox

All right. Thanks, Kurt. I'm not going to review what I think is a fun part of the business and that's building these assets and more specifically building the first purposely designed AVA in the AVB portfolio. So why pursue the AVA brand? Strategically, for development, it opens up submarkets where the Avalon brand might not fit. It serves a growing demographic that's currently underserved and allows for greater product differentiation in submarkets, thus, exposed to new supply. And we'll talk about that a lot today, as you've already discussed earlier about DC. And in larger assets, it enables us to multi-brand communities to appeal to multiple segments and price points.

Here, you're looking at a map of the H Street neighborhood, the -- you see H Street Northeast, it is the northeast of Capitol Hill, and just northeast of Union Station. The blue, double blue line is actually H Street itself. AVA H is up located just to north of that. And then, you'll notice there's a real quarter just to the west of AVA H, and that separates the new northeast neighborhood from the NoMa neighborhood, as it's referred to, and that's where the first asset that we acquired from Archstone is located.

We began pursuing sites in DC soon after the AVA concept was developed and we focused where we hadn't on in the past. And basically, we focus where we those -- we run psychographic maps of various neighborhoods in DC proper and you saw those earlier today and they showed us where there were high concentrations on young urban socials. And we went to the neighborhoods that were not your typical Class A multifamily sites. When we found this site, we pursued it aggressively because this site is within the neighborhood. The neighborhood was and is still rapidly developing, and it could be developed in a less costly hybrid structure of concrete and wood. You'll notice in the pictures here that the DC government has spent millions of dollars instituting a streetcar system that's going to run down H Street, essentially running where the parallel blue lines are on the map. And that is supposed to be operational later this year or early in '14.

We finished due diligence on this site in January 2011. And because it was a buy right deal, we were able to start construction in October 2011, just 9 months later, completing deliveries in March of this year. Buy right, for those of you who don't know, means there's no public input on design or its use. We just have to follow the zoning code that is on the site currently and we can apply for building permit. We knew that supply was coming rapidly to the NoMa area, just to the northwest, as I pointed out earlier. So we wanted to stand apart, and the AVA brand enables us to do that. Basically through its architecture and in amenity areas, its unit design and its unique brand experience was an emphasis on social engagement.

As you'll see during the tour of AVA H Street later today, AVA is and will be in the more urban, hip redeveloping neighborhoods because that's where this customer segment lives or wants to live. And as Kurt said, you can decide for yourself how hip you think it is but it is an attractive neighborhood in DC today.

To help keep rents more moderate for this customer segment, we work closely with customer insight design and our construction groups to create smaller apartments than the market normally provides. In this case, at AVA H, we're average 687 square feet versus 822 average in this submarket as a whole.

While we offset the smaller unit size with the design features that Kurt was showing you earlier and you'll see later today, they're not familiar to most customers but were very memorable and have been well-received. We also skewed our mix to more studios and 2-bedrooms for 65% of the mix versus 50%, which is typical in most urban development. This results in a lower average square foot per bedroom and lower rent per bedroom. This enables us to target roommate living situations, as we've discussed earlier, and we're successful doing so with over 70% of our 2-bedrooms being occupied by roommates.

We also work to provide selective brand amenities that allow for active social interactions but are not costly to operate, avoiding amenity creep that is prevalent in most new products and that translates into higher capital and operating costs. We also avoided services that are costly to provide but are not valued by this customer segment. Specifically, we left out the 24/7 manned front desk that has no value to this customer as long as they can get packages when they're delivered and they're kept safely for them. We handle this with technology. We send e-mail alerts to the customer when the package is received and we have a virtual concierge screen over the mail area that shows them, if they arrived by foot, that there's a package waiting for them.

We also are offering a consistent customer brand experience that is different. Leasing associates, you'll see today, are stationed in the lobby. There is no leasing office. We have music throughout the chill lounge areas and the vestibules, as well as the elevator lobbies and the garage. There's no formal dress code requirements for our staff on site. We've also reduced response time for -- to repair a service request from 24 hours, which is our Avalon standard, to 48 hours which is our AVA standards, and that's because this customer segment is willing to sacrifice that service-level for more affordability.

All the above brand characteristics, we believe, result in superior returns. To test that premise, let's compare AVA H Street with First & M. These 2 assets provide unique opportunity for us to compare development economics across 2 assets in the same submarket developed at the same time by 2 different companies, ourselves and Archstone, both of which we consider to be pretty good players in the development business. First & M is a beautiful core asset located less than 0.5 mile away from AVA H. It's a 469-unit high-rise completed in 2012, and acquired by AVB in February with the Archstone acquisition. It has an extensive array of amenities and its product mix is comparable to the competitive set. It has achieved excellent rents at a very good lease-up pays and will become an Avalon brand for us.

Looking at the table to the right side of the slide, you'll note that the absolute rents or average rents per unit are over $600 higher on average than AVA H. While per square foot rents are very similar, they're only about 3% apart. And as mentioned before, our rent per bedroom is lower. It's $1,400 here versus almost $1,600 for First & M. Also we've kept operating cost down which is very important in a small community because of the scale consideration, with a fixed amount of staff to run any given property. And as you can see, controllable expenses at AVA H are over 20% less than First & M on a per unit basis. And again, because of scale, that's just difficult to achieve. This all results in a favorable cost and yield comparison. Ava H Street cost us $241,000 per unit delivered. Remember past slides from a few minutes ago, that was the same price we sold the Coverly for in suburban Maryland, or that equates to $350 per net square foot and yields about 7.5% return on cost. First & M cost Archstone $361,000 per unit or 50% more than AVA H, or $412 per net square foot, which is 18% more and that's due to larger-sized unit and yields about 6.4% on that original cost.

In summary, AVA's cost is 33% lower per unit or 15% lower on a net square foot basis, while the yield is over 100 basis points higher, resulting in about double the value creation on a proportionate basis for both assets. Our first round of development of the brand seems to compare pretty favorably. The jury is still out, we're still working on it but we believe this is a scalable model to operate the Ava brand and continue to achieve superior returns.

Matthew H. Birenbaum

Thanks, John. I think we can stop here for a couple of questions that people have. It's a really, really interesting case study on, we just don't get the opportunity very often to peel back the covers on a competitor, like we got with Archstone acquisition truly understand, again, a pretty good competitor, we think. The way they program a new development in the same submarket and really got to see the relative economics and I think a great demonstration of both how we're applying the brand framework and getting economic value out of it. So any questions on this [indiscernible]

Unknown Attendee

So you just walked through the economics and how they're more attractive in the Avalon brand. So what's the thought of just having 15% of the portfolio?

Jonathan B. Cox

It is -- obviously, every case is unique. It is a local business. It is a niche brand, and I think we have to be careful about that. One of the things that the power in it is that it is somewhat polarizing. There's people that are going to love it and there's people that are going to walk in the door and say it's not for me. And so I think that's a reflection of our estimate of the relative size of the market opportunities across our whole portfolio. It's going to vary by geography. We have, I think, already 4 AVA assets in Seattle, for example, which is kind of AVA Central in some ways when you look at the demographics of Seattle and the psychographics of Seattle. We don't have any on Long Island. We're probably not going to get any, except if you count Brooklyn as Long Island. So it is going to vary by market and I think that's just -- I don't think we're wedded to -- we're never going to necessarily get there and say we're done with the allocation by brand. But I think it's probably a reasonable expectation as we look out over both the opportunity set and just kind of the asset positioning of our portfolio and what we can do through development.

Unknown Attendee

Just wondering, for purpose-built facilities, purpose-built AVA products seems fairly straightforward, but how do you get there from a redevelopment standpoint, given the right apartment mix, the right amenities mix?

Jonathan B. Cox

Yes, it's a great question. It's one we wrestle with too. I think -- and you'll get a sense for this on the tour hopefully, which is AVA is about the product and it's about what we're putting out there within the 4 walls of the apartment, but it's also about the experience and it's about the music that's playing when you walk into the lobby, it's about the way you're greeted when you walk in as a prospect, it's about the way we interact with our customers, both in person and online, it's about the way the staff is dressed, it's the staffing model. So we can't change the unit mix on redevelopment but we can change a lot, the style, the feel and the attitude of the communities. And I was actually skeptical of it myself. But when we're seeing some of the recent redevelopments we've done in AVA Newport, which is an older 1950s asset in Newport Beach, a small 140, 150-unit garden property and it's just amazing to see how that asset has been entirely transformed by a couple of key moves in a couple of key areas. And then, some things, we can take the chalkboard paint and some of the splashes of color and other things we do into the corridors or into the actual apartment. But it is surprising how much the look and feel of the asset can be transformed through those common areas as well and through the overall experience that we're providing and how that resonates with the customer, and over time, changes the customer profile. Yes?

Unknown Attendee

So if someone walked up to me and said, "Hey, Rich, I'm a mature bohemian," I'd probably try to end that conversation really quick. But I am curious, that sounds like an old artist or something, right? Somebody that maybe had a longer length of stay type of individual. I'm curious why you shy away from that demographic right now.

Jonathan B. Cox

It's a fair question. I think, all of these segments or frameworks and there's going to be a continuum all the way across. That particular segment and that particular study was very, very local to, I think, 1 or 2 metros, I think it was San Francisco and maybe New York, and that was pretty much it, if I'm remembering it right. And we do have that. We have mature bohemians in our communities. It's more a question of is there enough there for us to target a whole brand against? Or can we do other things within an Avalon or an AVA to potentially attract some of that segment as well?

Kurt D. Conway

Realistically, in every community, in all likelihood, all 5 segments will have some representation. In AVA, we want disproportionate, young urban socials. There's going to be some mature bohemians that are living at AVA H Street.

Unknown Attendee

Are you a mature bohemian?

Kurt D. Conway

I'm both mature and bohemian. How about you? Are you mature or Bohemian?

Jonathan B. Cox

We may have a new phrase here for Richard Florida. It'll be in the next book, The rise of the mobos. Other questions? Yes?

Unknown Attendee

What would be the difference between the land base [indiscernible] with AVA H Street, you signed up with grownup H Street AVA that -- very sorry, grownup AVA products that the land bases is typically lower?

Kurt D. Conway

The question is about the land bases, I don't know, Jon.

Jonathan B. Cox

The land bases for AVA H is about 51,000 a door. I believe, on First & M, it's about 60,000 a unit.

Kurt D. Conway

So on a per foot basis, that's probably pretty similar, right?

Jonathan B. Cox

Correct. Yes.

Kurt D. Conway

We have found -- that probably has, overall, I would say, in terms of new development, to the extent that AVA is more concentrated in somewhat edgier neighborhoods, one of the benefits of that maybe a lower land bases . But it's hard to say, looking across our portfolio, because so much of it has to do with when the land was bought. Our land bases in AVA Stuart Street in Boston is terrific. I don't know what the number is, Bill, off the top of my head, but 30,000 a unit, something like that, 35,000? But that has much to do with when we bought that land and when we contracted to buy that land as it does with its location, I think it's a block away from Archstone Boston Common. Yes?

Unknown Attendee

Neighborhoods change and taste change. Certainly, this demographic seems changed. Have you thought longer term in the product about will it require more CapEx to keep it still appealing to this group? Or are you going to need to rebrand it at some point potentially if the neighborhood is no longer edgy?

Matthew H. Birenbaum

Yes, it's a great question. I don't know, Kurt, you wanna speak to that a little bit and I can also?

Kurt D. Conway

I mean, I think, we've, especially in terms of the common space, there's -- it's more epiphany that might need to change. The size of the apartments, obviously, can't change but finishes can. So I think it -- there's enough built-in flexibility to be able to change as the market changes.

Matthew H. Birenbaum

Okay. I think we'll move on to Jong Chung, who's going to talk about our internal design group and how he interfaces with the different other groups within the company. And then Sean Clarke is going to talk about how that was -- that capability is applied to in Eaves redevelopment.

Jong Chung

Thanks, Matt. So the design group is, as Matt said, an internal design group that's dedicated to -- and a multi-disciplined function that's integrated with both the customer insight and market research groups. We consist of licensed architects, interior designers and lead accredited professionals to really provide a full design management service for all of our development, redevelopment and CapEx projects. So this design management service is really provided from early conceptual design, all the way through construction and beyond.

So as this chart shows, and Craig had a similar chart, there's a lot of sort of two-way arrows here. So we're really at the intersection of both these centralized customer insight and market research groups, as well as the decentralized or the local redevelopment, development teams, as well as our design consultants that we hire.

So one of the things we do is we really serve as a conduit for lessons learned to flow back and forth between the centralized groups, as well as the decentralized groups. And a lot of those lessons learned is really able to flow black back and forth in realtime versus waiting for something to happen in the East Coast and implement it out at the West Coast after an asset is complete. So we really want to -- are able to stay on top of those early on. And one of the ways we're able to do this or one of the many tools we have really perform our function is really we have brand guidebooks, guidelines and standards and we manage and we created them and manage them to provide a really efficient sharing of information and really to minimize recreating the wheel from project to project. So with our large development and redevelopment platform, we're able to really get a lot of the blocking and tackling of developing and designing apartment and apartment communities out of the way. So some of these resources range from start construction standards to apartment home finished packages, apartment prototypes and design program requirements such as what does the maintenance office need to -- how big does it have to be, what does it need, what does the leasing office have to have to function properly. Those kind of things are standardized and really provided to the local asset teams. From a brand standpoint -- part of our work is really to work directly with the asset teams to really ensure that the essence of one of the specific brands is implemented in the design of a communities. So these guide books have been created for each brand, and we provided them to each project team. And really, what these brand guide books provide is an overview of brand positioning and attributes. We provide information on the targeted customer that really adds dimension to the customer. It's not just about, this is their age, this is what they earn. We really add dimension to where do they shop, what do they read, where do they eat and really, try to get a full understanding of the customer and provide it to the designers that we hire.

Then it also defines what the brand experience is going to be both for the prospect and the resident. And we also outlined what the key brand design features are, as well as what the expression of the design is going to be for each brand. So at the beginning of each project, we'll have a brand immersion meeting with each project team. That's both the local development or redevelopment team, as well as our design consultants. And we walk through what these key major attributes of each brand are and also to share, as I said before, share what the latest evolution and sort of our thinking is on the brand, so some of the latest design concepts, amenity concepts that are out there and really able to keep the brand fresh and current as much as possible.

So the next couple of slides will just show you how the design is differentiated between the brands. The photo on the left is a leasing center at an Avalon community. We're really looking to create a refined, urbane residential great room with a really modern and curated interior aesthetic. We're the AVA in the middle. The design is intended to be stylish and current. The leasing experience, as Jong noted earlier, the leasing consultant actually sit in the space in what we have perched, as we like to call it internally. In the space and the leasing consultants and the residence interact in this space. And so the space is designed to really enable social interaction, not only between the leasing staff and the prospect, but also amongst the residents. So the photo in the middle, Matt alluded to it earlier, our AVA Newport, Newport Beach. It's a space that was -- with a few minor touches here and there, a couple of finished changes, really, we were able to make this change formative to exude the AVA style and attitude. And then for eaves, we like to design these spaces, especially the leasing centers, to be really fresh, bright and familiar. So we want the interaction with the customer and the prospect to really be comfortable and not necessarily an interaction that occurs over a desk like some of the more formal transactions in other leasing offices.

So this differentiation has really carried throughout, not just our common areas, but also into our apartments. So an Avalon apartment, again, we want to make this urbane and modern. We try to use more warm and darker wood tones to really create a more sophisticated look. Whereas in AVA apartments, much like the common areas and the lobby that we just looked at, the apartments are intended to be much more contemporary, streamlined and stylish. And the eaves apartments, we wanted, as we talked about earlier, better than basic. We really want it to be bright and clean and highly functional.

So what I like to do is walk you through sort of a typical design management process using a recently completed project. This is Avalon at Ocean Avenue in San Francisco. So early on, when the site was identified, we worked closely with the local asset teams to really develop -- during the development of the site plan and the architectural design and really, also work with them to help define what the vision of this community would be. In addition, we provided input on key designs consultants or a selection of key design consultants. And then, really, stayed involved throughout the entire design process including attending design meetings, quite a bit of design meetings, to performing thorough design reviews of design documents during major milestones. So in addition to really being a key member of the asset team during the development of both the site and architectural design, we -- our multi-disciplined team, really, is able to get involved during the design of the unit layout, the interior design and even landscape design, especially critical as landscape design and interior design is really starting to melt as these highly social spaces. So we really don't want to let those kind of spaces slip through the cracks, if you will.

And we also help ensure that these designs and the construction standards that we have are implemented. So by being closely involved during the entire design process, every project that we're involved in, we're able to really share the very best design concepts, solutions, design amenity concepts and lessons learned throughout the company in realtime. So really, what this fully integrated design management process ensures is that a consistent product is delivered, design to continuously evolve and the differentiation between the brands is maintained.

So I want to sort of just kind of jump to some projects where we may not have a full -- the budget and limited scope may not allow us to hire a full complement of design professionals. So there are some projects, and particularly eaves conversions or some of our merchandising projects where, really, we create the design internally with our team. And the scope of these -- some of these projects may be a refreshing leasing offices, indoor/outdoor amenity at all the way to selecting exterior paint, colors and schemes, and merchandising model apartments. So we'll work directly with the project team like Sean's group to really create a space plan layouts, select design finishes, FF&E furnishings, as well as specification. And then in order to execute and implement the design, we sometimes will hire local designers to assist us with the permit drawings and the final installation on-site. So this is an example of some of the work product and the results of an eaves conversion, which Sean will jump into and give us a little more in depth example of.

Sean M. Clark

All right. Thanks, Jong. As Matt mentioned, part of the purpose of my presentation is really to illustrate how we leverage the design group and market research group and certainly, the customer insights group into how we approach and select and plan for redevelopment. But I'd like say also, importantly, it also helps inform how we think about making capital investments. And so the capital investment that we do make in an asset and we can focus on those things that are truly going to be value-added for the community and for the customer.

The case study that I'm going to focus on is eaves San Jose, which is 1 of 13 existing assets that we own in the San Jose market. Of our 13 communities, eaves San Jose actually is 1 of 3 eaves communities in that bother market. And as you can see from the map that's up here on the right -- on the right side of the slide, it's located in Northeast part of the San Jose. We acquired this asset over 2 phases, and the first phase was purchased in 1998. It's 340 out of the 440 homes. And the second 80-unit phase was later purchased in 2007 to make up the 2. And as you can see from the slide too that the asset or the community was built in the mid- to late-80s. The redevelopment capital that we invested here, as noted here, is about $14.5 million, which includes both enhancement and even some CapEx. The redevelopment that we did here was something that we started in the fourth quarter of 2011. And the overall duration here was about 14 to 16 months and something the we're able to do fairly quickly.

A little background, which is what this slide is, is meant to illustrate about how we came to select eaves San Jose as a redevelopment candidate. One of the things that we do, and Sean mentioned this, that the asset management team does routinely, we go through and review our portfolio each year to identify properties that might be re-merchandisings or redevelopment candidates, or maybe even potentially sold. And we identified eaves San Jose, really, for several reasons. The chart on the left side of the screen, which is provided by Craig and his team, illustrates that the property was underperforming relative to the submarket. And you can see the assets relative GP performance, the green line on the bottom side of that chart. In addition to that, the market research team certainly forecast a favorable demand and supply fundamentals for the 2012, 2013 window, which would lead to some significant rent growth in that area. And it was certainly an opportunistic play or an opportunistic opportunity for us to capture the premium for newly renovated product.

And on the right side of the screen, you can see that it does represent or did represent what was and what is an attractive niche at the lower end of the price point for that submarket, or at least for that part of Northeast San Jose. And it would allow us to position the property, not only at a place that's substantially below some of the supplies that I think Craig talked about or alluded to earlier this morning when we're talking about some of the supply issues coming into some of the markets, but also even below most of the existing comps in that submarket as well. And so our positioning conclusion in terms of how much capital we would invest and even what we thought that targeted rent premium would be based on, was largely based on the price point of the community that you can see here on the right side of the screen, and obviously relative to the submarket. But also, based on the cluster of customers, both at the property itself and within the broader submarket. So we are able to catch those little yellow purple and all those other colors that Craig had on his chart.

And certainly, the customer in this case, was one that preferred a value-oriented product. And so therefore, we really decided to target or rebrand the community as an eaves product. The next part of this presentation is to really focus on what we did and so I'll turn it -- at least toward what we focused on from the design intent under the eaves brand. And with an eaves execution, and certainly as Jong mentioned, our approach to redeveloping leasing offices and the amenity spaces is to avoid heavy construction and for a lot of reasons. It's costly, mostly. At to put those dollars into refreshing spaces with largely things that are easily executed, paint, carpet, flooring, accessories, FF&E. And as you can see from the images on the screen, you can see on the left side what the leasing office was before. And you can see on right side, we didn't change much, we didn't change anything in terms of the basic structure of that building, but significantly changed both the operations, as well as the finish of that space as well. And our internal design team, John's team, as he mentioned, typically helps us select all the finishes. They did In this case, they selected all the paint, the colors, all consistent with the eaves brand. And in this case, it was one of those illustrations or cases where we were able to eliminate bringing a third-party designer. And altogether, we procured this -- all the FF&E directly and certainly had all the paint selections on hand.

And so the advantage of that are really several things, actually. One is that it allows us to reduce cycle times in terms of how long it takes us to procure furniture for executing in these spaces. Certainly it allows us to minimize the downtime in leasing offices, while we're in there renovating that space. It also allows us to maintain a better quality control. Since we can order off-the-shelf furniture, that's easily procured. And one of the nice things is that it can be replaced easily down the road. And so if something wears out, if you have a chair, it's not something that the leasing staff has to hang on to until they see a broader -- or they get a budget request for a larger replacement of the FF&E package, we can do things more targeted. It also ensures that selections that we do make are consistent with the more value-oriented appreciation or positioning for the brand. And for example, we don't buy $4,000 custom chairs, not that we do that in general anyway, but -- and the items that we do select are attractive and yet they're durable. And it's something that I think will allow us to maintain the integrity of the brand, not only when we immediately deliver it, but over time as well.

This next slide really gets into a little bit about what we talked about -- or what we did with the exterior and the site work. The design team also helped us update the exterior look of this building. As I mentioned, it was a mid-80s building, and you can see on the left side that the original construction had T1-11 siding, which dates the product. Pat would tell you that, from a buyer point of view, it's not something that buyers look out or think about. The buildings in this case were painted with a color selection that was consistent with the brand. You can see on the right side of the screen, part of the redevelopment program was to address that T1-11 siding by replacing it with HardiePlank siding. A relatively straightforward thing, but again, I pretty significant move in terms of what we were able to do with the fit and finish of the building.

With an eaves redevelopment, we tend to try to focus on improvements that will also reduce operating costs. In this case, this particular community had a number of ponds and creeks that really ran throughout the site. And we were able to remove those ponds and creeks and replace them with dry stream beds which reduced ongoing operating cost or maintenance expressed by roughly $40,000 a year, plus all the electricity that would go with running circulating pumps and everything else that would go along with that. And importantly, and part of how we leverage the customer insights group as well was, one of the decisions that we made was to eliminate 1 of the 3 swimming pools on the site. And in favor of the new barbecue and a tot lot. And in doing that, we were able to, not only reduce ongoing operating cost associated with maintaining 3 pools, but we were able to keep enough of them that wasn't necessarily a service level diminution for the customer, but also add something in terms of the barbecues, the tot lot that was valued by the customer segment as well.

The next slide gets into a little bit about what we did within the apartment home, and part of the eaves brand or the value-oriented segment tends to be where we focus the most energy is typically in the kitchens and baths. And in this case, the apartment interior scope was focused on new kitchen and bath cabinets, countertops and new appliance package, flooring. And just to illustrate the point, in this case, where we made maybe a tactical decision about where we would focus capital inside of the apartment home and where we wouldn't. I mean you can see that we recently updated the kitchen fairly significantly, but this was a case where we chose to not include a microwave in the appliance package. And in this case, it wasn't something that would be -- was particularly valued or valued enough by this specific eaves customer segment and not necessarily something that was offered at other comps. But it would have been a fairly expensive thing to add and demand a higher rent premium that we felt probably took this beyond on where we want it to be in terms of positioning.

All the finishes that you see here are within our eaves finished scheme and they're off-the-shelf items. Things that we can easily repeat and duplicate over and over. And I think Kurt mentioned this as well, this was one community that we did also as an occupied turn project. And certainly, the benefit of that is that we can work through the community much faster. And as I mentioned, we got through this 1 in about 14 months, and it certainly allowed us to minimize the dilution in terms of what impact on economic occupancy.

And then just to touch lastly on this one from an economic point of view, to a successful, in our view, on both a rebranding level, but certainly on the economic level as well. In terms of the returns, we achieved roughly a 9% return on the invested capital, the $14.5 million that you noted here. And that's based on an achieved renovation rent premium of about $200, and significant savings and OpEx about $270,000 a year that we were able to achieve through a lot of the work that we did on site in terms of addressing the exterior siding, et cetera. And then lastly, the projected IRR for the asset was roughly 15%, which is consistent with what we're looking for, which not only reflected the initial return that I just mentioned, but also the enhanced cash flow and certainly, the terminal creation value.

Unknown Executive

Great. Thanks, Sean. And we will open up here again for more Q&A on design and the redevelopment case study or anything else you've seen this afternoon. I guess Jason is bringing the mic around.

Unknown Attendee

Just wondering, it seems like a very interesting opportunity if you can do the kitchen and bath upgrades in the apartment. I was wondering how that actually works in terms of you go to them and say, okay, we'll offer to do your kitchen, starts an extra $100. What's the disruptions of their -- how is that -- it's interesting to do but how does it actually work?

Sean M. Clark

Yes. It's a good question. And it's one that Kurt mentioned. I mean, some of what came out of that process was the customer insight support in terms of the feedback that we were getting from the customer. And we do these and within relatively tight windows, they can happen within 6 or 8 days. We can get all of that work done. And a lot of that happens through pretty rigorous scheduling. And from a customer point of view, there's a lot of advanced work that goes into these, which is educating the resident with respect to what's going on. We'll do mockups, so they can see what's coming. So in many cases, residents are willing to put up with the disruption for the 6 days or 8 days, for the benefit of getting what they're going to get through the renovation. And I think that the real proof, I guess, is that we're not only able to achieve the rent premium or the rent change, but it's also without any real compromise to turnover at the asset as well.

Unknown Executive

And just to be clear, most of the times when we're doing this, it's not the resident's choice. I mean, it is our apartment. But what we'll do, we have to honor their lease rent through the term of their lease. So we'll typically try and get in there and say, great news. We're coming in, we're going to renovate your apartment. We're not raising your rent until your lease term is up, which is we try and time it 2, 3 months something like that.

Sean M. Clark

That's right. And then maybe there'll be some renovation until...

Unknown Executive

Meal coupon, vouchers, stuff like that. Other questions?

Unknown Attendee

You mentioned that [indiscernible] stock market, why do you think it underperformed? And was it -- obviously, any point in time you can think of a decision to sell it, but you decided to double dive with more capital. So what particular -- how will you describe, how [indiscernible] all of the capabilities that we talked about here? The decision was to put more capital and not to sell assets, what was the problem with the asset that you're seeing actually cause you to underperform?

Sean M. Clark

It's a good question. And then I'll let others also weigh in on it. I think part of the answer, certainly, was the condition of the asset. And there was new supply coming into the market. It's a great positioned asset in terms of where it's at and the base of residents that are there. So I largely think that it just had to do with some of the curb appeal of the asset, the curb appeal of some of the apartment homes, which obviously we addressed through the redevelopment. In terms of why we chose to invest capital in that relative to selling asset, as I mentioned, I think this was 1 of 3 eaves assets that we have within the broader San Jose market. So I mean to duplicate this asset, where going to find an asset like this, I think, would have been tough to do from an acquisitions point of view and certain path could probably tell you that. I think we are trying to find a balance in terms of what the portfolio allocation ought to be. I think that certainly would be reason why you hang on to it. And it represented a good asset and certainly, in market that was still relatively strong from a rent growth point of view. Matt, if you want add anything to that?

Matthew H. Birenbaum

Yes. I think you're asking the right question, which is -- with some these -- if you see something that's been underperforming like that, we have to ask ourselves a question, at some point, either we're going to put more into it to correct what we think -- to get it on a different trajectory or we're going to sell it, because we don't want to continue to own something that we think is going to underperform at submarket forever. So I think the answer varies based on each individual assets, how is it positioned in the submarket and kind of what we perceive as both the near-term and long-term supply demand fundamentals if that opportunity exists or not.

Sean M. Clark

And early indications are, I think, it's performing in line with what's happening in the broader submarket now.

Unknown Attendee

It's clear if you look at the bigger scenario [indiscernible] capital?

Sean M. Clark

Right.

Unknown Executive

[indiscernible]

Unknown Attendee

One of you comment on associate turnover at the individual brand? Is there any discernible difference about people staying longer working for you at AVA versus any of the other brands? And is there a perception that you're moving up the ranks if you go from eaves to Avalon or what have you, can you comment [indiscernible]?

Unknown Executive

Yes. I think I'm going to let Sean speak to that a little bit. But it's too early to have statistics on it. But I think, actually, one of the benefits of the brand is we can better sort associates by their interests, their passion and their ability to -- and match it to the brand in some cases, particularly with AVA, there's an art to that. But Sean, do you want to add to that?

Sean J. Breslin

[indiscernible] to that point, [indiscernible] the feedback that we're getting from [indiscernible] premium brand [indiscernible] gravitate on brand segment of our population is that [indiscernible].

Unknown Executive

I would also add that, from an employer standpoint, it gives us just another career track for people. So there's, like any organization, only so many people can get promoted. This provides good kind of lateral movement for people where they can earn new skills and a different customer experience. And actually, will make them more qualified to be a portfolio director in the long term.

Unknown Attendee

[indiscernible]

Unknown Executive

For our associates? I don't know, Sean?

Sean J. Breslin

[indiscernible]

Unknown Attendee

When you look at the portfolio of Archstone, what's the redevelopment opportunity in the next couple of years? You're sitting here today given what you plan for rent, et cetera, where you can meet your IRR special and where you think it makes sense?

Unknown Executive

Yes. We have gotten that question a fair amount. And I think we think there are pretty rich opportunities in the Archstone acquisition. I don't think we're going to have any trouble finding $100 million to $120 million, $125 million in redevelopment capital that we can be deploy at great returns kind of any time soon. We're just now kind of looking at that and thinking about our plan over the next year, really, the next couple of years. And we had a queue of Avalon assets that we're kind of in the queue for redevelopment as well, and how we might reshuffle that to add some of the Archstone assets, move them up in the tier. But this is another area where we have added human resources to be able to effectively address it on an ongoing basis. I don't know if Sean, do you have any other?

Sean J. Breslin

[indiscernible] for the assets [indiscernible] and probably right now we'll [indiscernible] handful of assets [indiscernible].

Unknown Executive

I guess, I'm going to wrap this session up and turn it back over to Tim. So I want to thank all the panelists and just reiterate that what we hope we illustrated through this is both the investment we're making and the capabilities, and this is hard work. This is not glamorous stuff. A lot of this, other than market research, a lot of this is really fine grain gritty, getting down there in the details. But the art of this is in how we do that, our commitment in doing it and then translating it back out to the regions. And I bring it back full circle to the comment you I made earlier this morning about the culture and the balance of the decentralized execution with the centralized support and resources. And so we think that this is a little bit of a secret sauce, but there's a lot of art to this, and this is the area where we think it's going to be very difficult for folks. They may be able to adopt our markets, but it's a whole other thing to adopt the structure that allows for this type of synergy. Thanks.

Timothy J. Naughton

All right. Thanks. You guys feel free to stay and [indiscernible]. I thought I'll just take just a couple of minutes to wrap up before we take a break and we'll invite Richard Florida in, and we'll start that right around 3 and maybe a minute, couple of minutes beforehand. I thought I'd offer at least a few closing comments.

First of all, I hope you got a better sense of how we're thinking about our business right now and how we're adding value in a number of ways across multiple platforms and making use of different capabilities, I think you just heard a good demonstration of just now. And as Matt mentioned, as it means also to extend what we think is a competitive advantage that we've had in our markets, really, over a number of years. At the risk of summarizing a few hours of presentations in a minute or 2.

Here are a few thoughts we hope you take away. One, we do believe we are still earlier in the first half of what ultimately could be very robust housing cycle. Secondly, we think many of our markets, particularly the more supply-constrained markets, does demonstrate the least affordable aspects of -- as it relates to for sale like California, New York, are poised to outperform over the next several years. All of our external growth platforms at this point are adding and contributing value. In development, importantly, development is just at the beginning of its cycle in terms of adding meaningful and very powerful accretion to the bottom line, as Bill laid out. We take a disciplined approach. I hope you agree as it relates to capital management and particularly, as it relates to match funding and financial flexibility that Kevin mentioned, which obviously supports our external growth. And we think, importantly, locks in that accretion that we talked about through being able to tap this very attractively priced capital. We take a fine-grained approach to customer segmentation and portfolio allocation with an aim to ultimately optimize the growth profile, the growth potential of the existing portfolio.

And lastly, I think you've just seen we've got a robust set of capabilities in the areas of market research, customer insight and design that make us better allocators of capital across, really, all of our growth platforms and markets. I started off this morning by saying we really do think the difference between us and the sector really is capital allocation and all the efforts and activities that surround that, many of which you've heard today. It's a capital-intensive industry. Capital allocation matters. It's not an industry where you grow through retained earnings. You have to tap the capital markets in order to grow, and those that are able to do that and deploy that in the most disciplined and accretive manner, obviously, will be the winners at the end of the day.

And it doesn't just start with a sound strategy. So it really is a function of being able to deliver on the strategy through these platforms and capabilities. It really inform the where, when, why, how of capital, of deploying capital, of raising and deploying capital and growing capital. And I think you just saw really great examples of that where you've seen growth -- different growth platforms be well-informed by different strategic capabilities that bring the realities of the marketplace and the voice of the customer that Kurt talked about, and certainly, the best practices and consistency through design to how we actually put that capital to work.

So it's really all those things. It's embedded in our culture. It's part of every conversation that happens in the company. I hope you hear more of it today as you interact informally with our associates. And I hope you hear it when you go out on sites, I mean to do property tours. It's something that we take a lot of pride on. We think it is what separates us relative to many of our competitors.

So with that, I just want to thank you for making time. Most of you had to get on a plane and come into our hometown and our headquarters. We appreciate you making those efforts. I hope you've gotten a little bit more insight and I've said at the beginning, one of the objectives was to maybe get a little more insight in terms of how we're thinking about the business and how we're trying to position the company to outperform in the future.

I do want to thank all the presenters, all the panelists today and importantly, people behind the scenes. I think most of you know Jason Reilley at this point who heads up IR, who's been working feverishly, I can tell you, for a number of months but a number of other folks back here in the back corner, senior analysts team, a couple of which are here, Brian and Mike and Christine from marketing. And I'm sure I'm forgetting somebody else who's probably back, a couple of folks upfront. So it's a big effort, but it's important to give you a little bit more details about how we -- the approach we take to our business.

And so with that, we're going to take a break. We did drop the surveys, I don't if people have had a chance to peek at them, but they really do get that sort of the theme of the day and it's sort of the opportunity for you to be heard, and what you think of the different platforms and activities and capabilities that we've been talking about today and the ability to perhaps differentiate yourself in the industry by applying those. So we'd like to have you turn those in some time right after Richard Florida's comments, and I guess we'll try to tally them as quickly as we can to share with you some of the results at dinner. And hopefully, it will be a little bit of fun when we do that.

So I've got just a little bit before 20 of now. Why don't we plan on -- if everyone can be back in their seats by, let's say, 5 minutes before 3 and we'll make sure that Richard Florida starts at 3 o'clock sharp. So thanks again for coming, appreciate it.

[Break]

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