Jul 28, 2011
Executives
John Christie - Senior Director of Investor Relations and Research Leo Horey - Executive Vice President of Operations Thomas Sargeant - Chief Financial Officer and Executive Vice President Timothy Naughton - President, Director and Member of Investment & Finance Committee Bryce Blair - Chairman And Chief Executive Officer
Analysts
Jonathan Habermann - Goldman Sachs Group Inc. Jeffrey Spector - BofA Merrill Lynch Swaroop Yalla - Morgan Stanley Karin Ford - KeyBanc Capital Markets Inc.
David Bragg - Merrill Lynch Paula Poskon - Robert W. Baird & Co.
Incorporated Richard Anderson - BMO Capital Markets U.S. Jeffrey Donnelly - Wells Fargo Securities, LLC Nicholas Yulico - Macquarie Research Alexander Goldfarb - Sandler O'Neill + Partners, L.P.
Michael Salinsky - RBC Capital Markets, LLC Michael Bilerman - Citigroup Inc David Toti - FBR Capital Markets & Co. Seth Laughlin - ISI Group Inc.
Unknown Analyst - Eric Wolfe - Citigroup Inc
Operator
Good afternoon, ladies and gentlemen, and welcome to the AvalonBay Communities Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference call, Mr. John Christie, Director of Investor Relations.
Mr. Christie, you may begin your conference.
John Christie
Thank you, Amanda and welcome to AvalonBay Communities' second quarter 2011 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's a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's 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.
But now I'd like to turn the call over to Bryce Blair, Chairman and CEO of AvalonBay Communities, for his remarks. Bryce?
Bryce Blair
Thanks, John. And welcome to our second quarter conference call.
On the call with me today are Tim Naughton, Tom Sargeant and Leo Horey. Tim and I will each have some prepared remarks and then all 4 of us will be available to answer any questions you may have.
Last evening, we reported EPS of $0.49 and FFO per share of $1.13, which was $0.02 above the midpoint of our prior guidance. On a year-over-year basis, our FFO increased by about 9%, and after adjusting for nonroutine items, increased by about 13%.
Higher-than-expected quarterly results were driven by slightly stronger-than-expected revenue growth as well as by lower operating expenses, some of which were timing related. On a year-over-year basis, NOI grew by 8%, which is the strongest increase we've experienced since the first half of '07.
The full year we expect NOI growth of between 7% and 8.5% and FFO per share to be between $4.60 and $4.75. This range excludes the impact of the sale of a ground lease asset that was included in our previous guidance.
We mentioned last quarter, we intend to sell our leasehold interest at Avalon Rock Springs, which, once sold, will result in a net annual noncash pickup in FFO of around $0.10 a share. This addition to FFO was included in our initial outlook, however, currently we don't anticipate that Rock Spring will close prior to the end of the year.
As a result, this noncash pickup in FFO will not be realized in 2011 and our outlook has been adjusted accordingly. The midpoint of our FFO range would represent a year-over-year growth rate of about 17% and this would equal the highest rate of growth for AvalonBay in our company's history.
And it's being primarily driven by the strong growth in our operating portfolio and the significant increase in our investment activity. The multifamily sector is experiencing the strongest performance in years and yet the uneven economic recovery and other concerns have raised questions regarding the strength and the duration of the apartment sector's outperformance.
I'd like to briefly address 4 of the most common questions that are often raised and offer some thoughts as to the impact on the apartment sector's outlook. And the most frequent question we often hear is whether the recent stall in job growth will undermine rental demand.
And while it's certainly true that job growth is a key driver of rental demand, the nature and composition of the jobs being created is very important as well. Nationwide, job growth for all age groups is averaged about 125,000 per month, but less than half of 1% through the first half of the year.
This is not a strong as original expectations and not strong enough to bring down the stubbornly high nationwide unemployment rate, yet when you look at the components of job growth and the unemployment rate for the younger college-educated workforce, who make up a disproportionate share of our rental household, you get a different picture. And let me share some of those stats with you.
Job growth for young adults, that's being the age cohort 20 to 34, during the first half of this year has been strong running at a 1.6% growth rate, just 4x greater than the rate of job growth overall. Additionally, while the overall employment rate is over 9%, the unemployment rate for the college-educated workforce is roughly half of that or 4.5%.
And finally, when we look at our own portfolio, we don't see any indications yet, but the recent sluggishness in overall hiring is impacting apartment market condition. Traffic is strong.
Turnover is low. Both renewal and new move-in rate are in the 7%-plus range.
So while overall job growth is modest and overall unemployment is high, job growth and employment is much stronger for the prime AvalonBay renter segments, which are typically young, affluent, college-educated households. A second question we often hear is whether rental rate increases will ultimately be constrained given that income levels nationally have been pretty flat.
It's a good question, yet when we look at average income for our new residents, we actually have seen material growth over the past few years. Incomes for new residents have risen from a recent low of about $101,000 per household in Q1 of last year to just over $112,000 per household as of the second quarter of this year.
This represents an increase of about 12% and is due in part to some real wage growth but also due to an upgrade in the profile of our residents. And when we look at the rent-to-income ratio it's currently running at 20% to 22%, which is modestly below our historical average, suggesting that there continues to be room for growth.
Ultimately, however, continued growth in rents can be benefited by strong job growth and in turn, by rising household income. A third question is related to the threat from improved home affordability.
Home affordability has improved due to home price declines and low mortgage rates, yet we're continuing to see historically low percentage of our residents move out to purchase a home. During the second quarter, this level was 14% and remains near historic lows.
And it's important to point out that despite the price decline, home prices in many of our markets remain quite unaffordable. The ratio of home price to income for AvalonBay markets averages 5:1 versus just over 3:1 nationally, and in some of our particularly expensive markets such as New York and San Francisco, this ratio is 7:1 or greater.
In addition to the continued high cost of ownership in many of our markets, is the very real concern about the value and merits of home ownership, particularly among a young mobile age cohort, who puts a premium on flexibility and convenience. Creates a certainly favor rental household -- rental housing.
A fourth question we often hear is related to the threat from an increase in the supply of apartments in the coming years. And nationally, multifamily starts are up but they're up relative to historically low levels and remain below long-term averages.
So far, this year, total multifamily starts are running at an annualized rate of about 150,000 units, which is still only about half of the 10-year average of about 300,000 units per year. The starts are likely to return to historic levels sometime next year, which means completion should return to normalized levels in late '13 and 2014.
So overall, while the long-term strength of the apartment sector is dependent upon the health of the overall economy, there are a number of factors specific to AvalonBay's markets or relative to our primary customer segment that suggests that we're still in the early stages of what is shaping up as a strong recovery. So I'll now pass this to Tim, who will be commenting on our portfolio operations and investment activity for the quarter.
Tim?
Timothy Naughton
Thanks, Bryce. As Bryce mentioned, I'll comment on a couple of areas, both portfolio operations and investment activity.
I'll start with the portfolio. Portfolio performance continues to improve and is in line with the revised outlook we issued early last month.
Despite sluggish and uneven job growth, demand supply fundamentals remained strong, traffic to move-out ratios are cyclically high leveled as prospect traffic was up over 10% while turnover declined on a year-over-year basis. In addition, as Bryce mentioned, the quality of prospect traffic continues to improve, which we believe is a function of low levels of new apartment deliveries combined with the weak for-sale housing market.
We've seen an increase in move-outs due to rent increases. We've been able to release vacated apartments to higher income prospects, resulting in an overall higher resident income profile with the capacity to pay higher rent.
Rents have now generally recovered since the last peak and most of our markets have entered the expansion phase of the cycle. In the second quarter, same-store NOI grew by 8% on a year-over-year basis, driven by an increase in same-store revenues of 4.5% and a decline in same-store expenses of 2.5%.
The decline in expenses was aided in part by lower turnover and lower bad debt as well as some timing-related items that we reversed in the second half of the year. The trends in revenue performance continues to improve as same-store revenue growth accelerated by 80 basis points from Q1 with same-store revenues were up by 3.7%.
All regions are showing positive growth, ranging from 3% to 6%. And the West Coast outperformed the East Coast for the first time in 10 quarters, reflecting the momentum in the West that we noted last quarter.
Same-store revenues accelerated through the quarter as well and grew by almost 5% in June. This momentum is continuing into the third quarter and July revenues are projected to be up by around 6% year-over-year, driven by annual increases in new move-in and renewal rents of 7% to 7.5% for units with expiring leases.
Renewal rates are projected to be strong for the balance of the quarter as offers for renewal increases for August and September are averaging over 7%, ranging from a low of around 5% in Southern California to a high of over 10% in Northern California. Overall, for the balance of the year, we expect same-store revenue to be up over 6% in Q3 and around 7% in Q4.
On a sequential basis, same-store revenues posted solid increases as well, growing over 2% from Q1. Again, every region experienced strong sequential growth with the exception of Southern California, which grew at about half of the rate of the rest of the portfolio.
While Southern California had lagged to other markets, it continues to improve and is now experiencing solid recovery with effective rents growing in the mid-single digit range over the last couple months. As we mentioned over the last couple of quarters, while recovery and expansion is broad-based, we expect that the West Coast will continue to exhibit stronger momentum and outperform the East Coast for the balance of 2011 and into 2012.
Shifting to investment activity and let's start with development. We began to ramp up new developments in Q2 as we started 3 communities, totaling over $200 million located in Boston and Long Island.
In addition, we've authorized the start of another $500 million that will begin construction in the third quarter, including the start of our $275 million West Chelsea deal in Manhattan, which will be developed with 2 different products, including separate high-rise and mid-rise buildings targeting 2 distinct customer segments. The high-rise, which faces 11th Avenue, will command views of the Hudson and will be targeted toward a higher-end luxury segment, while the mid-rise building will be targeted to a more useful segment with smaller, more versatile floor plans and then finally, more modern aesthetics.
Avalon West Chelsea is located near the entrance to the recently opened second phase of the High Line and within a few short blocks to the new 7 line station scheduled to open in the next 2 years, that's 34th and 11th Avenue. For the full year, we expect to start around $1 billion in new development, which is up a bit from our previous outlook.
The average projected yield for the development portfolio continued to improve in Q2 and now stands at just over 7%. Although we expect it to normalize in the high 6% range, once the rest of the plan starts to occur during the second half of the year.
With the cap rates in the 5% range, the development portfolio is expected to generate significant NAV growth over the next few years. Based upon current projected yields and current cap rates, projected development will contribute $1 billion plus net asset value over the next 2 to 3 years based upon cumulative starts of $2.5 billion to $3 billion from 2010 to 2012.
We also are continuing to replenish and build the shadow pipeline, as we added another $200 million in development rights in Q2 and have another $500 million in due diligence. We're remaining aggressive in building the pipeline early in the cycle when development is usually most accretive and many competitors are still reestablishing their development platforms.
Turning to acquisitions. In the second quarter, we closed on a total of $400 million in acquisitions, including the previously disclosed, the EDR asset exchange, which included 6 Southern California communities and accounted for $260 million of the total.
We also closed on 2 assets in the D.C. market, totaling $140 million, including one community for the investment management fund located in Rockville, Maryland for just under $50 million.
In addition, we have a few other fund acquisitions, currently in due diligence totaling $150 million. With the investment period ending in August for the fund, these acquisitions are likely to be the last investment for Fund II.
Overall, including these 2 deals, we're projecting a total capital investment for Fund II of approximately $800 million. Any additional acquisition activity for the balance of the year will likely be funded through the balance sheet.
As we've discussed in the past, this will allow us to be more aggressive in pursuing some of our portfolio management objectives. So in summary, the recovery department market has now transitioned to expansion with strong rental rate growth and experience across our markets.
Solid fundamentals are translating into improved portfolio performance, despite uneven economic and job growth. And finally, we're continuing to pursue an aggressive growth strategy in this phase of the cycle through acquisition, redevelopment and new development.
And with that, I'll turn it over to Bryce for some closing remarks before opening it up for Q&A.
Bryce Blair
Well, thanks, Tim. I want to wrap up our prepared remarks with a few comments on capital market's activity during the quarter.
In April, we took steps to mitigate future interest rate risk by entering into $430 million of forward starting interest rate swaps, where we agreed to pay a fixed rate of interest in exchange for a floating rate of interest at a future date. There's no impact to 2011 earnings as a result of this transaction.
Also during the quarter, and early into the third quarter, we were active under our continuous equity program or CEP, raising about $105 million and we've now raised a total of about $300 million under the current CEP since its inception in November of last year. Overall, the balance sheet remains in great shape with $360 million of cash on hand and nothing outstanding under our line of credit.
Unencumbered NOI continues to improve at about 70% and interest coverage is strong at 3.2x as of quarter end. Overall, we feel very positive about both our performance so far this year as well as our outlook for the balance of this year and into 2012.
We have strong internal growth from our portfolio, strong external growth from our development activity, a strong balance sheet to fund that growth and a seasoned management team to execute it. Regarding the management team, I did want to comment briefly on the announcement early last month regarding my decision to retire as CEO at the end of this year and Tim's promotion to CEO.
As mentioned in the prior announcement, I will continue in a halftime capacity during 2012 and will remain as Chairman during that time. This was a difficult decision for me personally, yet it was an easy one for me professionally.
Difficult for me personally as I felt so fortunate to have the opportunity to be part of AvalonBay for over 26 years and to serve as its CEO for 10. AvalonBay has been a big part of my life and I'll very much miss it.
Yet professionally, it was an easy decision as AvalonBay have such a deep and talented management team. Tim and I have worked together for over 20 years.
Tim knows the industry, the company and many of you very well, and with the support of Tom and Leo and the balance of the senior team, I know they will continue to enhance AvalonBay's reputation as a best-in-class company. With that, Amanda, we're now available to answer any questions.
Operator
[Operator Instructions] Your first question comes from David Toti from FBR.
David Toti - FBR Capital Markets & Co.
I just wanted to ask a couple of questions around the development pipeline and maybe I'm reading too much into this, but it looked like sequentially, the additions to the land bank essentially kept your inventory pipeline flat. Is that just something that's lumpy or is there kind of a signal that you see that the pipeline sort of maxed out at current levels at least for shadow pipeline?
Timothy Naughton
David, it's Tim. I think, that's really just a coincidence that the pipeline stayed level.
As I mentioned in my remarks there's a couple of hundred of new development rights and half of it starts a couple hundred million this quarter. But as I also mentioned, we do have $500 million in due diligence so that pipeline could grow at $500 million in one quarter and we are anticipating probably about $500 million next quarter.
It's likely to stay flat though for the next 90 days.
Bryce Blair
And I might just add to that, David, if you look back this picks up in some comments from prior calls but over the past year so if you looked at our development pipeline a year ago today, so in the second quarter of 2010, we had 28 communities representing about $2.2 billion in the pipeline. Today it's $32 billion -- 32 communities representing $2.7 billion.
So over the last year, it's grown by $500 million, notwithstanding that we started 13 communities during that time period. So we've been adding at a greater rate over the past year than we've been starting as that pipeline has grown and that really ties into Tim's comments in his prepared remarks that we've been pretty aggressive to add to it during the early part of this cycle when we have had a competitive advantage against many of our peers.
David Toti - FBR Capital Markets & Co.
Okay. And then, is it possible to disclose the yields you're expecting for the 3 new starts that you added this quarter?
Bryce Blair
The 3 new starts?
David Toti - FBR Capital Markets & Co.
My question is, are the yields getting tighter on the new starts or are they pretty much in line with the averages that you've described?
Timothy Naughton
Well, just maybe going back to 2010, I think we spoke about it -- this is Tim, by the way, David. I think we've talked about this in 2010, the deals that we did in choose to start in 2010 really represented sort of the best of the best and had average yields north of 7%.
When you look at the balance of the development rights portfolio, it's a mix from some legacy deals that are sub-6% to newer deals that in some cases approach 8% or maybe even more than 8%. But we expect that, that projected yield will stay in the high 6% range over the next few quarters as we start some of the deals that are teed up here over the next few quarters.
David Toti - FBR Capital Markets & Co.
Okay. That's helpful.
And then my last question just has to do with the notable expense control. Is the increasing level of capitalization in any way tied to that?
I know they're quite separate buckets but I'm just wondering if there's a relationship that we can expect to see continue as your capitalization levels increase?
Bryce Blair
For the asset or our CapEx per unit?
David Toti - FBR Capital Markets & Co.
The total capitalized interest and sort of development spending on the capitalized items. I'm just wondering if there's any spillover from your operating expenses into that bucket.
Bryce Blair
No, there wouldn't be any spillover that I can think of.
Operator
Your next question comes from Jeff Spector of Bank of America.
Jeffrey Spector - BofA Merrill Lynch
Can you please provide some detail on the 4 parcels acquired this past quarter and since subsequent to the quarter?
Bryce Blair
So there are 2 communities during the quarter, and as you mentioned 2 right after the quarter. One was in California, one was in New York, one was in Connecticut and one was in Massachusetts so basically 3 East Coast, 1 West Coast community.
One of them was a relatively recent purchase meeting that went under. It was priced during 2011.
The other deals had been under contract for a number of years and a couple of them had been renegotiated. So the average price per unit is in the high 30s per unit and they are all wood frame, 3 wood frame communities, 1 concrete construction.
Jeffrey Spector - BofA Merrill Lynch
Okay. And then a question on your statement that the higher income earners are replacing those moving out.
Obviously, those moving out can't afford the new price points and I guess I'm just trying to think about that customer if they were a good paying customer and with your portfolio management objectives I guess over time, are you trying to see if there's a way to keep that customer within your portfolio?
Timothy Naughton
Tim here. I would say, yes.
We actually do -- and Leo, you may want to comment on this -- we do actually have a fair number of folks that do transfer or move from one community to another, oftentimes over a job change or some other life change, but to the extent we can accommodate them at another community that might fit their means or their objectives then certainly we'll try to do that.
Operator
Your next question comes from Alex Goldfarb of Sandler O'Neill.
Alexander Goldfarb - Sandler O'Neill + Partners, L.P.
Just looking at your New York performance this quarter, the year-over-year growth, the revenue growth, looked lower than the rate that you guys had in the first quarter, yet the sequential growth fourth quarter to first quarter, first quarter to second quarter seems to be increasing so I just want to get a little better perspective on that.
Leo Horey
Alex, this is Leo. With respect to sequential growth, as you are aware, there are more expirations that occur in the second and third quarter than occur in the first and the fourth.
So whatever direction rents are moving, the sequential is magnified in the second and third quarter. That's to deal with one aspect of your question.
With respect to New York in general and the discussions that have been out there in the press, the results in New York really are divided into 3 different areas. That's for our portfolios: it's Rockland County, Westchester County and New York.
And in Westchester is where our results have been lagging, but in Rockland and New York they've been performing quite well around 4.5%, 5% on a year-over-year basis. In Westchester, it's really just because of some supply coming in that area.
In fact, if you look at our southeast property, the revenue growth there was just above 1%, where if we compare it to a New York City asset like Riverview, which again is just outside the city, we saw revenue growth north of 7%.
Alexander Goldfarb - Sandler O'Neill + Partners, L.P.
Okay. That's helpful.
And then the second question is just a little more color on the Rock Spring marketing. Just curious if this is a pricing issue, if this is a financing issue, just sort of issue curious why it's taken a little bit longer than what you initially thought?
Timothy Naughton
Alex, Tim here. I think as we talked about last quarter, we did that.
We had a partner in a deal that we did buy out last quarter and after sometime after that, decided to take it to market, which we talked about last quarter. It is a more protracted process than in Montgomery County, just to give a little bit of color.
The county and the housing authority actually had a first refusal that often takes 60-plus days to clear but at this point in the process, the asset is still being marketed and we just don't anticipate this giving the timing that it's going to close before the end of the year. It's a more protracted process generally in Montgomery County and the last thing I'd say is like any deal to the extent if we're unable to get those kind of valuation we think represents fair value, it may not trade.
But at this point, we're still pursuing the sale of that asset.
Alexander Goldfarb - Sandler O'Neill + Partners, L.P.
Okay. So your point is that if you don't get, obviously, the pricing that you want despite having the gap impact to your P&L you would retain the asset rather than just sell it?
Timothy Naughton
We wouldn't sell it at any cost, that's correct.
Operator
The next question comes from Eric Wolfe of Citi.
Michael Bilerman - Citigroup Inc
It's Michael Bilerman here with Eric. Bryce, in addition to announcing your retirement, you also announced that you're going on to Pulte's Board of Directors.
And I know you sort of entered the empty nest part of your life and with the kids out of the house and them being sort of a net prime renter cohort. What's sort of your advice to them?
Is your inclination to sort of help them out and help them buy their first home so they'd build up equity, or is it that they should continue to lease their residence?
Bryce Blair
Well, Mike, you've covered a lot of topics there. You've talked about my career, my family, that renter market and the housing markets.
So let me try to be a little bit responsive. And I touched a little bit of this in my prepared remarks but to be quite honest as I talk to my kids and try to listen to them and listen to their friends, for the most part, the last thing that's on their mind is home ownership.
They are focused on their first jobs, their first apartments, their moves. My son is 3 years out of college, he's already moved twice.
He's on his second job already and he just is plenty happy being a renter. I think the advice I would give to whether it's my kids or anyone's children is to not let the housing be a burden in terms of their career or lifestyle choices and at that stage of their life, they are quite, quite mobile and put a high premium on flexibility and I think rental plays into that.
Now as they mature further into their age, there will be a time when likely home ownership will be the right choice for them. But for right now, for someone in their -- mid- to late 20s I think that's certainly not the norm and among their peers, it's just not something that they talk a lot about or pursue.
That's been my experience. In terms of joining the Pulte board, I have joined the board and attended my first board meeting, I'm finding it interesting, and it's always been AvalonBay operates in the housing industry, rental is just one segment of it.
So it was just interesting for me to better understand the other side of that coin and hopefully, I can be of assistance to the Pulte board as well as this benefits the learnings in terms of the broader housing market.
Michael Bilerman - Citigroup Inc
Does that put you at all in any sort of conflict of interest?
Bryce Blair
No, I don't see that in any way and [indiscernible] that both here and at the Pulte side and neither side saw that.
Michael Bilerman - Citigroup Inc
Eric has a question as well.
Eric Wolfe - Citigroup Inc
Just one quick follow-up question. I guess it relates to what you were talking about in terms of a lot of young renters coming in the door.
Have you seen the average age of your residents come down over the last couple of years and I guess, along with that, have you also seen the average length of time that they're staying increase as well?
Leo Horey
Eric, this is Leo. I would tell you that we haven't seen any significant change.
To give you some perspective, about 28% of our residents are 20-year-olds, about 24% are 30-year-olds and then it drops off pretty precipitously about 13% of them are in their 50s and then the rest just scatter around. I haven't seen any significant change and the turnover rates have stayed relatively constant, which would suggest that the average resident is staying about the same length of time.
Turnover was up a couple of years ago but it has dropped down in over past year as we've seen through the first half of the year it's relatively constant.
Operator
The next question comes from Mark Bifford [ph] of Bloomberg Research.
Unknown Analyst -
I was wondering if you could just talk about the rent growth, the strong rent growth you saw, and the occupancy tick down. I'm just wondering how you look at in the future, pushing occupancy and you gave us the 7.1% revenue growth.
I'm just wondering what mix of the 2 will drive that number.
Leo Horey
This is Leo again. Based on where we are in the cycle, we're taking a much more aggressive stance, a couple of quarters ago I believe that we've said that we would expect lower occupancy in order to drive rent growth and as long as we believe that market conditions are remaining strong, we will continue to take that stance.
So today across most of the markets -- and it does vary from market to market, you would accept more availability in order to drive rent growth. If we felt like that things were really slowing down then we would probably switch over except less availability and that would pull back rent growth, but we don't see any signs right now that are causing us to change our approach.
We look at it regularly. I'll look at it very carefully at the end of August.
Why? Because we're going to go into a period where seasonal traffic patterns typically decrease as both Bryce and Tim alluded our traffic patterns have been up and we've been able to maintain our occupancy around 96% while pushing rent fairly aggressively on both lease renewals and new move-ins.
Unknown Analyst -
And Tim, you talked a little bit about the development pipeline and the starts from 2010 to 2012, and the NAV creation of about $1 billion from that pipeline. I'm just wondering if you could expound on that and get a little bit of your assumptions either on the cap rates side and just the yield side for how you came up with that number.
Timothy Naughton
Sure. Well cap rates as I've mentioned, I think Bryce, in his prepared remarks he's using roughly 5% cap rate which is roughly where current cap rates are, somewhat lower than that on the West Coast, and perhaps in some urban markets like New York, [indiscernible] and D.C.
And then just simply using what we're anticipating based on current rents the average yields of -- the average initial yields of development fields to be in -- and that's without any inflation just to be clear, that's based upon our assessment of current rents as well as construction cost for those that was started in 2010 so that we can expect to start to 2012. But we've already started about 1/3 of that activity, almost $1 billion of that $2.5 billion to $3 billion of those deals the projected yields have been in south of 7% range.
Unknown Analyst -
And do you expect that to rise given the strength you've seen on the rental side?
Timothy Naughton
We would expect it to move with the market. I haven't said that deals that we're going to start from this point forward are more in the high 6% range so it would be off of a lower base, but yes, we would expect the yields to continue to improve along with the general market.
Unknown Analyst -
Okay. And then my last question is just related to the Fund II that will be closing soon.
What is the expectation for maintaining that, is there a life to it where you will start selling assets out of it or where you start buying assets for your own portfolio, how will that work?
Timothy Naughton
There is a life to it. And it's a second fund.
We currently are managing the assets of a first fund that we still have about on the order of $720 million, $730 million of assets under management there along with the projected level of investment in the second fund. In the second fund, we've got about $1.5 billion total investments, the total investments or assets under management.
Fund I obviously started before Fund II so that's more seasoned and we are actually starting this year to sell assets in that front and expect we'll continue to average out over Fund I and Fund II both due to the fact that's a finite life vehicle as well as to take advantage of market opportunities here over the next couple of years. The fundamental is to remain strong.
Operator
The next question comes from Dave Bragg of Zelman & Associates.
David Bragg - Merrill Lynch
Can you just frame some of the other markets in your portfolio around the 7% to 7.5% increase, I think you touched on Southern California at the low end, Northern California at the high and also New York but could you go around the rest of the key markets?
Bryce Blair
Sure, Dave. I would tell you that the strongest markets above that 7% are Boston on the East Coast and then Seattle and Northern California those are showing the strongest trend, and then I would tell you that I would put D.C.
and New York Metro area, I think they're further into the economic recovery. And then finally, below, obviously we talked a little about Southern California but Southern California is moving in the right direction and it's encouraging for looking forward to 2012 I think it could certainly help our performance.
Did it give you the perspective you're looking for?
David Bragg - Merrill Lynch
That's helpful. And then just directionally maybe a little bit more on D.C.
and how that's looking going forward as compared to the broader portfolio.
Bryce Blair
The D.C. results are solid but stable.
They're just more mature right now so renewals are -- renewals and new move-ins are just below the average that Tim was sharing.
David Bragg - Merrill Lynch
Bryce, and just your commentary at the open-ended scenario that you painted with the demand from the younger cohort, the rent income, metrics being very favorable and perhaps improving despite rising rents, low supply, lack of move-outs to buy homes, et cetera. Assuming that all of those remain in place over the next 12 months with probably the only if being the job growth, can you give us your thoughts on the ability to repeat the performance today in terms of pricing power next summer?
Bryce Blair
Well, Dave, we're certainly not prepared to offer any initial guidance into 2012. I did say in my comments though that we do believe that we're in the very early stages of a strong economic recovery and we are literally a few quarters into this recovery and we think it's got some pretty substantial legs to it that clearly could be derailed by some macroeconomic conditions, but what my comments were intended to try to reinforce is it isn't just about jobs.
There are a number of other factors that have and continue to add strength to the rental market but we are looking forward to a strong 2012. You'll just have to stay tuned in terms of us to quantify it, the beginning part of the year.
Operator
Your next question comes from Jeffrey Donnelly of Wells Fargo.
Jeffrey Donnelly - Wells Fargo Securities, LLC
A few questions. First, can you just talk about the environment for acquiring development sites today?
I'm thinking where is pricing on land versus a year ago. I'd be interested to know who dominates that field.
And I guess, are you concerned that the strength of this recovery could restore some of the sideline merchant builders?
Bryce Blair
Well, Jeff, I'll offer a few comments. I'm sure Tim will add to it as well.
But one, I'd like to think AvalonBay dominates that field, that certainly with the markets we are active in. We are the most active apartment developer, certainly the most active public apartment builder and I think the most active apartment builder in the markets that we operate in.
I did give some color in terms of the 4 sites we just acquired in terms of pricing, but I guess just to back up, there's no question that prices have been escalating as the fundamentals have become -- the strength of fundamentals become more apparent, it has attracted more merchant builders. It's also attracted increased activity from the public builders as well and not surprisingly puts upward pressure on prices and on terms.
So the deals today are not as good as the deals 12 months ago. We as, as you all remember, we began the construction again in the fourth quarter of '09 and we're in one site back then.
That's one of the reasons I mentioned, the growth that we've added over the past 12 months. So there's no question, competition is up for sites and it's putting upward pressure on land pricing.
Jeffrey Donnelly - Wells Fargo Securities, LLC
And just a follow-up, I'm not sure if you agree. But I would argue that asset prices in this recovery have probably outpaced the rental recovery.
So I'm curious, what signals do you look at to know it's prudent maybe to take your foot off the pedal on construction, not necessarily today but down the road and I guess, how do you weigh that versus the asset sales to balance out of growing development pipeline?
Timothy Naughton
This is Tim. First of all, you're correct.
I mean, asset prices have outpaced rents just by virtue of the fact that the cap rates have fallen 125 to 150 basis points. So all rents are maybe on recovery here on the order of 10%.
In many cases, asset prices recovered probably 2.5, 3x that across most of our markets. In terms of construction and when you know when to think about pulling back up, it's something we talk a lot about internally.
There's certain metrics we look at that we talked about earlier. We look at obviously yield versus cap rate.
I mean, it gives you a sense of a level of value creation but also just the amount of cushion, if you will, between what you can earn off of a new development versus an acquisition. But we do look at land prices, we look at the rate of growth in the construction pricing as well, which continues to be relatively benign.
We're starting to see it inch up of bit but nothing like we saw towards the end of the last cycle, where we had the construction pricing growing at a multiple to inflation, so I think if we saw that along with the land prices that were outpacing inflation over a long period of time, that's a pretty good signal to start pulling back.
Jeffrey Donnelly - Wells Fargo Securities, LLC
And just last question. I'm curious as to your thoughts conforming loan requirements or hurdles I should say and a lot of the high-cost markets, where you guys operate, coming down at the end of September.
Do you think that's going to be a catalyst for demand for you guys after that or maybe it's not as impactful because move-outs to home purchase are relatively low?
Bryce Blair
It's Bryce. It's tough to know.
I mean, you're talking about them coming down from a very high level to still a high level. And over time I think, and we would expect them to continue to come down ultimately having a marginal benefit to run our demand.
But it's just hard to quantify it or believe that it's going to be a major shift. It's directionally moving certainly towards benefiting rental demand as those levels come down.
Operator
Next question comes from Jay Habermann of Goldman Sachs.
Jonathan Habermann - Goldman Sachs Group Inc.
Could you guys comment just on your desire I guess in terms of as you look at construction on the West Coast over the next part of the cycle. I guess as I look at Page 18 of the south and the development rights, I mean, roughly $2 billion of the $2.7 billion are concentrated in sort of the Northeast and mid-Atlantic, but how you are you guys thinking about California and starts over the near term?
Timothy Naughton
Jay, Tim Naughton here. I think it's a good question.
Historically what we've seen and what we're still seeing right now is typically in the Northeast development economics are just more compelling than they are in many other markets across the country but certainly more than what we typically see in California, I think that's a function of a few things. The markets tend to be more stable and I think that the volatility sometimes that you see in California really argues for an acquisition disposition strategy relative to new developments, whereas in the Northeast where they tend to be a little bit more stable just the premium you can get for development or acquisition tends to be more constant to the course of the cycle.
So I think that's one element at play and the other thing that we've seen in California for whatever reason land often just on an entitled basis and we look at it on a risk-adjusted basis relative to what you can invest on as an acquisition or an acquisition rehab, oftentimes just hasn't been as compelling to us.
Jonathan Habermann - Goldman Sachs Group Inc.
Okay. That's helpful.
And Tim, you'd also mentioned perhaps some acquisitions after Fund II reaches completion driven by sort of portfolio management objectives. Can you give us some sense of what you are thinking, are you expecting these to widen out more in the near-term and create some opportunities or are you seeing better opportunities at this point?
Timothy Naughton
Well, in terms of portfolio management objectives, I was speaking more towards strategic but certainly opportunistically we're always going to be looking for opportunities where we think in terms of how you -- greater than what the assets' trading at markets. So that could happen, As, Bs, it could happen, really, any geographic market.
But in terms of strategic opportunity just geographically, I think we've continued to look to Southern California, California in general just read my prior remarks about development economics and perhaps recycle over time in Boston, New York we have a development pipeline and where we think development's going to continue to make economic sense.
Operator
The next question comes from Rich Anderson of BMO Capital Markets.
Richard Anderson - BMO Capital Markets U.S.
I have an obligatory need to ask a question about legalized gay marriage in New York and if you've seen any impact on your business or any noticeable impact on your business. I asked the same question EQR for last year as well.
Leo Horey
This is Leo. There's nothing that we track with respect to this.
So there's no noticeable impact.
Richard Anderson - BMO Capital Markets U.S.
Okay. That's what I thought you would say.
I just thought I'd ask. Bryce, at the very beginning in the conference call you said that the 8% is the strongest growth that you've seen since the first half of 2007.
Using history then as our guide, why should we think that -- why shouldn't we think that same-store growth will start to trail off from here?
Bryce Blair
Because it trailed off in the fourth quarter of '07.
Richard Anderson - BMO Capital Markets U.S.
What I'm saying is, I mean, are we at the high watermark right now at 8%?
Bryce Blair
No, that's not the intention of my comments. We've gone from '07 to today we've been through a pretty significant correction in capital markets in the economy in this country and we are back to the early stages of recovery.
As you mentioned I think on the last call, I just found it interesting as we look back to the 2 expansions in the '04 to '08, we had a 4.5 year run, which is relatively short by expansion cycles and in the prior one '94 to '01 it was 8 years. We're just one year into this.
We've got revenue growth about 6% so far if you look at it that way and then '94 to '01 that expansion to its cumulative revenue growth travel on being at 50%, so do we think that year-over-year revenues are 20% or something on a yearly basis? No.
But if you look at fundamentals whether it'd be the demographics that I've spoken to numerous times, if you look at just fundamental demand for rental housing, the absence of supply and the job growth of which it is modest, but it is there significantly certainly in the younger age cohorts, the number of factors that give us, I think, a valid reason to expect that this recovery is not short-lived but it has a long duration ahead of it whether that's going to be 3 years, 4 years or 8 years, I'm not going to insult anyone's intelligence to suggest that I know how long it's going to be but I think as expected, it's going to be truncated after a year is, there's no evidence of that.
Leo Horey
Leo. Rich, just to give you some perspective.
During the mid-2000 period at this quarter revenues were up on a year-over-year basis 4.5%. It was just below 8% during that period and maybe equally or more importantly during the period of the '90s and early 2000 it peaked at approximately 12% so even with positive results we've seen on a year-over-year basis, these results are still substantially below what we've experienced in the last 2 expansions.
Richard Anderson - BMO Capital Markets U.S.
Right but now with unemployment approaching 10%. Right?
I mean, the rules are different this time?
Leo Horey
Every recovery is different. They have their own idiosyncrasies to it and as I mentioned, yes, 10% is important.
It is not necessarily reflective of the customer in which we are renting to, which has a very different profile to that but clearly job growth, just to fundamentally clear, job growth is important to this recovery, job growth is important to rental household demand and we're not trying to minimize that, but in the absence of really any strong job growth, we and others have had very strong results.
Richard Anderson - BMO Capital Markets U.S.
You might have said this in past calls or whatever but the Class D move into more of a Class B element to your portfolio. Can you kind of quantify how big of a program that is, is it several billion dollars?
I assume it is, but do you have a way of quantifying the overall strategy not to say, how long it's going to take you to get there but just how big it could be?
Bryce Blair
Richard, I think, that was thrown around roughly on a fair market value basis if we're close to 85-15 today probably at less than that on a -- maybe 75-25, which on a total asset value of call it, $15 billion it would be about $1.5 billion.
Richard Anderson - BMO Capital Markets U.S.
Okay. Great.
And then last question I just kind of go back to the question Mike Bilerman on Pulte board membership and why that's not a conflict. I mean, it seems to me that it would have -- they would be very interested in the mindset of renters in terms of their business of homebuilding.
And it's kind of like you’re playing for the Yankees and the Red Sox to use an analogy. At the same time, are there some restrictions you have in their board meetings that you can offer or what makes it not a conflict, I guess my question would be.
Bryce Blair
No. I honestly see no conflict in it is something again we discussed before I joined the board both at my board, AvalonBay's board and the Pulte board.
Now what I expect to bring to the Pulte is my experience in the real estate business and just as an executive. I'm not there to disclose any AvalonBay secrets nor take any Pulte secrets to the AvalonBay's side.
So no, I don't see any conflicts. As I said, it is a -- we operate in the housing industry and insights from the housing industry are ones that can benefit either company.
Operator
Next question comes from Nicholas Yulico of Macquarie Capital.
Nicholas Yulico - Macquarie Research
Just a question. It's looks like you added a development range in San Francisco in the quarter.
Could you say, is that in the city or is that on the peninsula?
Bryce Blair
It's in the city. It's in the Civic Center in midmarket.
Nicholas Yulico - Macquarie Research
Okay. So that would be like a high-rise or a mid-rise?
Bryce Blair
Correct.
Nicholas Yulico - Macquarie Research
Okay. Great.
And then just last thing I want to make sure it sounded like there's really no plans for Fund III at this point once Fund II is exhausted, is that right?
Thomas Sargeant
Yes, this is Tom. We think the fund business is a great business to be in, we've been to Fund I, we're not closing out Fund II.
I wouldn't say there won't be a Fund III but there certainly will be a pause for a period of time as we reshape the portfolio and walk through the disposition activity under Fund I and II.
Operator
The next question comes from Paula Poskon from Robert W. Baird.
Paula Poskon - Robert W. Baird & Co. Incorporated
Could you just give more color on the lower operating expenses between those that we're just a timing shift into the second half and those that were through cost-containment?
Leo Horey
Sure, Paula. This is Leo.
The expenses for the quarter, productions area like bad debt that we talked about at the beginning of the year in utilities and in marketing. Those were offset obviously, as you can see in insurance and property taxes.
The bad debt we expect to continue for the remainder of the year. We've been having good results and our bad debt rate has actually been below what we budgeted.
On the utility side, some of it is savings that will continue, we've done some things to contain consumption with cogeneration or writing programs and some of it will reverse so part of utilities is timing, utility bills come in very sporadically with respect to marketing, some of it is expenditures that have not occurred that we expect will occur, and some of those expenditures are true savings. So it was probably characterize some of it at the big areas where there's movement on, some of it is timing and some of it's cruise savings that will carry forward.
Paula Poskon - Robert W. Baird & Co. Incorporated
And then at the risk of talking about what might feel like ancient history from your comments on the Investor Day last November. That thing you discussed having more B product in the portfolio, how do you calibrate that strategy with the demographic and the tenant profile trends that Bryce walked through in his opening remarks?
Timothy Naughton
Paula, this is Tim. Like we talked about in the past, it's really not intended to be one-strategy-fits-all, it really is a -- it's a function of the submarkets and what we believe as sort of the ideal product positioning within an individual submarkets.
And over a longer investment goal, we found through our research that about half the time as are higher and luxury products has outperformed and about half the time more value product outperformed. Generally it's fairly intuitive either based upon supply patterns within a particular submarket or just underlying nature of the demand so it's just our belief that there's just not one strategy that's going to dominate another strategy across all markets and submarkets and I think that's going to be true during different phases of the cycle certainly but certainly over a longer investment hold.
Bryce Blair
I was just going to add, Paula. This is Bryce.
In terms of my comments I assume you're referring to when I speak to young, affluent, college-educated resident majority base today and that is the majority of our resident base in the future. I mentioned we talked about shifting our portfolio from 15% buying asset value to 25%, so it has never been the intention to shift it to majority focused on the B product but also it shouldn't be concluded that the product does not include young, college-educated residents.
I can assure you I have 2 sons who are young, college-educated residents of the apartment because that's what they can afford and that's what is being done in our research is really try to better understand the needs of that age cohort, respond to them with the appropriate product.
Paula Poskon - Robert W. Baird & Co. Incorporated
And then just one last question. Any thoughts on the report last week that the Obama administration is considering pushing a proposal to have the GECs essentially become landlords by renting out foreclosed homes?
Leo Horey
Paula, this is Leo. With respect to foreclosed, number one, we don't expect it to have any material impact, what we find is that renters either choose to being a professionally managed communities or go into the gray market and they really don't overlap a lot.
So we really see a minimal impact of that proposal going forward.
Operator
The next question comes from Michael Salinsky of RBC Capital Markets.
Michael Salinsky - RBC Capital Markets, LLC
Can we have an update on the disposition plans for the second half of the year? Maybe a look at how much you guys are actively marketing and I'm just curious as to what you are thinking in terms of fund dispositions.
I know in your guidance you included some dispositions there.
Timothy Naughton
Michael, Tim Naughton here. As I mentioned earlier, we are targeting our leasehold interest at Rock Spring and then a couple of assets for the second fund, one on the West Coast, one in the East Coast.
We are going to be looking again over the next 30 days whether to expand the levels of the dispositions particularly for the first funds just given some of the trends we've seen and certainly in the markets particularly on the West Coast where asset value fell pretty dramatically here in the last 6 months.
Michael Salinsky - RBC Capital Markets, LLC
Given the pricing, you're seeing right now is there any sentimental was raising her disposition volume, maybe accelerating your recycling has as you're trying to move as you're repositioning the portfolio?
Timothy Naughton
We might. It probably won't have a big impact on 2011 just given that it's basically August 1st here today and by the time you identify, get the asset ready, give it to the market year into 2012.
So it's more likely to have more of an impact on 2012 and 2011 activity.
Michael Salinsky - RBC Capital Markets, LLC
Just to go back to Jay's question in terms of East Coast versus West Coast, any bias in terms of new development starts in the next 12 months or any impetus to add to the predevelopment pipeline in a certain market versus another at this point?
Timothy Naughton
Mike, I wouldn't say there is a bias. There's a bias for doing good business but we're business in all regions and all markets right now, it's really a function of the opportunity on a case-by-case basis.
Michael Salinsky - RBC Capital Markets, LLC
And finally, any submarkets where you guys are getting a little bit concerned about new supply down the road?
Timothy Naughton
Within D.C., I think we've talked about it. It's the first general MSA market that we expect to see supply hitting in 2012.
Beyond that, we expect maybe to see some in Seattle. In 2013, we think California's in pretty good shape through 2013 and Boston in 2013 and New York we're actually seeing a little bit of supply hit the market now we expect it to fall a bit before deliveries to get back up again a couple of years out.
Operator
[Operator Instructions] The next question comes from Karin Ford of KeyBanc Capital Markets.
Karin Ford - KeyBanc Capital Markets Inc.
Can you just update us where occupancy stood as of July?
Leo Horey
Karin, this is Leo. Occupancy equivalent to July is projected to be around 96%, so stable to what you just saw.
Karin Ford - KeyBanc Capital Markets Inc.
And last question is just on Los Angeles, it seems like L.A.' s performance and recovery is differentiating itself positively versus some of the other markets such as Orange County and Southern California.
If that's case, do you think that L.A. is going to sort of lead the recovery that you're starting to see in Southern California?
Leo Horey
I still would probably put Orange County first although I feel pretty good about L.A. L.A.
just came through the policies, which always occurs in second quarter and it's a period where you can come under pressure just because of turnover in that market and we came through it pretty stable. If you asked me to characterize Southern California I'd put Orange County first, put L.A.
second, and I'd put San Diego, third, but I feel good about all those markets and the directions that they are moving.
Operator
Next question comes from the line of Swaroop Yalla of Morgan Stanley.
Swaroop Yalla - Morgan Stanley
We've been hearing lenders and banks increasing their liquidation offer for distressed assets at opposed to extend and pretend. Some of your competitors have certainly been active in that segment of the market.
Just wondering if you've considered acquiring some of those kinds of deals and if not is it because they don't fit in the overall strategy for the company or is it some other issue?
Timothy Naughton
Swaroop, Tim here. Certainly, we look at the assets and relationships of the number of lenders and banks.
Yes, it didn't make sense for us. I expect less of their properties in our markets, to be honest so some high-profile deals that people know about that likely have come to market in shape or form over the next couple of years but we're looking at those kinds of deals just as we look at any broker deal or any other deals that might come to us directly.
Swaroop Yalla - Morgan Stanley
Great. And then just lastly, are you updating any of your job growth forecast as part of your guidance I know you guys gave out expected Avalon market job growth as 1.7%.
Is that for the overall market or again the prime rental cohort which you disclosed to earlier?
Bryce Blair
This is Bryce. Globally it's clear, we do not generate our own job growth forecast but we certainly update it monthly based upon the updates that come in from the vendors that supplies the data and it has continued to trend down throughout 2011 as I mentioned in my earlier remarks and currently expect it to be about 1.5%, just 1.5% nationally is the number that we are running with for 2011.
Within Avalon base market is actually a bit below that as our markets do tend on the downside to modestly follow the national average so we are certainly students to the job market in the sense of tracking it carefully and watching for changes both at a national but more importantly at a regional or submarket basis.
Operator
And the last question comes from Seth Laughlin of ISI Group.
Seth Laughlin - ISI Group Inc.
Maybe just following up a bit on Rich's question is when we think about when key growth rates are going to occur in the sector. There was a more gradual recovery in the '90s.
From the trajectory that we've seen, is it safe to say that while there's room on a cumulative basis be may be reaching that a bit faster and the cycle would be shorter in duration from kind of a trough to peak?
Bryce Blair
I'm not sure. I'm not sure I'm following the logic there that you're your laying out.
You know, I don't think this recovery is similar to either the prior 2 recoveries, I think it is pretty darn unique and frankly it surprised many in terms of the initial strength in the recovery so that's your point it has come on quicker and therefore may plateau at this level. I think we probably would agree with that but I think the more relevant question is the duration of it and I think it is just a little foolhardy for us to sit here and try to guess or predict the duration of the recovery.
Seth Laughlin - ISI Group Inc.
Understood and obviously understanding that the cycle is different in many ways, has the role of revenue management systems at least relative to the '90s, which I think Tim's compared the cycle more to the '90s in the past than what we saw in 2000. Has that played any role in terms of the efficiency of companies able to get to peak rents a little bit faster or at least returning to rent faster?
Bryce Blair
Probably so. I mean certainly transparency and visibility into pricing is much higher today than it was before and so you'd expect things to adjust more quickly given that visibility.
Tim, have you have anything to comment?
Timothy Naughton
The cycle versus prior? Yes, just in terms of peak might occur your commentary cycle it's a little different but if you look at demand supply fundamentals just stepping back I think we would have anticipated in 2012 would be a year that read demand supply peaking just given that supply like to start to pick them back up in 2013 probably lowest level through the end of '11 through 2012 at a time when we've hope to start seeing more job growth in 2012.
Now they said job growth gets deferred, delayed that makes sense but just looking at just demand supply ratios off of a very high occupancy base in 2012, it looks pretty good, too.
Operator
And we have no further questions at this time.
Bryce Blair
Well, thank you, all. We'll conclude the call.
We just thank everybody for their time today. Thank you.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.
You may now disconnect.