AvalonBay Communities (AVB) Timothy J. Naughton on Q4 2015 Results - Earnings Call Transcript

| About: AvalonBay Communities, (AVB)

AvalonBay Communities, Inc. (NYSE:AVB)

Q4 2015 Earnings Call

February 04, 2016 1:00 pm ET

Executives

Jason Reilley - Senior Director of Investor Relations

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Kevin P. O'Shea - Chief Financial Officer

Sean J. Breslin - Chief Operating Officer

Matthew H. Birenbaum - Chief Investment Officer

Analysts

Nick Yulico - UBS Securities LLC

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Gaurav Mehta - Cantor Fitzgerald Securities

Austin Wurschmidt - KeyBanc Capital Markets, Inc.

John P. Kim - BMO Capital Markets (United States)

Jana Galan - Bank of America Merrill Lynch

Robert Chapman Stevenson - Janney Montgomery Scott LLC

Ryan Peterson - Sandler O'Neill & Partners LP

Dan M. Oppenheim - Zelman & Associates

Vincent Chao - Deutsche Bank Securities, Inc.

Dave Bragg - Green Street Advisors, Inc.

Omotayo Tejumade Okusanya - Jefferies LLC

Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)

Richard Charles Anderson - Mizuho Securities USA, Inc.

Neil Malkin - RBC Capital Markets LLC

Operator

Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities' Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the remarks by the company, we will conduct a question-and-answer session.

Your host for today's call is Mr. Jason Reilley, Senior Director of Investor Relations. Mr. Reilley, please go ahead.

Jason Reilley - Senior Director of Investor Relations

Thank you, Craig, and welcome to AvalonBay Communities' fourth quarter 2015 earnings conference call.

Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC.

As always, this 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 also available on our website 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 Tim Naughton, Chairman and CEO of AvalonBay Communities, for his remarks. Tim?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yeah. Thanks, Jason, and welcome to our Q4 call. With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. Kevin and I will provide commentary on the slides that we posted last night, and then all of us will be available for Q&A afterwards.

During our comments, we'll focus on providing a summary of Q4 and the full-year results and I'll spend a good part of time talking about the outlook for 2016. I'll talk about the economy, apartment markets, and operations. Then, I'll turn it over to Kevin, who'll talk about development as well as capital and risk management as we move further into the cycle.

So, let's start on slide four. Highlights for the quarter and year include Core FFO growth in Q4, 14.4% and 11.4% for the full-year, which is about 300 basis points higher than our original outlook at the beginning of the year. And, importantly, we continue to generate FFO growth this cycle for the top of the sector, while having the lowest leverage.

Q4 same-store revenue growth came in at 5.4% or 5.7%, when you include redevelopment as many of our peers do. And for the full-year, same-store revenue growth came in at 5.0% or 5.2%, including redevelopment. Same-store NOI for the year came in at 5.8%.

We completed about $500 million this quarter at right around a 7% yield, and $1.3 billion for the full-year at initial yield of 6.7%. We started another four communities totaling about $400 million in Q4, bringing our full-year level starts to roughly $1.2 billion or roughly in line with completions this year.

And lastly, we raised $400 million in new capital in the quarter, principally $200 million or $300 million unsecured debt offering. And for the year, we raised a total of $1.9 billion in capital to fund new investment and refinance maturing debt.

Turning now to slide five. The $1.3 billion of new development that we completed this year that I just referenced is contributing to healthy earnings and NAV accretion. Yields of 6.7% are roughly 250 basis points greater than our initial cost of external capital raised this year, and the cost base is, of these completions at $310,000 per unit is more than 30% less than the value of our average stabilized asset on a per unit basis, with rents at a 12% to 13% higher, implying that value creation was around 50% over cost. We're roughly $650 million in net NAV created or $5 per share in 2015 alone.

Turning to slide six, in addition to strong financial results, we excelled in other important aspects of our business in 2015, including: customer satisfaction, where we were ranked number one nationally, among all apartment operators for online reputation; associate engagement, where we're ranked number one in our sector and number two among all D.C. metro-based organizations on Glassdoor; corporate responsibility, where most of you are focused on sustainability, has put us towards the top of the sector in the U.S. and globally; and community recognition, where a number of our newly developed communities earn prestigious awards from various industry groups.

We probably don't talk enough about this with investors, but we know that achievement serving the needs of these important constituencies, I think our customers, our associates in the community as well as the shareholders, is critical to building the kind of culture and company that can be enduring and successful.

Shifting now to 2016, let's move to slide seven. We're projecting 9% core growth in Core FFO per share this year, driven by about two-thirds internal operations from the almost 6% same-store NOI growth that we're projecting at the midpoint, and about a third from new investment activity, once you net out the cost of new capital issuance, which is covered mostly from stabilizing new developments.

The principal difference in growth between 2015 and 2016 is that we expect less external growth from new investment activity, which in turn is being driven by the impact of fewer deliveries in 2015 that will be stabilizing in 2016 and some unevenness in the timing of capital raising activity.

When looking at the earnings impact of our development platform, it's probably more helpful to view it over a multiyear period. For example, if you look at it over the 2015-2016 timeframe here, a new investment activity net of changes in capital cost is projected to deliver approximately $0.70 per share to Core FFO or around 10% cumulative growth over the two-year period.

Moving to slide eight, given our outlook for 2016, we announced a dividend increase of 8% this year. The dividend is now up by more than 50% over the last five years; and importantly, has grown by 5.5% on a compounded basis over the last 20 years.

Our dividends are an important component of total return. They represent almost two-thirds of the total return of roughly 1800% that we've earned over the last 20 years and that kind of growth really does underscore the accretion and growth embedded in our business model. I think sometimes this gets a little lost during the market volatility and ramp in trading activity we're seeing in the sector today.

Turning to slide nine, our outlook has been driven in part by the prospect of a stable economy, continuing into 2016; and from our perspective appears to have reached mid cycle in terms of GDP and employment growth.

Improving consumer should benefit from stronger labor market in 2016. And then the public sector is expected to actually contribute to overall economic growth this year, although, it still have a lesser rates in the private sector after having been a drag for a number of years to overall economic growth.

Now, turning to slide 10, job growth in our markets is projected to outperform the U.S. again in 2016, as it did in 2015, it's just over 2%. The East Coast is expected to improve in 2016, while the tech-heavy West Coast market should moderate of the blistering pace over the last couple of years, although it's still remain at healthy levels around 2.5%.

On the slide 11, total personal income growth, which combines the job and per capita income growth is expected to accelerate in 2016 as wage growth gains traction, particularly for the younger millennial cohort, most of whom continue to rent. Our wage growth as we've discussed in the past, will become an ever increasing important driver of our business as economic cycle matures and more supply starts to come online in 2016.

Speaking to that, moving to slide 12, and supply, we do expect that completions in our markets will increase, in 2016 by about 50 basis points to around 2% of stock. But roughly in line job growth, suggesting pretty stable conditions overall.

Of course, some submarkets are particularly in urban cores, we'll see higher levels of deliveries that may impact local markets as owners use concessions to simulate absorption during lease-up. This is particularly true in urban and high rise product where inventories can build quickly as deliveries tend to occur over a more concentrated period of time.

But overall, housing demand should continue to favor the apartment sector due to many things that we've been talking about over the last couple of years, including favorable demographics, pent-up demand as millennials continue to unbundle, and ultimately changing lifestyle trends with delayed marriages and family formation. All these factors should help support another healthy year for apartment fundamentals in 2016.

And, turning to slide 13, that is reflected in our outlook for our same-store portfolio this year, where we're looking for same-store revenue growth of 4.25% and 5.5%. With modest improvement on the East Coast, on the West Coast we expect some moderation in Seattle and Northern California, after exceptionally strong growth in 2015.

Overall, then growth is expected to be healthy with performance between the East Coast and West Coast narrowing a bit in 2016.

And, with that, I'll turn it to Kevin who will discuss development and capital activity.

Kevin P. O'Shea - Chief Financial Officer

Thanks, Tim. Turning to development activity on slide 14, we show development under construction in absolute terms and relative to our total enterprise value. So, projected for year-end 2016, and historically going back to 2004.

As you can see here ongoing development activity as a percentage of our total enterprise value has been relatively stable over the past few years at around 10%, which is at the low-end of our target range. This reflects our continued discipline in allocating capital to this activity as we move further into the cycle.

Moving to slide 15, profit margins on our development activity have remained remarkably resilient and healthy in this cycle. Thanks to the underlying strength of apartment fundamentals, our sector-leading development and construction capabilities, and, the decisions we've made about which opportunities to pursue as this cycle matures.

Since 2012, our development completions have increased from about a $0.5 billion to more than $1 billion. During that time, development yields have been around 7%, while corresponding cap rates for those particular assets have been at or below 5%, resulting in stable profit margins on development in the low 30% range.

As shown on slide 16, communities currently in lease-up continue to provide healthy profit margins. For the 12 communities undergoing initial lease-up in 4Q 2015, which represent $970 million in total capital costs, the current weighted average monthly rent for home is $115 above initial expectation. In terms of yield performance, the weighted average initial projected stabilized yield for these communities is currently 6.7% or 30 basis points higher than our original projection of 6.4%.

Turning to slide 17, I'd like to talk about how we manage risk associated with our development activity. The first way we do so is by maintaining a broadly diversified development pipeline, one that is diversified by geographic regions, by product type, and by exposure to urban and suburban submarkets.

As the charts on slide 17 illustrate, while our development pipeline remains diversified across regions, future development rights are biased toward infill suburban submarkets and mid-rise product, where rents, construction and land costs are more affordable, development economics are more favorable and the production cycle tends to be faster. Going forward, we expect our development rights pipeline will continue to be an important source of outsized growth in NAV and FFO per share.

Moving to slide 18, another way we manage development risk is how we source and structure new development opportunities. With the overwhelming majority being controlled through long-term purchase contracts with modest at-risk deposits and relatively few being controlled through land we've purchased and hold on our balance sheet.

At the end of 2015, our development rights pipeline consisted of 32 communities, representing $3.4 billion in projected total capital cost. Of these 32 communities, 25 communities are controlled through purchase contracts, while we own the land on the remaining seven communities. In addition of these seven communities, where we own the land, two account for approximately $420 million of the $485 million in land held for development on our balance sheet.

We expect to begin construction on these two development rights, Columbus Circle and Hollywood in 2016, which would reduce our projected land held for development by year-end 2016 to the lowest level in more than a decade. A third method, which we use to manage development risk is substantially match funding new starts with long-term capital. A topic we've talked about a lot in this cycle.

On slide 19, we highlight our funding position against the total projected capital cost of development underway. As you can see, we only need to source about $500 million in long-term capital against the $3.4 billion in development under construction or recently completed.

Taking new account to $2.2 billion of capital already spent to-date, $400 million of unrestricted cash on hand and $350 million of projected annual cash flow from operations after dividends. This means that about 85% of the value creation from ongoing development activity has already been locked in for our shareholders.

Turning to slide 20, we show how being substantially match-funded significantly enhances our growth in EBITDA, while simultaneously enhancing our already sector-leading credit profile, essentially making us similar to an acquisition-oriented REIT from a funding risk perspective, but with lower leverage and stronger built-in earnings growth.

Specifically, the projected EBITDA from recently completed development and from development under construction totals about $216 million, as shown on the chart in the left. This represents about 18% growth in annualized core EBITDA from the fourth quarter.

Even in a worse case, if all the $480 million in unfunded commitments were funded with new debt, our net debt to core EBITDA would still decline from 4.8 times to the mid-4s, after taking into account the EBITDA from new development.

Of course, our actual net debt to core EBITDA will move around a bit as we source new capital to fund incremental development activity, therefore the slide isn't meant to communicate that our leverage is going to decrease to 4.5 times or that our target leverage is 4.5 times. In fact, our target range for this metric is to be roughly between five times and six times.

Instead the purpose in showing this slide is to convey that due to match-funding strategy, we are optimally positioned to benefit from development activity, that is expected to be accretive both to earnings and balance sheet strength and that our credit profile is actually enhanced by our profitable development capabilities, given our funding strategy.

And with that, I'll turn it back to Tim.

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Thanks, Kevin. And just ending here on slide 21, before opening up the call. In summary, 2015 was a very good year for the company and the industry. We're expecting 2016 to look a lot like 2015. Once again, benefiting from above-trend growth, I think this outlook is not surprising, just given our view that we are mid-cycle with healthy apartment, fundamentals continuing, and then just the stable level deliveries and healthy accretion are coming from our development pipeline.

As we move further into the mature portion of the economic expansion, we are highly focused on managing the investment and funding risk of the business. And as Kevin mentioned in his remarks, we're doing this through managing the size and diversity of our pipeline, reducing land inventory, and match-funding new commitments and maintaining leverage at the low-end of our target range.

And with that, Craig, we'd be happy to open up the call for Q&A.

Question-and-Answer Session

Operator

Perfect. First from UBS, we have Nick Yulico.

Nick Yulico - UBS Securities LLC

Thanks. So, I guess my first question would be, you've talked a lot about how you've been able to deliver projects at higher yields and underwriting for the past few years, you continue to do that. But as far as your guidance goes for this year, is your assumption for development pipeline that you're basically, you know, delivering at the yield that you give on the development page? And so that if you actually beat by 30 basis points at the high end of your range, or could you just put a little sensitivity around that?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Nick, this is Tim, and Matt, feel free to jump in. In terms of the attachment that shows the development pipeline with the projected yield of 6.3%, that is based upon current rents and rents marked to market once you start leasing and you get up to about 20%, 25% occupancy. For those communities that have started construction, where there may have been market rent growth, but we haven't yet started leasing, we haven't marked any of those to market, just to be clear.

And I think you can probably see, over the last few years, we've generally been beating the initial pro forma yields by 30 basis points, 50 basis points, or 60 basis points, just because of a strong market rent growth and the fact that we've been able to bring, deals in more or less at budgeted cost.

I think it really is ultimately, I mean if you look at the development pipeline today, the shadow pipeline of deals that haven't yet started, the economics of that look a lot like what the economics look like on the deals that we've been starting in the last couple of years.

So, I think a lot of it's going to – how you would underwrite those would depend upon, how you'd underwrite the markets ultimately in terms of where we're doing business and how you might underwrite construction cost relative to market rent growth change over the next couple of years.

Nick Yulico - UBS Securities LLC

That's helpful. I guess, just related back to the guidance, should we be assuming that if you are getting the 30 basis points beating on original underwriting, is that already kind of factored into your midpoint of your guidance, or is that sort of get you to the higher end of your guidance range on FFO?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yeah. I'm sorry. In terms of FFO, it reflects the – the budgets for each of those assets which – they would have some embedded level of market rent growth, commensurate with the markets in which they reside.

Nick Yulico - UBS Securities LLC

Okay. Got it. That's helpful. And then just one other question was on, you gave your outlook for U.S. job growth, basically being similar to last year. If job growth were to be slowing here, which people are concerned about, where do you think – which of your markets have the most risk then from a fundamental standpoint?

Sean J. Breslin - Chief Operating Officer

Yeah, Nick, this is Sean. There's probably a couple of answers to that question, but I guess what I'd probably say based on historical precedent in the markets is the – the sort of high beta markets. If you want to think about it that way, it tend to be the technology markets. So, Northern California and Seattle tend to have a greater reaction in rent levels relative to a given change in job growth at many of our other markets.

So, the technology markets are the ones you probably would be most concerned about, that's assuming of course that any reduction in job growth is somewhat proportional. In the past, we've had some losses in the energy sector. It has not had a direct effect on our market, but there's certainly some indirect effects as it relates to a reduced amount of capital investment on behalf of those companies, it's going to ripple through the economies. So, those are the markets, I'd probably be most concerned about, given a reduction in job growth.

Nick Yulico - UBS Securities LLC

I guess just one last quick question. And then maybe it's for Kevin, is that I think the concern would be that you guys – although you guys have a great balance sheet and you are mostly funded for the development pipeline today as you look at it year end, still starting more projects, and people then worried about you guys and having to raise capital a year from now. I mean, what would be your sort of answer to that, that shouldn't be a concern for folks?

Kevin P. O'Shea - Chief Financial Officer

Well, there's a few things, Nick. And first of all, as we demonstrate in 2009, if we don't think we have a reasonable access to capital, we don't have to start new project, that would be one thing to keep in mind. We don't need to keep creating commitments, if we don't think cost effective capital is available to us in one of our principle funding markets.

And I guess the second thing to keep in mind is that, if we do keep a very strong balance sheet both from a match-funding perspective, but also in other dimensions including having low leverage and ladder maturities. So, that we have an awful lot of flexibility to deal with sort of an air pocket that might exist where there may be disruption of the capital markets before we've been able to sort of adjust and dial back on new start.

So, I think fundamentally, we have a great deal of flexibility and the commitments we create in the capital, we're going to be able to source to deal with volatility and the capital markets and that's how we manage the balance sheet.

Nick Yulico - UBS Securities LLC

Thanks.

Operator

And next we have Nick Joseph from Citi.

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Thanks. You talked about the development rights pipeline and its current focus on infill suburban submarkets. Do you think that there's a difference in investor demand in terms of the transaction market between urban core assets and infill suburban assets? And then how do you think about that in terms of the IRR differential between the two?

Matthew H. Birenbaum - Chief Investment Officer

Yeah, Nick this is Matt. There is great demand for almost everything right now. I think there is a difference in cap rate, clearly urban core assets do tend to trade at a lower cap rate. How much lower depends on what you're comparing it to, if you're comparing it to, here in D.C., D.C. versus Arlington is not going to be that different versus – as compared to say D.C. versus Tysons Corner for example. But, we do reflect that in the target yields that we put out for deals. We look out where we think the cap rate should be on those assets' specific sites today, and where we think long-term exit cap rates might be. So, we do factor that in.

Going forward, I don't know. It's speculative. There has been foreign capital that's probably preferred to stay mostly in the urban type of trophy assets, and that's one reason the cap rates are a little bit lower on those. But, we've got pretty strong healthy demand for both at this point.

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Thanks. Well, if we were to enter into a recession, do you think there's more stickiness to the urban core cap rates versus the suburban? Or do you think they would move up together?

Matthew H. Birenbaum - Chief Investment Officer

I don't know, I think every cycle is different, it's hard to know.

Kevin P. O'Shea - Chief Financial Officer

Nick, I guess, I think there is probably liquidity premium for the urban core stuffs. So, to the extent, you get into a period of more significant capital dislocation, the probability of being able to move or to monetize an urban asset, I would say, it's probably greater than a suburban asset or – and I think that's part of the premium valuation or discount cap. The discount for the cap rate is just that liquidity aspect of it.

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Thanks. And then in terms of rental affordability overall, are we at a point in the cycle where rental rate growth will more closely track wage growth, or is there still room to be able to increase rents at a higher pace than overall wage growth?

Sean J. Breslin - Chief Operating Officer

Yeah, Nick, this is Sean. We are at sort of the upper-end range on that metric. It's running around 22%, which is within the band of history; but certainly, at the upper-end of that band. So, there's no question and we need to continue to see income growth to support rental rate growth in the future. So, we had a certain deceleration in income growth for whatever reason, which is not what's expected. And I think we're seeing that throughout the economy now, in terms of pressure on wage growth, then there would become greater constraints on pushing rents further in the future. No doubt about it.

Kevin P. O'Shea - Chief Financial Officer

Hey, Nick. And just to add to that. When you look at wage growth, we talked about in the past that there is a bifurcated labor market, right, in terms of college grads and non-college grads where you get 5% for the total population unemployment, 2.5% for college grads. The majority of our residents are college grads and I – and we are seeing that they're probably getting higher than average, making higher than average wage gains, which just provides a little bit more support I think for our business, in terms of – to continue to generate decent rent growth.

Sean J. Breslin - Chief Operating Officer

And Nick, just to give you a sense. On a year-over-year basis in the fourth quarter, lease income for new residents relative to last year was more than 5%. So, we're seeing that for our population of residents for sure.

Nicholas Joseph - Citigroup Global Markets, Inc. (Broker)

Thanks.

Sean J. Breslin - Chief Operating Officer

Yeah.

Operator

Next, we'll go to Gaurav Mehta with Cantor Fitzgerald.

Gaurav Mehta - Cantor Fitzgerald Securities

Yeah. Thanks. Good afternoon. Going back to your funding activities, can you talk about how you are thinking about asset sales versus capital markets today?

Kevin P. O'Shea - Chief Financial Officer

Hey, Gaurav, this is Kevin. As we laid out in our outlook, we anticipate sourcing about $1.1 million in asset sales and unsecured debt. I think in terms of the attractiveness of those markets today, both are highly attractive; and I'd say, while we don't comment on the precise mix in part, because the capital markets and sales can be volatile and the pricing can change over time. Of that $1.1 billion, the majority of the capital in our plan is contemplated to come in the form of unsecured debt issuance.

Gaurav Mehta - Cantor Fitzgerald Securities

So, not much asset sales this year?

Kevin P. O'Shea - Chief Financial Officer

Well, it's $1.1 million. We haven't again precisely identified the actual mix, a minority of that amount will come through asset sales, the majority will come through unsecured debt is our current capital plan. Tim, do you want to add?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yeah. Just I think to add to that, I think you are a limited somewhat and how much you could sell from a tax perspective and retain the capital without having to do a special dividend. Just because of the tax gains that are embedded and a lot of the assets that would be on our disposition list. So that would impact at the margins in terms of how you might think about debt versus asset sales.

Kevin P. O'Shea - Chief Financial Officer

And the other points to bear in mind, is that with our leverage being a little bit, currently being a little bit below our target level we've got capacity for incremental debt, particularly out when you give effect to this deleveraging impact of stabilizing development.

Gaurav Mehta - Cantor Fitzgerald Securities

Okay. And then lastly, on your development pipeline, the 6.3% average yield that you have on your current pipeline, is it possible to break it down between your expectations for the suburban versus urban assets?

Kevin P. O'Shea - Chief Financial Officer

We haven't really broken it down that way. It really varies by market. I mean yields are lower in New York City, or cap rates are lower. So, maybe they are a little lower on the urban stuff. Again, we think cap rates are 25 basis points to 50 basis points lower on the existing assets. I don't know that the urban yields are that much lower, but they're probably a little bit lower.

Gaurav Mehta - Cantor Fitzgerald Securities

Okay. Thank you.

Operator

And next, we'll hear from Jordan Sadler with KeyBanc Capital Markets.

Austin Wurschmidt - KeyBanc Capital Markets, Inc.

Hi. It's Austin Wurschmidt here. Thanks for taking the question. You mentioned the average initial cost on the $1.9 billion in capital you raised last year was around 4.3%. What are you, I guess, assuming in your guidance in terms of that cost of capital in 2016?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Hi, Austin, that's probably a little bit more specific than we've ever guided to you before. So, I don't really have any comment on that.

Austin Wurschmidt - KeyBanc Capital Markets, Inc.

So like maybe a little bit differently, when you think about the spread between the development deliveries and the cost of capital you plan to raise this year, would you think it would be something along the same lines as you achieved last year?

Kevin P. O'Shea - Chief Financial Officer

Yeah. I think probably in that ballpark. I don't know, Tim do you want to...

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yeah. I mean, honestly – I mean we said we're primarily looking to rely on debt and asset sales. And we had two debt deals this past year that we could probably issue debt at about the same pricing today on a 10-year basis around in the mid-3% somewhere and cap rates in a range depending upon which market you're selling in, probably in the low-4%s to the mid-5%s. So, to the extent that we're more weighted towards leverage, which we're likely to be, this year. I think it gets you probably in the low-4%s, again like we were in 2015.

Austin Wurschmidt - KeyBanc Capital Markets, Inc.

That's fair. Thank you. And then just separately, given your guys' focus a little bit more on increasing your development exposure to suburban markets, and you've talked a lot about the growth in the 35 year old to 44 year old age cohort. Just curious about your thoughts given we've kind of seen that homeownership rate within that segment tick up here more recently, and how you're thinking about that in terms of renter demand moving forward.

Matthew H. Birenbaum - Chief Investment Officer

This is Matt. I guess I can speak to that on a little bit and then I don't know, Sean or Tim, you want to chime in as well. The demographic trends are long trends. I mean the great thing about is, you can see it coming five years, 10 years down the road. And so, as we think about how we want to position our portfolio where we are seeing the best risk-adjusted returns, opportunities to invest out of program communities for the future. It's driven by some of those big macro trends. So, I don't think a small movement in the home ownership rate on the margins is going to impact that when you look at just overall numbers coming through. It's a pretty dramatic shift that's going to occur here. So, I think things have to change a lot before it changes our opinion on that.

Kevin P. O'Shea - Chief Financial Officer

And I guess the only thing to add is you really start to get the leading edge of that active boom in that. If you look back – a lot of people don't realize this but if you look back over the last five years to 10 years, the drop in home ownership rates are most pronounced in that 35 to 44 segment more so than the 25 to 34 segments. So, you have a lot more people moving into that segment. They drop by like 1,100 basis points, something like that.

And even if it ticks back up, I saw you're talking about lot more rental households over the next 10 years coming from that segment. And it's impacting how we're thinking about product right now in terms of providing – I think we've talked about the signature package in terms of a higher level of finish and some larger units than we've maybe been doing over the last few years, and certain deals in it, it impacts how you think about amenities as well. So, we do think it's going to be a pretty big source of demand and it represents that that extra core represents about 20% of our residents today, whereas the under 35 cohorts maybe 40%, 45%.

Austin Wurschmidt - KeyBanc Capital Markets, Inc.

Great. Thank you.

Operator

And our next question comes from John Kim with BMO Capital Markets.

John P. Kim - BMO Capital Markets (United States)

Thank you. There was a recent article that Facebook was offering employees $10,000 to $15,000 to move closer to its headquarters in Menlo Park. I'm wondering if you had heard other Silicon Valley companies doing this and if you've seen any impact in your properties?

Sean J. Breslin - Chief Operating Officer

John, this is Sean. We're not specifically aware of a, like I saw, call it a global offering like Facebook made. Obviously, there are other companies out there recruiting people across America that provide incentives for them to relocate. So, we don't necessarily track that. It's very episodic in terms of how it occurs, it's just part of the normal fabric of the process on a daily basis. So, there's nothing material out there that we're aware of other than the recent Facebook offering and we're not hearing about it in a way that it's influencing our data in any form or fashion.

John P. Kim - BMO Capital Markets (United States)

Okay. And it sounds like Northern California may decelerate in revenue growth this year. Can you comment on markets that you see may have the best chance of accelerating growth this year?

Sean J. Breslin - Chief Operating Officer

Sure. Sean again. I guess, what I'd say is, at this point, you've properly identified Northern California is one of the markets, where there is probably a little bit of concern about slowing, just came up a couple of different times. But in terms of markets that have some upside, certainly the Mid-Atlantic is one that has some potential upside in terms of – we're at a point of cycle where we know that supply is about 2% last year. It's going to increase about 2.5% this year.

But more importantly, as we're getting pretty good job growth out of the Mid-Atlantic now, up and below 2% range. And it's starting to have a nice effect on occupancy and rent change across the markets here. So, the expectation is that there is potential for some upside in the Mid-Atlantic. I would now describe it as opportunistic and that there is significant upside. There's still a fair amount of supply coming and it's not a sort of high bid market as I described in the Northern California and Pacific Northwest region.

So, you tend to get a moderate recovery and we're seeing that here in terms of recent trends, where rent change is up about 100 basis points in the first quarter as compared to the first quarter of 2014. So, there is nice momentum there.

And then the other market that may have some upside, I'd say is Boston. Boston has been performing well, job growth has been steady. And supply is projected to decrease this year relative to 2015. So, there is probably a little bit of potential upside in Boston and in the Mid-Atlantic are the two that probably stand out the most I'd say.

Southern California has been increasing nicely and we expect that to continue, but I wouldn't think it falls into the potential surprise category, like the others do.

John P. Kim - BMO Capital Markets (United States)

Okay. Thanks for that. And finally, on Edgewater, on your settlement in January, can you remind us what you plan to do with the proceeds? Are you planning to potentially redevelop the asset or just repay the mortgage?

Kevin P. O'Shea - Chief Financial Officer

John, this is Kevin. The mortgage we repaid last year, we've already, as we've indicated in the release, received $44 million in proceeds that was back in 2015. We anticipate receiving another $29 million in final, additional proceeds in the first quarter. And so, part of that is meant to compensate for the lost income on the project. And so, essentially it becomes source of cash for us in 2016 and that's from a funding point of view how we view it.

Matthew H. Birenbaum - Chief Investment Officer

I'm sorry. John, I had just to add, this is Matt. We are planning to rebuild and we've been having conversations with the local jurisdiction there and are expecting to file rebuild plans shortly.

John P. Kim - BMO Capital Markets (United States)

Okay. Looks like the settlement amount came in close to your last point of book value. I'm just wondering where you see it versus replacement cost?

Kevin P. O'Shea - Chief Financial Officer

Well. Maybe I should just correct you on the first piece. It – we wrote off the book value last year and even after having done so, the $44 million of proceeds that came in reflected. We had a causality gain. So, the proceeds receiving last year exceeded our remaining book value in the destroyed building. As I indicated a significant portion of the proceeds about $20 million relates to compensation for lost income due to the business interruption of losing the building. So, that's one little point of clarification.

Matthew H. Birenbaum - Chief Investment Officer

Yeah. In terms of the cost to rebuild, I don't think we know yet exactly what's going to cost to rebuild. We have to finish the plans and bid it out, but relative to the overall recovery, it would certainly be less, right?

Kevin P. O'Shea - Chief Financial Officer

Yeah. And overall we received $73 million and about a little more than $50 million that's related to destroyed building and our sense is that, that was meant to cover the replacement costs for that building.

John P. Kim - BMO Capital Markets (United States)

Got it. Okay. I was looking at the replacement on the book value in your 2013 10-K. Thank you.

Kevin P. O'Shea - Chief Financial Officer

That's probably also included the other building that was not destroyed.

Operator

And next we'll move to Jana Galan with Bank of America Merrill Lynch.

Jana Galan - Bank of America Merrill Lynch

Thank you. You mentioned rent as a percent of income is kind of at the upper end of historical ranges. Any submarkets where you're above the prior peaks and how do you think about maybe millennial budgets where they might not have a car?

Sean J. Breslin - Chief Operating Officer

Yeah, Jana. Good question. In terms of markets where it's, I guess constrained, it's not necessarily any one market that's well beyond historical ranges. You've got certain markets that are more expensive, but obviously you got people making substantially more income. So, there is nothing that's on the extreme outlier side, if you want to call it that.

Anyhow, we do try to take into account millennials and the choices they make, so those numbers tend to be higher in some of those urban locations where people don't have cars, using metro or the subway, or whatever it might be. So, we do find that in those cases, people are in a position where they can tend to spend a little bit more of their income on rent in other geographies, so it's a fair point.

Jana Galan - Bank of America Merrill Lynch

And then maybe just on your outlook for your Metro New York, New Jersey portfolio, can you maybe talk to the different submarkets, as certain submarkets are seeing much more supply than others?

Sean J. Breslin - Chief Operating Officer

Sure. In terms of the Greater New York, New Jersey market, I mean if you look at it across say New York City, Northern New Jersey, Central New Jersey, Long Island, Westchester, it's a pretty diverse geography. A lot of the supply is concentrated in New York City and Northern New Jersey.

So, if you're looking at Hudson County and then you spread throughout the boroughs, you're going to see that. Supply as a percent of inventory still on Westchester, Long Island, Central New Jersey is pretty insignificant. So even though you have demand in those markets that identify with greater supply, there's a lid on growth next year as a result of it. So, there's not a wide variation. For the most part, New York-New Jersey is going to be probably in the mid-to-high 3% range. There is not one market that's in the low-2%s and other one in the 5%s, to give you some perspective if that helps. It's a pretty tight range.

Jana Galan - Bank of America Merrill Lynch

Thank you.

Operator

Next from Janney, we have Rob Stevenson.

Robert Chapman Stevenson - Janney Montgomery Scott LLC

Good afternoon, guys. Sean can you do more or less the same for the D.C. submarkets, in terms of fourth quarter performance, was there any bifurcation by sort of submarket in the D.C. Metro? And then in terms of your 2016 outlook, any material differential in expectations between D.C. proper, Northern Virginia, et cetera?

Sean J. Breslin - Chief Operating Officer

Sure. As it relates to the – I'll call it sort of recent momentum including the fourth quarter and spillover into early 2016, I'd say the laggard across the Metro area has been suburban Maryland. Job growth has been okay, but the supply has been heavy and steady throughout that region, particularly Rockville, North Bethesda, Chevy Chase has been inundated with supply. So it's been the softest.

The strongest has been in and around D.C. So, D.C. proper as well as the close-in sort of RB (42:50) corridor and things like that, towns and submarkets that are close in to D.C. And then I'd say the rest of Northern Virginia kind of falls into second place. So, call it, the district and immediately adjacent submarkets, Northern Virginia and then suburban Maryland being the laggard as kind of recent conditions.

In terms of expected performance in 2016, what we have is overall for the Mid-Atlantic, probably be in the mid 1% range. And again, it's relatively tight I'd say, when we're talking about suburban Maryland probably, right at the midpoint there. We may see a little bit better performance out of D.C., just given the nature of our specific assets in D.C., which is the Gallery Place, Foxhall, stuff in the Northwest Corridor that's older and rent controlled.

When you look at it from a market perspective, I would say that one thing to be cautious about is, the greatest amount of supply to be delivered in 2016 is in the district, because depending on the distribution of your portfolio within the district really will dictate what's your performance is going to be.

So, the way I think the market would probably look at it is, D.C. people would probably expect to be a little bit softer, given the nature of the deliveries. Infill suburban submarkets probably perform – in Virginia performing better. And then, western Fairfax, I would say and suburban Maryland probably be in the laggard.

Robert Chapman Stevenson - Janney Montgomery Scott LLC

Okay. And then, can you also talk about expectations for the three main Southern California submarkets in 2016 and how you see that sort of shaping up and, any type of issues in any of the individual markets that you're worried about from a supply standpoint?

Sean J. Breslin - Chief Operating Officer

Sure, happy to talk about that. In terms of – again, recent performance rolling forward, I'll try to keep it relatively brief without going on too long here. But, where we've started to see some supply impacts is in Orange County. Orange County softened up a little bit. There is a fair amount of supply coming into Irvine, there's some in Laguna Hills, there's supply in Anaheim, there's been supply in Huntington Beach, a little bit in Costa Mesa, so that's softened a little bit. And our expectation for 2016 for that market is for it to trail the other regions as well because of the same issues.

San Diego and L.A., we expect the lead going into 2016 and continue throughout the year. And for the most part, that's not only the nature of the market, but how our portfolio is positioned, which is for the most part it's the asset in suburban submarkets across San Diego, which is relatively small portfolio, but that's where the majority of our assets are located.

And Los Angeles, same thing in terms of the distribution of the assets within those submarkets. We don't have any same-store assets in Downtown L.A., as an example, which is getting supply now that's equal to double-digit percentages of existing inventory. So, you're going to have softness in some of those submarkets like Downtown L.A., where you're getting a heavy amount of new deliveries.

So, I'd say for 2016 overall, if I'm going to see L.A.-San Diego leading and Orange County lagging, just given the nature of our portfolio, but also just from the market perspective in terms of where the supply is concentrated.

Robert Chapman Stevenson - Janney Montgomery Scott LLC

Okay. Very helpful. Thank you.

Sean J. Breslin - Chief Operating Officer

Yeah.

Operator

Next up we have Ian Weissman with Credit Suisse.

Unknown Speaker

Hey, guys. This is Chris for Ian. Obviously, you don't do a lot of acquisitions. Can you talk a little bit about the motivated you to do the Avalon-Hoboken and then what's the forward cap rate on that asset?

Matthew H. Birenbaum - Chief Investment Officer

Sure. Chris, this is Matt. You're right, we haven't done a lot of acquisitions historically in this cycle. So, at this point, what we are doing is we are trying to – we're always looking for opportunities to improve our portfolio where we can.

And, that happens to be a very unique opportunity there in Hoboken. We weren't per se looking to add in New Jersey on a net basis. But, we're always looking to improve our submarket exposure. It's a highly supply protected submarket. So, one of the few parts of New Jersey, we have not been able to penetrate through new development. The cap rate is about 5%, which is pretty attractive for an asset. It's only seven years old.

The average unit size there is about 1,000 square feet, so it's actually more targeted at families and necessarily at young singles. And that's what – in that part of Hoboken, it's kind of interesting to see how it's evolving in that way as Hoboken kind of matures as a desirable location, not just for people kind of right out of school, but for people; married couples, who're a little bit older as well, there's a super market right next door. So, it was just a unique opportunity and we feel like we're able to, based on some unique characteristics of the way the asset was marketed, get it at price it was more compelling than most of the acquisition opportunities we're seeing.

Unknown Speaker

Great.

Sean J. Breslin - Chief Operating Officer

Yeah, maybe just to add to that, maybe implicit in your question too. I mean we're not looking at acquisitions as a growth platform right now to be clear. But, we are seeing a lot of volume and we see it as an opportunity to potentially upgrade the portfolio. And so we do look at sort of mid cycle. We see a lot of volume. We're focused both on asset management and portfolio management to try to upgrade and improve the portfolio as we can.

And as I mentioned earlier in one of the other questions, that we are somewhat limited in terms of how much dispositions we can do before, you can't retain the capital anymore, but we do see that as – we do have some assets we like to sell and we're seeing an active transaction market, where we see assets, we preferred our own and so we're trying to do some fair trade along the way as well.

Unknown Speaker

Got it. That's helpful. Then the 5% is how much CapEx per units does that have in there?

Kevin P. O'Shea - Chief Financial Officer

Yeah, normally when we quote cap rates, it's just kind of typical market convention. So, I don't know the exact number; but this is again a fairly young asset. So, my guess is something like, 400 units or 500 units something like that.

Unknown Speaker

Okay. Great. And then, I appreciate all the color on the risk mitigation (49:13) you guys do on the development pipeline, but just wondering if you can give us some perspective of where cap rate spreads were on new starts before the market entered a downturn last time around? And then, where those spreads ended up, and then I guess at the 250 basis point cap rates spread you've got now, is that enough cushion to kind of stay profitable as things turn?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Yeah. This is Tim. I would say, we're probably looking at development yields around, what we're looking at today mid-6%s. There was a year or two where it ended up, they came in around closer to 5% in terms of actual performance.

Conversely, I would say, cap rates will probably in the mid-4%s, where they are today and that really, as you know, there are hardly any trades at all; but to the extent there were trades, it probably went north of – it probably went north of 6% for a year or two. But hopefully that's help – but if you look at the deal that we were building in 2009 and 2010 that ended up stabilizing initially at 5%, those are more or like 6.5% and 7%s today, just to put it in perspective.

So, they are fine assets. We're not going to make the same kind of return that was made on deals that we started two years later, for sure. But still find outcome, given the kind of recession we went through.

Kevin P. O'Shea - Chief Financial Officer

Chris, this is Kevin. Just to add to that, looking at some of the data that we have here internally in terms of original projected yields and initial stabilized yields by vintage of completion. And going back to that time period, yields fell about 100 basis points. So, that's their initial underwriting.

Unknown Speaker

Got it. Okay. Thanks a lot, guys.

Kevin P. O'Shea - Chief Financial Officer

Yeah. And, that's a great point, Matt's alluding to, the match-funding is what's the most critical thing because comparing sort of, you had to really compare the yields on the deals that have started with the capital that is sourced in the same period of time. That's the virtue of match-funding, you walk into NAV growth right now at this point in time.

Unknown Speaker

Perfect. Thanks.

Operator

And our next question is from Ryan Peterson with Sandler O'Neill.

Ryan Peterson - Sandler O'Neill & Partners LP

Yeah. Hi, thank you. Just on your Columbus Circle development, could you guys provide an update on any plans to monetize a portion of that through either retail or condominiums?

Matthew H. Birenbaum - Chief Investment Officer

Sure. This is Matt, I can speak to that a little bit. We are working on it. The program is getting set. As an example, I think when we first bought the land, we thought we were going to do about 50,000 square feet or 55,000 square feet of retail there. The programs that we have now is more or like 67,000 square feet or 70,000 square feet of retail. We were able to add some retail in a seller level and a sub-seller level. So, it's now matured to the point that we have a pretty good definition of what the offering is and we have been talking to folks and we'll keep you updated as we make progress on that.

Ryan Peterson - Sandler O'Neill & Partners LP

Okay. Great. And then my second question is just, what your thoughts are on 421-A, whether that will be resuscitated or whether you think that will kind of severely curb development in New York?

Sean J. Breslin - Chief Operating Officer

Yeah. I think it's obviously too early to tell. It is a program that's been around for a long, long time. And it is important for to make rental production work for the most part in the city, in New York City. So, I think our local folks would say, probably there will be a program in some form of fashion. It will come back at some point. These things get snagged in politics and in New York, there's kind of this unique situation, right. It's not just the city, but all the new – the state legislators involved as well.

So, as it relates to our portfolio specifically, it doesn't really have much impact, the deal we're just talking about Columbus Circle, we're never intending to put that deal in the program. So, our plan is not to have any affordables and not to have any tax abatements from the start. And, the other deals that we have done in New York, it's already been vested. So, it might impact the land market until things settle out, but it's too early to say what this impact might be going forward.

Ryan Peterson - Sandler O'Neill & Partners LP

Okay. Great. That's it for me. Thank you.

Operator

Next from Zelman & Associates, we have Dan Oppenheim.

Dan M. Oppenheim - Zelman & Associates

Thanks. I was wondering just if you can talk a little bit in terms of what you're thinking about for, you said you'll start Columbus Circle here in 2016, any thought in terms of timing for that, or just finalizing in terms of the retail offering and overall plans?

Matthew H. Birenbaum - Chief Investment Officer

Our current expectation is we've started in the second half of the year. I think we're starting demolition right now. So, we've got some work to do there. And, we're just finalizing the plans, but it's in the plan for the back half of the year.

Dan M. Oppenheim - Zelman & Associates

Got it. And then, I guess relatedly, on page five of the slide, you talked to basically show the, where you're getting in terms of the rent and the capital costs for the development projects that were completed in 2015, basically showing some of the, call it, higher gross yield relative to the stabilized portfolio. How do you think about that in terms of the growth rate? I mentioned Columbus Circle, look at that a couple years from now, almost going to look the reverse in terms of lower yield, but likely thinking about a higher long-term growth rate, and so wondering how you think about the growth on this or what you've started in 2015?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, Dan, it's Tim. I mean in terms of – we've talked to this in the past, every deal has a target yield that's impacted by what we think the projected growth profile, cash growth profile. That asset will or that submarket will deliver, so something like a Columbus Circle, we think we'd have a higher growth profile than the average field in our – our portfolio.

We would expect that to have a lower go-in yield and that's pretty much how land markets and development markets price. So, it's a fair point because we do have a couple large deals that the – and Hollywood deal as well, which is an L.A. deal which – usually California deals are lower cap rate and higher growth. So that will impact the projected initial yield, if you will, because we are expecting to get, basically the same IRR but more of it through residual and cash flow growth.

Dan M. Oppenheim - Zelman & Associates

Okay. Thank you.

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Sure.

Operator

Next, we'll go to Vincent Chao from Deutsche Bank.

Vincent Chao - Deutsche Bank Securities, Inc.

Hey, good afternoon everyone. I just wanted to go back to some of your job growth outlook, especially the New York, Metro New Jersey area, just hearing some other forecasts calling for some deceleration there. Looks like you're looking for things to pick up in 2016 versus 2015. I was just curious if you could comment on what's driving that, if it's really your expectations in New York City or if it's some of the suburbs?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, we really rely on third parties for our job forecast. I guess I would start there. There is some chat, I think partly what's been going on in the equity markets whether some of the economists and consensus is going to drift down a little bit, in terms of GDP and job forecast in general to the extent that it, they changed it related to the equity markets.

I guess it would be logical that maybe New York, New Jersey might be more impacted than the average market. But now, we used some judgment, but when we're quoting job growth, we are relying on third parties that we have found to be most helpful in the past.

Vincent Chao - Deutsche Bank Securities, Inc.

Okay. That makes sense. And just one other question, just in terms of L.A., it sounds like expectations for Southern California overall are going to be for continued acceleration, but it did seem like same-store revenue growth here in L.A. slowed a little bit, and I was just wondering if there was something specifically that kind of weighed on growth here this quarter, understanding it's still 6%, which is good, but...

Sean J. Breslin - Chief Operating Officer

Yeah, this is Sean. There's nothing specific that we're concerned about as it relates to L.A. I mean every asset has different characteristics in terms of lease expiration profile and things of that sort. You're trying to push rate in some cases and then in other cases, trying to gain occupancy. So, you just kind of get in the quarter-to-quarter noise and I don't think there's any concern about L.A. at this point at all.

Vincent Chao - Deutsche Bank Securities, Inc.

Okay. Thanks.

Operator

Next we'll go to Dave Bragg from Green Street Advisors.

Dave Bragg - Green Street Advisors, Inc.

Thank you. Good afternoon. I had a couple of quick ones for you. The track record of the cycle on development is clearly compelling, as you laid out on 2015. Thinking about it from the profit margin perspective that you laid out, what level of profit margins are you targeting on incremental starts?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, Dave, as we mentioned, we typically do start with the cost of capital and add some accretion factor to that. I mean it ends up being in the 150 basis point to 200 basis point range in terms of premium from a target perspective.

And we've been able to meet or exceed that certainly the cycle. We put the slide up there that showed the – with the average deal was crossing about $310,000 just using your data, if you just sort of extrapolate that out, using the rent premium that those deals are getting, they would suggest an average value about $470,000 for that book of business.

And if you look at the pipeline, the shadow pipeline that has an estimated cost about $350 a door today with honestly a bit more urban-oriented product, with probably has a little bit higher rents on average, slightly higher rent. So, it's still pretty healthy looking margin based upon what we know today which are today's rents and today's cost.

Dave Bragg - Green Street Advisors, Inc.

Okay. Thank you. And, Tim, you've mentioned a couple of times, or you've alluded to a limit surrounding your disposition potential in 2016. Could you put a number around that?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, it depends which assets you choose to sell at the end of the day, but it's not atypical. It's probably, the assets we're looking to sell have more than a 50% embedded gain on the proceeds. So to the extent, you've got, call it $200 million or $300 million of capacity before you start getting into requirement just to distribute, you could sell 2x there, but it depends on the mix. And I don't know if you've got anything you want to add to that?

Kevin P. O'Shea - Chief Financial Officer

Sure. Just a couple of things in that. Probably tax is not an area people are overly eager to get into a deep discussion on to be sure. There's really two issues, one is just the special dividend obligation associated with the fact that we are a tax paying entity, but for the fact that we have the dividends paid deduction. But there's also excise considerations as well.

So, I think from our standpoint, when we look at using asset sales to fund development, we have a fair bit of running room in terms of being able to sell assets. Before we had to worry about a special dividend obligation, we would probably more likely encounter situation where we might have to pay an excise tax, which is sort of a little bit of a 4% tax payment on excess income over distributions.

And so, it becomes sort of kind of almost like a transaction cost, if you will. That get added to selling assets to fund development. So we certainly have a reasonable amount of ability to continue to sell assets to fund development, but what we'd run into first is probably haven't pay an excise tax, which is just an extra transaction cost, if you will, which we'd rather not incur, if we can avoid it, but it's something that's probably more relevant.

Dave Bragg - Green Street Advisors, Inc.

All right. Thank you for that. One last one for you, Kevin. You suggested that you'll lean on unsecured market as it relates to the sources of funds. What are your latest thoughts on 30-year money?

Kevin P. O'Shea - Chief Financial Officer

Well, we don't really have 30-year unsecured money in the balance sheet today. We do have fair bit of about $1.1 billion of tax exempt debt, that's secured in and has probably on average about 21-years left to run. So, that's something we have done in the past and we like that form capital, though it's far or less available today.

In terms of 30-year unsecured debt, since we don't currently have it. You have to ask yourself what's it in substitution for. I think probably it's been a little bit more of a compelling equity substitute for those who want more leverage than a compelling substitute for 10-year debt when you do the breakevens.

For us, we might be willing to entertain doing it. I guess probably, one guiding principle would be, if we will look at the total amount of debt, we're going to issuing in one year, there's only so much we want to issue in the form of 10-year unsecured debt before.

In the future period, we would have more debt coming due than we prefer, which – as we talked about before, we try to target having level maturities that are on balance less than or equal to our projected amount of dividend.

And so, if we felt we're going to be issuing a certain amount of debt in the unsecured markets. In a given year that might be more than we want to have come in due in 10 years. We might think about doing the excess in the form of a 30-year note offering.

Dave Bragg - Green Street Advisors, Inc.

Great. Thank you.

Operator

And next from Jefferies, we have Tayo Okusanya.

Omotayo Tejumade Okusanya - Jefferies LLC

Yes, good afternoon. I was just curious, just given all the market volatility concerns about a recession, are you seeing your tenants reacting any differently when you gave them new acting rents in January? And when renewals were coming up, whether they are being much more, you know, aggressive about trying to get a rent cut or decline or some type of relief, just kind of given the overall nervousness in the economic backdrop?

Sean J. Breslin - Chief Operating Officer

Yeah, Tayo, it's Sean. I mean to answer that directly based on the data, the answer is no, in terms of the actions they're taking. For example, rent increase is too high and move out to rent increase doesn't really move that much on average, it has the certain markets.

And so I think you probably have to go market-by-market to figure out where that's most pronounced. So there's certainly been pushback in Northern California, that's above historical averages. But that's the market where we've seen pretty significant rent growth in the last three years, so you sort of expect that when someone get to a third, 8%, 9%, 10% rent increase, wages have been growing, but they are not growing that quickly, there's some pushback, but I'd say it's part of the normal process. There's not as significant shift to one direction or another that we're seeing across the portfolio.

Omotayo Tejumade Okusanya - Jefferies LLC

Okay. That's helpful. Thank you.

Operator

And from Robert W. Baird, we have Drew Babin.

Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)

Good afternoon. I was hoping you could talk about a couple of your larger developments out there, the Willoughby Square, AVA DoBro asset and North Station in Boston? And where those yield expectations stack up kind of relative to that 6.3% and what gives you confidence for those assets in particular that, you know, targeted yields will be achieved either from a cost control standpoint or market fundamentals?

Matthew H. Birenbaum - Chief Investment Officer

Sure. Drew, this is Matt. I can start on that and Sean, if you want to chime in anything. Those are two big urban high rises and again, we think about the target returns starting out relative to kind of what the spot cap rate is – would be on those assets is one thing we look at as well as objective growth profile would be, to kind of get from different potential starting target yields to target IRR, which is more similar across different deals.

Those two deals were underwritten in kind of the high fives based on the rents that we're in place when we started those deals. We have not marked either one to market yet. The Willoughby Square deal is a very large building. So, it will be a while before we have kind of 20% lease, which is typically when we would market-to-market. But I think we're feeling pretty good about the capital budget there and we're feeling pretty good that based on what we've seen so far, the market is certainly a little bit above where it was pro forma and Sean...

Sean J. Breslin - Chief Operating Officer

Yeah. Drew, this is Sean. As it relates to Willoughby/AVA DoBro, which is really – as you may not know, it's two components to the building as an AVA component and then Avalon component. We have product in the AVA section of the building right now, which delivered late in the fourth quarter after a few delays with the MTA in their space. But early returns are good. We haven't marked it to market, but face rents are in the $60 a foot range.

So, I think pro forma was around $55, and at $60 a foot that's a kind of slow leasing season, Christmas, January kind of rates. So feel pretty good about that in terms of how that product is positioned in Brooklyn. As I mentioned, we don't have the Avalon component yet, but it's – those would be the nicer units at top of the building. So, our expectation is once we open those up probably mid-year, we're going to see a nice pop in overall rates for the building.

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Hey, Drew, this is Tim. And just to add maybe on the cost (01:07:29). So we feel pretty good about the cost. I mean we do access our own GC, sometimes with the CM, construction management firm, but we hold the contracts.

And so, we typically have better visibility than if we are working with a third party in terms of any cost pressures on deals. And we feel pretty good about – as Matt mentioned, – we feel pretty good about these deals right now in terms of bringing those online in the – for the budget amounts that we've laid out on our schedule.

Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)

Great. That's helpful. One more. Should there be any slowing in employment growth in the Bay area, how do you feel that the San Francisco MSA kind of stacks up against Silicon Valley against the East Bay area, either from a supply standpoint or just – what are the dynamics on the ground in terms of setup if things get slowed down?

Sean J. Breslin - Chief Operating Officer

Yeah, sure. Drew, it's Sean. Couple of thoughts on that, I mean in general across that market, when things soften up, the most expensive price point product tends to suffer first. So, if you had the most expensive high rises in the city, you're going to see some reaction to that. If you – that's just a macro comment. It sort of depends on when it occurs, and what supply is being delivered.

As we go into 2016, there is more supply concentrated in San Jose than there is in either the East Bay or San Francisco, as an example, that's across San Jose, now it's concentrated in Northeast San Jose. If you play that up in the Mountain View, certain submarkets is about three or four submarkets there. It's up in San Francisco, there's fair amount of supply being delivered into Soma.

So, if you're exposed to Soma, you're probably going to get hurt just as much. So, it sort of depends on when in the cycle that occurs and what supply is being delivered at that point in time. But generally speaking in the higher price point assets tend to suffer first. And what you tend to see is, people will migrate as things become more affordable, they'll migrate back towards into the city and the cycle kind of repeats itself. So hopefully, that provides some broad perspective about what happens in the market.

Drew T. Babin - Robert W. Baird & Co., Inc. (Broker)

That's helpful. Thank you. That's all I got.

Operator

And next, we have Rich Anderson with Mizuho Securities.

Richard Charles Anderson - Mizuho Securities USA, Inc.

Thanks. Sorry to keep it going here. But I had a question, looking at the development pipeline, do you develop eaves product? Are they all kind of retrofit from current assets?

Matthew H. Birenbaum - Chief Investment Officer

Yeah, Rich. This is Matt. I wish we could, but those are all renovations or...

Richard Charles Anderson - Mizuho Securities USA, Inc.

Okay. Okay. So that's – I get it. I thought so, because there's none listed there. And that's my recollection. But then I noticed that you also have been selling some of these product. I'm just curious how that brand is doing relative to AVA.

Sean J. Breslin - Chief Operating Officer

Yeah, Rich, it's Sean. One way to think about it is just how the portfolio eaves communities are performing relative to Avalon or AVA, that's typically a story of which market is actually in, if it's in Northern California, obviously it's been very strong versus say, Westchester.

But generally speaking right now within the market footprint, our eaves communities are pretty synonymous with B communities, as you refer to Axium metrics or Reese (01:10:47) or any of those. And eaves communities tend to be outperforming right now. To give you some perspective in the fourth quarter for our portfolio, the B assets or the eaves assets, which is for the most part of B assets, were about 70 basis points ahead of how the A assets were performing.

As you look at Axium metrics, this is a pretty similar pattern there in terms of the outperformance. So this part of the cycle well positioned value-oriented communities are outperforming. To the extent, we're selling one of those communities. This typically is related to either submarket specific or asset specific either issues we have or concerns about concentration in terms of other activity, we might have in the region that typically drives those disposition decisions as it relates to, pretty much any community, but eaves as well.

Richard Charles Anderson - Mizuho Securities USA, Inc.

Okay. And then bigger picture on the development pipeline, in light of the fact that you're projecting your land position to decline in 2016, 26 projects under development, about 10% of your asset base is tied up in development. If you were to kind of roll forward three years or four years from now, would those numbers be materially lower than they are today, if you had to hazard a guess?

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Rich, this is Tim. I guess they'll be lower. How materially, it really kind of depends a bit on the opportunity set. We've been a little surprised honestly over the last let's say year and year-and-half, but we continue to see, we think are pretty compelling opportunities at reasonable land prices.

So to the extent that things get – start getting too expensive or too distorted which they have on a limited basis for instance in the Bay Area, we're – it's tough to make the numbers work in the Bay Area. So all the markets start to looking like the Bay area, we would deplete the development rights inventory pretty quickly. But that's something I guess, I mean typically the Northeast and Mid-Atlantic could be a little bit more stable, and I would expect – the expected case would be, it would start to draw down a bit over the next three years.

Richard Charles Anderson - Mizuho Securities USA, Inc.

Okay, Great. Thank you.

Operator

And gentlemen, your final question of the day comes from Wes Golladay with RBC Capital Markets.

Neil Malkin - RBC Capital Markets LLC

Hey, Guys, it's actually Neil on for Wes. Just a question on occupancy. It looked like this quarter you saw pretty strong drop in occupancy across the board, particularly in Northern California. Just wondering if you can comment on that. Was it a function of just seasonally weak or lower leasing, a function of you switching your expiration to the middle, higher volume, higher velocity times of the year, pushing rent too hard? Can you comment on that?

Sean J. Breslin - Chief Operating Officer

Sure, Neil. This is Sean. One thing to keep in mind is our occupancy was down on a year-over-year basis. If you look at it on a sequential basis, we were actually up 20 basis points, and there were a couple of markets at the end of 2014, particularly Northern California and the Greater New York region, where frankly availability was a little lower than we had wanted it from an ideal perspective in terms of pushing pricing and occupancy drifted up a little heavy.

So we're not too concerned about the year-over-year change, sequential change, we're perfectly fine with. We're well-positioned today in terms of where we sit, we are basically mid-95%s, in terms of economic occupancy it's down about 30 basis points, 40 basis points. But it's right about where we think we should be.

As we look toward to the spring, we want to try and put pricing as much as we can and availability is in the mid-5% range, it's up 30 bps, 40 bps from last year at this point in time. But, as I mentioned, we thought we were probably a little bit on the low side at this point last year. So, we think we're in a pretty good shape and here just looking at a year-over-year comp that's creating that change in occupancy.

Neil Malkin - RBC Capital Markets LLC

Okay. Thanks. And then lastly, are you seeing any evidence that in the Bay area for some of your rentals on the higher end that people maybe are pushing back or maybe seeing some softness in renewals or new leases, that would lead you to indicate that there may be something more than a temporary blip going on in that market?

Sean J. Breslin - Chief Operating Officer

Yeah. Good question. I mean obviously Q4 is typically is a slower period, I would say it was a little beyond seasonal adjustment in the fourth quarter, whether it continues to soften a bit, just to be seen. But, I think as we indicated earlier, we're expecting chart growth to slow in that region, deliveries will be accelerating in that market.

So, we are expecting it to soften a bit as we move throughout the year, whether that for a sign of it in the fourth quarter not just to be seen. But, we did expect some softening, we realize that and the question going forward here is, what's the basis job growth since we know what supply is going to be. So, our expectation is that market will moderate through 2016, given just the fundamentals that are in place.

Neil Malkin - RBC Capital Markets LLC

All right. Fair enough. Thank you very much for taking the time.

Sean J. Breslin - Chief Operating Officer

Yeah.

Operator

And, with no more questions, I'd like to turn things back to Tim Naughton for any closing remarks.

Timothy J. Naughton - Chairman, President & Chief Executive Officer

Well, thank you, Craig. I know people are busy, given the time of the year. I just want to thank you all for being on today. And, enjoy the rest of your day.

Operator

Ladies and gentlemen that does conclude today's conference. Thank you for your participation.

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