Apr 30, 2009
Executives
John Christie – Director Investor Relations, Research Bryce Blair – Chairman, Chief Executive Officer Leo Horey – Vice President Operations Thomas Sargeant – Chief Financial Officer Tim Naughton - President
Analysts
Karin Ford – Keybanc Capital Markets Michael Salinsky – RBC Capital Markets Jonathan Habermann – Goldman Sachs Mark Biffert – Oppenheimer Robert Stevenson – Fox-Pitt Kelton David Toti – Citigroup Jeffrey Donnelly – Wachovia Rich Anderson – BMO Capital Markets Alexander Goldfarb – Alexander of Sandler O'Neill Paula Poskon – Robert W. Baird [Scott Hendrickson – Permiam] [Scott Kirt - Tecap]
Operator
Welcome to Avalon Bay Communities first quarter 2009 earnings conference call. (Operator Instructions) I would now like to introduce your host for today's conference call, Mr.
John Christie, Director of Investor Relations and Research.
John Christie
Welcome to Avalon Bay Communities first quarter 2009 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 usual the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms which may be used in today's discussion. The attachment is available on our website at www.avalonbay.com/earnings and we encourage you to refer to this information during your review of our operating results and financial performance.
With that, I'll turn the call over Bryce Blair, Chairman and CEO of Avalon Bay Communities for his remarks.
Bryce Blair
With me on the call today are Tim Naughton our President, Leo Horey, our V.P. of Operations and Tom Sargeant, our Financial Officer.
Leo and I will have some initial prepared remarks and then all four of us will be available to answer any questions you may have. Last evening we reported EPS of $0.59 and FFO per share of $1.27 which represented an increase of 2.4% versus the same period last year.
The FFO per share was above the range we had given last quarter largely due to $0.06 of non routine items. Adjusting for the non routine items this quarters results were largely as expected.
In terms of portfolio performance, the recession is continuing to negatively impact renter household demand. For the quarter, revenue declined by about half a percent with three regions holding onto modest year over year revenue increases and three showing year over year declines Overall, NOI for the quarter was down just over 2% which was in line with expectations.
Leo will be providing additional color on the portfolio and market performance during his remarks. In the balance of my comments I want to touch on three topics; the economy, our development activity and our recent capital market transactions.
Since the beginning of '08 the economy has lost about 5 million jobs with 3 million lost in just the last five months. The weakness has spread across virtually every industry and every geographic market.
According to Moodyseconomy.com not one of the roughly 380 metropolitan areas in the U.S. is experiencing meaningful job growth.
With an average of almost 700,000 jobs lost per month, the first quarter will likely be the weakest in terms of jobs. However, for both the U.S.
and Avalon Bay markets, job losses are expected to continue for the balance of '09 through mid 2010. The speed and breadth of the job losses in recent months has resulted in sharp downward revisions to employment forecasts for both this year as well as next.
Our financial outlook released in January incorporated expected job losses nationally of about three million jobs based upon a forecast from Moodyseconomy.com which was as of December of '08. Their most recent forecast reflects a base line projection of national job losses for this year of just over five million jobs.
This is almost 70% higher than their December forecast, obviously a very significant change in just a few months. As I mentioned in my initial remarks, our first quarter property results came in largely as expected yet the effect of the accelerating job losses of the past few months will negatively impact operating results during the balance of the year.
There are however, a number of positive which will offset at least some of the impact of the job losses. First, the weak housing market continues to benefit rental fundamentals.
While home price declines narrow the affordability gap and the shadow rental market presents some additional competition, the fact is the home ownership rate both nationally and even to a greater extent in our markets, continues to decline as an increasing number of households opt for rental over home ownership. As of 4Q '08 the home ownership rate in our markets declined to 58.5% which is down another percent since just last quarter.
Second, one clear positive from the current difficult economic and capital market environment is the impact on future apartment supply. Nationwide, multi-family permits for the quarter are down 50% from year ago levels.
I'm guessing that apartment deliveries in 2010 and 2011 will be very modest. Putting these factors together, we would expect to see continued revenue declines through '09 and into 2010 before leveling off and returning to positive growth.
As has been our practice, we will be reviewing our outlook at midyear and provide an updated guidance at that time. Turning to development activity, we stated during last quarter's call that given the weak economic and capital market environment, we would not be starting any additional development communities during at least the first half of this year.
During this quarter, we completed two communities, reducing the amount under development by about $175 million. In terms of development economics, construction costs do continue to decline which is a significant positive and yet it's not enough to make up for actual and expected revenue declines and concerns over the fragile capital market environment.
You can expect that we will remain very cautious with regards to new starts for the balance of the year. In my earlier comments I highlighted the fact that $0.06 of our FFO is coming from non routine items.
$0.05 of this was a catch up related to our Christie Place development in New York. This deal has been very successful from both a pure real estate perspective as well as a financial perspective due to the attractive bond financing we placed on the property.
The real estate is yielding about 9% on total costs and it was financed with 80% floating rate tax exempt bonds that are currently averaging less than 2%. Consequently the cash flow after debt services is quite strong and has allowed us to move into the promote for this joint venture on a current cash flow basis.
I highlight this deal both to provide some additional details on the non routine items, but also to stress the value that can be created from certain developments, particularly when we're able to benefit from low cost, tax exempt financing. Lastly, I want to spend a few minutes on our recent capital markets activity.
We've been very busy over the past few months working on both a secured debt facility as well as additional equity commitments for our second investment management fund. These transactions closed in April to provide both significant liquidity and committed capital to pursue future investment opportunities.
The secured debt facility was a $740 million ten year facility through Freddie Mac at a rate of 5.9% secured by 14 communities. Also in April, we had the final closing on our second investment management fund, increasing the total commitment to $400 million.
Assuming 65% leverage, this will provide for over $1 billion of investment potential. I think it's important to note that in spite of the difficult capital market conditions that began last year, that our access to capital at cost effective rates has been very strong.
During '08 and through the first quarter of '09, we have raised $1.9 billion of debt capital at an average rate of 4.9%. It's particularly attractive when compared to the 6.3% rate on the nearly $600 million of debt redemptions through mid '09.
The 140 basis point savings on the $600 million translates to approximately $8 million in annual interest savings. Overall, the capital markets activity provides liquidity to meet funding commitments for all developments under way, to fund all debt maturities into 2011 and to opportunistically acquire existing apartments through our investment management fund.
After considering the April secured facility, we have no balance outstanding under our $1 billion credit facility and almost $300 million in cash on hand available to satisfy debt maturities and development expenditures and even after the recent transaction, we have the capacity for approximately $1.5 billion of additional debt before we reach any of our debt covenants. With that, I'm going to turn it to Leo who's going to provide some additional color on our portfolio and market performance.
Leo Horey
I will focus my comments on three areas; first reviewing the financial performance of the portfolio during Q1, second highlighting markets that are either exceeding or lagging our expectations and third, providing some general thoughts on the performance of our lease up communities. During Q1, portfolio performance was consistent with our expectations.
Same store revenues declined .7% on a year over year basis and 1.6% sequentially while expenses grew 2.4% year over year. These revenue and expense results produced a year over year decline in same store NOI of approximately 2%.
Occupancy averaged 95.4% for the quarter which was ahead of our projections, but this favorable variance was offset by greater reductions in rents than originally anticipated. Through the quarter, occupancy was fairly stable but has now declined to the high 94% range in April, reflecting the increasing weakness from continuing job losses.
New move in rents remain negative across all of our regions as rents were reduced in response to market conditions and to sustain closing ratios. Renewal rents continue to remain positive in all of our markets but we are carefully monitoring turn over and reasons for move outs to ensure that renewal offers secure as many existing residents as possible.
We are closely monitoring our occupancy and rent levels as we enter the spring and summer leasing season to identify any new trends that emerge. As we have discussed previously, this is the period when prospect traffic typically increases and when approximately 60% of our leases expire.
Turning to expenses, the overall increase was driven by property taxes, bad debt and certain maintenance related expenses offset by declines in payroll and insurance costs. Throughout the quarter, our regional operations teams focused on renegotiating service agreements with vendors to continue to manage operating costs.
For example, in Boston, we reduced our common area cleaning services by over $225,000 by rebidding our existing agreements. These efforts will help to constrain expenses and improve NOI during a period of declining revenues.
Drilling down on a discussion of our markets, in general, renters are understandably price sensitive as they focus on reducing their living expenses. Three facts regarding reasons for move out are worth noting.
First, moving within or to another community was the top reason for move out at approximately 18% and may residents are stating that the reason for this change is to reduce housing costs. Second, financial and loss of employment accounted for approximately 15% of our move outs.
These reasons typically account for about 10% of move outs and provide further evidence of the impact the weakening economy is having on our residents. And finally, home purchases fell to 15% of move outs, well under the historical average of 20% to 25%.
There is no sign yet that improving home affordability is boosting home purchases among our residents. The specific Avalon Bay markets on which we are most focused continue to include New York, Orange County, and Los Angeles.
While occupancy is stable in the 95% range in the New York Metropolitan area, new move in rents are being reduced to secure leases. Reduced rents in Manhattan are causing residents to move back into the city from the outer boroughs and from the New Jersey waterfront and a large number of condo deliveries in the city during 2009 may put additional pressure on the rental markets in both the city and the surrounding areas.
Orange County and Los Angeles remain the weakest of all Avalon Bay markets with year over year rental revenue change of approximately negative 4% and negative 5% respectively. Both markets have been hard hit by the recession with job losses for 2009 projected to exceed 300,000 or greater than 5%.
Pacific Northwest and Northern California remain two of our strongest performing markets, but are transitioning due to eroding market conditions. In Seattle the global slowdown has impacted this export driven local economy that is dominated by technology companies and Boeing.
Micro Soft is reducing its work force after experiencing its first ever year over year revenue decline and the reduction in contract workers throughout the region is further reducing rental demand. In addition, new apartment supply is projected to be the highest of any Avalon Bay market at greater than 2.5% of total inventory.
In Northern California, while supply is relatively modest at half a percent of inventory, layoffs in the technology sector are negatively impacting renter demand. Prospects are responding to lower rental rates as opposed to concessions and new and existing residents are focusing on smaller, lower priced apartments.
On the brighter side, the Washington D.C. metropolitan area is performing ahead of expectations.
The area has the lowest unemployment rate and the most favorable job outlook of any Avalon Bay market. While supply as a percentage of total inventory remains high at roughly 1.5%, apartment deliveries are being absorbed.
In fact, occupancy averaged approximately 96.5%. In Q1 year over year rental revenue growth remained positive and the rate of decline in rental rates actually improved throughout the quarter.
Finally, while the lease up communities are experiencing the same challenging market conditions as the stabilized portfolio, the task of the leasing community is more challenging because all of the leases are new move ins. A new lease up cannot rely on 45% of the existing residents to renew, so while we continue to make progress absorbing apartment homes as delivered, rental rates are under pressure at communities in sub markets with difficult demand and supply fundamentals and at communities where the rental rates are at the top end of the market.
This creates some unevenness in the lease up performance from community to community with some properties performing better than others. For example, at Avalon and Anaheim stadium in Southern California, rental rated decreased approximately $200 per month from Q4 to Q1 in order to produce an average of approximately 20 leases per month throughout the first quarter.
In contrast, at Avalon at Blue Hills, a suburb of Boston, rental rates remain stable while successfully leasing almost 30 apartments per month during the first two months of operation. In the case of Anaheim, we are dealing with an oversupplied market with significant job losses and high rents.
In the case of Blue Hills, we are delivering more affordable product into a sub market with limited competition. In short, we will continue to adjust rents as necessary to maintain reasonable closing ratios and to absorb apartments consistent with expectations.
In summary, job losses are more pronounced than originally projected, but our portfolio performed largely as expected during the first quarter. We are focused on maximizing performance at both our stabilized and our lease up communities despite the difficult economic environment and we will continue working to maximize NOI by constraining expenses where ever possible.
With that, I'll turn call back over to Bryce.
Bryce Blair
I just have a few additional comments before we open it up to questions. The past few quarters and the next year or so are likely going to be very difficult ones for the economy and for apartment fundamentals.
There's little we can do about the economy, but there is a lot we can do to ensure that Avalon Bay is well positioned not only to respond to the challenges, but also to be in a strong position to pursue emerging opportunities. Let me highlight three specific steps we have or are taking.
First, we've enhanced our liquidity while maintaining a strong balance sheet. Over the past five quarters we've raised $2.5 billion of capital through new debt and asset sales.
This capital has provided us with valuable liquidity while at the same time extending debt maturities and reducing our average interest rate. We continue to enjoy the strongest balance sheet in the sector with the lowest leverage and the best dividend coverage of any apartment REIT and the strongest of all REIT's.
Secondly, we're taking the necessary steps to slow our development activity. During '08 we reduced the volume of starts by 50%.
At the end of '08 we reduced our future pipeline by 40%. We plan to start no additional communities during the first half of this year and may very well not start any at all this year.
At the end of '07, we had about $2.2 billion under construction and assuming no additional starts, our volume under construction will have been reduced by two thirds by year end '09. And third, we raised the capital to pursue attractive acquisitions.
With the closing of our second investment management fund, we have over $1 billion of capacity to pursue acquisitions in our markets. So while others are struggling with the constraints of a weakened balance sheet, Avalon Bay enjoys the financial flexibility afforded by a strong balance sheet.
While others may not have the available capital to pursue acquisitions, Avalon Bay has the committed capital and experienced team to benefit from those opportunities. So I think we're being realistic about the current difficult economic conditions and their impact on our business, yet we're also confident about Avalon's ability to capitalize on some interesting opportunities that will undoubtedly emerge during this downturn.
With that, we'd be glad to take any questions.
Operator
(Operator Instructions) Your first call comes from Karin Ford – Keybanc Capital Markets.
Karin Ford – Keybanc Capital Markets
Can you talk about the plans with the fund when you would expect to start investing and what type of opportunities and what return expectations you'll have to make new investments with the fund?
Bryce Blair
Tom, why don't you talk about the time period and the investment period and then Tim, maybe you can talk a little bit about what we're seeing in terms of acquisition opportunities.
Thomas Sargeant
The investment period is a three year period that began in August of '08 and to date we have not made any investments. The return expectations are pretty much consistent with our first fund which is 13% to 15% net to investors and the promote and fee structure largely the same.
There are some differences but they're not really that meaningful.
Tim
We are actively looking at opportunities across our markets and while a lot hasn't traded yet, there is a fair bit of activity in terms of assets being brought to market, probably a little different than the last couple of years. We are seeing a lot of interesting core opportunities, really high quality assets that probably mid 90's vintage to recently constructed.
As Tom mentioned in terms of returns, it's our sense that Cap rates have moved into the mid 6% to 7% range for those kinds of opportunities. It probably needs to be a little bit better in something that requires some repositioning and that probably translates into an unlevered IR in the low double digits and kind of mid teens on a levered basis assuming a 60% to 65% leverage.
Karin Ford – Keybanc Capital Markets
You mentioned bad debt as one of the items comprising your expense growth. Can you talk about trends you've seen on the bad debt side sequentially and year over year?
Leo Horey
In the fourth quarter, our bad debt was about 28% of revenues. In the first quarter of '09 it was about .9% of revenues and just to give you some perspective, during the last downturn, it peaked at about 1.1%.
Karin Ford – Keybanc Capital Markets
I wanted to ask your thoughts about delivering and the re-acquisition process going on in the REIT sector and what Avalon Bay's thoughts are with respect to reducing leverage via equity asset sales.
Thomas Sargeant
At the end of your question you kind of addressed a couple of things that I would point out and that is there's a lot of ways to introduce equity into your capital structure. It's not just issuing shares.
We've introduced a lot of equity into the capital structure over the last couple of years by selling assets and retaining that capital and making a special distribution of stock. In terms of equity offerings, we have a long standing policy against telegraphing capital markets activity but it is interesting to note that there are no multi-family companies that have issued equity in this recent wave of equity issuances and its generally due to the fact that the multi-family companies do have access to alternative credit markets and the balance sheets are generally less levered.
And, as Bryce mentioned, we arguably have the best positioned balance sheet in the sector and certainly have the financial ability to choose when and what type of capital markets offering we do. Leverage today on an NAB basis, if you use third party estimates is about 40%.
We have great fixed charge coverage. We have 85 unencumbered assets that are available for secured financing, very manageable debt, maturities schedules, etc.
So we're in a good position to be very selective about what capital market option we select going forward.
Operator
Your next question comes from Michael Salinsky – RBC Capital Markets.
Michael Salinsky – RBC Capital Markets
Starting on the operational side, can you talk a little bit about what kind of rates you're seeing on new leases versus what kind of rates you're holding for renewals right now?
Leo Horey
Across the portfolio, new move in rents are approximately down about 10% to 12% and we have been able to maintain positive renewal rents across the portfolio, roughly around 2%.
Michael Salinsky – RBC Capital Markets
On the balance sheet, two questions. We've seen the pricing for the unsecured markets come in, what is the delta right now between secured financing and unsecured financing, and secondly how much further secured borrowings can you put on the balance sheet without jeopardizing the rating at the rating agencies?
Thomas Sargeant
In terms of the current delta, that's moved dramatically just overnight actually because there's been a lot of activity in the markets so I would have said that delta is 300 basis points. It's probably closer to 225, maybe 250.
It's moving very quickly so that's good news as that source of capital reopens in the market. In terms of the debt we could take on, it's important to note that we've met with both of the agencies recently that rate us.
They were made aware of the large secured facility that we were about to undertake in connection with our annual review with them and the sense that we have is that they understand that the capital market environment is difficult and understand the need for us to divert away from unsecured debt to secured debt. Neither of us raised the issue about the recent transaction and it's really hard to say what rating actions they might take if we did more secured debt.
But clearly, reducing unsecured debt with secured debt certainly helps mitigate overall ratings issues and pressure because you're issuing secured debt to take out unsecured debt so there's less unsecured debt exposed to a more secured debt oriented balance sheet. So while we have no plans to take any steps that would put our overall investment grade rating at risk, these are extraordinary times and everyone understands the need to diverge from our historical use of unsecured debt.
Michael Salinsky – RBC Capital Markets
You were able to raise additional capital. It looks like either March or April for the fund.
What is the interest rate right now for private equity towards the multi-family space and has that either changed for the better or worse in recent months?
Thomas Sargeant
My sense is that private equity is still on its heels right now and I think that the private equity sources are attracted to the best sponsors and the best markets with great business plans and the ability to meet their obligations and not just lean on the investment partner for capital. I think that's one of the reasons why we were able to attract additional capital for our fund.
I think generally speaking though, it would be very difficult to go out into the market today and raise private equity capital or even to a venture capital. I think that's a very difficult market today.
Michael Salinsky – RBC Capital Markets
In terms of the appetite from investors, from buyers right now, what is the appetite out there and what are they looking for? Is it just a pure spread game?
Are they looking for growth? Is it still a redevelopment planning?
What's the focus right now among people looking to buy multi-family products?
Tim Naughton
Probably a year or two ago the focus was probably almost entirely in value added, had very little focus, not as much focus in core. It seems to me today that folks are a little more interested in cored just because the absolute returns have moved up and some of the quality assets being brought to the market are as good as anything we've seen really since the mid 90's.
Just in terms of overall appetite, as I mentioned before, there has not been a lot of transactions that have closed. There is activity and we're hearing that often there's 10 to 12 bids on a deal whereas four or five months ago, it may have been hard to generate five qualified bids on a deal.
So definitely more folks are active our there in the market and the guys that had committed capital, maybe were sitting on the sidelines four or five months ago are starting to come onto the playing field.
Operator
Your next question comes from Jonathan Habermann – Goldman Sachs.
Jonathan Habermann – Goldman Sachs
Bryce, comments on the development, I thought for the last several quarters you have obviously talked about willingness to not pursue any starts at this point in the cycle and you talked about the existing supply in your market but I guess as that supply winds down, there could continue to be a fair amount of availability just given the continuing pressure on jobs. Is it your expectation that you mentioned costs haven't come down enough, do you continue to think that you're just going to wait on the sidelines on the development front?
Bryce Blair
We only give more specific guidance on that at mid year, but as I mentioned, certainly we're feeling continued caution in that regard. We decided to hold off on anything in the first half of the year, and since then the economy has only got worse.
So that gives us pause for caution. However, there may be selected deals that we do choose to start just because their value proposition is compelling and because of unique sub market conditions, buy out conditions, etc.
So you shouldn't expect that we're going to open up the flood gates and start a lot of development, but at the same token you shouldn't be surprised if we start one or two. So it's going to be very selective, but a very cautious outlook.
Jonathan Habermann – Goldman Sachs
In terms of compelling returns, can you define that a bit more?
Bryce Blair
In the eights.
Jonathan Habermann – Goldman Sachs
Shifting a bit to the existing development, obviously the lease up portfolio, you mentioned using adjusting rent as sort of a lever there. Can you speak to what you're doing at this point?
Is it really coming more from concessions or is it outright reducing of rents?
Leo Horey
It's actually coming from outright reduction of rents. We used concessions late last year and what we found is we attract more traffic and we close more prospects by making the process simple and just moving into effective rent.
So if you were out shopping our properties, you may find some places with concessions. The majority of them would be just moving toward using effective rents.
Jonathan Habermann – Goldman Sachs
You mentioned asset sales in the context of raising the additional, the debt, the $740 million secured loan. Do you have anything on the market at this point and as you think about as you move more toward secured, will that put some limitations on your sales do you think moving forward?
Tim Naughton
We have a couple of assets that we're in the very early stages of marketing so we really don't have any feedback yet in terms of value. But our plan this year is fairly modest in terms of asset sales.
Thomas Sargeant
Whether the secured debt is a help or hindrance, it depends I think at this part of the cycle. When things were red hot and we were selling our apartment communities typically to condominium converters, they wanted them free and clear.
They did not want any encumbrances and that was understandable. In today's market, having some debt on the property as long as it's sufficiently sized and the rate is reasonable can be a positive.
So we have and we will market some with debt and some without debt.
Jonathan Habermann – Goldman Sachs
But this is loan or substitution rates? The debt doesn't transfer with the asset?
Thomas Sargeant
It is a pooled facility that does allow substitutions in and out so we could unencumber an asset and substitute another asset in if we wanted to sell something. You question was specific to the pooled facility.
Jonathan Habermann – Goldman Sachs
On the promote, is that just a one time event or does that continue given where interest rates and do you expect interest rates to remain low for the balance of the year?
Thomas Sargeant
The $3.8 million was a catch up but there is a continuing benefit depending what interest rates are, I think you could assume a couple pennies this year related to that.
Operator
Your next question comes from Mark Biffert – Oppenheimer.
Mark Biffert – Oppenheimer
Related to the unsecured to secured discussion that you were explaining before I wondering what level would you look to do more unsecured versus secured just given the flexibility you could have with that?
Thomas Sargeant
That's a tough question and I know the answer. I'm not sure I want to give it just because I don't want to trigger the market in any way that we would be coming out with another offering.
But I would say that historically the difference between the two it's been down basically right on top of each other to going up as much as 400 differential between the two. Right now as I said, I think that's coming in a little bit and it's probably 250 over what we could do with Fannie or Freddie deal today.
My guess is that it needs to come in substantially before we would be triggered to come into the unsecured market. And really, at this point with $.5 billion on the balance sheet in cash, we're not anxious to come back out into the market any time soon.
Mark Biffert – Oppenheimer
You had mentioned, talking about the move outs being reducing expenses being the number one and I think unemployment was number two. In terms of your reducing rent, how are you fairing compared to class B type properties in your markets and how much are they having to pull down their rents as well?
Leo Horey
In general the way it works is in the early part of a downturn, the B's do outperform the A's and people tend to move in that direction. Understanding that from the last downturn, we've been spending a lot of time focusing on expanding the competitive set that we look at so in an existing sub market where we might have an A property, we are monitoring the B's and making sure that the historic differential between those two properties doesn't get out of whack.
We've also thought and have spent time looking at adjacent markets where people might be trying to move to in order to get at that B product, so we haven't seen, because we've been making quick adjustments, we've been able to stabilize our occupancy and I believe our occupancy has been running fairly consistent with the B product in the various markets.
Mark Biffert – Oppenheimer
Have you seen any significant shift in population just because of major unemployment in certain markets similar to the auto industry? You may have a mid west community that might have a big shift of people out of them.
Have you seen that on the coast of your market at all?
Leo Horey
If you're in New York and the adjacent sub markets to New York, the financial service sector is presenting some challenges, so Stamford, Connecticut, Fairfield, the Jersey waterfront, that's been a challenge. When you move to the technology sector as I mentioned in my earlier comments, certainly northern California and Seattle that's creating some pressures.
Operator
Your next question comes from Robert Stevenson – Fox-Pitt Kelton.
Robert Stevenson – Fox-Pitt Kelton
In terms of the rent declines and/or the concessions on the development lease subs, what's been the trend to bring the January to April time period? Is it accelerating into now or has it been relatively flat?
What's been the trend there?
Leo Horey
It's been relatively flat. Just to give you some perspective, in Q4 we averaged about 16 leases for the month throughout the quarter and moving in Q1 we were 17 or 18.
And then in April, it actually increased to about 22 and we've been able to do it in most cases, and as I mentioned during my comments, it's somewhat uneven, but we've been able to do it with the rents as they've been described in attachment seven.
Robert Stevenson – Fox-Pitt Kelton
Looking at the portfolio, there's a hole. Have you made any major tweaks to the underwriting methodology and what disqualified people and what qualified people, etc as the market softened?
Leo Horey
No. We have experience from the last downturn.
We don't change our underwriting criteria. In other words, if anything when it gets really difficult and when we start utilizing more and more concessions if we have to, we will exclude the concessions from that consideration.
So we don't compromise our leasing standards in order to bring more residents into our properties. We never do that.
Robert Stevenson – Fox-Pitt Kelton
Given the amount of REO assets these days, have you been seeing any decent land deals from the banks and from other holders that you would think about putting into your pipeline for 2011, 2012 starts?
Tim Naughton
I think it's just too early for that honestly. We have not seen much REO come to market at all either from approved assets or land at this point.
Robert Stevenson – Fox-Pitt Kelton
The spreads that you were quoting for unsecured, if I'm doing my math right that means that you could go to the market today and issue unsecured at somewhere in the 7.5% to 7.75% range?
Tomas Sargeant
Based on the activity in the market over the last 24 hours, that's correct. It's likely below 8%.
Operator
Your next question comes from David Toti– Citigroup
David Toti – Citigroup
Are you seeing a lot of push backs on renewals across the portfolio or is that just a metro New York phenomena?
Leo Horey
We're seeing push backs on renewal across the portfolio. As I mentioned in my earlier comments, over the entire portfolio it's running about 2% across the region.
That runs from a low of 1% positive to a high of about 4% positive so in a pretty narrow range, but we're getting push back everywhere as you might imagine.
David Toti – Citigroup
Looking at the numbers on the regional specific data, you could infer from the numbers that there was perhaps giving up of occupancy in terms of capturing some rent growth. Is that true or are you generally still holding the occupancy line?
Leo Horey
Let me tell you exactly how we're operating, the strategies we're using. We're using the general strategy and we're applying it to all the markets as the markets require.
What we try to do is understand what we believe the sub market or market occupancy and then we have a bias for being more occupied than that. So let's say in a market we believe that the occupancy is 94%, we would target 94.5% or so and then we would try to maximize our rental rates from that occupancy platform.
So the decline is really associated with just the weakening fundamentals and the fact that our various markets are seeing occupancy declines.
David Toti – Citigroup
Just moving over the development, are you comfortable giving any kind of forecast for where you've stabilized, where you'll settle on an aggregate basis?
Tim Naughton
We generally haven't tried to forecast the future with respect to the development portfolio. And again just to remind everybody these do reflect basically current market conditions as it relates to both the revenue and the expense side of the equation.
With the project to completion capital costs as the denominator, but as a general rule, it's been more of a challenge with respect to new move ins versus renewals. So to the extent that rents continue to decline or moderate, it looks like it will have a bigger impact on the development portfolio.
David Toti – Citigroup
Maybe sticking with the development portfolio for a second, you talked some of the projects that were in lease up, some where rents were down more significantly in the 7% to 9% range but then the success that you're having in Boston where rents were effectively flat, overall when you look at your development pipeline in terms of the active developments from last quarter, when you weigh it all together, the rents were down about 2.5%. Your weighted average yield only dropped 10 basis points which would imply that March is getting better on the expense side, so I'm just trying to get a better picture of what actually is in expenses.
I would have thought you would spend a little bit more money marketing or are you really being able to rein in the operating expense side to keep your NY margins or your NY yield a little bit higher?
Thomas Sargeant
I don't know that your numbers are exactly accurate in the sense that I think the buckets always changing a bit from quarter to quarter. The numbers you mentioned around 2% to 2.5% on rents is probably right.
Of those that we're activity leasing the rents were down a bit more than that around the order of 5%. The other thing affecting that is the denominator of the deals that were under construction both last quarter and this quarter.
We did recognize about $5 million in savings as well. So that's helped the yield a little bit at the margin as well.
David Toti – Citigroup
Is anything happening on the expense side in how you're looking at them. When you look at your NY yield project, has there been changes?
Thomas Sargeant
The operating expense is not what's driving it. It's the anticipated cost to complete the deal and the revenue line.
David Toti – Citigroup
The good news is quarter to quarter the 14 deals you didn't add anything and the two deals you delivered, you were able to make the comparable analysis so the weighted average ramp was 25/25 last quarter and effectively is 25/10 this quarter.
Thomas Sargeant
Yes, you could make that on the rent, but on the yield, the yield when you're looking at, comparing the 6% to the 5.9%, in the fourth quarter, that included the three communities that were completed last quarter which aren't in the bucket this time. So the bucket is different.
David Toti – Citigroup
I know you talked about your normal process is to wait until mid year in terms of getting through a little bit more of the peak leasing season to have a better sense on where guidance is, and I don't want to put words in your mouth, but I want to get a sense of your view as to where things sit today based on what's happened in the first quarter and where we are in the first month of the second quarter, how the revenue side of the equation is trending relative to where you thought it would be for the year.
Bryce Blair
I tried in my comments to be pretty clear and pretty straightforward that clearly the economy is weaker. The job losses are greater.
We all know there's a direct relationship between the magnitude of job losses and job gains in terms of revenue, so it shouldn't be a surprise that we're more concerned about the second half of the year than we would have been in December, just given those facts. When you're looking at job losses of about 5 million which is 3.5% to 4% nationally, GDP falling greater than originally expected and unemployment likely peaking 10% or above 10% into early 2010, it certainly does impact how we feel about things.
The first quarter was in line with expectations but that's not surprising. We've said many times over the years that there's a six month or so lag between major changes in the economy and changes in revenue.
So that's why Leo mentioned in his comments that we're keenly focused on the portfolio and taking the necessary actions, but also monitoring it so we can be in a better position to forecast, to provide updated guidance in the middle of the year. To do it every quarter I think is just not sufficient time in order to take a deep enough look.
David Toti – Citigroup
I don't know if you had a chance to review, but Nethercutt was talking about how the pace of decline is holding steady from the beginning of the year providing a little bit more hope or optimism that while there will be declines throughout the year, the pace of decline is not accelerating.
Bryce Blair
I can tell you I did not listen to the call. I'm sure those comments were riveting but I did not listen to the call and in terms of commenting on his comment, I think I'll defer from that.
Operator
Your next question comes from Jeffrey Donnelly – Wachovia.
Jeffrey Donnelly – Wachovia
You have about half a dozen projects in your pipeline that did see the average rent collectively decline about 5% and most of these were in your weaker markets this quarter, Boston, New York, Southern California. Is that average rent reduction shed some light on where you think market rents are going for the assets in your established communities at the margin over the next year?
Leo Horey
I would tell you that the issue is we're doing twice the work in a year at a lease up. So if anything the lease up rates typically come under more pressure than does a stabilized rent.
That's what I was alluding to in my original comment which is that with a lease up, it's all new move ins, and obviously as I've disclosed, our new move in rents have been more impacted. On a stabilized community, you have renewals that help buffer that.
So I would suggest that the development communities typically come under more pressure than do the stabilized properties. '
Thomas Sargeant
Just to add to that, I think the average rent at the development communities is about $550 to $600 higher than the stabilized. I think we're seeing a little bit more pressure on the higher end as Leo had mentioned earlier.
Jeffrey Donnelly – Wachovia
With respect to net effective rents particularly in your northeast cities, have you seen any firming as you roll into April, meaning has the year over year declines in new and renewal rents moderated at all or is the rate of decline accelerating?
Leo Horey
It's actually been flat. In my opening comments what I said was that throughout the quarter new move in rents have been basically flat and also renewal rents have been basically flat so there is some stabilization there and it really, I did look before the call.
January, February and March and in general, it's been pretty stable.
Jeffrey Donnelly – Wachovia
The deterioration in Southern California for Avalon is a bit stronger than we've seen in some of your peers. I know you don't speak to t heir results but what's your perception on how Avalon has performed versus competitive sets in the Southern California market?
Leo Horey
First of all, do we watch our peer performance? Absolutely.
It's something that we measure ourselves against, but when you're looking at those results you have to consider the nature of the communities or the type of properties we have in the market. You also have to consider the sub markets in which those properties are located.
And frankly, you have to consider certain accounting conventions that occur. We do watch our performance and we also watch our performance versus third parties and see how we do there.
Over time, I think that our performance has fared pretty well. In any one quarter, it's difficult to draw any specific conclusion.
Jeffrey Donnelly – Wachovia
Do you expect you'll see many more opportunities for multi-asset portfolios or improved assets REO or not in the coming year or do you think just access to capital for multi-family are going to keep even at those leveraged owners that are distressed.
Tim Naughton
I'm not sure if I followed the whole question but in terms of pools of property, you're not really hearing it yet. I guess where it might likely come from, you are seeing insurance companies, they are selling.
They have a desire to move a certain amount of capital and to the extend that they think they can get a good execution off the portfolio, I'm sure they'd look that way but based upon recent experience, most folks have been able to optimize proceeds by breaking portfolios apart and particularly given the reluctance of buyers even making big bets right now.
Operator
Your next question comes from Rich Anderson – BMO Capital Markets.
Rich Anderson – BMO Capital Markets
Are you using revenue management system RIO or anything like that?
Leo Horey
We have revenue management at a number of our communities. We have piloted it extensively over the last couple of years and the pilot included about 18 communities.
We've increased it to the mid 30's now. I expect by the end of the year, it will be 50 to 55 communities up on it.
There are other initiatives that we have going that are slowing it down somewhat but we do believe in the science of revenue management and we have started deploying it into the portfolio.
Rich Anderson – BMO Capital Markets
I saw you doing RIO, is that right?
Leo Horey
Yes.
Rich Anderson – BMO Capital Markets
If you felt it wasn't possible right now for you to make your current range of guidance, would you still have the company hold off from revising it down? I'm assuming that you think the guidance right now is still possible.
Bryce Blair
We issued guidance at the end of the year in January and our practice has been to update guidance at mid year. We don't have an obligation to update that between those periods.
If we thought there was something material, you would expect as it's been our practice, you would hear from us.
Rich Anderson – BMO Capital Markets
Do you have any statistics that relate national job loss numbers in your market and the sensitivity to the same store and growth? Have you done any work like that?
Bryce Blair
We sure have. We actually had a revenue guidance model that you probably heard us speak to for almost 10 years now which works from changes in demand driven largely by changes in jobs and changes in supply in our markets to project changes in revenue by sub market as well as by portfolio.
In the past couple of years we've modified that further to take into account other factors that have become increasingly significant such as changes in home ownership rate and changes in demographics. So we do have a regression analysis that does give us good guidance which we then marry with the feedback we're getting back at the property level and at the regional level in order to make judgments about expected future revenue growth.
Rich Anderson – BMO Capital Markets
So if you were to input at 70% increase in job loss, what does that spit out in terms of revenue growth?
Bryce Blair
Lower revenue than it would have otherwise. We said a couple of times; we're giving updated guidance at the second quarter.
Rich Anderson – BMO Capital Markets
Have you sensed any of the government stimulus packages, have they been stimulating at all? Have you noticed anything in terms of activity or is it still too early?
Bryce Blair
I think it's clearly too early. No one has seen any improvement on the job side.
There is certainly some positives lurking in terms of the economy. Tom talked about one of them already and that's just tighter credit spreads.
We're also seeing nationally modest increase in the volume of home sales and those are some positive signs and yet consumer confidence remains very low. Credit is still very tight and in some sectors is not available.
Retail sales are abysmal and the job market certainly doesn't have much life in it. So while there will always be conflicting signals out there right now I think there's more negatives than positives.
Rich Anderson – BMO Capital Markets
Would you, given the state of fundamentals and falling jobs and all that, would you be comfortable, or have enough comfort as a company to go out and acquire assets, just hypothetically say second half, fourth quarter in the absence of Fund II would you be able to do it on your own balance sheet or does this Fund II put you over the edge to really consider? How important is Fund II for you to really start considering acquisitions?
Bryce Blair
Fund II is very important. It's strategically important to us in terms of giving us that committed capital to pursue acquisitions but it does not limit us in terms of acquiring things on our own balance sheet.
It is our exclusive acquisition vehicle but for exceptions which would be larger asset portfolios, 1031 exchanges, etc. So I think the short answer to your question is if we saw a compelling opportunity, we have the balance sheet capacity to take advantage of it.
Rich Anderson – BMO Capital Markets
We would still be talking about acquisitions and the conversation would still be on the table even in the absence of Fund II.
Bryce Blair
Yes.
Operator
Your next question comes from Alexander Goldfarb – Alexander of Sandler O'Neill.
Alexander Goldfarb – Alexander of Sandler O'Neill
Are there any other promotes from any other deals possible this year?
Thomas Sargeant
No, I think that Christy Place is the deal that you'll see most of the promote activity. The funds generally have back ended promotes associated with them so any other JV's are not likely to trigger a promote this year.
Alexander Goldfarb – Alexander of Sandler O'Neill
On the buying back of debt, given that pricing of the near term debt has really tightened up, from a capital management perspective does it make sense to go longer out to medium or longer term debt to buy back or capital allocation to keep whatever cash you have on hand.
Thomas Sergeant
I think there's an argument to be made to do a waterfall type tender where you would go out and scrape the tops of a number of different bonds. It does put some pressure on liquidity if you're trying to manage your short term securities.
I don't really want to get into a lot of market color on that because honestly we've been buying our bonds back and we don't want to affect the market for our bonds in any way by commenting on our willing to either buy back or not buy back. It's very similar to equity where we really don't want to talk about equity.
I'm not trying t dodge your question but we do make a market in our own bonds and everybody should know that and we want to be careful that we don't somehow change that market based on our comments.
Operator
Your next question comes from Paula Poskon – Robert W. Baird
Paula Poskon – Robert W. Baird
[Inaudible] rental rate performance between those assets that have LRO and those that do not.
Thomas Sargeant
We missed the first part of your question but I think there's a difference in the rental rates performance between the LRO properties and the non LRO properties.
Leo Horey
We obviously piloted the revenue management projects over an extended period of time as we've been discussing. Clearly we determined over a period that there is a lift in general to those properties which is why we're deploying it across the entire portfolio.
Paula Poskon – Robert W. Baird
Are you surprised by what it's telling you given the severity of the economic downturn? Are you adjusting what it's telling you in any way?
Thomas Sargeant
We don't just take the recommendations that come out of LRO and just move without thinking about it. The process of revenue management still involves the executives at the local level.
So yes, we use it as a guide post but the local market knowledge has to be brought into play and just so you know, the revenue management tools that are out there, they don't forecast out when there's been some big change that's occurred. In other words, they don't look and say there's going to be a lot more job losses.
So you have to bring in your own judgment. We use it as a guide.
It's a very good guide. We obviously believe that it is very useful, but it doesn't act of its own motion.
Paula Poskon – Robert W. Baird
What percentage of your portfolio remains completed unencumbered?
Thomas Sargeant
The percent of the portfolio that's unencumbered, on average over the year we expect the unencumbered percentage, the NOI would be about 67%.
Operator
Your next question comes from [Scott Hendrickson – Permiam]
[Scott Hendrickson – Permiam]
You indicated a 10% to 12% decline in new rent rates. I'm actually at one of your Manhattan property that's offering about a 15% discount to what I paid back in August and all the concessions are about 25%.
Is this indicative of the magnitude of rent declines we should expect to see over the course of the year as leases roll off and if so, is that considered material?
Leo Horey
I would tell you that in the New York properties, depending which property you're at, we've seen declines of 15% to 20%. I don't know of your specific situation, so it's very difficult but in general, I believe we've discussed this in the past it's been more in the 15% to 20% area.
Operator
Your next question comes from [Scott Kirt - Tecap]
[Scott Kirt - Tecap]
Could you give us the dollar amounts for bad debt in December and in the March quarter and also if you could quantify delinquencies so we can get a sense of the trend?
Thomas Sargeant
We don't talk about delinquencies in the information I provided. .8% of revenue for the fourth quarter and .9% of revenue for the first quarter is the level of detail that we provide.
[Scott Kirt - Tecap]
I'm sure there's some seasonality also just given it's just after the holidays but is your sense that that number is fairly static, that you're not highly concerned about it ratcheting going forward? your numbers look a lot better than some of your peers.
Thomas Sargeant
As I mentioned through the call we don't change in any way our qualifications for residence so we always end up with people with great qualifications. Do I have concerns about the number?
Certainly I have concerns about the number when the economy is deteriorating the way it has but longer term, to try to give perspective, during the last downturn it maxed out at 1.1%.
[Scott Kirt - Tecap]
So you don't see this as being necessarily any worse than the last, maybe not even as bad as the last downturn?
Thomas Sargeant
We're not taking a position on that at this call in terms of what you say is bad. We'll be giving updated guidance in the second quarter in terms of our overall outlook and bad debt is just a component of that.
[Scott Kirt - Tecap]
On the occupancy front, what was the guidance that you had given for this year?
Leo Horey
We did not give guidance on occupancy. We just gave guidance on expenses, revenue and NOI.
[Scott Kirt - Tecap]
So you share what your unemployment assumption is for the year?
Leo Horey
I mentioned in my remarks we would expect unemployment, these are not our forecasts, we survey a lot of different economic forecast and I'm principally basing it on moodyseconomy.com which project unemployment peaking at just over 10% in the beginning of 2010.
[Scott Kirt - Tecap]
You gave us some encouraging stats on new move in rents being static through the first three months of the quarter. Would you care to help us understand how they look so far in April?
Leo Horey
I haven't got summary information yet.
Operator
This concludes today's question and answer session. I will turn it back to Mr.
Blair for any closing remarks.
Bryce Blair
Thank you all for being on the call and we're just trying to respect your time and the other conference calls. It's a busy week this week.
So thank you for participating.