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AvalonBay Communities, Inc. (NYSE:AVB)

F1Q2011 Earnings Conference Call

February 3, 2011 1:00 PM ET

Executives

John Christie – Senior Director, IR and Research

Bryce Blair – Chairman and CEO

Thomas Sargeant – CFO

Tim Naughton – President

Leo Horey – EVP, Operations

Analysts

Andrew McCullough – Green Street

David Toddy – FBR Capital Markets

Alex Goldbar – Sandler O’Neal

Jay Habermann – Goldman Sachs

Jeff Specter – Bank of America

Karen Ford – Keybanc Capital Markets

Jordan Saddler – KeyBanc Capital Markets

Eric Wolfe – Citigroup

Rob Stevenson – Macquarie

Jeffrey Donnelly – Wachovia

Michael Salinsky – RBC Capital Markets

Tao Okosanya – Jefferies & Company

Paula Poskon – Robert W. Baird

Rich Anderson – BMO Capital Markets

Sarup Yala – Morgan Stanley

Adra Stonsia – Barclays Capital

David Pepperman – Green Light Capital

Operator

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities Fourth Quarter 2010 Earnings Conference Call. (Operator Instructions) Following remarks by the company, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference call, Mr. John Christie, Director of Investor Relations and Research. Mr. Christie, you may begin your conference.

John Christie

Thank you, Alicia (ph) and welcome to AvalonBay Communities Fourth Quarter 2010 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion, and there are a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon’s press release as well as in the company’s Form 10-K and Form 10-Q filed with the SEC.

As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today’s discussion. The attachment is available on our Web site at Www.avalonbay.com/earnings and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I’ll turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities for his remarks. Bryce?

Bryce Blair

Well, thank you, John. Joining me on the call today are Tim Naughton, our President; and Tom Sargeant, our Chief Financial Officer; and Leo Horey, our Executive Vice President of Operations. I’ll be reviewing our fourth quarter results and investment activity, put the past year in a little perspective and offer some summary comments for this year. Tom will highlight our financing activity last quarter and our financial outlook for ‘11 and Tim will provide some additional color to this year’s outlook and then all four of us will be available for Q&A.

So last evening we reported EPS of $0.31 and FFO per share of $1.01 for the quarter. Our full-year FFO declined 11% after adjusting for some non-routine items. For the fourth quarter, rental revenue was up 2.5%, capping a year of significant improvement in our same store operations. Our fourth quarter results also showed another period of significant investment activity. We completed almost $500 million in development. We started construction on five new communities with a total capital cost of about $300 million. We also completed three redevelopment communities last quarter and started work on five new ones. For the investment management fund, we acquired two existing communities, one on each coast, along with a third acquisition last month for a total of $150 million.

So we had a busy quarter, and overall, a very active year. Our decision to ramp up our investment activity was driven by our assessment this time last year that 2010 would be a year of transition for the economy, for apartment fundamentals, and for our investment activity. This assessment proved accurate as the economy strengthened with the private sector adding about 1.3 million new jobs last year and importantly a disproportionate share of those job gains went to younger age cohorts who have the highest propensity of rent. That ownership rate also continued to decline falling an additional 70 basis points over the last year. This decline created approximately 700,000 new renter households, roughly half of which are estimated to have ended up in multi-family as opposed to single-family rentals.

As a result of this increase in demand and a continued decline in supply, our operating results continue to improve year-over-year starting with rental revenue decline of 4% in the first quarter of last year and ending the year with an increase of 2.5% in the fourth quarter. Also through a consistent strategy and the continued focus on balance sheet strength, we were able to increase our investment activity taking advantage of what most believe will be a period of very strong fundamentals for rental housing over the next few years.

Just to highlight, we started seven redevelopments and completed $400 million in fund acquisitions. We started almost 650 in new developments last year, which was up 70% more than we projected the beginning of the year. And this was after a year of very low activity in ‘09. Also during the year, we added over $600 million of new development opportunities to the Development Rights pipeline, and we anticipate adding over an additional $300 million to the pipeline during the first quarter of this year as we complete the due diligence process on several new pursuits. Few if any of our peers have the balance sheet, the pipeline or the organizational capacity to ramp up that quickly, and this ramp-up will be a meaningful contributor to our earnings growth in 2011 and beyond.

For 2011, roughly a third of our projected double-digit FFO growth is driven by contributions from the stabilization of prior investment activity. The decisions we made last year put AvalonBay in a strong competitive position to create value and earnings growth as we enter a period of strengthening fundamentals in our markets.

Now I’d like to turn it over to Tom to discuss our recent financing activity and our outlook for this year. Tom?

Thomas Sargeant

Thanks, Bryce. I just have two topics to cover before I’ll turn the call over to Tim, and these are our financial outlook for 2011 and the capital market’s activity for 2010 and a little bit on the liquidity for 2011.

Regarding the outlook for 2011, we provided an FFO per share range of $4.50 to $4.75 per share, which at the midpoint of the range is growth of nearly 16% in FFO per share. Revenue growth of 4% to 5.5% is expected with NOI growth of approximately 6% to 7.5%, and this is slightly higher than the NOI range we provided in November at our investor conference and reflects slightly better revenue growth combined with muted expense growth. Tim will add some color on the markets and provide additional context for these ranges.

I’d like to highlight that this outlook includes the impact of our planned sale of a community with a land lease that currently has unfavorable accounting treatment. Accounting for this lease requires that we straight-line lease expense such that no lease expense is recorded under GAAP than actual cash lease payment, and we estimate that the sale and the related termination of this excess lease expense, the lost NOI and redeployment of capital has a net positive benefit to our outlook of about $0.10 per share, and that is included in our outlook range. Our planned projection midyear sale of the asset, and if the sale does not occur we would not realize this benefit to our earnings in 2011. And adjusting for the midyear sale, the stabilized benefit is closer to $0.12 per share.

Turning to the balance sheet, we sourced new capital in 2010 of $784 million, approximately $344 million was comprised of equity, which was issued at an average price of about $98 a share, and that was consistently above the average NAV during the year for AvalonBay as published by independent analysts. Asset sales totaled another $190 million. We also issued new unsecured debt totaling $250 million, and we also redeemed $150 million of secured and unsecured debt, but did activities especially notable. The 3.95% coupon rate on the ten-year note issued in November was the lowest rate ever for a ten-year rate offering, and this transaction along with our debt redemptions brings our long term fixed rate debt to an average rate of about 5.66%, about 25 basis points lower than 2009. Floating rate debt is just 20% of all debt outstanding.

So overall we’re pleased with the results of the capital activity during the quarter and the year, and by most measures, the activity was attractively priced and created value for investors.

Looking forward, we enjoy great liquidity today and have good visibility into our sources of capital for 2011. Uses total about one billion, and considering that we have no balance out on our $1 billion credit facility and about $500 million in cash, we can fund all of our capital outlays with internal or committed liquidity. Market conditions are strong today, and with growing earnings and strengthening credit metrics, access to outside capital is readily available. Finally our assets are highly marketable, and we can recycle capital through asset sales to meet liquidity requirements. The type of capital we assess, whether through debt, equity or asset sales, will depend on the capital market conditions at the time we seek new capital. And retained cash flow after dividend payments will also be a source of capital in 2011.

One final note on the dividend: We don’t anticipate to increase the dividend in 2011. Instead, we’re going to retain more cash to reinvest in development and improving our dividend coverage. We have never cut our dividend and it’s always been covered from recurring cash flow. And with stronger earnings growth expected in the coming year, we’ll add to the dividend coverage such that our payout ratio will drop below 80% in 2011.

And with those comments, I’d like to turn the call Tim.

Tim Naughton

Thanks, Tom. I’d like to provide a little color behind our outlook assumptions and how the outlook for the economy and apartment markets is shaping our business plan for 2011. The economic recovery now underway should lead to economic expansion as both real and nominal GDP reached pre-downturn levels. A pause in job growth that we experienced in late 2010, due to public sector job losses, should give way to meaningful growth in 2011 as rudyseconomy.com is currently projecting a total of three million jobs will be added to the U.S. economy this year. This equates into annual job growth of almost 2.5% with the same rate of growth projected in AvalonBay’s markets.

Increasingly economists are expecting that the rise in corporate profits and liquidity combined with higher consumer confidence and the extension of the Bush tax cuts will result in higher levels of business investment and consumption fueling economic growth and corporate hiring. This improved sentiment is taking hold despite some potential economic headwinds such as sovereign debt concerns, the prospect of higher inflation and a stubbornly soft housing market.

In addition to household growth fueled by expected job gains, the apartment industry should benefit from the soft for-sale housing market as renter propensities are generally expected to continue to increase due to a combination of negative psychology of would-be buyers, favorable demographics and tighter mortgage underwriting standards. In addition, the limited level of new supply which should reach a 50-year low in 2011 and be down by around 60% in our markets from last year will further enhance very favorable apartment fundamentals as demand/supply ratios could reach double digits in AvalonBay’s markets.

So how does this outlook help shape our expectations and plans for the business? Starting with operations, we expect portfolio performance to accelerate throughout the year as economic growth and hiring activity picked up pace. By year-end we anticipate effective market rents to be rising by high single digits on a year-over-year basis. As a result, we expect growth in same- store rental revenues to accelerate from around mid 3% in Q1 to over 6% by Q4. Regionally the East Coast should outperform the West Coast again in 2011 although the West is expected to accelerate at a faster rate. The change in the growth rate of same-store revenue should increase by about 400 basis points over 2010 in the East and by around 700 basis points in the West. Overall, the same-store portfolio is projected to grow at a rate that is more than 550 basis points faster than 2010 when same-store revenues finish the year down by about 1%.

The mid Atlantic and Boston market should continue to perform toward the top of the portfolio as the Boston economy will benefit from exposure to some of the healthier sectors such as healthcare, education and technology while D.C. will contain the benefit from elevated levels of federal spending and increases in technology employment. New York and Northern California are expected to come on strong as the year progresses given their exposure to the strengthening technology and professional business service sectors. Southern California and Seattle will continue to improve as well, but their performance should trail the overall portfolio as Seattle will experience more supply than our other markets and Southern California, particularly LA, is projected to gain jobs at a slower pace than the broader economy.

Shifting now to the investment side of the business, our business plan calls for a significant increase in investment activity with overall investment levels up around 25% from 2010. We expect to start around 850 million in new development this year. Combined with 650 million in starts last year we’ll have around 1.4 billion under construction by the end of this year, a level consistent with that experienced in 2005 and 2006 or during the middle of the last cycle. We believe that by positioning the organization and the balance sheet to take advantage of increased levels of new development early in this cycle puts us in a favorable competitive position that will translate into out-performance as the cycle unfolds. While new development underway is increasing significantly throughout the year, it will still be well below the peak of 2.2 billion that we saw last cycle.

The case for new development is particularly compelling today. The combination of attractive yields which are generally 150 to 200 basis points above prevailing cap rates along with cyclically low construction cost and strong fundamentals expected for the next two years present ideal conditions in which to expand investment in this area of our business. In addition to new development, we’ll be active in the area of redevelopment as well. We expect to start about $100 million in redevelopment this year or about the same level that was started in 2010. We believe that this is a reasonable study state volume given the size and age of our portfolio. The type of activity planned for 2011 will be more offensive in nature. We will look to reposition communities to enhance their competitive position in their respective sub markets.

In 2010, given the state of the apartment markets, much of our redevelopment was defensive in nature where capital expenditures were focused on end-of-useful-life components and were really designed to preserve a community’s competitive position rather than to enhance it.

Lastly we’ll continue to be active in the area of acquisitions as the investment period for fund II draws to a close in the third quarter of this year. We plan on investing most of the remaining capacity of the funds or approximately $400 million by the end of Q3. In addition, we’re planning on some transactional activity of balance sheet assets where we’re planning to buy and sell wholly owned communities to help achieve some of our portfolio management objectives. This activity may be in the form of one-off or portfolio transactions as we explore different strategies to help shape our portfolio.

As we expect to be more active on the investment front, we’ll obviously be active in the capital markets to fund this activity. Generally we plan on match funding new investment activity either from existing cash or through new capital market activity. It is our intent to fund long-term assets with attractively priced long-term capital and continue to be conservative in managing liquidity by not relying on the line to fund new investments.

So in summary, an improving outlook is setting the stage for a sustained recovery in the economy and the apartment markets. We expect that our supply-constrained markets will outperform during the next few years as they’ve historically done in the expansionary phase of the cycle. And lastly we’ll be more active on all fronts in terms of new investment activity, looking to put capital to work in accretive investments at the beginning of what appears to be shaping up as a very promising cycle for apartments.

And with that, I’ll turn it over to Bryce for some closing remarks before opening it up for Q&A.

Bryce Blair

Thanks, Tim. So we believe AvalonBay is in a very strong competitive position today. In ‘09, our focus was on building liquidity and maintaining a flexible capital structure. Last year we increased our investment activity to position AvalonBay for the recovery that’s now underway. And in spite of capital constraints and earnings pressure, we maintained our dividend always covering it from recurring cash flow, and investors were rewarded with a 44% return in ‘09 and a 42% return last year.

Now as we return to a period of earnings growth, we have strong internal and external growth opportunities. We have positive revenue momentum in our same-store portfolio, accretive opportunities in our development program, and significant and growing development activity with attractive risk adjusted returns. Importantly we have a balance sheet to carry this activity through and a management team that’s worked together for over 20 years with a proven ability to execute. All of this and what looks to be an improving economic environment with new supply at record-low levels fueling earnings and value growth into ‘11 and beyond.

So, Alicia (ph), that concludes our remarks and we’d be glad to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Andrew McCullough, Green Street. Your line is open.

Andrew McCullough – Green Street. Hi. Good afternoon, guys. Can you just walk us through the math on the ground lease sale and how that impact is 10 cents a share if it’s supposed to happen in the second half of the year? I’m trying to compare that to the run rate. I’m just wondering how it gets up to 10 cents.

Thomas Sargeant

Yeah, Andrew. This is Tom. The ground lease, the way the difference between the cash payment and the accrual rate works is once you sell the asset, you reverse all previous accruals during the year. That combined with the interplay of the NOI that you get to keep for the period that you own it and the redeployment of that capital and other capital market considerations derives the 10-cent difference.

Andrew McCullough – Green Street

Okay. Are you looking to dispose of any of the other ground lease properties?

Thomas Sargeant

No, but the other ground lease properties represent about a penny a share difference in this area, so it’s nominal compared to this one ground lease.

Andrew McCullough – Green Street

Okay. And then can you tell us what currently the percent of your operating communities are not in the same store pool and what kind of growth you’re expecting for that group in terms of NOI for 2011?

Thomas Sargeant

This is Leo. Approximately – approximately 33,000 apartments in the same store pool and depending on all the other buckets, there’s a total of about 50,000 apartments that we’re either working on. With respect to the growth bit, we expect from those other properties, it’s similar to what we expect from the same store pool. So, for instance, when I’m working on other stabilized type properties, which are properties that are not in the same store pool, I’m marking then against these same store portfolio.

Andrew McCullough – Green Street

Okay. And then just one big picture question about development. With what you expect to start next year, development continues to ramp, but you’re still quite a bit below your previous run rate right before kind of the peak when your development pipeline got the biggest. What do you think is the current appropriate size of the development pipeline as maybe a percent of total assets for Avalon today?

Bryce Blair

Andy, this is Bryce. Yes, you’re right, our peak development was actually in the first quarter of 2008 where we peaked at about $2.2 billion underway, which at that time represented about 20% of our total market cap looking at company size at that time. Today we have about 900 million underway at year-end ‘10, which is about 6% of total market cap. As Tim mentioned we expect it to get to $1.4 billion by year-end ‘11, which would be about 10%. And the number that I have given before is we’re comfortable with that number moving up to about 15% as a number that as we think about the constraints relative to organization, market risk, balance sheet issues, earnings issues, getting up to 15% quite comfort; getting beyond that, I think our history has shown us feels a bit much. So long story short, we’re about a third of what we were back then, so we have plenty of room to run, and even at year-end, it would be about half of what it was previously.

Andrew McCullough – Green Street

Great. Thanks very much.

Operator

Your next question comes from the line of David Toddy, FBR Capital Markets. You may proceed with your question.

David Toddy – FBR Capital Markets

Thank you. I just want to follow along the lines of Andy and the development pipeline. Can you just talk us or walk us through some of the catalysts or the indicators that you would need to see specifically with regard to pushing some of the shadow pipeline into the active development pipeline and perhaps highlight the delta in your starts projection in terms of what projects would be moved in by year-end?

Tim Naughton

This is Tim. I’m sorry, I’m not sure I know what you mean by the delta in terms of – the last part of your question, maybe you can just amplify a little bit on that.

David Toddy – FBR Capital Markets

Sure. In terms of the higher development volume that you’re expecting to be at by year-end, what are some of the projects that would be in that pipeline that would be moved to the active side?

Tim Naughton

Okay. Why don’t we start there? Generally if you look at the Development Rights attachment that is in the schedules, it generally is the communities that are towards the top that would move into the development community basket if you will in 2011. So we try to sort them particularly for the next 12 to 18 months more or less in the order in which we expect them to start based on what we know today.

David Toddy – FBR Capital Markets

Okay. And along those lines, what would you need to see specifically with respect to some of those projects to sort of commence development? Is it really rent levels? Is it stuff that is already underway and probably unstoppable at this point and you’ll start regardless? What’s the catalyst for moving that up?

Tim Naughton

Deals won’t start regardless. As you recall, late 2008 and 2009, we really weren’t doing anything. So the kind of factors that need to be in place, it starts with projected returns. We look at both initial returns and frankly more importantly unlevered IORs, and generally we’re looking for 10% plus in terms of unlevered IORS. And initial returns are generally in the mid 6% plus range. And as Bryce mentioned just in terms of balance sheet and organizational capacity, obviously those things would need to be in place just from a risk standpoint in terms of our comfort of being able to pull those things – pull those deals through and execute properly.

David Toddy – FBR Capital Markets

Are you seeing any inflation indicators with respect to your hard costs, how you have underwritten the sort of risk in that going forward for some of the near-term projects?

Tim Naughton

Well, that’s a fair point. One of the reasons why we are aggressive at this point in the cycle, we have yet – we really haven’t seen total hard cost inflation. We are seeing it certainly in some of the commodities, but when we look at across all the hard costs categories on average, we think costs are bottoming. They’re in the bottoming process right now. And in terms of how we have underwritten into the deals, the deals you see on the Development Right schedule generally reflect our estimate of what development costs would be as if we were starting the project over the next call it three months or so. So in a sense there’s not any inflation embedded in those numbers, if that’s responsive to what you’re looking at.

David Toddy – FBR Capital Markets

Great. And then just lastly, can you give us a sense of specific yields on west month and park crest? I expected stabilized yields.

Tim Naughton

Well, the yields are based upon current rental market conditions, but they would be in the one case mid 6s to north of 8% in the case of west month.

David Toddy – FBR Capital Markets

Great. Thank you very much.

Operator

Our next question comes from the line of Alex Goldbar with Sandler O’Neal. Your line is open.

Alex Goldbar – Sandler O’Neal

Yes, hi. Good afternoon. Tom, just wanted to go back to the ground lease. So I think in your comments do you say the net effect on annual basis is a 12-cent increase? Is that correct?

Thomas Sargeant

Well, the way to look at this is that we – a land lease is a – we’re selling the excess during the year. We get to basically recapture all of that excess land lease expense over the land lease payment, but we also lose some NOI during the year for the asset sale. If you had the asset sold at the very beginning of the year, it would be $0.12 a share, which is the exact difference between the excess lease payment – sorry, the excess lease expense over the excess lease payment. And the other comment I made when Andy asked a question was that there is another lease out there that throws off about a penny negative on the same concept in terms of the accounting. That lease stays in place. So for this year, $0.10. But if you had it at the beginning of the year, it would be $0.12.

Alex Goldbar – Sandler O’Neal

Okay. That’s helpful. As far as the dividend goes, it sounded like you’re sticking with what you guys said at the investor day, which is just even though you could increase it and things are looking pretty good, your intent right now recommendation to the board for 2011 is to maintain the dividend? Is that correct?

Thomas Sargeant

Yeah, I think – I think we really are very committed to driving payout ratio down to levels that we normally see in the beginning or the mid to end of the cycle. And so we want to hold the dividend steady and the board is with us on that right now. Obviously we also want to make sure that we don’t find ourselves in an excise tax position again or in a position where we’re under-distributing regular taxable income. If something happened in the year where we sold a significant number of assets that triggered gains that required us to make a special distribution, you could see that policy change; but for right now, we don’t anticipate that.

Alex Goldbar – Sandler O’Neal

Okay. And just the final question is on – here in New York on the 421A, they’re contemplating bringing the program back maybe. Just in your guys’ view, how important is this program? I mean, is it – is the benefit that it brings worth the rent restrictions that go with it, or if there’s no 421A it really wouldn’t affect your guys’ decision at all as far as you underwrite New York development?

Bryce Blair

This is Bryce. 421A has been important for us and for the development of most rental housing in New York given the tax structure, the owner’s royalty tax structure in New York as it relates to commercial properties. It’s a little bit of a mixed bag because there has been and continues to be discussions about relooking at the tax structure in terms of property tax in New York. Don’t hold your breath on that, but a fair amount of discussion about that. Long story short is we do think it’s important, and it has been one of the ways that has spurred rental development in the city.

Alex Goldbar – Sandler O’Neal

Okay. So you support it, and it’s worth the rent restrictions?

Bryce Blair

Yes.

Alex Goldbar – Sandler O’Neal

Okay. Thank you.

Operator

Our next question comes from the line of Jay Habermann with Goldman Sachs. Your line is open.

Jay Habermann – Goldman Sachs

Great. Good afternoon, everyone. Can you talk a bit about the difference in yields on some of your planned developments and even the differences as you see across the country between more suburban type locations versus maybe CBD? Are we close to seeing any kind of pickup in CBD development at this point?

Tim Naughton

Jay, this is Tim. Just in terms of – in terms of new developments that we’re currently looking to put under contract, as well as deals that we’re looking to start this year, generally we’re looking at initial yields in the 6.5 to 7.5% range. Having said that, I think I spoke to this last quarter. Some of the legacy deals, there are a few legacy deals that don’t meet those kind of returns. In terms of more CBD type development, we’re getting closer just in terms of – just in terms of the economics. They tend to be still a little bit shy of what we’re seeing in some of the wood frame particularly northeastern suburban stuff. But we are looking to start a number of in-fill and even CBD type deals in 2011.

Jay Habermann – Goldman Sachs

Okay. And then even zeroing in a bit in terms of the rent growth forecast, can you talk a bit about price point and maybe sort of the potential increase rents on sort of A versus B? Are you seeing still that ability to push As further because rents obviously dipped a bit more in the past cycle?

Leo Horey

Jay, this is Leo. We are seeing that we can push them on both As and Bs. I mean, historically we would say that early part of an expansion we can push As more aggressively; but I do track our revenue performance both revenue and an NOI perspective on the properties we classify as As versus Bs, and we’re having success equal success on both types.

Jay Habermann – Goldman Sachs

Okay. And then lastly, I guess some mention on Southern California. You mentioned lagging growth in LA in terms of jobs, but can you give us a sense of where you expect NOI to shake out this year versus your overall forecast?

Leo Horey

Jay, with respect to Southern California in general, I expect – if I was to break down revenue growth, I would expect Washington DC and Boston to be above the average and obviously the midpoint of our range was 4.75%. I expect northern California and the metro New York area to be basically at the average, and I expect Seattle and Southern California to be below the average in the high 2s. And, you know, so that’s basically where Southern California is going to come in. And that gives you a range of how we’re getting to our numbers.

Jay Habermann – Goldman Sachs

Okay. Thank you.

Operator

Our next question comes from the line of Jeff Specter with Bank of America. Your line is open.

Jeff Specter – Bank of America

Thank you. Could you talk a little bit about what you’re seeing from competition out there and along those lines are you seeing an increase in development opportunities for you?

Tim Naughton

Jeff, Tim Naughton. I’d say seen an increase in both cases. Last year we talked a little bit about some of the – in some of the prior quarters about how a lot of deals just – land deals were coming to market. We just weren’t seeing a lot of activity there. We were seeing some activity with respect to – some increase in activity with respect to existing assets, but not land deals. As the year progressed, we started to see a little more, and I think we talked about this last quarter. We were working on a number of deals by the end of the year, which we finally started to pull through. So definitely seeing more opportunities. It’s nowhere close to what we were seeing towards the middle of last cycle. But we are seeing an increase in activity, and with respect to competition, everyone is saying the same thing right now. So people are trying to line up, get their platforms in shape in order to pursue new development.

I think particularly some of the private guys will restructure themselves in a way that allows them to be competitive in the land markets. I think frankly some other guys are going to fall short. But definitely I think everyone sees the same things we see in terms of favorable environment for new development right now. But not everyone is in the same position we are from a financial resource and organizational standpoint to be able to take advantage and capitalize. And it really resonates with land sellers right now. To the extent that they are going to sell a piece of land, they aren’t looking to get in bed with somebody for 12 to 18 months only to have that entity not show up for closing. So it is a huge competitive advantage right now that we don’t expect will last the full cycle, but it’s particularly helpful at the beginning of the cycle when opportunities are frankly more favorable.

Jeff Specter – Bank of America

Okay. Thank you. And can you talk a little bit more about California, what you’re seeing there, maybe dig into some of the sub markets a little bit and just give us some feedback on where you think things may turn sooner than other markets?

Leo Horey

Sure, Jeff. This is Leo again. I’ll start with northern California. I’ll tell you that northern California, the momentum in northern California is the best on the West Coast and is strong even in comparison to what’s going on in metro New York and New Jersey. Within northern California, San Francisco and San Jose are performing the best. Oakland is performing well, but it’s behind. So if you said what markets are the strongest, clearly anything in San Francisco or San Jose.

Moving to Southern California, the three markets down there where we do business are basically San Diego, Orange County, and L.A. I would tell you that they’re moving similarly, although our portfolio in L.A. is in the Warner center Woodland Hills area, and that’s just challenged by supply. So that’s the challenge that we have in the L.A. portfolio. Orange County is picking up, and some of the demand supply statistics for 2011 look pretty favorable there, and San Diego has performed better than the other two areas and is expected to kind of continue perform as it has been doing.

Jeff Specter – Bank of America

Thanks. Sorry.

Leo Horey

Is that giving you what you’re looking for?

Jeff Specter – Bank of America

Yes, and just one follow-up on L.A. the supply, is it, A, is it higher quality? Is it condos that are competing? What’s the supply?

Leo Horey

The supply is new apartments, and they are quality. So it’s new deliveries of A quality apartments.

Jeff Specter – Bank of America

Great. Thank you.

Operator

Our next question comes from the line of Karen Ford with Keybanc Capital Markets. Your line is open.

Karen Ford – Keybanc Capital Markets

Hi, good afternoon. Wanted to ask about your comments about buying and selling balance sheet assets in 2011. Will this be along the lines of portfolio allocation you discussed in the investment day, i.e. more class B assets and changing sub market allocation within your existing markets? How big do you think that activity might be, and what do you think would be the spread on cap rates between what you’re going to buy and sell there?

Tim Naughton

Karen, this is Tim. Yes, it is on the lines of what we talked about at investor day. Having said that, I think we would expect more of this activity to perhaps happen in the latter half of the year where we don’t have as many of the conflicts with the Fund 2 activity as it relates to one off transactions, sometimes it’s hard to do on the balance sheet given that Fund 2 is an exclusive acquisition vehicle for the company. To the extent that there are certain carve-outs, to the extent that it’s a trade or 10-31 so that if we’re buying and selling, it gives us a little bit more flexibility. But the activity is likely to be in the back half, and therefore you know maybe not as high as it might be on a go-forward basis 2012 and beyond. And it would be largely strategic, and I think we mentioned we point out in our outlook that we expect it to be net neutral.

So it would be moving from certain markets to other markets. We have said we have been looking to increase our exposure in the Southern California for instance and decrease it in other markets. But it would also be trading it to sub markets that we think are likely to outperform relative to assets we’d be trading out of. And to some extent, it will be trading As for some Bs at the margin. In terms of relative cap rates, we haven’t necessarily pro forma’ed the difference in cap rates, but I think our expectation might be if anything, we’re likely to buy it a little bit higher cap rate than what we would sell.

Karen Ford – Keybanc Capital Markets

That’s helpful. And just following up on the cap rate discussion, have you seen any impact on cap rates from the recent rise in long-term rates?

Leo Horey

Not really, but it’s also a time of year that a lot of activity – there’s not a lot of activity occurring. You know, the last deals that give price during the year generally happen late October, early November. And then people tend to put their disposition plans together early in the year. And so we’re just starting to see and hear about listings, and so we’re not pricing a lot of deals right now. We’re not seeing a lot of deals price in the market. We’re hearing anecdotally about some deals going a little sideways that might suggest that interest rates particularly for private buyers are having an impact on values, but we just haven’t seen it translate into deals that have actually closed to this point.

Karen Ford – Keybanc Capital Markets

Thank you. I think Jordan Saddler has a question as well.

Jordan Saddler – KeyBanc Capital Markets

Yes, thanks. Leo, just following up on the As versus Bs in terms of what you’re seeing so far, it sounds like you’re seeing a lot of the same in terms of revenue and NOI growth. I’m just curious what’s embedded in your 2011 guidance. Maybe that’s a better question for Tom. Is there a difference in terms of your expectation for the As versus the Bs?

Leo Horey

Jordan, this is Leo. There’s no difference in expectation. The only difference in expectation would have to do with their general locations: what region they’re in or what sub market they might be in.

Jordan Saddler – KeyBanc Capital Markets

But generally if you have As and Bs in the same market, the guidance is – your expectation is that they would perform similarly? Meaning As won’t bounce...

Tim Naughton

Yeah, Jordan, this is Tim. I think we spoke about this at investor day. It’s not that we necessarily see them performing similarly in every market. I mean, it’s one of the reasons why we want to invest in Bs in certain sub markets and As in other sub markets. So I think we’re saying overall when you kind of cut through the portfolio, we’re not seeing a discernible trend As over Bs as an asset class itself. But within individual sub markets, we’re definitely seeing some Bs looking out to outperform and As outperform. And I think we even shared some data. When you look back over the last 10 or 15 years, As outperformed about half the time and Bs outperformed about half the time depending upon the sub markets in which they reside in.

Jordan Saddler – KeyBanc Capital Markets

Okay. Thank you.

Operator

Our next question comes from the line of Eric Wolfe with Citigroup. Please proceed with your question.

Eric Wolfe – Citigroup

Thank you. For your expense gross guidance of flat up 2%, could you just give us a breakdown of how much you expect real estate taxes, payroll, and R&M to increase this year and why you’re confident you’ll be able to achieve this low level of expense growth?

Leo Horey

Sure, Eric. This is Leo. Payroll is going to be up around 4%. Some of that is due to the benefit that identified even in our Attachment 8. I think you have property taxes around 3.5%. And what other category were you asking about?

Eric Wolfe – Citigroup

Repairs and maintenance.

Leo Horey

The repairs and maintenance is going to be closer to flat to down slightly. And the reason that I believe that we can get there is the bottom line is payroll and then utilities largely driven by water and sewer rates and gas rates, insurance and property taxes I do expect to be up. So we’re going to experience some inflationary pressures. The issue is those things are being offset by bad debt which is I expect to come down. And bad debt is an expense. We don’t use it as a revenue offset. I expect our snow removal will relate to costs that have to do with both snow removal and maintenance and payroll related to the snow removal to come down. And we are making continued strides in marketing. So overall, I do believe that we can get into the range that we put out. And that’s how we’re going to get there.

Eric Wolfe – Citigroup

Okay. So even though payroll I guess is going up about 4 and then real estate taxes are going up 3.5, it sounds like some of the smaller items I guess which comprise a lower percentage of your expenses are coming down? Is that the right way to think about it?

Leo Horey

It is the right way to think about it.

Eric Wolfe – Citigroup

Okay.

Leo Horey

They’re coming down because of some situations that occurred in the previous years. So in 2010.

Eric Wolfe – Citigroup

Got you. And I think you partly addressed this in your remarks, but in terms of your rental rate growth expectations for the year, could you give us a sense for how much you expect these increases to trend like through the year meaning in the first quarter is it going to be larger than in the second quarter? You would think that it would accelerate through the first half just given the easier comps and just wondering how that’s supposed to trend through the year.

Tim Naughton

Eric, this is Tim. As I mentioned in my remarks, we expect it to start the year in the first quarter in the mid 3% range and end in the fourth quarter over 6%. And we didn’t really sort of parse it any more than that in terms of the middle of the year, but I think it’s fair to assume that it’s our expectation that it will march up during the course of the year.

Eric Wolfe – Citigroup

But that’s same store revenue, right?

Tim Naughton

All…

Eric Wolfe – Citigroup

Not just what you’re increasing in terms of rents thinking first quarter or first quarter you’re pushing rents 5 to 5.5% and going in the second quarter you’re pushing 6 to 7?

Tim Naughton

I’m sorry, in terms of effective market rent growth, I think as I mentioned we expect by the end of the year to reach high single digits; and at the start of the year more in line with what we saw at the end of last year, sort of mid-single digits.

Eric Wolfe – Citigroup

One last quick one to follow up on Andy’s question. Can you tell us how much you expect total NOI and total revenue to increase this year on a percentage basis just given the fact that you do have a large non-same store pool?

Tim Naughton

I don’t have that number readily.

Leo Horey

We just don’t have that data here.

Eric Wolfe – Citigroup

Is there just on the bad debt, how much bad debt was there in 2010 relative to what you’re projecting for 2011? It just seems that as a percentage to overcome such – to overcome it on the expense side seems like a lot. So can you just outline what you have?

Tim Naughton

Sure. In 2009, bad debt ran about a percent and a half of revenue using the 2010 buckets for 2009. In 2010 using 2010 buckets, we dropped to approximately 1.2% of revenue, and we’re expecting that we’re going to drop to about .9% of revenue for 2011. And that’s how we get there.

Eric Wolfe – Citigroup

Why would you expect bad debt to come down in 2011? Why not try to hold flat to be conservative?

Tim Naughton

Because we expect the economy to improve and things to stabilize even further than what we experienced in 2010.

Leo Horey

It’s Leo. Historically bad debt has averaged – if you go back in time, it’s been as low as a half a percent of revenue.

Tim Naughton

So, Eric, in ‘09 and ‘10, as the economy weakened, we saw the bad debt start to move up. And we have seen it materially moved down in the tail end of 2010 and expect that trend to continue into ‘11. So our basis for budgeting is not to budget the most conservative way. Our budgeting is what do we expect is going to happen based on the trends we’re seeing in our portfolio.

Leo Horey

Bryce, just to add to that, when we look at bad debt historically, it is extremely closely correlated to job growth, so it would be inconsistent to be expecting job growth of 2.5% and frankly keeping bad debt constant. It’s completely inconsistent with our experience. And Eric just to follow up on your prior question, we’re expecting total revenues including all the buckets to be up around 9% on a year-over-year basis and NOI – total NOI to be up closer to 13%.

Eric Wolfe – Citigroup

Perfect. Thank you.

Operator

Our next question comes from the line of Rob Stevenson with Macquarie. Your line is open.

Rob Stevenson – Macquarie

Good afternoon, guys. Tom, you guys did 52% turnover last year. What are you anticipating in 2011? And what you think the impact is either positive or negative?

Leo Horey

Rob, this is Leo. We expect turnover to go up 1% to 2% for 2011. Obviously that helps on our REIT costs. That hurts on our REIT costs, but not significantly.

Rob Stevenson – Macquarie

Okay. And then a question on fund 1. Can you remind us what type of fees or promotes or anything else that you guys are in line for as you sell out here and what if based on today’s appraisal values what the IRR looks like on that fund today?

Thomas Sargeant

Rob, this is Tom. I think the important thing on fund 1 is that a lot of those assets still have not been sold, so anything I would tell you would be very speculative. In terms of the promote structure, the fees are about 1.25 on the equity and that’s committed equity. The overall promote structure is staggered based on a performance level above a hurdle rate, and I think we have disclosed in the past that that hurdle rate starts at 10 and we get 20% over 10 until you get to a 14, and then it steps up. I don’t think you can expect much promote in 2011. Actually, you should expect none, because most of this promote is back-ended. We have a hybrid approach, a hybrid waterfall approach. So most of that – most of the promote that would be earned would happen at the very, very end of the all the asset sales and fund 1.

Rob Stevenson – Macquarie

Okay. And are there disposition fees for you?

Thomas Sargeant

There’s no disposition fees. So you can see that for us to project a promote based on an IR today is very speculative.

Rob Stevenson – Macquarie

Okay. And then lastly if we have sort of similar weather in the east and Midwest over the next six weeks as we have over the last six weeks, is that level of snow removal cost already budgeted in your numbers, or is that going to result in lower FFO for the quarter?

Leo Horey

Rob, this is Leo. With respect to the way snow removal is handled, in the mid Atlantic we do it on time and materials. But in the northeast and the Midwest, it’s under contract. The contract does have a cap. We are under those caps. If we continue to have storms like we’re having, we will go above those caps and there will be some impact on the first quarter. But we’re not at the caps at this time. So it’s really just going to depend on what happens with weather. We should be in a good position based on the caps we put in place but the level of storms we have been seeing, if those keep repeating themselves, then there will be some challenges.

Rob Stevenson – Macquarie

Okay. Thanks, guys.

Operator

Our next question comes from the line of Jeffrey Donnelly with Wachovia. Please proceed with your question.

Jeffrey Donnelly – Wachovia

Good afternoon, folks. I guess for Bryce, where do you think condominium prices are today compared to where they were in the say the prior peak for your core markets such as Boston, New York, DC, and San Jose? And I guess as a follow-up, how do you think that compares to what’s happened to apartment values over that same period?

Leo Horey

I’m going to pass that to Tim and let him take a shot at that one. I mean, it’s a very speculative question. Obviously every market is different, and it depends on what price point. I don’t know, Tim, if you have any sort of general thoughts on that?

Tim Naughton

My sense is I’ll maybe start with apartment values. I think apartment values are probably back within 7 or 8% of peak, maybe even closer to peak than that. And then when you look on the for sale side whether it’s single family or condominium, we’re still well off peak by 25, 30% plus, and my sense is condo values are probably well north of 30% off of peak values. So the relationship between condominium and apartments has changed fairly dramatically which has made – which has changed the affordability equation certainly in our markets. And it’s something that we’re keeping an eye on as relates to the ability to push pricing on rents, but we haven’t seen – we haven’t seen that really be a headwind to date as it relates to pricing power on the apartment side.

Jeffrey Donnelly – Wachovia

Okay. And then just to switch gears and maybe following up on an earlier question on construction costs, I noticed in your development rights list you guys had added a property that I think you optioned in Hingham to your development pipeline which appears to have a per key cost of I think it was 210,000 or just about 10% lower than what you developed Hingham Shipyard for. Is that indicative of the reduction in construction cost from peak levels, or is that just the efficiencies of maybe expanding the existing project?

Tim Naughton

Jeff, this is not an extension to the Hingham Shipyard. It’s a different parcel. So the reduction in cost that you’re referring to is really a function of two things: Yes, some of would be reduction in construction market, but secondly it is just a different product on a different site with different land economics.

Jeffrey Donnelly – Wachovia

Okay. And then just the last question, at your analyst day, you had talked about increasing your percentage ownership of class B apartments, but for a company of your size, that’s a fairly significant figure even though I think in percentage terms it’s a slight increase in dollars. It could be meaningful just given the smaller deal size of those properties. I guess how do you expect to get there over time? Is it sort of 1s, 2s on acquisitions? Because the development pipeline that you have, it would seem that you’re facing a pretty strong headwind there?

Tim Naughton

It’s really a function of multiple strategies is the way we think about it. Part of it will be one-off transactions, whether it’s on the buy side or the sell side. You know, but likely at some point to involve some portfolio transactions, again whether we’re buying a portfolio or whether we think about selling a portfolio. And so I think it will probably be a combination of at least both those strategies.

Jeffrey Donnelly – Wachovia

Okay. Thank you.

Operator

Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Michael Salinsky – RBC Capital Markets

Good afternoon, guys. First question relates to operations. You raised your same store NOI guidance, but you also raised your employment forecast. Just curious as to what the sensitivity is relative to the employment forecast as you’re looking at your internal models there?

Bryce Blair

Michael, this is Bryce. Certainly jobs are an important contributor to the project demand supply balance for ‘11 and out years. The way our actual projections are is very much a marriage between the top down and the bottom up. Leo and his team developed individual budgets at an individual property level in many ways irrespective of the job growth. It’s just what is happening at the ground level in terms of rents and competition and at the same time we’re developing at the corporate level if you will a top side forecast in terms of what’s happening not just with jobs but with expectations on the housing market and its impact on the ownership rate, what’s happening with the unbundling of the younger age cohorts that’s been bundled up for a couple years, and importantly what is happening to supply. And then we basically it rate between those two. And to arrive at what we believe is a reasonable projection for 2011.

I will say just maybe to call attention to a couple of things that the job growth nationally last year was positive at call it .7, about a million 3 jobs that I mentioned. In AvalonBay’s markets, basically it was zero. There was really no net new jobs during 2010 in the markets we operate in. It was positive in the first half of the year, and we gave basically all that back in the second half of the year. The forecast in 2011 is for a similar rate of job growth for both the nation as a whole and for AvalonBay’s markets of close to 2.5%. Now, as I hope you all know, we’re not providing – we’re not generating these job forecasts ourselves. We do consider ourselves experts in apartments. We’re not experts in job forecasts. We do rely upon third parties. But we do think that is a reasonable projection for job growth for 2011. It is up significantly from where it was in the middle of 2010, and importantly, it’s a pretty significant really dramatic improvement within our markets. So supply – I mean, job growth definitely is trending positively and has been increasing over the last couple months.

On the supply side, you know supply continues to – the rate of new supply continues to be reduced. That’s true nationally. It’s true even more so in our markets. During 2010, the nation as a whole saw a reduction in the rate of supply. In AvalonBay’s markets, we had not yet seen that. Supply of apartments was steady between 2009 and 2010 in AvalonBay’s markets. It really isn’t until 2011 and continued into 2012 where our markets get the benefit of that reduction. So I’m highlighting this because it is – it is critical to our assessment of projections we have given that the economy will continue to strengthen and more certainly the supply will continue to be diminished. Those are two key variables. They’re not the only variables.

As I mentioned you do have the issue of homeownership rate, demographics, the impact of any excess inventory in the markets. There’s a lot of other variables that impact things, housing affordability which I think was at the heart of a prior question, which we factor all those in as well. But clearly jobs and supply are the two most talked about and certainly two of the most important.

Michael Salinsky – RBC Capital Markets

Okay. That’s helpful. Second of all, Tim or Leo, I don’t know if you mentioned, but what are 60 to 90 day forward renewals running at this point?

Bryce Blair

Basically we’re in between the offers that are out are in the 5 to 5.5% range.

Michael Salinsky – RBC Capital Markets

Okay. Third question just as it relates to the ramp-up of development, how much overhead ramp-up is going to be needed? How much rehiring is that going to relate to? How much should we expect from that standpoint?

Bryce Blair

There has been and will continue to be some hiring. Probably not as much as you might expect. Through this downturn, while we reduced development and construction significantly, about 35 to 45% in terms of overhead levels, we kept it pretty stable at the more senior level at the officer level which is a more highly compensated. So as we grow and add to the development and construction particularly the construction, it does increase obviously at the project management level pretty linearly. So it will increase. But we don’t have a forecast for – we have not provided a forecast for our capitalized overhead.

Michael Salinsky – RBC Capital Markets

Okay. Fair enough. Finally, Tom, not to leave you out here, quick question on CapEx assumption for ‘11 as well as where currently you could issue unsecured versus secured?

Bryce Blair

CapEx for 2011 is in the 700 range Leo I think per unit.

Tim Naughton

Yes, 700 per unit.

Leo Horey

And I think over the last couple years we had it close to 300 in ‘09 and closer to...

Tim Naughton

450...

Thomas Sargeant

450 in 2010, so part of 2011 is certainly a catch-up from some of the past things that did not get completed. In terms of debt, unsecured debt versus secured debt, today we can do an unsecured debt deal for about 4.5%. Secured debt and the GSE is about 5, so there’s about a 50 basis point gap. I’ll point out that 4.5% deal, while it doesn’t look as attractive as the 3.95%, if we were to do that deal today, it would be the fourth lowest coupon ever issued by a REIT. So these rates still remain at historically low levels and certainly gives evidence of how attractive the Capital Markets and how accommodative they are right now.

Michael Salinsky – RBC Capital Markets

That’s all for me. Thanks, guys.

Operator

Our next question comes from the line of Tao Okosanya with Jefferies & Company. Please proceed with your question.

Tao Okosanya – Jefferies & Company

Yes, good afternoon. Just going back to the dividend policy, just given the strong earnings outlook being projected for 2011, just wondering why it doesn’t all kind of extrapolate to strong taxable income, which would force you to raise the dividend?

Thomas Sargeant

Okay. This is Tom. The dividend obviously lots of components to the dividend, but remember that we can – we can claw back into – we can claw forward future dividends to cover prior year taxable income, and that’s called the 858 election.

Tao Okosanya – Jefferies & Company

Right.

Thomas Sargeant

We have to match every year, and that gives you ability to manage your dividend more – in a more stable environment. There really is no reason to change the dividend based on current year earnings just because you do have the 858 election that you can rely upon. As I said in my comments earlier, if we were to sell a lot more assets than we’re planning to sell in the – during the year, that could change our view, but right now we feel very comfortable maintaining the dividend at its current level and driving our payout ratio down below 80%.

Tao Okosanya – Jefferies & Company

Got it. Okay. That’s helpful. All my other questions have been answered. Thank you.

Operator

Our next question comes from the line of Paula Poskon with Robert W. Baird. Please proceed with your question.

Paula Poskon – Robert W. Baird

Thank you. Could you give some color on what you’re seeing in terms of land opportunities and what level of volume would lead you to get done this year?

Tim Naughton

Paula, this is Tim. I spoke a little bit about it earlier. We are seeing more activity right now, and I think Bryce mentioned in his comments we’ve got actually in Q1, we’ve got about another 300 million. We expect to pull through the due diligence process and be adding to our development pipeline next quarter. In terms of the kind of volume that would make us – that we would be – I guess I’d start with, you know, we want to make sure they’re good deals first. But the organization is probably capable of doing 800 million a year right now without really much additional overhead. So to the extent it could be in the 800 million range, I think we feel pretty good about that as a steady state level. On the other hand, to the extent that the opportunities are emerging and we think they’re better than opportunities that are likely to come in other parts of the cycle, we’re ready to be more aggressive as well.

Paula Poskon – Robert W. Baird

Thanks. And just any color on what you’re seeing in terms of January trends on the operations?

Leo Horey

Paul, this is Leo. With respect to operations, occupancy got down to about 90 – low 95, 95.2 in December. It has rebounded. It was 95.6 in January and early indications for February is we’ll be around 96%. Turnover in January is in line with the past, so we are pushing ahead very aggressively again.

Paula Poskon – Robert W. Baird

That’s all I have. Thank you.

Operator

Our next question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed with your question.

Rich Anderson – BMO Capital Markets

Thanks. I tried to get out of the queue. Sorry about that. But as long as I’m on, can you talk about Fort Green and how that’s leasing up relative to your expectations? I feel like there’s been some change of fortunes there in Brooklyn.

Tim Naughton

Rich, sure, this is Tim. In terms of the lease-up, it’s close to being done and we’re actually starting to see is renewals. And one of the reasons we had a big increase in the average rent that we reported this quarter up about 300 bucks from last quarter is the renewal activity that we’re seeing. Average renewals have been on the order of 24%, and we’re actually seeing renewal rates of over 80% right now of existing residents. So we’re definitely seeing higher prices gain traction in those markets so some of the other lease-ups are coming to an end and we’re getting back closer to the original pro forma level rents that we had originally anticipated when we started the deal.

Rich Anderson – BMO Capital Markets

I think the arena is having an impact at all on the area and why wouldn’t the other Fort Green sort of Development Rights be moved up a little bit higher in that schedule?

Tim Naughton

You’re talking about Westfield, which is our other development right in Brooklyn, I think.

Rich Anderson – BMO Capital Markets

Yeah.

Tim Naughton

It may well end up being moved up as the market continues to improve. It’s a large deal, and so I think we’ll – we’ll give it more than a quarter to – for the market to stabilize in season I expect. But in terms of the impact of the arena, it’s pretty speculative. I’m not the local Brooklyn expert. I think the improvement we have seen to date has just been a combination of the stabilization in the New York economy and the completion of the competitive lease-ups. That’s 98% of it I’m convinced.

Rich Anderson – BMO Capital Markets

Okay. Last question: with Arch Stone having restructured its debt, does that make you any more interested in some or all of that portfolio in the context of your class B strategy?

Tim Naughton

Rich, as we have said in the past, we just did not comment on potential portfolio activity at that level.

Rich Anderson – BMO Capital Markets

Okay. I thought I’d catch you tired.

Tim Naughton

If nothing else, you’re consistent.

Rich Anderson – BMO Capital Markets

Thank you.

Operator

Our next question comes from the line of Sarup Yala with Morgan Stanley. Please proceed with your question.

Sarup Yala – Morgan Stanley

Good afternoon. Bryce, you touched upon the homeownership rate and talked about 700,000 households of which about half moved into the multifamily segment. I was just wondering, is that based on your experience in your own portfolio or is that based on some third party survey?

Bryce Blair

Third party data.

Sarup Yala – Morgan Stanley

Okay. Great. And then just lastly in terms of the redevelopment you’re targeting a hundred million, what kind of yields are you looking at?

Tim Naughton

This is Tim. Generally we’re looking for initial yields on enhancement capital or return on enhancements of north of 10%, but frankly what we look at even more closely is we look at the projected unlevered IRRs as a redevelopment versus if we were just going to dispose of the asset. So just to try to get a sense of how much value we’re adding through the redevelopment process relative to the capital we’re investing in order to complete the redevelopment. That’s probably the more important metric that guides our decision-making.

Sarup Yala – Morgan Stanley

Great. Thank you so much.

Operator

Our next question comes from the line of Adra Stonsia from Barclays Capital. Please proceed with your question.

Adra Stonsia – Barclays Capital

Good afternoon. Can you hear me?

Thomas Sargeant

Yes.

Adra Stonsia – Barclays Capital

Can you comment on your expected Capital Markets activities in 2011? You said that you expect to issue between 500 to 700 million of new capital. Can you talk about how much would bit in terms of equity versus debt?

Thomas Sargeant

Adra, this is Tom Sargeant. We don’t break out the Capital Markets activity. It really depends on the current market conditions at the time we seek new capital. What’s interesting about the current environment is whether you do debt or equity or even asset sales for that matter, the incremental impact on earnings in 2011 is nominal between any of the choices, so it really depends on the capital market conditions at the time we seek that new capital.

Adra Stonsia – Barclays Capital

Understood. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of David Pepperman with Green Light Capital. Please proceed with your question.

David Pepperman – Green Light Capital

Thanks for taking my call. In terms of the same store expense growth for 2011, is the 10-cent benefit from the ground lease transaction flowing through the 0 to 2% expense growth? And then is the $0.12 gain something that becomes a headwind in 2012?

Thomas Sargeant

David, no, it’s not flowing through that category. In terms of the headwinds for 2012, I’m not sure I understand the question, but it doesn’t create a headwind.

David Pepperman – Green Light Capital

I guess I just want to be clear on the ground lease transaction is catching up for a prior cash versus GAAP differential, but I assume that’s a one-time thing that benefits ‘11 that you don’t get again in 2012, or is that an ongoing annual benefit?

Thomas Sargeant

It’s an ongoing annual benefit because you eliminate that excess charge over – you eliminate that excess charge over the actual cash payment, and that elimination is a permanent elimination.

Tim Naughton

David, just to add to that, just to be clear, it’s not reversing any prior year for 2011 period as it relates to the accounting treatment for that land lease for that period of time. So there’s no – there’s no reversal of accrual that we’re benefiting from in 2011 that would relate to prior year periods.

Thomas Sargeant

That’s correct. There is a reversal though during the year to the extent we sell the asset during the year. Anything that we expense in excess of the actual cash payment will be reversed at the time that sale occurs. So it’s all within the year. All of the cumulative excess payments are on the balance sheet, and that will get reversed but that’s only on the balance sheet.

David Pepperman – Green Light Capital

Okay. Thanks. And then in terms of the .6% sequential rental rate growth in Q4 that moderated a little bit versus the prior couple of quarters, can you just go through what the rental rate growth was in Q4 on expiring leases and how you think about that trend?

Leo Horey David, this is Leo. I guess there’s a couple issues. In Q4, rate growth accelerated at about 0.6 and was offset by a decline in occupancy, which is how we get to the 0.4. What you have to remember when you’re thinking about sequential is that 20% of our expirations occur in the first quarter, about 28% occur in the second quarter, 32 in the third quarter, and then 20% again in the fourth quarter. So as we’re pushing through rate increase, in the second and the third quarter we have more expirations to force that rate through. In the first and the fourth quarter, we have fewer expirations so you kind of have to normalize it.

David Pepperman – Green Light Capital

So does that bring you to about a 3% kind of expiring lease growth versus being a little high nor Q2 and Q3?

Thomas Sargeant

Q2 and Q3 we had much higher. Essentially almost 50% more leases expiring in Q2 and Q3 than we do in Q1 and Q4.

David Pepperman – Green Light Capital

Got you. So I guess what was the rate growth for those leases that were expiring in Q4?

Thomas Sargeant

Q4 the average, the blended was around 4.5%.

Tim Naughton

David, I think I understand. This is Tim. I think I understand the math you’re doing. You’re just taking the .6% and divided it by the 20% of the leases expiring. There’s also additional – there’s also less transactional revenue that comes through as a result, and it’s a pretty big drop-off just given how turnover drops from or expiring leases drop from 32% to 20%. So that’s part of what drives that number as well.

David Pepperman – Green Light Capital

Okay. I appreciate it. Thank you, guys.

Operator

There are no further questions at this time. I’ll turn the call back over to Mr. Bryce Blair.

Bryce Blair

Well, thank you, Alicia (ph). And with that, thank you all for your time today. We know it’s a busy week, and so we’ll let you get on to other business. So thank you for participating.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect.

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