Oct 30, 2009
Executives
John Christie – Senior Director, IR and Research Bryce Blair – Chairman and CEO Tom Sargeant – CFO Tim Naughton – President Leo Horey – EVP, Operations
Analysts
David Toti – Citigroup Rob Stevenson – Fox-Pitt Kelton Jay Habermann – Goldman Sachs Swaroop Yalla – Morgan Stanley Ross Nussbaum – UBS Mark Biffert – Oppenheimer Alexander Goldfarb – Sandler O'Neill David Bragg – ISI Michael Salinsky – RBC Capital Markets Michael Levy – Macquarie Paula Poskon – Robert W. Baird Chris Sommers – Greenlight Capital Rich Anderson – BMO Capital Markets Michelle Ko – Bank of America
Operator
I would now like to introduce your host for today's conference call, Mr. John Christie, Director of Investor Relations and Research.
Mr. Christie, you may begin your conference.
John Christie
Thanks, Christina. And welcome to AvalonBay Communities third quarter 2009 earnings conference call.
Before we begin, please note that forward-looking statements may be made during this discussion. And there are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially.
There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, the press release does include an attachment with definitions of 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. And with that, here is Bryce Blair, Chairman and CEO of Avalon Bay Communities.
Bryce?
Bryce Blair
Thanks, 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.
Tom and I will have some initial prepared remarks and then all four of us will be available to answer any questions you may have. In my comments, I will be discussing our third quarter results and then shift to a discussion of operating fundamentals, investment activity, and capital markets activity.
Let me begin with a discussion of our third quarter results. Last evening, we reported EPS of $0.72 and FFO per share of $1.09.
The FFO results reflect a year-over-year decline of approximately 15%, which was impacted by declines in portfolio performance as well as increased interest expense driven by the quarter’s capital markets activity. Our same-store portfolio performance continued to decline in both year-over-year and on a sequential basis, as the impact of the job losses, which have averaged over 500,000 jobs per month in the first half of the year takes its toll on renter demands and rental rates.
For the quarter, same-store revenues declined by approximately 4.5% and NOI declined by 8.5% on a year-over-year basis. In the balance of our comments, Tom and I will focus on three key themes, which are driving both our operating performance and our investment in capital markets decisions.
First, while we expect operating performance to remain weak near-term, there are signs that the weakness in both the economy and in some of our operating metrics are beginning to moderate. Second, after a year of being very quiet on the investment front, we are planning to modestly increase our investment activity in order to deliver product into expected improving fundamentals two years out.
And third, the capital markets continued to recover and we’ve been very active during the quarter, improving liquidity, extending debt maturities and adding equity to the capital structure, all of which enhances our overall financial flexibility. We will be commenting further on each of these topics, but let me start first with a discussion of the economy and on operating fundamentals.
Our fundamentals do remain weak and mixed signals persist. There are signs that things may be moderating a bit.
In terms of the economy, there are some positive trends. Job losses, while still significant, averaged 250,000 jobs lost during the third quarter, just down significantly from the average of 500,000 jobs lost during the first half of the year.
The Conference Board’s Index of Leading Economic Indicators rose for the sixth straight month in September, a good sign that recovery is underway, while the Consumer Confidence Index remained low at 48 and has rebounded from its trough of 25 during the first quarter of the year. GDP growth after falling by 3.5% in the first half of the year turned positive during the third quarter.
And though encouraging, employers are not yet hiring, and any significant increase in job growth will likely not come until the second half of next year. In terms of our portfolio performance, while rental rates do continue to decline, the modest improvement in the economy is translating into improvement in some of our portfolio metrics.
Let me highlight a few statistics. Occupancy and availability have improved sequentially and have returned to historically normal ranges.
Concessions are down 50% from both last quarter and from the period last year. Turnover, which was higher than historic norms of last four quarters, is not returning to seasonally normal levels.
And finally, the rate of decline in new move-in rents has improved from a 12% year-over-year decline in the first half of the year to approximately 9% recently. Just to be very clear, we are not saying we’ve reached an inflection point in terms of our portfolio performance.
We haven’t. Rents on both a new move-in basis and on a renewal basis continue to decline and are expected to continue to do so into 2010.
What we are saying is that we are beginning to see improvements and some leading indicators. Yet we still have a way to go before returning to positive revenue growth.
The second theme I mentioned was a plan to increase our investment activity. Job losses are beginning to moderate and consensus forecasts have projected moderate job growth in the second half of next year.
While the pace of job growth is likely to be quite modest, there is little doubt that it will be met with a severe shortage of new apartment supply. Due to the economic and financing environment, new multi-family rental starts are expected to total about 130,000 units this year.
Now by way of reference during the ’04 to ’07 time period, multi-family rental starts averaged 215,000 per year. And for next year, they are expected to total only about 70,000.
This would be a reduction of about 70%. With modest job growth supporting increased renter demand, an anemic level of new product being delivered, 2011 and 2012 will likely be a period of strong apartment fundamentals.
Also we’ve seen a significant reduction in construction costs, which will likely continue into 2010, will undoubtedly start to turn as the economy strengthens. So far, through the first three quarters of this year, we have started no new developments.
It’s a decision we think was prudent given the extraordinary weakness in the economy and in the capital markets. Now, given some improved clarity in the economic front, reduced construction costs and significant firming of the capital markets, some development opportunities are becoming attractive and we think a modest level of new development activity is warranted.
During the fourth quarter, we expect to begin two modestly sized developments, one of which is a second phase in an existing development community. With these two starts, the amount of construction we’ll have underway year-end ’09 will still be roughly half of what was underway year-end ’08.
We are currently assessing what our development volume will be for next year, and we will provide you with an update in late January when we issue our 2010 financial outlook. With that, I’ll now turn it over to Tom who will discuss our capital markets activity and comment on our financial outlook.
Tom Sargeant
Thanks, Bryce. This afternoon, I’d like to focus on several topics that were covered in last evening’s press release.
The first is a review of the capital activity for the quarter, including the tender that we completed just this month in October. I’d like to recap key balance sheet metrics and finally add some additional comments on the revised financial outlook for the balance of 2009.
As Bryce noted, we really did have an extraordinary quarter for capital activity. Issuing unsecured debt for the first time in three years, redeeming and tendering debt, launching a continuous equity program, and completing asset sales boosted liquidity and mitigated refinancing risk.
Excluding the tender, this activity totals about 885 million. And this supports the view that the credit and equity markets continue to recover.
So just to recap, we issued $500 million of unsecured notes. We issued $102 million of common stock.
We sold two existing communities for net proceeds of about $68 million. We then turned around and we tendered for $300 million of our unsecured notes.
We paid off $103 million of unsecured notes at their scheduled maturity. And then finally, we redeemed about $112 million of our unsecured floating term note.
Just some additional color on this activity, which centers around the new debt and the tender program. The blended rate and the maturity for the new debt issued is about 5.9% and has a nine-year term.
Issuing $500 million of debt while tendering for $300 million of near-term maturities allowed the company to enhance the overall execution of the new issue, while extending duration and mitigating medium-term maturity risk and reducing our interest costs. The numbers show this.
As the average years to maturity on all of our fixed rate debt is now 9.5 years, this compares to 8.5 years just a year ago. This quarter’s activity and the cumulative impact of all of our financing and redemptions over the past year create interest savings, and to illustrate, note that the weighted average interest rate on all of our debt and preferred stock at 9/30/08 was about 5.9%.
At 9/30/2009, as if the tender was completed, average rate was about 5.15%, even while floating rate debt as a percentage of all of our debt is down from 29% in September to just 19% this September. The difference between secured and unsecured debt at the time of our recent unsecured debt issuance was around 50 basis points, well inside the recent 150 to 200 basis point spread that kept us out of the unsecured markets.
This offering marked the return to the unsecured markets for the first time in three years. And the scarcity there of our offerings and the remaining debt outstanding helped in the overall execution of the transaction.
Most importantly, this transaction allowed us to avoid additional secured debt and preserves our access to the unsecured markets. Equity issuances during the quarter under the CEP program netted proceeds of about $100 million, $102 million at an average price of approximately $70 a share.
This program allows for more cost-effective and efficient matching of investment and financing activity and mitigates pricing risk by spreading the issuance over an extended period of time. This is especially important given the volatility of the equity markets.
Turning to key balance sheet metrics, our current liquidity position strong with cash on hand at the end of the quarter of about $777 million. We have no balance out on our $1 billion credit facility.
Our leverage remains modest by industry standards at around 40% of the average of the NAV ranges published for the company. Fixed charge coverage stands at about 3.1 times, and our communities remain largely unencumbered, preserving our access to the unsecured markets.
And our forward projection of liquidity need suggests we can meet all of our investment and financing commitments well into 2012 based on development activity underway through the third quarter. Just a couple of comments on our revised financial outlook.
For the year, we narrowed the range for our expected operating results and expect revenue decline between 3.5% and 3.75% for 2009, with an NOI decline of approximately 7%. It’s important to note that fourth quarter will include a charge to earning of $26 million for the premium paid to acquire the bonds before maturity such that FFO per share at the midpoint of the range is expected to be about $3.88.
Comparing our July outlook to our revised outlook, the principal changes include about $0.05 per share from operations, offset by about $0.05 from interest and equity sales and a $0.01 from expense development cost, and of course the charge of $0.33 per share for the tender. And we do recap this reconciliation in our press release last evening.
So in summary, the variety of our capital transactions underscores the substantial improvement in the capital markets over the past year. Capital activity totaled about $885 million was completed, including new debt, other debt redemptions, new equity and asset sales, in stark contrast to the markets just one year ago today.
All-in rates on new unsecured debt are at attractive levels, and once again, competitive with the secured debt market. In terms of capital, the visibility into our sources of capital has improved and we now anticipate new development starts in late 2009 and into 2010 that we expect will deliver into a stronger economic climate.
And finally, our revised financial outlook considers to continue downward adjustment in rental rates, resulting in 2009 revenue declines of about 3.5% to 3.75%, with NOI declining about 7%. FFO per share range of $3.86 to $3.90 includes charges of $26 million for the debt repurchase in the fourth quarter.
And that concludes my comments, and I turn the call back to Bryce.
Bryce Blair
Thanks, Tom. So just to wrap up, as we see here in the third quarter of ’09, we do have considerably more visibility and confidence regarding the next couple of years than we did a year ago.
Job losses are slowing, GDP has turned positive, capital markets are firming, and some of our portfolio metrics are moderating. And yet we are still likely a few quarters away from meaningful job growth and a bit longer to positive revenue growth.
However, the stages being set for strong recovery in ‘11 and ‘12, we believe, and we also believe we are well positioned to outperform during this period. Our supply constraint markets are projected to outperform during ‘11 and ‘12.
Our investment fund provides us with about $1 billion of capacity for acquisition opportunities. Our development pipeline allows us to deliver new products at a time of little new supply.
And we have the balance sheet in the organization to execute this business in a risk measured way. So yes, we are certainly focused on the near-term challenges, but we are also focused on preparing for the next phase of growth.
With that, operator, we’d be glad to take any questions.
Operator
(Operator instructions) The first question comes from David Toti with Citigroup. Please go ahead with your question.
David Toti – Citigroup
Good afternoon, everyone. Michael Bilerman is here with me as well.
I just wanted to ask a few questions about the decision to embark on new developments, and I’m sure you’ve anticipated some questions. Given the option to acquire at discounts with upfront yields that may be relatively effective, how do you weigh that against starting development two years out with probably a more modest initial return?
Tim Naughton
David, This is Tim Naughton. I would say that the new development doesn’t necessarily preclude doing acquisitions.
I think in certain markets, certain opportunities, one investment strategy will make sense as well as another – you know, another might make more sense. In terms of development starts, I think I mentioned last quarter we are focused on unlevered IRR and typically we would expect to get a premium or would demand a premium over what an unlevered IRR might be on a similar asset for an acquisition maybe on the order of plus 11% on an unlevered IRR for development and perhaps 9% or so for an acquisition.
Clearly, in some markets, development doesn’t underwrite. In some markets, there is a significant discount to replacement cost to buy assets.
There are some markets, however, where yields are above cap rates. In the couple assets that Bryce had mentioned, that is the case.
Both of those deals, we are looking at initial yields somewhere around the 8% range where cap rates would trade in this market somewhere certainly sub 7. In both of those cases, West Long Branch in New Jersey and the Northborough, the second phase of our current Northborough deal, we obviously have pretty good experience with recently completed deals, Tinton Falls in the case if New Jersey and then Northborough one in the case of Boston deal.
And both of those were successful lease-ups, all things considered in the 25 to 30-month range at rents that were around pro forma. And today we are seeing construction costs at about 15% below what we actually built those communities for.
And so from our standpoint, there are going to be opportunities. It's not going to be everywhere where we think development will make sense and other acquisitions are going to be a more attractive option.
David Toti – Citigroup
All right. And then how do you underwrite the risk to your rent assumptions in those.
I understand where it makes sense in specific markets. But I would assume you have to assume there is more risk to the top line assumption into that pro forma?
Tim Naughton
Certainly. It’s one of the reasons why you demand a premium to new development over acquisitions.
But in terms of the out-years, the underwriting is very similar between an acquisition and a development, but in terms of the initial rents, you’re right. There is just more risk in terms of which you’re going to be able to achieve on a development than in an acquisition.
In the two particular cases I mentioned, I think the risks are fairly nominal, just given that we’ve recently completed and leased up new deals in each of those sub-markets.
David Toti – Citigroup
Okay. And then just moving over to the operating side.
You guys saw a somewhat positive growth on expenses in the quarter whereas many of your peers are lowering expenses overall on a comparable basis. Is there something that you – that is specific to your company that you are unable to trim?
Are you already sort of at a minimum? What is driving some of the expense growth in terms of the components?
Leo Horey
David, this is Leo. For the quarter, what drove the expense growth was bad debt and maintenance related costs.
Those were offset by utilities and insurance. Those are the main drivers.
I would tell you when you look at our expenses, I’d ask that you look at it over an extended period of time. Over the past five years, I believe our expense has been pretty de minimis, more like in the 2.5% range.
I mean, we are running just above that at this time this year. So I think that we have been very good managers of the expense side of the equation over an extended period of time.
David Toti – Citigroup
Okay, thanks. And then just one last question, Bryce, in your opening remarks, you mentioned that you are seeing some signs of stabilization, maybe some signs of improvement.
Could you just talk about some of the markets where you are seeing that? And do you think some of these improvements are sticky?
Bryce Blair
David, when I said signs of moderation, I was talking about in our portfolio metrics, which are the metrics I was referring to in terms of turnover, in terms of availability, in terms of occupancy, and then in terms of the new lease rents.
David Toti – Citigroup
Are there any market specific though that would be driving some of those improvements?
Bryce Blair
Leo, do you want to comment on specific markets?
Leo Horey
Sure, David. I’ll kind of group the markets into three buckets.
First being Boston and DC, those are the favorable markets that we have. And then in the middle bucket, which is more closer to the average, it would be the New York metropolitan area.
And then finally, where we're more challenged is clearly on the West Coast. So if you were to frame it, that’s how I’d frame it.
Bryce Blair
David, if that’s you typing away, it’s coming through –
David Toti – Citigroup
No, no, that’s not us. But thank you for all the detail.
Bryce Blair
Okay, fair enough.
Operator
Your next question comes from Rob Stevenson from Fox-Pitt Kelton. Please go ahead with your question.
Rob Stevenson – Fox-Pitt Kelton
Good afternoon, guys. Leo, can you talk about the weekly foot traffic in leases signed on a year-over-year basis?
Are you seeing the same level of activity or meaningfully less than you were a year ago through the last week or two?
Leo Horey
I mean, David – I'm sorry. Rob, for the quarter – I'm going to talk about the quarter first.
Traffic is down on the order of about 10%. However, leases have remained flat on a year-over-year basis.
So as you might imagine, conversion is up. I think importantly, though, when I touch somewhat on what Bryce said, through the quarter, occupancy went from 95.8 in July to 95.9 in August to 96.2 in September.
And early indications on October are we are staying in that 96% realm. And from the second quarter to the third quarter availability, which is kind of a forward-looking measure, it measures the number of leases – existing leases that have given notice for which we have no future lease, or vacant apartments for which we have no future lease, that’s come down 125 basis points from the second quarter to the third quarter.
And on a year-over-year basis, it’s down about 50 basis points.
Rob Stevenson – Fox-Pitt Kelton
Okay. And then I think that you guys mentioned early in the call that you guys were down like 9% on your rate on new leases.
What are you guys on renewals? And then also what was – you had mentioned on David’s question about bad debt being up in the quarter.
Where is it today?
Leo Horey
Rob, I’m going to handle the new move-in rent [ph] question first and then I’ll move on to the bad debt. For the quarter – for the third quarter, new move-in rents were down on average 10%.
But I’m going to walk you through the quarter. In July, they were down on a year-over-year basis about 11.5%.
They went into the upper 9s in August. And in September, they were down about 9% on a year-over-year basis.
And just to reiterate, that was while occupancy was rising. On the renewal side, the move-ins went – the renewals went from about 2% in the quarter to just below 3%.
So they grew throughout the quarter. The good news is that turnover on a year-over-year basis actually declined.
So the difference between new move-in rents and renewal rent, that gap closed and that’s one of the things that we talked about on our last call. And it closed into historical range.
For us, historically it’s run about 6% that difference. Moving to bad debt, bad debt ran about one-in-a-third [ph] percent for the quarter.
And it was basically flat throughout the quarter. It was up a little bit higher in August, but in general, that one-in-a-third percent.
And that compares to last year at about 0.8% and the previous quarter at about one-in-a-quarter percent.
Rob Stevenson – Fox-Pitt Kelton
Okay. And then one quick one for Tim.
Do you guys look at any significant amount of acquisitions for the fund in the third quarter? And if so, pricing cause you to not go forward.
Was it something else?
Tim Naughton
We are active on the transaction front, Rob. Really on the disposition side as well as the acquisition side, we are working transactions on both sides.
In terms of pricing, I’d say cap rates (inaudible) are down a little bit since mid-year when really the first transactions were being closed this year, as there was very little done in the first couple quarters, as you know. And I think I mentioned on the last quarter call that we saw cap rates in the 6.5% to 7.0% range.
I would say that in our markets they are probably in the 6% to 6.75% range; 6% on the West Coast, kind of mid-6s as you move east. And pretty similar to what we’re – obviously what we are underwriting on the acquisition side since that represents what’s going on in the market.
We are working on a couple deals. That’s not a lot.
That’s on the market. Right now, we anticipate that more will come to the market early next year as more transactions close, and we are that much further into the price discovery process.
Rob Stevenson – Fox-Pitt Kelton
Okay. Thanks, guys.
Operator
Your next question comes from Jay Habermann with Goldman Sachs. Please go ahead with your question.
Jay Habermann – Goldman Sachs
Hi, good afternoon. Just switching back to development again, can you give us some sense of just dollar amount you are thinking about over the next – whether it’s six to 12 months of new investment?
And you anticipate staying at sort of the $1 billion mark which you’re anticipating or $800 million mark which you’re anticipating by year-end?
Bryce Blair
Jay, we have not yet finalized our plan for 2010 and therefore aren’t in a position to provide that guidance.
Jay Habermann – Goldman Sachs
Okay. I assume that you clearly see some opportunities to expand your development pipeline.
But I mean, do you see that the spreads versus acquisitions will lighten up significantly further? It doesn’t sound like you are expecting cap rates to rise all that much.
Bryce Blair
No, I don’t think we would be expecting cap rate to rise all that much. As Tim mentioned, though, on the development side, it is – it's certainly not uniform in terms of the opportunities by sub-market as well as within our pipeline.
So we are – we have identified a few deals that we think make sense right now, two deals that we think make sense right now. Undoubtedly a number more in 2010, but the size of that will be guided by a closer look at those development opportunities and the assessment of that versus acquisition opportunities.
I will say, as Tim mentioned, one does not preclude the other. As you all know, the industrial management fund is our exclusive acquisition vehicle with few carve-outs.
So we can be simultaneously deploying acquisition capital. While we are deploying development capital, one doesn’t come necessarily at the expense of the other.
It is a relevant measure to look between the two in terms of good investment decisions for sure, but in terms of capital allocation on AvalonBay’s balance sheet. They are largely separate decisions.
Jay Habermann – Goldman Sachs
And I know you touched on the markets briefly. Can you, I guess, dive in a bit deeper into sort of Northern and Southern California, I guess specifically the West Coast, perhaps the timing of the recovery in this cycle and just comparing versus past cycles because it sounds like from your comments, you’re a little bit more optimistic on perhaps Boston, DC, and to some extent, New York?
Bryce Blair
I’ll let Leo – I think just first off, it's not necessarily optimism. I mean, just the actual results today are better in Boston and DC.
In terms of more color today and outlook, Leo, you may provide some color on that.
Leo Horey
Sure. Jay, this is Leo.
I guess I’ll start – I'll just work down the West Coast from Seattle. On the Seattle side, job losses over the last six months were pretty significant.
What we are seeing is that that’s abating. In other words, there aren't a lot of job losses that we are seeing.
The Seattle issue is going to be, can we get the supply absorbed. By our estimate, supply in Seattle for ’09 is going to be about 2.5% of inventory.
In 2010, it will still remain relatively high at about 1.7%. So in order for Seattle to come back, we are going to have to see some job growth to get all that inventory absorbed.
Compared to last quarter, some of the challenges that we had were more in the northern suburbs. This quarter, it’s more in the east side.
And by the east side, I mean, Redmond and Bellevue, where we are seeing products being delivered. Moving to Northern California, the Northern California market, we basically break into San Francisco, Oakland and San Jose.
All three of those markets have had demand side challenges with fairly significant job losses in the high-single digits as a percent of total employment. And the demand picture that we are receiving would suggest that the job losses are going to continue into 2010, which will be a challenge.
On the supply side, we are not seeing a lot of supply coming into San Francisco or to Oakland certainly below the average for AvalonBay markets. But on San Jose, we are kind of at the AvalonBay average or a little more.
So if you look at the three markets, San Francisco demand side, Oakland more demand side, San Jose has some supply problems but also some demand issues. In order for this to turn around, in San Francisco, we need to see some strengthening in the financial services sector; in the professional businesses support sector which would be accountants, lawyers; and then the Internet and software industries, where San Jose is more tech job related, particularly in the hardware.
And Oakland is some tech, but is also real estate. Overall, I would tell you Oakland is the most price sensitive of the markets we have, and typically languishes more.
San Jose can come back fairly quickly as can San Francisco once the demand picture turns around. Finally, turning to Southern Cal, in the Southern Cal, Los Angeles and Orange County have been more challenged.
San Diego has performed better, and that’s what bears out in our results. Again, it’s more of a demand picture in Los Angeles and San Diego where the challenges in Orange County is a supply issue.
It’s about – by our estimate it’s about 1.8% of standing inventory. And again, in order for Southern California to turn around from an industry perspective, we really need to see – in Orange County, we need both the tech sector and global trade, and then in LA we need the global trade.
So that would give you some perspective on the West Coast markets.
Jay Habermann – Goldman Sachs
Thanks. And then just final question.
If you look out to 2010, I know you’re not providing guidance at this time, but can you give us some sense of strategy? I guess, thus far you’ve certainly seen some increase in occupancy, but as you think about rate next year, balancing the trade-off between the two, how you think strategy might change next year versus this past year?
Leo Horey
I would say that we are going to foresee the strategy that we’ve been pursuing, which is that we are going to maintain a high occupancy platform or a relative high occupancy platform. And just so you know, that high occupancy platform varies from market to market.
We have a bias towards being more highly occupied than the sub-markets. So for instance, in Seattle, the sub-market might be 94 – 93.5% to 94% occupancy where we may run our portfolio, say, 94% to 94.5% with a bias of maybe 50 to 75 basis points.
And then we are going to maximize rents from what we consider to be that high occupancy platform.
Jay Habermann – Goldman Sachs
Okay. Thank you.
Operator
Your next question comes from Swaroop Yalla with Morgan Stanley. Please go ahead with your question.
Swaroop Yalla – Morgan Stanley
Hello. Most of my questions have been answered.
I just wanted to touch upon the homeowner tax credit deadline, which has been extended to next year. Can you provide us some – any sort of evidence on where you are seeing that as an impact for renters moving out to purchase a home?
Bryce Blair
Sure. Clearly, the home buyer tax credit assisted in some of the improved statistics that have come out and in terms of home sales where the volume is up modestly on a year-over-year basis.
Inventory is down to about eight months supply. And we have started to see a bit of that in our statistics.
As I think you know, we track pretty closely the reasons for move-out. And move-outs to homeownership was 16% this past quarter, which is up from last quarter, but it’s still below historic norms which would be in the low-20s.
So – and I think certainly as people saw the GDP numbers this morning at 3.5%, one of the principal commentaries on the stronger GDP growth was home sales as well as the stimulus in terms of the auto sector. There is no question that the government support in those two industries is helping the economy overall.
And with the extension of it, it’s going to continue to support the housing industry for a bit. Moving – I think sort of posted in your question was, what does that do in terms of competition and also the issue of home affordability.
Home affordability – we operate in the homeownership market, and homeowner – a household can choose to rent or to own. And as houses have become more affordable depending upon the market, they are down 20% to 40%.
Nationally, just versus a couple of years ago, the median house price is down about 25%. And after-tax home payments are down about a third.
So clearly homeownership is a more affordable proposition today than it was a couple years ago. That’s no surprise.
We expect that we are going to continue to see some competition from homeownership, which is going to push it back to more normal levels. We just hope the government doesn’t do what they have done in the past and overdo things and push it to unsustainable levels.
We don’t think that’s going to happen, but stay tuned on that. So hopefully that’s responsive.
Swaroop Yalla – Morgan Stanley
Yes. Thank you so much for the color.
Operator
Your next question comes from Dustin Pizzo with UBS. Please go ahead with your question.
Ross Nussbaum – UBS
Hi, guys. It's actually Ross Nussbaum here with Dustin.
Bryce, I think you had said that we were – in your commentary, we were a few quarters away from meaningful job growth, which I’d agree with. But then I thought you said it might be a bit longer until we see positive revenue growth out of the company.
Does that suggest we might be still talking about negative same-store revenue growth all the way through each quarter of 2010?
Bryce Blair
Well, we’re not giving specific guidance. Let me talk, Ross, generally.
We have said – and frankly, it goes back really all the way to ’02 and ’03 where we provided a lot of color between changes in jobs and changes in revenue for the apartment sector and for AvalonBay’s portfolio. I’d just like to take time between changes in GDP before you see changes in jobs.
It takes time between changes in jobs before you’re going to see that reflect itself in portfolio performance. So there is a lag of a couple quarters.
Sometimes it’s a little bit less, sometimes it’s a little bit more, depending upon the significance of the inflection point. But clearly, if you look at just frankly at some measure, which you all – many of you have asked in the past, the last downturn, ’02, ’03, we saw ten quarters.
Some companies are a bit less than that. But a couple years of year-over-year revenue declines before things turned positive.
We are only in the third quarter of this today. So hopefully our comments are being heard correctively.
We are not declaring victory on the economy, job growth or positive apartment fundamentals. We are simply saying that as a student of our portfolio, we are starting to see some positive signs of moderation in it.
But we think 2010 will be another tough year for portfolio performance.
Ross Nussbaum – UBS
Okay. And then if I could follow up on the bad debt expense, I just want to understand from an accounting standpoint, I’m assuming that you normally have a bad debt reserve running through the numbers such that this quarter I guess you are saying that the actual amount of bad debt was in excess of the reserve, or was there a write-off of something from the prior quarter?
Tom Sargeant
Well, it’s kind of works through a reserve, but – and I'm sorry, Ross, this is Tom Sargeant. It does work through a reserve, but the reserve is a very short duration reserve.
It’s virtually one or two months. So you pretty much see bad debt reflected almost immediately in our numbers.
So it’s not a matter of that we have to increase a reserve or that we provide a provision for bade debt. It’s more almost a one-month lag between the time you would – someone would go delinquent, and when you would write them off and that would flow through as bad debt.
As Leo said, bad debt pretty much has trended the same way over the last several quarters.
Ross Nussbaum – UBS
Thank you.
Operator
Your next question comes from Mark Biffert with Oppenheimer.
Mark Biffert – Oppenheimer
Good afternoon. Bryce, just to add to Ross’s question there, given that you probably could expect rents to decline for the next few quarters at least, does that imply that NOI would likely trough at some point next year and that we could see a further decline in the NOI line as well?
Bryce Blair
I’m sorry, we just getting a little background noise here and it's distracting. But – what we’re trying to do is provide color on the impact on the inflection points that we are seeing in the economy into apartment fundaments.
We are just – we are not prepared to give guidance relative to 2010, but clearly if revenues are going to continue to decline, you are going to see NOIs continue to decline. And when that peaks what it peaks at, we are not prepared to provide that guidance.
Mark Biffert – Oppenheimer
Okay. And then, Tom, quickly just in terms of the asset sales, do you guys – do you have a portfolio identified of non-core assets that you would look to sell as well to monetize versus issuing debt?
Tim Naughton
This is Tim. I think I mentioned earlier we are actually working on some transactions on the disposition side currently.
And those decisions are really being driven more by portfolio management objectives than necessarily capital needs. And so for the most part, they would represent sort of non-core assets or assets in markets where we just feel like we’re over allocated and need to trim a bit.
Mark Biffert – Oppenheimer
Okay. Thanks.
Operator
Your next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead with your question.
Alexander Goldfarb – Sandler O'Neill
Yes, good afternoon. I just want to go back to development for a little bit.
First, what are you guys seeing on the tax incentive and from the zoning authorities? Is that becoming more favorable to development or less so?
Tim Naughton
On the entitlement side, I’m sure it’s becoming more favorable the deals that we are talking about starting, there were deals that have been – frankly been entitled for a while. So it’s not really affecting us on those deals specifically, but there are a number of deals.
And I think we spoke this last quarter, that on land where we own where we are going back and we are replanning, and oftentimes that requires some relief from some of the existing entitlements. And generally you are getting very receptive audiences in the local planning staffs of these communities.
In terms of tax relief, we will take it quick anywhere we can get it from, whether it’s on permits or on taxes, sales taxes or property taxes. It just kind of depends on the tools that the particular municipality has to play with.
But generally, they are receptive – if you can bring – you can get some activity going in their local jurisdiction, they are receptive within the bounds which they can operate.
Alexander Goldfarb – Sandler O'Neill
So are you saying most like TIFF activity or anything of those sort of incentives or –?
Tim Naughton
We haven’t seen a lot of TIFFs necessarily in our markets, but –
Bryce Blair
Pilots.
Tim Naughton
Yes, we’ve seen more pilots and tax abate – I guess, tax abatement, but not necessarily because they are public infrastructure. But we will see some tax relief at some period of time that obviously does add value to the deal.
Alexander Goldfarb – Sandler O'Neill
Okay. And then going to David Toti’s question on sort of developing versus acquiring, Long Island seems to be quite a difficult market to get entitlements to as evidenced by some prior deals.
Is that a market that you’ve looked to continued to try and develop in, or do you see that as more as an acquisition market?
Bryce Blair
It’s – I think we’d be open both on Long Island. I think for us historically it’s been more of a development market, probably because it’s been hard to acquire there.
Assets tend to be pretty closely held in that market, and you just don’t see a lot of trading activity. So we’ve committed a franchise to Long Island to develop assets there over time.
We’ve had great success there.
Alexander Goldfarb – Sandler O'Neill
Okay. And then final question is, Tom, I know that you are not giving guidance for 2010, but just on the excise tax, because you had it last year, we have it this year.
Should we assume to have it in 2010 in our numbers or assume to not have it?
Tom Sargeant
Well, as you said, we are not giving guidance, Alex, on 2010. I can remind you and everybody that we do have it in our outlook for 2009 it’s something we are going to address in the fourth quarter.
Obviously if there is a special dividend, it clears it out for 2009, that would settle it for 2010 as well. So I think you will know something one way or the way by the end of December, whether or not to include it in your number.
Alexander Goldfarb – Sandler O'Neill
Okay. Thank you.
Operator
Your next question comes from David Bragg with ISI. Please go ahead with your question.
David Bragg – ISI
Thanks. Good afternoon.
Could you talk about your ability to burn off concessions from lease-ups that stabilized last year?
Leo Horey
Dave, this is Leo. In general, we are not using concessions.
So if a deal stabilized last year, got to 95% occupancy, we are not using concessions at all on those deals. If you look our concessions for moving in, this is on the same-store portfolio, as Bryce indicated, it was down about 50% quarter-to-quarter and year-over-year.
It’s running at about $200 per move-in, and that’s about what’s going on with the other stabilized properties which would be the lease-ups that stabilized last year.
David Bragg – ISI
Okay, got it. And then a question on this quarter was, interested in getting some insight on sequential movements in new move-in rents from second quarter to third quarter and into October.
In what markets did you see an upward tick?
Tom Sargeant
Dave, the sequential numbers that we have are, I believe, in attachment five that give you the sequential market-to-market. And just on new move-in –
David Bragg – ISI
Yes, just new move-ins.
Tom Sargeant
We don’t have new move-ins isolated. It’s something that we are – as you can appreciate in smaller markets, it would be very difficult to do that because it depends on the mix of one bedroom versus two bedrooms and things along those lines.
I am working to aggregate that to the entire portfolio, but I don’t have specific information that I can offer you now.
Bryce Blair
And what we’ve tried to do, Dave, was get some indication of the trend in that, which is not literally a specific answer to the question you asked. But the fact that it went from new move-in rents down 12% year-over-year to, as Leo mentioned, the trend in the third quarter going from 10 to high-9s to 9.
So that certainly gives you a measure of the direction of it, but it doesn’t answer the literal sequential quarter-to-quarter.
David Bragg – ISI
Right. Okay, thank you.
Operator
Your next question comes from Michael Salinsky from RBC Capital Markets. Please go ahead with your question.
Michael Salinsky – RBC Capital Markets
The disposition thing there for a little bit. Can you talk about the interest for the property that you guys have been marketing out there and how pricing is coming?
You’ve heard some deals that have been priced in the high 5s. Just given the asset (inaudible) kind of interested in what demand you are seeing and where pricing is starting to come on there?
Tim Naughton
It’s a good question. Demand is actually quite intent.
And I think part of that is a function that there is a lot of assets in the market, but we’ve seen a number of offers ranging from low-double digits, call it 12 to 15 offers to as many as 40 offers on assets in the San Jose area. And in terms of pricing support, there is generally five or six guys there at the end that are all right there on price, so – which kind of tells you that if you had a couple more assets or so, you could probably sell at same price, which is not always the case.
So demand is quite deep right now. And then pricing, as I mentioned earlier, I think I would estimate roughly – a rough range of 6 to 6.75.
Some assets have gone below 6, even on some of the stuff that we are pricing, and some may be slightly about 6.75. But that’s roughly the range I would give you, 6 to 6.75.
Michael Salinsky – RBC Capital Markets
And with the October asset sale, you guys are – you're done for the year or is there additional things that could close before year-end?
Tim Naughton
There are some additional things that could close before year-end that are in due diligence now.
Michael Salinsky – RBC Capital Markets
Okay. And switching over to development pipeline, you talked about starting two projects in the fourth quarter and just looking at the order there, it look like you had some pretty sizable cost reductions in there.
I know you’ve been focusing on trying to cut out some costs. Can you talk about where the pre-development pipeline stands?
I know you guys don’t quote exact deals, but just kind of from an overall return standpoint, what kind of delta you need right now to move forward on some of the others projects?
Tim Naughton
As I mentioned, on those two projects, the yields are around 8%. There are a handful of other projects.
They tend to be suburban, northeastern, wood frame, new communities that are around that or approach that yield. There are some communities in the West Coast that would be pretty far off that number, and probably aren’t going to make sense for at least the next year or six quarters.
But the range could be anywhere from 8% to low-5s in terms of – low-to-mid 5s in terms of current underwriting. Having said that, it’s hard to really get a handle on estimated construction cost until you are ready to go to market.
Those two deals, as you noticed, came down pretty significantly in terms of our estimated cost. And that’s probably because they are designed, and we are taking the market.
We are getting real pricing, and the pricings come down significantly. So that’s part of the equation as well.
Michael Salinsky – RBC Capital Markets
That’s helpful. Thank you.
Operator
Your next question comes from Michael Levy with Macquarie. Please go ahead with your question.
Michael Levy – Macquarie
Can you please tell us more specifically what turnover was during the quarter compared with the June quarter and last year’s September quarter?
Tom Sargeant
Turnover for Q3 was 71%. And in September, it was down 5% on a year-over-year basis, but I don’t have the exact number for that month.
Michael Levy – Macquarie
I’m sorry. I meant I guess 3Q ’09 versus 2Q ’09 and 3Q ’08.
Tom Sargeant
It was –
Michael Levy – Macquarie
71 – 71% –
Tom Sargeant
71% for 3Q ’09 and 73% for 3Q ’08. And it typically is higher in the second and third quarters because of the way expirations work, and it’s lower in the first and fourth quarters.
Michael Levy – Macquarie
Yes, of course. And so can you please – but is it usually higher in the September quarter than the June quarter?
I was under the impression that they were relatively the same.
Tim Naughton
Yes. The second quarter – this is Tim.
The second quarter tends to range in the 60% to 65% range versus the third quarter more in the 70% to 73% range. So it’s actually higher in the third quarter typically than the second quarter.
Those are the two peak quarters during the course of the year.
Michael Levy – Macquarie
Okay. And on the concessions, I was wondering whether you can break that down for us a little bit more.
Are there certain markets – and I know that there is a big push to move away from concession pricing. But are there certain markets where concessions aren’t being used at all any longer while they remain prevalent in others?
Or is it more a reduction in concessions across the board?
Tim Naughton
I would tell you, the Northeast and Mid-Atlantic concessions are de minimis. In the Pacific Northwest and Southern California, they would be higher.
To give you a range, I mean, I’m talking in the $30 to $50 range in the Northeast and Mid-Atlantic on new move-ins, and in the $500 range for move-in in the Pacific Northwest and Southern California.
Michael Levy – Macquarie
Okay. Just switching – on that note, when there was talk early of lower rents, lower new rents in the high-single digits, can you please let me know whether this was being quoted on an effective basis or on an asking rent basis?
Tim Naughton
It’s quoted on an effective basis.
Michael Levy – Macquarie
Okay. So it includes those concessions?
Tim Naughton
Yes, it does.
Michael Levy – Macquarie
And finally, on move-outs to home purchases, it sounds like you are saying that move-outs are low now that you expect them to increase in the future because of increased affordability for home purchases. If that’s correct, is this a result more of timing?
That is, a tenant decides to move into a new home today can obviously do that because he has a signed contract with you guys, but it’s more of as those leases expire and tenants realize that home affordability has increased, they make that switch?
Bryce Blair
Well, yes. I mean, clearly people are generally not going to break their lease.
But I guess my comments are more that – and just by way of reference, as we’ve tracked this for a decade now I guess, Leo, I mean, the move-outs to homeownership – move-outs to home purchase had typically been in the low-20s and moved up to as high as 30% during the go-go years and moved down to as low as 14% or so. So at 16%, it’s still at the low end of the range.
So my comments I guess were coming from two-fold. One, just historical perspective, you would expect things to start to move back to more normalcy.
And when you add to that, the unusual and peculiar time rent right now where you have a very weak housing market that’s receiving some government stimulus, which is impacting home affordability.
Michael Levy – Macquarie
Okay. Thank you very much.
Operator
The next question comes from Paula Poskon with Robert W. Baird.
Please go ahead with your question.
Paula Poskon – Robert W. Baird
Thank you, and good afternoon. To come back to the dispositions for a moment, the things that you have under contract that are in due diligence that you mentioned, will that – if those closed by the end of the year, will that put you in the range of your guidance of 200 million to 300 million?
Tim Naughton
Paula, it will, and there may be some assets that leak over into 2009 that could potentially take it just out of [ph] that range. I'm sorry, into 2010 that could potentially take it just over the range.
Paula Poskon – Robert W. Baird
Okay, great. And of the – among the ones that you did complete the sales, have you noticed any change in the composition of the bidding pool?
Tim Naughton
It’s pretty diverse. I would say it’s still probably three quarters funds and private partnerships, if not more.
On some recent assets, we’ve had as many as three or four weeks bidding on those assets, and you started to see a little bit of institutions coming back into the market. But the guys that tend to be the most competitive are the funds and the private partnerships.
Paula Poskon – Robert W. Baird
That’s helpful color, thanks. And on the development completions, in particular on the Northborough, it looks like that came in ahead of schedule.
It was initially, I think, scheduled for delivery in first quarter 2010, then last quarter it was moved up, and now it’s early. What’s driving your ability to deliver early?
Tim Naughton
I would say, on Northborough, it’s a prototype product in a market where we felt a lot of this product before. So some of that is just efficiencies, learning.
Some of it’s – there is a lot of labor right now, where they may have put 50 framers on it before, sometimes you're trying to scurry off a few of them. But we’re not having trouble meeting schedules pretty much anywhere right now.
Paula Poskon – Robert W. Baird
It’s helpful, thanks. And then in terms of leasing traffic, are you seeing any change in the creditworthiness of the applicant pool?
Bryce Blair
Paula, no, we haven’t and we generally do not. In fact, we never change our qualification procedures regardless of what stage of the economy and we are still closing at healthy rates in the mid 30%.
Paula Poskon – Robert W. Baird
And any changes in the trends among reasons for move-out other than the homeownership that we’ve already talked about?
Bryce Blair
The other trend that I would note that I think is material is that reasons for move-out related to rent increase or financial has dropped to 7%, whereas as we’ve said in the past, it’s historical run 8% to 10%, and even as recently as last quarter, it was in that 10% realm.
Paula Poskon – Robert W. Baird
That’s all I have. Thank you very much.
Operator
Your next question comes from Chris Sommers with Greenlight Capital. Please go ahead with your question.
Chris Sommers – Greenlight Capital
Hey, guys. Just a simple modeling question.
I was wondering for the fourth quarter what you guys are expecting for interest expense and then the non-established NOI.
Tom Sargeant
Chris, this is Tom Sargeant. We didn’t give that level of detail on our outlook.
We’ve given a lot of detail, but we didn’t break it down and we never break it down by interest and non-stabilized. I’m sorry; we don’t parse it in that format.
Chris Sommers – Greenlight Capital
Okay. All of my other questions were answered.
Thanks.
Operator
Your next question comes from Rich Anderson with BMO Capital Markets. Please go ahead with your question.
Rich Anderson – BMO Capital Markets
Thanks. I thought I got blackballed.
Bryce Blair
Rich, we’d never blackball you.
Rich Anderson – BMO Capital Markets
I wanted to sort of look at the future a little bit differently, so I don’t get an answer, we don’t give 2010 guidance yet. And I think I could do it.
And that is – Bryce, you went through some of the positive metrics you were seeing at this juncture, say, three or four quarters into the downturn in terms of rents for multi-family in your portfolio. How does that compare to previous cycles in terms of these positive metrics starting to materialize?
I mean, is it happening sooner than it did in 2001, 2003 time frame, or is it sort of replicating what you’ve seen in past cycles?
Bryce Blair
I would say it’s generally similar, but this downturn is different than anything we’ve seen in our business career. Certainly the last one, particularly for our markets, was – actually was a more precipitous drop.
We are coming off of really super heated economic environment in the Bay Area and many of our markets and super heated revenue growth. So the fall came very quickly in terms of rental rate declines.
The fall has been more moderate this time because of that. But the trends remain the same, which has (inaudible) you to have economic growth, GDP, and then you’ve got to get job growth, which we haven’t seen yet.
Then it’s going to translate into apartment fundamentals and finally ultimately into collected rent. So that hasn’t changed.
But the ebb and flow of it is different each time.
Rich Anderson – BMO Capital Markets
Feels like it might be a little bit shorter there on duration. Is that a fair way of looking at it?
Bryce Blair
Well, it certainly – the pain has been spread more evenly this time than last time where it was more concentrated. And as I mentioned, the fall was just so precipitous in ’02 and ’03 in some of the markets that we operated in.
And we have not seen that this time. The second thing is we have – we are enjoying the benefit of, notwithstanding my earlier comments, a very weak housing market.
So we are seeing less cannibalization of our customers than we did last time is another factor. So there is a number of different issues, but in terms of whether it’s going to be a little shorter or about the same, I’m just not prepared again to that level of projection at this point.
Rich Anderson – BMO Capital Markets
Okay. I assume you guys are – maybe you’re not, in the cap of not expecting to see this massive flood of distressed acquisition opportunities.
So I guess the first part of the question, a yes or no answer. And then the second is, are your banking – your banking relationship sort of keeping you informed about some of their situations in terms of acquisition opportunities that might come up down the road?
Bryce Blair
I’ll provide a comment and Tim may want to jump in. I think the first is, yes, we are in the camp that we don’t think there is going to be a flood of big distressed opportunities.
I think that’s just generally more true in apartments than it is in other sectors where – it may be more true in other sectors and less true in apartments. Having said that, we absolutely are keeping in touch with all of our banking relationships and looking at trying to particularly loose anything that we think makes sense.
But because of the continued debt availability in the apartment sector, which you don’t have in other sectors, because of just the nature of apartment fundamentals, the likelihood of having a flood does not mean there won’t be distressed assets. There certainly will be.
But in terms of a flood, that’s not how we are putting together our acquisition plan. Tim?
Tim Naughton
Yes, Rich. This is Tim.
I don’t think you need to sort of different between distressed sellers and distressed pricing. I think certainly there will be plenty of assets that change hands where they were just way over-levered.
And the sponsors aren't in any position to recapitalize. And so therefore it’s going to require a lender to sort of push it back out in the market and be recapitalized.
But there is plenty of liquidity lined up on the other side to buy these. So we think the pricing is likely to be more rational than “distressed.”
Rich Anderson – BMO Capital Markets
Okay. And then last question, when you look at the entire big picture between development and acquisitions and the lag effect of development and the risk you take on development and all that, what appears to be the bigger opportunity at this point, development or acquisitions?
Tim Naughton
I would say the bigger opportunity is acquisitions. I would say for the most part, most deals still are not going to underwrite, whether they are land that we have optioned or deals that are out there in the marketplace.
Having said that, as you get into 2010 and construction costs continue to bottom and you saw it having more visibility towards recovery, I think new construction, new development can be pretty compelling.
Rich Anderson – BMO Capital Markets
So it’s sort of phasing into development kind of?
Tim Naughton
I think so. But I think for the next two or three quarters, it’s likely still to be acquisitions.
Rich Anderson – BMO Capital Markets
Okay. Thank you.
Operator
(Operator instructions) Your next question comes from Michelle Ko with Bank of America. Please go ahead with your question.
Michelle Ko – Bank of America
Hi. Most of my questions have been asked, but I do have one question.
It sounds like with the improvement in the new move-in rents, I was just wondering do you think we’re past the trough. And can you also tell us what the historical trough was?
Leo Horey
Michelle, this is Leo. As Bryce said, we are not calling a bottom.
We’re just saying that certain metrics that we are looking at are suggesting that things are a little better. With respect to the trough, a historical trough, on a revenue basis, it occurred in ’02 where we – I think it was about the third quarter where we got to a less than – just less than 8% was the trough in Q3 of ’02.
So that gives you some perspective on what occurred historically.
Michelle Ko – Bank of America
Okay, great. Thank you very much.
Operator
There are no further questions at this time.
Bryce Blair
Okay. Well, thank you all for participating and listening.
And I know we’ll see many of you in a couple weeks at NAREITs, but we thank you for your time today.
Operator
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program.
You may now disconnect.