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Executives

John Christie - Director of Investor Relations

Bryce Blair - Chairman and Chief Executive Officer

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

Tim Naughton - President

Leo Horey – Executive Vice President of Operations

Analysts

Jonathan Litt - Citigroup

Kristin O’Connor – Morgan Stanley

Louis Taylor - Deutsche Bank

Alex Goldfarb – UBS

Andrew McCulloch - Green Street Advisors

Anthony Paolone - JP Morgan

Rich Anderson - BMO Capital Markets

Paula Palkins - Robert W. Baird

Michael Salinsky - RBC Capital Markets

Michael Dimler - UBS

Richard Pallee - ADC Investment

Karin Ford - KeyBanc Capital

Chris Hummer - Greenline Capital

Mark Bilfer - Goldman Sachs

AvalonBay Communities (AVB) Q4 2007 Earnings Call February 7, 2008 1:00 PM ET

Operator

Welcome to the AvalonBay Communities fourth quarter 2007 earnings conference call. (Operator Instructions) I would now like to introduce your host for today’s conference Mr. John Christie, Director of Investor Relations and Research. Mr. Christie, you may begin your conference.

John Christie

Thank you and welcome to AvalonBay Communities fourth quarter 2007 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. A variety of risks and uncertainties are associated with forward-looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in last evening’s press release as well as on 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 that may be used in today’s discussion. The attachment is 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.

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

Bryce Blair

Thank you, John. With me on the call today are Tim Naughton, our President; Leo Horey, our EVP of Operations; and Tom Sargeant, our Chief Financial Officer.

On the call I will summarize our results for the quarter and for the full year and then I will provide some comments regarding our outlook for ‘08. Tom will then discuss the capital plan for the year, comment on the dividend increase we announced last evening and provide some additional color on our 2008 financial outlook. After that we will all be available to answer any questions you may have.

Last evening we reported EPS of $1.65 and FFO per share of $1.14. The FFO per share of $1.14 includes an increase of a write-off of $0.05 per share and excluding this $0.05 adjustment, the FFO for the quarter would have been $1.19 which is slightly above the midpoint of the guidance that we gave last quarter.

Overall for the year our portfolio performance was in line with the original guidance given last January. The year-over-year revenue growth of 5.5% was within the original range we gave; moderate operating expense growth of 2.1% was the fourth straight year of expense growth at 3% or less; and NOI of 7.2% was in the upper end of our original guidance. Overall for the quarter and the year operating results were right in line with our original expectations.

The quarter also concluded a very active year on the investment front. During ‘07, we completed the development of eight communities for a total cost of $440 million and we began construction on 12 additional communities with the total cost of $1.3 billion. During the year, we acquired eight communities for a total price of about $325 million, seven of which were acquired on behalf of our Investment Management Fund; and with these acquisitions the fund is now fully invested.

It was also a busy year on the disposition front. We sold four communities and one partnership interest for total proceeds of approximately $275 million. These sales resulted in an economic gain of $150 million, which is a profit of about 120% over our initial investment of $125 million. For these communities, our total basis, based upon what we acquired to develop them for was $125 million and we sold them for $275 million. The average cap rate on these sales was about 4.6% and they generated an unlevered IRR of almost 18%. These are great numbers and even more impressive considering the average hold period was about nine years. The attractive gains from these sales clearly demonstrate the significant value created from our acquisition, development and our property operations activity.

Overall I characterize ’07 as the year where the operating fundamentals played out essentially as we expected and where we were very active in our development acquisition and disposition activities, ultimately executing very well in a very difficult capital environment. As a result of our performance we were able to deliver growth and operating FFO over 13% which represents the third straight year of double-digit growth.

Shifting to ‘08, our outlook calls for the continuation of the moderating fundamentals that we experienced throughout 2007. Our assessment is driven by the impact of four primary factors: a slowing economy, a weak housing market, improving demographics and constrained new supply. I want to touch on each briefly.

The weak fourth-quarter GDP, the job losses in January and the third-party forecast for ’08 all point to the continued slowdown in the economy. As the economy continues to slow, it’s resulting in lower levels of job creation and thus reduced household growth. Job growth nationally in ‘06 was 1.7%; it declined to 1.2% in ‘07 and is projected to be less than 1% in ‘08. The job growth in AvalonBay’s market is expected to be moderately less than the nation as a whole.

Now while consensus forecasts are still not projecting a recession, the likelihood of one appears more probable each day. Our baseline scenario does not assume a recession. However, we have modeled a modest recession and under this scenario, we are still comfortable with our range of revenue and NOI guidance. The reason for this is that even in our baseline scenario, we have assumed such a minimal level of job growth but eliminating all job growth doesn’t impact rental household growth very significantly.

I’ve commented in the past and I think there are other factors that will be increasingly important to rental demand in the coming years. Specifically the weak housing market and changing demographics.

Regarding, the weak housing market, it is a mixed blessing for apartment fundamentals. The most recently released home sales data shows a market that continues to weaken. For the fourth quarter, the volume sales on a year-over-year basis declined by 20% for both single family and condominiums. Levels of unsold housing inventory are over 40% higher on year-over-year basis for both existing single family and condominiums, pushing sales prices lower in most major markets.

This weakness in the for-sale market has resulted in a continued decline in the home ownership rate, which in turn results in additional rental demand. The homeownership rate declined by over 100 basis points to just under 68% in the fourth quarter from just one year ago. This is very significant as every 1% change in home ownership rate results in over an additional 1 million renter households.

The weak housing market is not an altogether positive, as it does result in increased rental competition from the unsold condominiums in the single-family homes, often called the shadow market. Now, while this is an issue nationally, it is less of an issue in our markets. Date is difficult to obtain, but a report issued late last year by one sell side analyst showed that the level of unsold single family and condominiums was highest in the sunbelt markets such as South Florida, Phoenix, Vegas and was moderate to low in AvalonBay’s markets.

Another positive for the rental market is the continued growth in the echo boomer population. This 20 to 34-year-old age group has a very high propensity to rent and is approximately 60% of renters. Over the next five years, this age group is expected to grow by about 2 million additional renter households. This is a significant positive for rental housing demand and we are just starting to see the benefits of this growth.

Finally as a result of the slowing economy, the continued high construction costs and constrained credit, we expect the supply if new apartment homes in ‘08 nationally to remain at levels essentially in line with ‘07. Within AvalonBay’s markets however, we expect the level of new constructions to decline by about 15% from last year’s levels.

Overall, we expect moderating fundamentals to translate into revenue growth for the portfolio, averaging in the low to mid 3s, but Northern California and the Pacific North being significantly above that range; and the other markets at or slightly below the midpoint.

Given this assessment of the economy, I wanted to outline our plans for the different components of our investment activity. First, we expect to continue to be very active on the development front, although new starts will be about 300 million less than our starts last year. With average development yields in the low to mid 6s, we continue to create significant value through our development activities, but we’ve become slightly more cautious, given concerns about the economy and capital market considerations.

Now regarding acquisitions, we have been cautious over the last quarter and we expect to remain so in the early part of ‘08. In terms of disposition activity, we expect to be very aggressive with plans to sell up to $1 billion of assets this year.

Currently the sales market remains very attractive for high quality assets in the strongest markets. With cap rates in the mid 4s, to low 5s we can sell assets about 150 base points below the implied cap rate on our share price or as compared to the initial yield on our development communities. Just as long as pricing remains attractive, we’re going to be an aggressive seller of assets and we’ll recycle that capital into our active development program or to additional share repurchases.

So overall with our assessments for continued weakness in the economy, we do not expect fundamentals in ‘08 to be as robust as in ‘07. However, we do expect it to be a year where the operating fundamentals will remain healthy by historical standards and where there will be potentially some very interesting investment opportunities on the development and the acquisition front, particularly for those with strong balance sheets and experienced track records.

With that I’ll pass it to Tom, who will focus his comments on our capital plan and provide some additional color on our ‘08 outlook.

Thomas Sargeant

Thanks, Bryce. Let me start this afternoon with an overview of four topics I’ll cover. The first is our capital planning and liquidity; second, the 2008 financial outlook that we provided last evening; third our share repurchase plan; and then finally our dividend increase that the board approved two days ago.

On the capital front, our financial flexibility allows us to avoid current market volatility and positions us to respond to opportunities that may emerge during the year. With about 30% leverage in floating rate debt that makes up just 10% of our capital structure and with over 80% of our net operating income unencumbered, we enjoy a full range of capital markets options to meet our capital plan for the year.

In terms of liquidity and the related sources and uses of capital, our capital needs total about $1.5 billion for the year and that will be used for investment activity and securities redemptions. To some extent these uses are flexible and we will have the ability for some investment activity and securities redemptions, depending on overall capital market conditions. We expect to meet these needs through both secured and unsecured debt with fixed and floating rates as well as asset sales and retained cash.

Just one note on the use of secured debt. As you know, we’ve historically favored the unsecured market over secured debt due to the financial and operational flexibility we enjoy through the unsecured markets. The relative uses of secured versus unsecured debt will depend on market conditions. However, recent pricing indications suggest that secured debt is 100 to 150 basis points lower in cost than unsecured fixed-rate debt, which really makes the use of secured debt today a compelling choice.

Turning to the financial outlook we provided last evening, you will find more detail on these sources and uses of capital as well as expected operating trends on attachment 15. Our overall outlook for NOI growth of about 3.75% at the midpoint reflects expected revenue trends and modest expense growth. Cost containment remains a key focus in 2008 with savings and insurance, marketing and redecorating costs offset by higher property taxes, utilities, and wages.

We have a good track record in constraining expense growth and to sustain this success, we’ve added an officer level position dedicated to centralized procurement as well as increase our tax staff to constrain growth in property taxes.

Just a few comments about our stock repurchase program. As we look to allocate and reallocate capital, we’ve adjusted our targets for overall returns and from this effort, we’ve determined that the risk-adjusted returns for investing in our stock are compelling and the board voted to increase the stock repurchase authorization by another 200 million.

We’ll use the extended authorization as opportunities arise balancing pricing, NAV and available liquidity with other capital allocation choices. Note that as a part of our capital allocation discipline, certain developments and preplanning will not move forward and the cumulative costs to-date previously capitalized for these pursuits totaling $4.5 million were charged to expense for the quarter.

Finally, the board raised our quarterly dividend for the upcoming year by 5% and this level of increase is supported by earnings growth while allowing us to retain a cost effective source of liquidity at time where the cost of and the access to liquidity is less certain. This level of dividend suggests that retained capital from operations will be about $100 million in 2008 providing an FFO payout ratio of approximately 71%, and this is the lowest in the sector and really underscores the safety of our dividend at these levels.

So, just to summarize, while the capital markets are volatile, we are well prepared with a balance sheet that offers great financial flexibility with access to secured and unsecured debt with both fixed and floating rates. We have good visibility into our sources and uses of capital for the year, balancing new debt with asset sales, development and stock repurchases and exercising our financial flexibility to optimize both earnings growth and value creation.

Finally, our financial outlook provides strong earnings growth, which supports our dividend increase of 5% while providing the lowest pay out ratio in the sector and one of the lowest of all REITs. Bryce, that concludes my comments.

Bryce Blair

Thanks, Tom. Despite the likely weak economic environment and the volatility in the capital markets that are expected this year, we are still able to project growth and operating FFO of over 13% for 2008. The reason for the strong growth, it’s not due to aggressive assumptions at the portfolio level, but rather it is a cumulative effect of the contributions from all aspects of our diverse investment activities.

Certainly same-store sales portfolio was contributing; also significant contributions from our development and redevelopment activity; the harvesting of value from our dispositions and utilizing the strength of our balance sheet.

‘08 will likely be a year where we will have to show flexibility in terms of our business plan in order to respond to the challenges and opportunities that the economy and capital markets will likely present. With a strong balance sheet, multiple investment options and a deep organization, we are well positioned to capitalize on opportunities that may arise.

With that we would be pleased to take questions at this time.

Question-and-Answer Session

Operator

Your first question comes from Jonathan Litt - Citigroup.

Jonathan Litt - Citigroup

On the dispositions you are planning for ‘08, is it more a focus on specific markets or quality of assets? How are you looking at that going and picking out which assets you’re looking to sell?

Tim Naughton

In terms of the dispositions that we’ve got planned for 2008, it’s not any one specific market. We’re looking at selling across many markets given the strength of the transaction market where there are opportunities to sell assets that we think are either outliers or don’t fit our view of the long-term objective of the portfolio, we just think it’s a good opportunity to dispose off some of those assets in this environment. So it’s really not any one market, it’s really across the board.

Jonathan Litt - Citigroup

The CapEx rate of the mid-4s to low-5s, is that an economic cap rate and if so, what type of assumptions would be needed to get to that kind of CapEx?

Tim Naughton

I think when we usually quote cap rates we usually are talking nominal cap rates as opposed to economic cap rates, but really not a big difference in our assets typically, you’re talking about 20 basis points maybe, just given the amount of capital expenditures that we typically see in our portfolio.

So, the 4.5 low 4 that Bryce quoted are still our best estimate. I would say there wasn’t a lot of transaction activity in Q4 just given the back up in the capital markets. We do anticipate a lot of product to come in the market including some assets that we’ve got currently in the marketing process.

So I think in the next few weeks, the next 30 or 45 days will be telling just in terms of pricing patterns. But at this point, we are not seeing any evidence that leads us to believe that there has been any kind of erosion in this kind of cap rates that we have been talking about.

Jonathan Litt - Citigroup

Last question is just on the pursuit costs in the quarter. Can you give a little bit more color on that and the type of projects that where no long being pursued?

Tim Naughton

The matter of pursued costs we wrote-off this quarter was larger than normal for AvalonBay, but keep in mind it is still pretty small when you are talking about against a $6 billion development pipeline. It really is part of our annual planning process, we do try to exercise some discipline in terms of looking holistically across our portfolio, just given target yields have gone up as Tom mentioned in his remarks as well as some of the liquidity considerations out there in the marketplace combined with some deals where the entitlements we viewed were low probability.

We just thought it was prudent to go ahead and abandon some of the deals that we had been pursuing. So it is really a logical set of actions just given the environment when you are talking about reducing the level of starts 20%, 25% increase in the amount of asset sales obviously the repurchase activity that we’re seeing combined with increasing abandonments, it is a very consistent set of actions that makes sense as we look at the current environment and look forward to 2008.

Operator

Your next question comes from Kristin O’Connor – Morgan Stanley.

Kristin O’Connor – Morgan Stanley

You said that you are expecting Northern California and the Pacific Northwest to be above your revenue guidance range while the other markets would be at or below the midpoint. Can you just give a little more detail on your expectations for those other markets? Like which ones are going to be below the midpoint and where you see the most slowing?

Bryce Blair

At this point, we’re really not prepared to give guidance on a submarket basis or market-by-market basis. I will add though that to a certain degree it does break East to West with the West Coast markets averaging about 5% and East Coast market averaging in the mid-2%. So it is a to a certain degree a tale of two coasts, but then translates into the median or within the range that we gave.

Kristin O’Connor – Morgan Stanley

Can you comment on the sequential weakness in the New York market? It looks like occupancy was down and rental rate growth was negative in the fourth quarter. Are you seeing any impact from financial services layoffs?

Leo Horey

Christine, this is Leo Horey. Our expectations for New York are very positive and we expect job growth that is solid and certainly has been solid over the last six months in the New York metropolitan area and it is expected to remain solid although with some concerns based on how the capital markets shake out and supply is fairly minimal.

Looking directly at our portfolio, the three markets that you would be addressing would be Fairfield New Haven, New York and Northern New Jersey. Fairfield, the assets that are impacted there by New York by the Stanford assets, those assets are doing well. If there is any drag from the Fairfield it comes more out of Northern Fairfield, which is much less related to New York.

On the New York assets, all of our assets are in Westchester County and Rocklin County and those assets have been doing well. We had to make some adjustments to keep occupancy stable, I mean, even at the reduced occupancies levels we are well into the 96% range, which is very solid.

Finally in Northern New Jersey, which really trades off the New York area, there is one asset that we had a little more availability that put some pressure but in general, things are going well there and there is a lease-up that is active in that Jersey City area that’s had some limited impact.

But, we feel good about where the assets are positioned in New York as long as the financial markets and the financial sector remains strong.

Operator

Your next question comes from Louis Taylor - Deutsche Bank.

Louis Taylor - Deutsche Bank

In terms of development starts for ‘08, just a rough sense of the geographic breakdown?

Tim Naughton

The first part of your question was cut out. But I think you’re asking about the rough geographic breakdown of development starts for 2008. Is that correct?

Louis Taylor - Deutsche Bank

Yes.

Tim Naughton

It’s pretty dispersed. Actually if you go back and look into attachment 12, the first tenders are the more likely deals to actually start in the 2008 so you see a mix of West Coast, California, Seattle, both Southern and Northern California as well as some smaller deals in the Boston and New York area.

Louis Taylor - Deutsche Bank

Second question just pertains to development leasing and the projects that are leased up right now. Are there any projects where the pace of leasing or the rents are very much from your pro forma?

Leo Horey

Over the past three months basically from the last call to this call, we have averaged about 19 or 20 leases a month and that compares to a typical run rate for the entire year of about 25. So we are running at about seasonal patterns. To be more specific during that period, it was a little slower at Avalon on the Sound, in New Rochelle, but we have seen more positive results lately.

To deal with the second part of your question with respect to lease, we are getting rents for the whole bucket that largely approximate the projections that we had initially anticipated.

Louis Taylor - Deutsche Bank

In terms of your $800 million of debt financing this year, can you give us a sense of the timing within the year and what would be your early read in terms of how much of that could be absorbed by Fannie and Freddie?

Tim Naughton

We expect that we will probably do about $300 million of secured debt in the first quarter following with $500 million later in the year on an unsecured basis and that may be bank term debt, it could be the unsecured markets. It depends on what capital market conditions are offered to us.

The $300 million secured debt probably would be with Fannie and/or Freddie on several assets although we also are talking with a few insurance companies that are also in the market for secured debt.

Operator

Your next question is from Alex Goldfarb - UBS.

Alex Goldfarb - UBS

How aggressive will you guys be in pursuing unsecured for the second batch before you go back to looking at secured debt?

Thomas J. Sargeant

Alex, how aggressive will we be?

Alex Goldfarb - UBS

If traditionally you guys have used unsecured then if you start going to the secured route, I just want to get a sense for how much you will pursue where unsecured is before saying okay let’s go start using more and more secured debt?

Thomas J. Sargeant

First, the amount of secured debt that we have in our capital structure right now, we have about 83% of our assets or the NOI from our assets are unencumbered. So we partly use secured debt, we generally use it for tax exempt bonds or to get entitlements in Massachusetts. Our current plan is to obtain about $300 million of proceeds from securing a couple or three assets, probably two assets. Then go into the unsecured market, it may not be a term loan, it could be a bank loan that is a floating rate structure or it could be the traditional unsecured markets depending on the condition of those markets at the time.

I guess I should emphasize the unsecured term debt market is open today. We could go out today and get a deal done, it’s speculative because no one is willing to go do it today and find out what the real price is, but probably somewhere on a five-year deal, 6.25% to 6.75% if you believe the buildup of the cost over Treasury. That’s just not competitive with an unsecured debt offering that is probably 100 to 150 basis points less.

So we are not abandoning our strategy, we like our unsecured strategy, it gives us a lot of financial flexibility but until the unsecured markets settle down and offer a more competitive cost to us, we are going to use the secured market selectively to finance our business.

Alex Goldfarb - UBS

Can you give us a sense of where the term loan market may be, the terms on that market?

Thomas J. Sargeant

That market floats over LIBOR and it would be a very competitive market. I don’t want to go into exact spreads over LIBOR but it would be a very attractive source of capital.

Alex Goldfarb - UBS

The 5% dividend hike, was that the minimum necessary to meet the REIT requirements?

Thomas J. Sargeant

No. It wasn’t. It was an amount that the board came to after considering earnings growth, retaining liquidity and frankly telegraphing the fact that over time if our overall earnings growth have moderated, you want to reflect that in your dividend. It’s still a very big endorsement though in terms of the optimism we have for our financial plan in 2008. When you only have 71% payout ratio, retaining all that capitals is a very important part of our strategy for securing capital or obtaining capital in 2008.

Alex Goldfarb - UBS

Just going to the dispositions, have you seen any change in the buyer’s ability as you mark assets for them to get financing or are they coming to you guys at all to help facilitate the arranging of financing as they buy assets?

Tim Naughton

No, we really haven’t seen a change in their ability. Frankly, the leverage buyers, the private leverage buyers have been out of the market for a while now. It’s really, for the most part, larger institutions. Oftentimes you really financed at the balance sheet level at the corporate level as opposed to the asset level.

In terms of guys that are out there using Freddie and Fannie, they are just putting more equity in the deals. We really haven’t seen a trend where they’re looking to us to help solve any financing gap they may have.

Operator

Your next question comes from Andrew McCulloch - Green Street Advisors.

Andrew McCulloch - Green Street Advisors

On your employment growth forecast, you have 0.5% employment growth for your core markets. What do you think a good long-term employment growth rate is for those markets?

Bryce Blair

Andy, I’ll provide a couple of comments and invite John Christie, who as you know, is our Director of Research to add in on that. You’re correct. In the attachment 15 we indicated 0.5% job growth in our markets in ‘08. I would just add to that that is not the modest recession scenario that I commented on in my comments. Under modest recessions scenario we are assuming that would go to zero.

But in terms of a long-term growth rate across our markets, John, would you have a comment on that?

John Christie

Andy, it’s somewhere just below 1%. I think it’s about 0.9% and our markets traditionally grow a little more slowly just because they are bigger, a little more mature than the U.S. I think the U.S. long-term -- and I’m talking 10 years -- probably is about 1.1%, 1.2%.

Andrew McCulloch - Green Street Advisors

On development, you brought your yield down just slightly from 6.5% to 6.4%. Is that a mix issue, because you added two California and one New York asset? Are is there other stuff going on there?

Tim Naughton

It’s simply a mix issue. We’re completing two deals that are north of 6.5% and started almost $600 million this past quarter that is in the low 6%, so it’s strictly a mix issue.

Andrew McCulloch - Green Street Advisors

Can you give me any color on what you are seeing in relation to land prices across your various markets?

Tim Naughton

Obviously the condo has gone [inaudible] in the last three or four quarters. In terms of what apartment guys are willing to pay for land, I think we are in the very early innings -- maybe the first inning -- in terms of adjustments to land buys. I do expect land will adjust somewhat in 2008 as people are doing what we are doing, which is increasing their target yields. That’s not all going to come out of construction costs. Some of it has to come out of land in order for a deal to fund right but as you know that doesn’t tend to happen overnight. There is generally a period of time which the best spreads are wide until they start to come together.

But I suspect we will see some transition in the land markets through 2008.

Operator

Your next question comes from Anthony Paolone - JP Morgan.

Anthony Paolone - JP Morgan

The $125 million to $175 million you outlined that you expect to spend on land in 2008, how much of that is just going out there and finding new parcels of land for future development versus taking down land that’s under options for projects say that are in your attachment 12 listing?

Tim Naughton

Tony, it’s all related to land that we anticipate having to take down under existing options contract. It doesn’t reflect a projection on our part there are going to be speculative land buying opportunities at this point.

Anthony Paolone - JP Morgan

With respect to looking out and underwriting new development deals, can you quantify just roughly the types of yields that you would want at this point given a backdrop of maybe a little more economic risk?

Tim Naughton

Just to be clear, we always underwrite on current rents, current expenses and current construction costs. I just really want to emphasize that. So in terms of what the future economic considerations might be they don’t necessary factor into what your current underwriting may reflect, although they do factor into what the target yields would be.

We probably moved our target yields up on the order of 50 basis points over the last three to four months, but a typical deal we need to underwrite is in the mid 6% or 7% today versus that would have been a low 6 number six months ago.

Anthony Paolone - JP Morgan

What market whether it is the New York high rise or West Coast would get the lowest, what would the lowest yield you would underwrite to be?

Tim Naughton

That we would find acceptable? Well first of all we are pretty darn selective. I think you probably note that this past quarter the pipeline actually was reduced, the shadow pipeline not increased, and generally that is our posture here at least for the first couple of quarters of the year as we think there will be some adjustments in the land markets.

But generally yields range about a 100 basis points in total 100, 150 basis points. So from those numbers, depending upon the unique characteristics of the deal or market, sort of 50 to 75 basis points on either side of that target today that I mentioned earlier.

Bryce do you have any other comment on that?

Bryce Blair

The only thing to add is to follow up on a question earlier that the mix of the assets that are started each quarter has a very big impact on it. So as we start more and more West Coast assets implicit in your question was West Coast yields are generally lower and the more urban deals are generally lower. So you shouldn’t be surprised this year the yield may in fact trend down for a couple of quarters as the mix of assets change.

What Tim is really referring to is underwriting of new deals, not necessarily what we will be starting in the next couple of quarters.

Anthony Paolone - JP Morgan

Also on development at the Wilburn and Battery Place projects that appear to be fully leased at this point. Where do those yields come in? It seems like you don’t trend rents, and I would imagine from the point you started those to the point they got fully leased up here the West probably moved a decent amount?

Bryce Blair

Well, it certainly is the case at Battery Place, they did. In the case of Wilburn, I think we may have seen some modest improvements, but those deals roughly average around 7% upon stabilization with just annualizing the existing rent roll up on completion.

Operator

Your next question comes from Rich Anderson - BMO Capital Markets.

Rich Anderson - BMO Capital Markets

The issue of dispositions, you mentioned 4.5% to 5% cap rates, but is that the average and are there markets where you are seeing something in the mid 5% or are there no markets were that you are testing a 5.5% type of number?

Tim Naughton

Rich like I mentioned before, we do have a number of assets in marketing right now. So we may find that out in the next 30 days, but to date we have not seen any markets that would be above the low 5% in our markets. Having said that I think there is evidence in other markets where cap rates have probably moved more, generally I think people are saying the higher quality locations in coastal markets seemed to hold cap rates more than the secondary or tertiary markets or for that matter some of the sunbelt markets.

Bryce Blair

I think to add to that, Tim is talking that there is probably a growing disparity between the stronger markets and the weaker markets, there is also a growing disparity between the higher quality assets and the lower quality assets. So this cap rate compression that we saw over the past few years that all markets are being treated the same and all assets are being treated same has been unwinding, and so we are hearing about some higher cap rates for some lower quality assets in some tertiary markets; we are just not seeing that yet for our quality assets in our markets.

But by evidence of our actions, we are concerned about that; that’s why we are moving aggressively with a large disposition pool.

Rich Anderson - BMO Capital Markets

On a market like Boston, which has been pretty weak maybe it will get weaker now that the Patriots lost, but you are not worried about that?

Bryce Blair

That really hurts Rick.

Rich Anderson - BMO Capital Markets

Chicago, will you look to exit that market? Sort of hanging out there with that 800 units, is that something that you would consider?

Bryce Blair

No, we do not have any plans to exit the Chicago market, in fact we’ve been growing our concentration in that market through acquisition activity. It’s a small market for us and will remain relatively small component of our portfolio, but we have no plans to exit.

Rich Anderson - BMO Capital Markets

Are there any loopholes where you can sell assets that you have owned for less than four years> I mean that you have changed the strategies that you can actually sell assets you have only owned for couple of years, or is that not the case?

Bryce Blair

No, it is the case. It’s not that you are prohibited from selling within four years. It is just when you’re outside of four years you are in a safe harbor. If you are within that four-year period, it is a fact and circumstance test and it depends upon your change in strategy.

Rich Anderson - BMO Capital Markets

On the G&A you might have mentioned this, I got on little late, on the midpoint 10% versus last year, what’s driving the G&A increase?

Thomas J. Sargeant

Overall G&A increases are due to compensation increases. Some of it relates to start-up costs for our new administrative processing center in Virginia Beach. Those would be the two main factors, compensation and start-up costs.

Operator

Your next question comes from Paula Palkins - Robert W. Baird.

Paula Palkins - Robert W. Baird

What are your expectations that are underlying your assumptions in guidance for ‘08?

Bryce Blair

I’m sorry, the first part of that was cut off. Could you repeat the question?

Paula Palkins - Robert W. Baird

Certainly. Just a follow-up on the G&A expenses question. What are you assuming in your guidance for G&A in 2008?

Thomas J. Sargeant

For the guidance on attachment 15, shows 8% to 12% increase overall in G&A from 2007 level. That consists of three categories: corporate G&A, property management costs and investment management service. So it is a combination of the three should go up between 8% to 12%.

Paul Purcell - Robert W. Baird

Just to elaborate on the cost of the new administrative center, do you expect that to moderate -- in other words we are further along in the game than behind?

Thomas J. Sargeant

We expect that is a non-recurring costs and over time we’ll actually see our costs go down because of that center. But they are non-recurring start-up costs you would expect whenever you start -- think of it as a new business.

Paul Purcell - Robert W. Baird

As you look at the reasons for move out and I apologize if I missed this in your prepared comments, are you seeing any differences in the trends across your markets for the reasons for move out asides from two-home ownership?

Leo Horey

With respect to home ownership, as we have been talking about, it typically trades between 20% and 25%; for the most recent quarter we’re around 20%. As far as move outs overall and any changes across markets or even just the categories, there really hasn’t better any change. The reasons for move out in all the places that we’re watching carefully are people moving out for financial reasons that typically runs 8% to 10%. We were at the lower end of that range this last quarter and we are not finding any major differences or major changes among our markets.

So things are staying pretty well on course, obviously the reason for move out related to home purchase is down somewhat.

Operator

Your next question comes from Michael Salinsky - RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

In your disposition guidance for the full year, are there any markets we should expect a significant concentration of those to come out of?

Tim Naughton

We anticipate selling in several markets; we are not exiting or intend to exit any markets in 2008. It is a pretty diversified pool of properties.

Michael Salinsky - RBC Capital Markets

Some development deals are having trouble finding financing right now. I know you guys use your line and everything else, but have you heard anything to that extent?

Bryce Blair

To some extent certainly on the debt side; not as much on the equity side. Generally what I’m hearing is for good projects with good sponsors there is still equity out there, but that tends to be more problematic. Sometimes getting the term after the construction term has been tougher on folks in terms of that are really looking to have some flexibility built into their capital structure upon the start of construction. But not as much on the equity side, really as you might imagine.

Michael Salinsky - RBC Capital Markets

Finally as you continue to recycle capital here, your current CapEx over the past couple of years has come down. What are you predicting for recurring CapEx for fiscal year 08?

Leo Horey

I expect the reoccurring CapEx for ‘08 to be in the low $500 range per apartment home.

Operator

Your next question comes from Michael Dimler - UBS.

Michael Dimler - UBS

On the secured debt, in terms of exactly what secured debt you are thinking would be considering issuing, was it Fannie or Freddie financing or are you talking about private mortgage financing?

Thomas J. Sargeant

It would be both Fannie and Freddie as well as insurance companies that are currently active in the secured markets. So we would price all sources.

Michael Dimler - UBS

In terms of Fannie/ Freddie versus the insurance pricing, is there a major difference there or are they about the same?

Thomas J. Sargeant

I don’t want too handicap too much our friends at the insurance companies because we want them to really sharpen their pencil in their bids, but Fannie and Freddie do have a competitive advantage because of their structure as a government-sponsored entity.

But having said, Fannie and Freddie are clearly providing more competitive bids out there but we are not giving up on our friends in the insurance business.

Operator

Your next question comes from Richard Pallee - ADC Investment.

Richard Pallee - ADC Investment

On the guidance page on attachment 15 you have LIBOR expectations. Just remind us how much of your floating rate debt is LIBOR-based, because I know you have some tax exempt variable rates that tends to move less.

Thomas J. Sargeant

If I could just spend a moment, we have gotten a few questions that have come in this morning about floating rate debt. I would just like to reframe the question for a second on floating rate debt. Overall, our floating rate debt as compared to the total market cap is about 10% and that’s fairly modest. We have very little debt to start with. I mean, on average our debt is less than the industry averages.

As you remember, floating rate debt allows us to create a natural business edge when rates are declining, we generally are in a contracting business environment so we see that rates floating lower allow us to match moderating fundamentals and help preserve overall earnings levels.

Said differently, interest rate changes are very correlated to revenue changes. So having more floating rate debt in our capital structure is a strategy we have been pursuing over the last five years.

The other thing about floating-rate debt is people frequently use the term, let’s match long-term debt with long-term assets and if you think about what our asset is, our asset provides revenues at lease, and that lease resets every 18 months on average. So if you’re trying to do asset liability duration management, we would really argue for shorter-term debt, that’s another practical maybe a more theoretical reason behind trying to have more floating rate debt in your capital structure.

But the combination of the practical aspect of revenues being correlated with interest rates and the fact that we want to match up the lease terms with debt are two of the reasons we really try to get more floating rate debt in our capital structure over time.

So I apologize for the diatribe on floating rate debt but I understand that people were asking questions about it and I wanted to at least address that.

In terms of our overall debt it’s about 10% of our capital structure and I don’t know if that’s responsive to your question.

Richard Pallee - ADC Investment

I was just curious of that 10% is half of that floating rate exposure LIBOR based? Because in the past when people were nervous that rates were going up, part of the argument was the variable rates tax exempt tend to have less volatility and obviously the LIBOR-based is more market oriented.

My question is a negative spin on it, just curious because I appreciate the hedged comment with respect to slowing economy, lower rates.

Thomas J. Sargeant

At the end of the year, we had about $250 million of floating rate debt that was not related to our line. Of that, about $125 million of it was tax exempt, and another $125 million of it was conventional floating rate debt primarily for the Massachusetts assets that we have to use floating rate debt for. So about $500 million then we had about $500 million out on the line. So it’s about $1 billion of floating rate debt, half of which is the line and half of which is other forms of floating rate debt.

Richard Pallee - ADC Investment

Therefore half of it is LIBOR-based?

Thomas J. Sargeant

Well, actually all of it when you think about it, it all kind of trades within LIBOR. If you look at the break out of the conventional floating rate debt it trades with LIBOR as well. So really 75% of that debt, that $1 billion almost directly floats with LIBOR. The other 25% or $250 million floats and it kind of comes in with LIBOR but it actually is a little more sticky, it’s the floating rate tax exempt debt.

Richard Pallee - ADC Investment

Right. That was my question, the heart of my question.

Thomas J. Sargeant

I’m sorry it took me so long to get to the heart of it.

Richard Pallee - ADC Investment

Leo, did you speak to availability at all? In other words what percent you have vacant and/or notice to vacate that is not yet leased in the portfolio?

Leo Horey

I didn’t speak to that; we typically don’t quote availability. But to give you some perspective in January our occupancy is running about 96.4% and it looks like it is going to stay that way through February. You can contrast that with last year at the same time where we were at 96.2% between January and February.

So one of the things that I would tell you Rich is I believe that we have come through this winter and really have the portfolio well positioned to gain whatever opportunity exists for us with respect to rent increases.

Operator

Your next question comes from Karin Ford - KeyBanc Capital.

Karin Ford - KeyBanc Capital

Hi, just one quick question. Going back to the land price discussion, I know you carry most of your land for future development under options, but of the $200 million you have held directly on your balance sheet, do you anticipate having to take any type of impairment charges on that if land prices keep coming down?

Thomas J. Sargeant

This is Tom. No, we don’t anticipate any impairment charges. I think that question probably arises because of the homebuilders and if you recall, we buy land for investment purposes and expect to develop it and as long as you can recover your costs through development over the estimated depreciable life on an undiscounted basis, you have no impairment charge.

That’s contrasted with home sellers or homebuilders that by their nature are buying land to sell it almost immediately, and they have to mark that to market. So we’re buying for investment, they are buying for sale and I think that’s the primary difference.

Karin Ford - KeyBanc Capital

I was just asking with relation to a function of you guys raising your underwriting returns with that method more land would end up needing to be sold instead of developed?

Thomas J. Sargeant

We don’t anticipate that at this time.

Operator

Your next question comes from Chris Hummer - Greenline Capital.

Chris Hummer - Greenline Capital

Looking at the balance sheet if I look at the growth in the construction in progress and land held for development over the last eight quarters, it looks like it’s about similar to the same increase in your debt. That suggests maybe you are funding this development 100% with debt, which maybe helps explain why the debt is up 40% from the beginning of ‘06 but the interest expense is actually down.

Does this reflect a shift in how much debt you guys want to have on your balance sheet relative to your real estate value going forward? Are you looking to do a higher debt to cap ratio going forward?

Thomas J. Sargeant

No, it doesn’t; we are not trying to signal anything with those numbers and when you look at interest expense there are a lot of things that go into that including increased capitalized interest as well as interest we earn on the proceeds from our equity offering last year that stayed invested in short-term marketable securities for a period of time. So we’re not trying to signal anything. I think you are trying to match things up that are probably not easily matched up in terms of a strategy.

Operator

Your next question comes from Mark Bilfer - Goldman Sachs.

Mark Bilfer - Goldman Sachs

You had mentioned in the release that you might look at the option of doing joint ventures. How much of the disposition volumes that you are planning could you do through a joint venture, and what’s your preference for using joint ventures?

Thomas J. Sargeant

The dispositions we have right now, we haven’t specifically lined up any joint venture activity for any of those dispositions. It’s something that we are exploring right now. We don’t know what the terms would be; it may be better just to selling them outright as opposed to put them in a joint venture.

So it is hard to determine what the terms might be on that. I think you have to look at that disposition activity and expect that at this point most of it will end up being sold to third parties and we won’t retain an interest. However if we can get great terms, we will put some of those in joint ventures and retain part interest.

Mark Bilfer - Goldman Sachs

Are you guys still looking at doing a fund or a second fund to your current one?

Thomas J. Sargeant

We are exploring options to fund acquisition activity. We think that there will be some great opportunities during the year for acquisitions and we are exploring sources of funds to pursue that, but to say at this point in time that we have got anything that we could speak to, that’s not something that we are prepared to announce at this time.

Mark Bilfer - Goldman Sachs

Last question related to the new position that you guys created and the cost savings that person is going to be in charge of procuring, are a lot of those cost savings already built into your expectations for ‘08 or is that in addition to what you have projected?

Thomas J. Sargeant

That position is a strategic add; it is very difficult for us to start attaching cost savings to that new position at this time although everyone will be tasked to perform and he will be tasked to perform and get us great cost savings. But it is really a strategic shift in how we think about spend and it would be premature to start pro forma in cost savings based on that new position.

Operator

At this time there are no further questions. Mr. Blair, do you have any closing remarks?

Bryce Blair

I just want to thank people for their time on the call today. We will be chatting with you in the future. Thank you.

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