Good afternoon, ladies and gentlemen, and welcome to Avalonbay Communities' Second Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference call, Mr. Jason Reilley, Director of Investor Relations. Mr. Reilley, you may begin.

Thank you, Keith, and welcome to Avalonbay Communities' Second Quarter 2014 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during the discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating performance and financial results. And with that, I'll turn the call over to Tim Naughton, Chairman and CEO of Avalonbay Communities, for his remarks.

Thanks, Jason, and welcome to our second quarter call. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. The format for the call today will be the same as the last 2 quarters. We posted a management letter and slide deck this morning on our website before the market opened. I'll be providing management commentary on the slides, then all of us will be available for Q&A afterward. My comments will focus on providing a high-level summary of the quarter's results, as well as our updated annual outlook. I'll also touch on some of the key economic and apartment market factors that are impacting performance and our outlook, including recent trends in portfolio performance. And lastly, I'll just touch on development activity, performance and funding. So let's go ahead and get started, starting on Slide 4 of the deck. Generally, performance remains in line with our business plan. In Q2, FFO growth was up around 10%. Core FFO growth was up around 5% after adjusting for nonroutine items. Same-store revenue growth was up 3.1% on a year-over-year basis and 150 basis points sequentially. If you would include redevelopment, it would be up about -- it would be up 3.3% and 160 basis points sequentially. And then on a year-to-date basis, on a year-over-year basis with a different basket, which is just the AvalonBay legacy assets, same-store revenue would be up -- it was up 3.7%, and 4.1% if you were to include redevelopment. Development completions this quarter totaled almost $200 million, with an initial projected yield of 7.3%. And we started another $400 million and 4 deals, all of which were in California. We were also active in the capital market this past quarter, having raised $440 million through a variety of sources, including the CEP. Now let's…

[Operator Instructions] And we'll take the first question from Nick Joseph with Citigroup.

Appreciate the updated heat map. Can you talk about the plan to fund the remaining $300 million across these 3 avenues?

Sure. Nick, this is Kevin. As Tim mentioned, we have -- under contract, we are marketing about $350 million of net proceeds that we expect to receive from dispositions. That leaves us about $300 million left to fund. We don't, as a matter of practice, comment with specificity on anticipated capital market or transaction market activity beyond what we've already disclosed in our press release. But I will say that, essentially, when you look at the heat map and you think about our capital alternatives in our principal funding markets that we've tapped over the years, unsecured debt, the transaction market and the common equity markets, they are all open and available to us and attractively priced. And you can probably expect us to think about accessing them over time in a relatively balanced manner, with a focus on maintaining a leverage-neutral balance sheet strategy.

Can you touch on the current leverage levels compared to the targets that you actually seek?

Sure. Well, there's a couple of metrics that we follow. Probably, first and foremost is net debt-to-EBITDA, which, for the second quarter annualized, was running at about 5.5x. In terms of what we're targeting on that metric, we typically seek to have it range between 5.0x and 6.0x. It's certainly been a little bit lower than that in the past and a little bit higher. So essentially, we're roughly in line with where we are targeting for that metric. Another metric we think about is unencumbered NOI, which is around 59% currently. We'd like to have that right around that level, maybe a little bit higher over time. As you know, we took on more secured debt in connection with the Archstone transaction, which shifted the mix of our debt from about a 50-50 blend of secured and unsecured more to about a 2:1 ratio secured to unsecured immediately following the transaction. We have since moved that ratio back down toward a 50-50 blend, but we're not quite there. And as we continue to shift toward -- our debt portfolio back more toward a 50-50 mix of secured and unsecured, you can expect to see that unencumbered ratio move up over time.

And then just finally, can you talk more on the New England portfolio? It seems like that's the portfolio, the part of your portfolio that's performing the worst, relative to original expectations.

Sure, Nick. This is Sean. As it relates to New England, there's really 2 markets there, the Greater Boston area and then Fairfield. Fairfield has certainly been the weaker of the 2 markets, essentially flat revenue growth for Q2. And that's a combination of a couple of factors, one being the pretty meager employment growth that we've seen in that market. I think, for the last 6 months, it's been barely positive, 2,000, 3,000 jobs, as well as some meaningful supply coming into certain submarkets. And I'd highlight Stamford, in particular, where BLT is building on the waterfront and has been building and continues to build there, putting some pressure on supply in that particular submarket. So while the current environment there is somewhat challenged, I would say, over the long term, we've been pretty successful with our development franchise there. So we'll continue to be active. So that's certainly one factor. In terms of Boston, Boston essentially just got a pretty slow start, given the difficult winter, and rental rates really didn't start moving until sometime in the mid of the second quarter. And it's up just barely as you look at it even through June in terms of market rents from probably January 1 through June. So rents have been relatively flat, and occupancy has been down, so that's been a pressure in Boston. You might be thinking it's a result of some of the supplies coming online, and we have experienced a modest impact at the Prudential Center as a result of some of the new supply that's up and leasing in the urban core of Boston, but it's not been material to date in terms of performance. I'd say it's more a reflection of the very slow start to the year.

And we'll take the next question from Nick Yulico with UBS.

You mentioned the lease-up assets being 50 basis points ahead of underwriting. Can you just talk about whether there's certain markets where that spread is bigger or smaller than that?

Sure, Nick. This is Matt. I can speak to that a little bit. It's actually pretty evenly spread. I mean, the place that's probably got the most dramatic outperformance is Northern California. Our AVA 55 Ninth deal, the yield there is north of a 7%, and we underwrote it to a little bit under a 6%, so that's not surprising, given the rent growth that's been going on in Northern California in the 2 years since we started that deal. But it's been -- other than that, it's been relatively consistent across the regions. The other one that I would say has been the biggest outperformer has been the Avalon Exeter, the tower -- the fourth tower, the first new product in the Back Bay there, Prudential Center, where we -- rents just greatly exceeded our initial underwriting, given the lack of really anything to comp it off of in that particular location. There really wasn't anything else that was a true luxury product in the Back Bay of that size and scale.

And then maybe you could also talk about land prices, where they are today in, say New York City and San Francisco, obviously being affected, I guess, by condo developers. What do you think that, that does to these markets in the next couple of years as far as maybe preventing some additional apartment supply or even further sort of boosting apartment valuations in these markets?

Yes, there's no doubt, this is Matt again, that land prices have gotten very heated in New York and San Francisco in particular. And we have not -- it's very tough for us to compete for land sites in the heart of San Francisco and in Manhattan right now. Particularly in Manhattan, pretty much all the land that's trading is trading at condo valuations. So I think you're right that there is a wave of supply coming to Manhattan now. Deals have started in the last year or 2, but it's pretty hard to make rental numbers pencil looking forward right now in that particular location. The other thing you're starting to see is people team up and do rental-condo hybrid buildings. We did buy a piece of land earlier this year in Brooklyn, not in Manhattan, where we are looking to partner in a JV with a for-sale builder, where we would build the building together. We would take the lower piece as rentals. They would the upper piece as condos. That might be one way you see folks provide some more rental product in those locations, but it does make the rental economics more difficult on the land in those urban cores.

And we'll take our next question from Steve Sakwa with ISI Group.

I know you're not giving a lot of detail on the Avalon Christie sale. But just to be clear, it sounds like the $0.44 gain that you're talking about is really not the full, I guess, what I'll call economic gain that you intend to receive. Is this really just a piece of it. Is that correct?

Yes, that's correct, Steve.

Okay. And I just wanted to maybe just follow up on the sequential trends that you're talking about. Obviously, you guys have a kind of ramp going into the back half of the year. I'm just curious, given the notices that you've sent out, presumably, for August, September and maybe even October, how much visibility do you have into that ramp, and what potential risks might there be?

Yes. Steve, this is Sean. We have pretty good visibility. I'd say a few things. One is, as Tim mentioned in his prepared remarks, we pretty much know where we are for July. It's pretty well baked, given it's July 24, and that's in the high 3% range. We also know where the renewals went out for August and September, which is in the 6.5% to 7% range, which is between 50 to 100 basis points higher than where they went out for June and July. So we have pretty good visibility on where those are trending based on sort of historical capture rates. We also have good visibility in terms of our comps, because it's baked in terms of where occupancy was in the first half of '13 versus the second half of '13, and as opposed to it being a headwind in the first half of '14, it could be a tailwind as we get into the second half. So you kind of put all those pieces together, plus the improving economic environment, everything that we're seeing in terms of job growth, unemployment rate, all the things that Tim talked about, the macroeconomic environment certainly is supportive of our plan. And we see it in the numbers, as I mentioned.

Okay. And then if I could just ask one more. On Page 9, you talked about, I guess, the peaking supply. And it sounds like you expect a little bit more to hit in '15. I'm just trying to figure out how much of that was maybe a shift of projects from '14 into '15 maybe due to delays, and how much of that was actually just kind of new starts that had maybe taken place in the middle of this year that weren't captured in your previous expectations but are now likely to hit in '15. And as you kind of look into '16, it sounds like you think that number may fall even further.

Yes, Steve. This is Tim. When we were looking at it in the beginning of the year, our projections for 2014 was right around 2% of stock and -- for '14. About 1.6% for '15. There's been a little bit of a shift from '14 to '15 just from deals getting delayed or things coming online a little bit later than we had anticipated. I'm not talking about ours, but the market. And so now the numbers are right around 1.9% and 1.8%, so there's been a net increase, call it a 10 basis points over those 2 years. And then '16 has been -- I think, at the beginning of the year, we were projecting about 1.2%. We're now close to about 1.5%. Obviously, less visibility at the beginning of the year than there is today right now. And we have been able to identify some other projects that just weren't as clear at the beginning of this year. So that's what we've talked about. We do expect some paper, but as I mentioned in my earlier remarks, development still make sense. It's a healthy business, and that's when you should add capacity into a market is when underlying fundamentals support it. And so we think structural demand can handle that, particularly given some of the things that rental housing goes -- has going for it. But we do see it leveling off. And when you start looking at that start date and peeling it back and trying to understand how much of it is multifamily for rent, and the fact -- the notion that some of that could convert over to condominium, we feel pretty good about those -- that outlook.

And we'll take our next question from Jana Galan with Bank of America Merrill Lynch.

On expenses, can you comment on which line items are contributing to the lower expense growth in the second half? And I think you mentioned that repairs and maintenance were a little bit front-loaded this year.

Yes, Jana. This is Sean. You're correct, the last part of your statement there, in that we expected the first half to be elevated for a number of different reasons that we alluded to in the first quarter call. In terms of some of the specific categories for the second half, it does depend on which bucket of assets you're talking about, so I'll talk about it in the context of the combined bucket, the Avalon and Archstone bucket for now. We do expect Q3 to trend down a bit as it relates to -- utilities is one, which is running at an elevated level right now for a couple of different reasons. There are some fixed costs in office ops that we know are going down in the third quarter, as an example. There's also a number of nonroutine projects as you get into the fourth quarter that come off pretty quickly in terms of -- the peak for that activity is typically during the Q2 and Q3 season, as opposed to Q1 and Q4, so it tends to ramp up in Q2, remain a little bit higher in Q3 and then fall off pretty quickly in Q4. And then there's also some costs that are trending down as it relates to some of the categories. The big one really that moves the needle is taxes. We do expect some healthy savings in taxes as you move into particularly Q4. So those are some of the major pieces that are driving it as you look at the second half of the year.

And then I know it's still very early to make any comparisons on AVA, eaves and Avalon brands, but anything you could share there on the performance in second quarter? And then maybe just in terms of the lease-ups on AVAs versus Avalons, if you're noticing that the market sees one as more in demand.

Sure. This is Sean. I could talk a little bit about brand performance within the regions, I think, is the best way to talk about that as opposed to overall just because market differences, West versus East, Northeast versus the Mid-Atlantic, et cetera, does make a difference. But generally, what we're seeing is the Avalon communities are outperforming in New England, New York, New Jersey and the Pacific Northwest right now. The eaves, our lower-priced communities, are outperforming in the California markets, both Northern Cal and Southern Cal. And then the Mid-Atlantic, the Avalon and eaves product is running at a pretty similar pace in terms of year-over-year growth. It's more depending on whether you're in somewhere in Maryland or Northern Virginia or D.C. is really the driving factor right now within the Mid-Atlantic as compared to product type or price point, really, at least for our portfolio, that is. And then in terms of the lease-ups, that's also somewhat market-driven in terms of which are healthier markets, higher price point communities, et cetera. There's not necessarily common thread there in terms of a particular brand outperforming in terms of lease-up pace.

And we'll take the next question from Dave Bragg with Green Street Advisors.

As a follow-up to Steve's question, I assume that the increase in your expectations for '16 completions is due to your very granular market-level analysis of projects that have been started so far or at least are planned. But directionally, what does this improved job growth environment and the fact that debt costs have stayed quite low, especially with more Fannie, Freddie activity, which access a takeout for developers, what do those factors mean for the outlook for starts in '15 and '16 to you?

Dave, this is Tim. As we've said, if you look at the underlying fundamentals, I'm not sure -- and then when you start comparing it to other sectors and where they are in their cycle, I don't know that we see anything that leads us to believe it ought to ramp up dramatically. But we don't see anything that leads us to believe it ought to ramp down dramatically, either. As I said in my opening remarks, I think it's been -- so far, what you've seen is a pretty disciplined market response. And frankly, since the early '90s, that's basically what we've seen in the multifamily rental business. We haven't really seen a period of oversupply, really, since the late '80s in our business. And I do attribute that quite a bit to just the quality of the data and, certainly, the visibility and transparency coming from the public companies. And again, based upon how we're looking at availability of capital, most of the REITs are trading somewhere around NAV. And as we look at the NMHC equity availability index, nothing really points to a significantly increased appetite over the last couple of years for our product.

Okay. And another question relates to Page 15 of your presentation, the suburban versus urban performance. Where do you rate Avalon's portfolio on these metrics, urban versus suburban? What percentage of your portfolio falls in each bucket? And what are your long-term objectives for the portfolio on these metrics?

Yes, Dave. In terms of our portfolio, the stabilized portfolio is about 2/3 suburban today, about 65%, and about 1/3 urban. What's currently under construction is about 50-50. And then if you look at the development pipeline, it's about 75-25 -- the development right pipeline, it's about 75-25, tilted towards suburban. And I do want to be clear what suburban means for us, because I do think sometimes, it's a bit misunderstood. For the most part, for us, suburban is office center and inside. It's not bedroom, leafy community, and there are very few exceptions to that. And then if you look at just within our suburban footprint, a fair bit of it is TOD -- we sort of classify as TOD suburban, which is on the order of 15% to 20%, depending on whether you're looking at stabilized or developmental portfolios. So right now, about 2/3 suburban, maybe trending up 200, 300 basis points as the current development starts to lease up, and then probably starting to trend down again as the development right pipeline starts to come through the system.

Okay, great. And the last question relates to your writeup in the management letter on West Hollywood. You mentioned 85 apartments will be marketed via your high-end Signature Collection. I'm not sure that I'm familiar with that. Is that a new brand? Or what is that offering?

This is Matt. I guess I'll speak to that one a little bit. Really, it's -- the thought is it's a sub-brand. It is within the Avalon brand, but that -- even within the Avalon brand, there is an appetite in the market for kind of a top-niche product that serves a subsegment of the Avalon customer base. And we are actually doing a little bit of this already. There's certainly high-rise communities we have in New York and other locations where we'll take the top 2 or 3 floors, make them penthouse levels, finish them out to a different finished standard. But we're trying to create more of a program around that going forward. So over time, it will have a separate section on our website and bundle it with some other services. And we think it's actually a growing market. We have had great success with it kind of on an ad hoc basis, even in places like Rockville Centre in Long Island, where we have a number of apartments that are finished to that higher standard and -- as well as -- again, I think we'll be able to have some at the top of the building. So it's really a way that we can kind of further evolve the brand and further segment the customer.

So it's your core customer, but at the very high end?

Exactly.

And I think that there's senior housing in this project as well. It's not related to that, is it?

No, it's not. You're right that the entitlement includes 77 units of affordable senior housing that we're actually developing in a partnership with a local nonprofit there, and we're going to build it for them, and then they will buy it on completion.

And is that just a one-off incident, or should we expect to see some more of that from you?

It's very deal-specific. We do -- as you may know, a number of our communities that we develop have an affordable component. Usually, it's anywhere 5%, 10%, 15%, 20%, and it's just -- those apartments are scattered within the project. But occasionally, there are sites like this where it's approved as a separate component of the community, in this case because it was seniors. And by doing it in that format, you can avail yourself of federal tax credits and other subsidies that aren't available to us as a normal REIT. So I wouldn't call it a trend. I think it was more of kind of a one-off that we might do from time to time as a way to maximize the value of a site.

We'll take our next question from Ryan Bennett with Zelman & Associates. Ryan H. Bennett - Zelman & Associates, LLC: I just wanted to follow up on the suburban, urban breakout. You said suburban is beginning to outpace urban. I was curious which markets you're starting to see that more so. And based on your current revenue growth forecast, where do you see that spread ending the year?

Yes. This is Tim. I don't know that we have a spread for you as it relates to how it's going to perform. Maybe I'll just share a couple of other statistics, too, just in terms of how we're seeing the markets generally. As I mentioned before, in terms of apartment completions, we're expecting just a little over 5% added over the 2014 to '16 period into our markets. When you break that down between suburban and urban, suburban, we are expecting about a 3.5% addition to stock; urban, we're expecting about an 8% addition to stock. And then when you look back at 2013, those numbers were comparable, where urban added about 2% to stock and suburban a little less than 1%. And so, while we're just starting to see suburban performance outperform, we've been seeing it in the same-unit rent for some time now. You need to seize that before it actually starts translating into performance. And so if we've -- if you've heard us talk about this over the last couple of quarters, we've been talking about it pretty confidently that we expect this to happen, in part because we were seeing it in the numbers that are often, generally, the leading indicators to performance. But as it relates to specific markets, I may let Sean speak to that, but generally, across the board, we were seeing suburban outperform urban when you break it down into same-unit rent growth, whether it's D.C., whether it's New York, whether it's Boston, whether it's Seattle, whether -- even in San Francisco, where East Bay and San Jose is outperforming San Francisco. So I'd say it's pretty much an across-the-board trend.

Yes, Ryan, there's really not much else than there other than what Tim said is that, if you think about all the different markets and where the majority of the supply has been, it's been more in the urban core. And so we have seen that in terms of effective market rent growth over the past couple of quarters that is slowly bleeding into revenue growth. Ryan H. Bennett - Zelman & Associates, LLC: Got it. Appreciate the color there. And one last one for me, just on Slide 11, just curious how this slide would look in terms of your market-level outlook for the second to fourth quarter for the Avalon and the Archstone assets, if there was any significant differences in terms of your revisions when you tighten the overall same-store guidance.

Yes, Ryan. This is Sean. There are some differences in terms of overall performance. We've not necessarily provided all the detail in terms of the -- all the Archstone-level detail, market by market. We've provided, at this point, the AvalonBay bucket year-to-date, which we'll continue to report on, as well as the combined bucket on a year-over-year basis. But in terms of the differences within the respective markets, I'd say where probably it's most pronounced in terms of the gap is really in the Mid-Atlantic, and that's purely a function of portfolio allocation. If you look at the Archstone portfolio that has come in the same-store, 95% of that is -- based on revenue, is in Northern Virginia and D.C., as compared to about 65% for the legacy AvalonBay portfolio. And what's outperforming right now in Metro D.C. is suburban Maryland. So that's probably the most pronounced difference in terms of performance, just a little bit in New York in terms of -- same thing, portfolio allocation, where we've got 2 big Archstone assets in Midtown West that are exposed to a little more near-term supply as compared to the legacy Avalon portfolio, which is mainly the Bowery, Morningside Heights, Brooklyn supporting a little bit better revenue growth. So without going through every single market, those are probably 2 that are the pretty good examples of where the variance is.

And we'll take the next question from Alexander Goldfarb with sandleroneill.com. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just quick -- 2 quick questions here. First, just following up on the earlier question on the Northeast. If you look at what the environment was like at the beginning of the year, I mean, Fairfield County wasn't in any great shape. Obviously, the development that's going on in Stamford Harbor Area has been going on for quite some time, and the winter was well known and was ongoing. So just sort of curious why you guys thought that New England collectively would do better when it seems to be performing as we'd expect.

Yes, Alex. Sean. I mean, certainly, when we provided our original outlook in January, we didn't necessarily have a sense of what would be happening with the full extent of the winter and the contraction in the economy that occurred in the first quarter that was not anticipated. So our belief is that, particularly in Boston, things would be quite a bit stronger than they are today. In terms of Fairfield, we did not expect to have significant outperformance there by any stretch. And I'd say it's been relatively closer to our expectations. What's underperformed is really Boston. I don't think there's a material change in Fairfield. We thought it'd be a little bit better job growth, to be honest, and there really has been almost 0. So Boston is really the market in New England where it's underperformed our expectations that we originally set back at the beginning of the year. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then going to the heat map, appreciate the changes, especially in equity. I doubt we'll ever see the equity at near 100 on your heat map. But just given how the stock has rebounded, obviously, you guys retapped the HEM. At the same time, market still seems pretty healthy for dispositions. And obviously, a desire -- as you guys did with Danvers and you did with Christie Place, there's still a desire to capitalize lock-in value that you created. How do you balance dispositions, which are still healthy, versus taking advantage of your stock, which is up over 20% year-to-date, and using more equity going forward? The heat map aside, just how do you consider that tradeoff, given where you were not even 6 months ago?

Sure. I may start out with a couple of comments, and Tim may want to add something. But essentially, the heat map does provide some insight as to how we think about the question, although it's certainly not as positive. And as to the equity component of where we're showing it now, there's actually 4 subcomponents that we track that feed into that overall number. And probably, of those 4 subcomponents, as you might expect, the one that's most important to us from a standpoint of just assessing the relative attractiveness of issuing common equity would be how our shares are trading relative to NAV. And so we look at that relative to consensus NAV, as well as our own estimate, which, as you know, we don't publish. But just tracking it relative to consensus NAV, that green is at a higher level than what you see as the overall rating and more in line with where you see assets trading on the heat map. I guess, for us, it's ultimately not a binary choice of -- between whether we're going to issue equity or fund equity through asset sales. As you know, looking back at our company's history, we've typically traded a slight discount to NAV, call it about 3%. And not surprisingly, over time, we've funded development activity, primarily -- at least the equity component of development activity, through selling assets and recycling the balance sheet. It's an approach that's worked very well for us. It's an approach that we're very comfortable with going forward. But from time to time, when it makes sense to tap the equity markets, we're prepared to do so. So we do look at the relative implied cap rate on issuing shares versus the realizable cap rates that we have on dispositions and take a look at those. We also effect both yields or prices for asset sales versus issuing common equity by transaction costs, which can be meaningful in the case of transaction costs and also meaningful in the case of issuing equity to the extent it's done in a marketed deal where you have both investment banking fees and investor discounts in the equation. So we look at that really on a net-net basis to see what's more attractive. There's also portfolio considerations that come into play in terms of our desirability to sell assets and enhance the portfolio and our exposure to given submarkets. So at the end of the day, there's an awful lot of factors that we bring to the equation. Those are some of the things we think about. But going forward, in an environment where we're trading at or above NAV, it's reasonable to expect that were going to look at both the possibility of issuing equity and the selling of assets as attractive and try to make the best decision from a pricing standpoint and a portfolio perspective.

Alex, maybe just one thing I'd add is just the time-to-market, too, on the dispositions, that we take that into account as well, as well as tax considerations. But I think Christie Place is a good example of that, where you need certain agency approvals. And it takes several months to get a -- from the time you actually price the transaction to the point at which you actually can bring the proceeds in. So that is a factor, as well, as we think about how we tap different sources of capital at different points during the year or during the cycle.

And we'll take our next question from Rich Anderson with Mizuho.

So you've shown some willingness to think above -- in front of the curve with your suburban kind of mindset versus urban. Can the same kind of thought process be applied to asset sales? That is, when do you start thinking about selling, actually, in San Francisco and Seattle and investing a bit more in D.C. and making that early-stage trade before things start to turn in the opposite direction?

Rich, this is Tim. Absolutely. We actually, as you know, were pretty big sellers in the Mid-Atlantic 2, 3 years ago. And I think we have to remind ourselves that the underperformance in D.C. has been 2 quarters now. We've been talking about it coming for about 2.5, 3 years, I think, as an industry because you could just see the supply kind of coming through the system. But in terms of really actual underperformance, it's been really mostly the last couple of quarters. So we did take -- obviously, we tried to take advantage of it a couple of years ago in the D.C. market in terms of selling. But we'll look to take advantage of it on the buy side, as well. As I mentioned in my prepared remarks, most of these markets have -- we think they're great markets. We love them all. Sometimes, we like some of them at different points in the cycle than others. And we should be willing to sort of trade off of when we think sort of market sentiment gets a bit distorted as it relates to asset value. So it -- that factors a lot into how we've been thinking about the fund business, where you're -- it's a real limited-life vehicle. You just really have very few windows to sort of pull the trigger. I'd say it's maybe a little less pressing on -- in terms of the balance sheet, in terms of an open-ended entity like a REIT is. But it's still something that we talked a lot about in terms of which assets and when and how to play the cycle. And ultimately, we are looking to differentiate ourselves in terms of capital allocation, and that's one aspect of capital allocation.

Okay. How close do you think we are to a trigger point in San Francisco?

Rich, this is Sean. We've been evaluating dispositions in, I'll say, kind of group Northern California and Seattle for some period of time. We've taken a few chips off the table, both directly and indirectly. We sold a large asset in San Jose last year. We sold a fund asset that was pretty large in San Francisco. I think one of the things that we're thinking about for San Francisco proper, if that's what you're really referring to, is there may be some option value there at some point in terms of condo activity. We've not seen that in any meaningful way in San Francisco at this point, but we have seen some activity in New York. We've also seen a couple of deals here in D.C. shift from rental to condo. And particularly, given the TOPA rules in D.C., you want to do that basically when you're completing the building, before you lease it up, so you don't have that restraint. So San Francisco, we're keeping our eyes open. But I'd say at this point, we think there may be good value there in terms of a condo exit at some point for some assets. So we're not hot to pull the trigger in terms of that particular market in terms of near-term dispositions. But, I mean, we're always evaluating all the markets. As Tim said, we look at a lot of different factors. We look at where rents are relative to the long-term trend. We look at forward IRRs on every asset in our portfolio as we develop our disposition pool and how's that capital priced relative to other sources of capital. And we try to be as opportunistic as we can. So you're right. We sold, I think, probably around $400 million in assets in D.C. over the last 2 or 3 years, knowing kind of the current environment was coming. But there hopefully will be a window at some point where we see pricing and expectations change in D.C., and it might be a good entry point. And for acquisitions, I think we think of using them 2 ways. One is to kind of reshape the portfolio in terms of portfolio trading. But also, at certain entry points of the cycle, to be -- to acquire assets when they're trading at discounts relative to where we think they should. So sort of a long-winded answer, but hopefully, that makes some sense. And Tim might have a couple of other things to add.

Yes. Rich, just one other thing to keep in mind on San Francisco or any California assets, I think the underlying difference between intrinsic value and market value needs to be a bit more distorted because of the whole Prop 13 and the frictional cost that you have with the mark on the taxes. I mean, it can be as -- it can impact cash flow by as much as 10% when you mark these -- when you mark taxes fully to market.

Okay. Next question is, just looking at Slide 5, why is it that the Archstone and conclusion of the Archstone portfolio, at least the math suggested a better operating margin there in that portfolio versus legacy AVB. What's the situation there? Why is that happening?

Rich, this is Sean. Let me talk just generally about the difference in terms of the portfolio. In terms of the operating margins, specifically, if that's what you're looking at, the main driver of that is taxes. In terms of -- obviously, the Archstone taxes are pretty much reset upon acquisition as opposed to the legacy AvalonBay portfolio. So there are some other subtle differences, but that would be the main driver in terms of margin, if that's the specific metric you're concerned about.

I was just looking at how it changed from the original forecast. Right, it seems to have...

In terms of the operating...

Extrapolate -- exacerbated to some degree since the original forecast.

In terms of overall expense growth, it's savings on taxes.

Okay, okay, okay. Okay, got you. All right. And then last question is, the topic of senior housing was brought up and couldn't help but ask the question to Tim about if he's learning anything on his seat at the HCN Board of Directors and if there's any coincidence there.

Yes. There's -- it has nothing to do with sitting on the board of Health Care REIT. So no, that was just an entitlement requirement when we stepped into the deal that already -- where the approval has already been started by another developer in the case of West Hollywood, if that's what you're talking about, Rich.

Yes. But are you learning anything? Is there anything that you can apply from your experience there to AvalonBay?

Absolutely. Any time you step on a board of another company, you learn a lot of things about how -- about their business and how you might apply it. I don't know if there's anything there as it relates to -- which is primarily assisted housing, to market rate rental, where the customer is about 50 years difference in age. But even in terms of how you think about capital and how you think about organizations and strategy, for sure.

Are you thinking about U.K.?

Are we thinking about U.K., as in United Kingdom?

Yes.

We are not considering other markets at this time, if that's what you're asking.

And we'll take the next question from Andrew Rosivach with Goldman Sachs.

Just a speed round here for Kevin. When you do your capital allocation and you're deciding whether or not to sell shares, I've got $20 on my price target that's associated with, essentially, the value of your development franchise. And do you take that into account? Because when you're selling an asset, you're just selling the income rather than this underlying development business that, as far as I can tell, is adding heck of a lot of value.

When we look at our own NAV, we do take into account the value from -- off of our development platform.

Okay. Because it just sounded like you were going for a consensus NAV, which just would mark-to-market the existing development rather than treating it like it's a recurring business.

Sure. In terms of -- well, there's -- the methodology that people use in their own NAVs varies from analyst to analyst. But you're correct that most of them typically focus on in-place NOI and the value of development underway and don't necessarily ascribe value to the development platform per se.

Yes. Andrew, this is Tim. I think I understand what you're getting at. And as Kevin mentioned before, for whatever reason, we've traditionally traded at around 3% discount to NAV. And so just -- yes, we think there's value there. The market doesn't generally give you credit for it. And if we were only to raise equity when we thought the market was giving us credit for it, we'd never be raising equity. We wouldn't be growing. We wouldn't be doing new development. So it is a reason why we use dispositions pretty aggressively in terms of recycling capital, as well as expanding the balance sheet and looking to the unsecured markets, as well as we grow -- as we grow EBITDA and, therefore, are able to expand the balance sheet through debt. But equity just still needs to be part of the equation if we're going to be able to grow accretively, which we have a wonderful opportunity set, particularly this cycle in front of us, to do so through development. So we'd like the market to give us that full $20 credit that you've got in your model, but it -- the market, for whatever reason, has been a little bit of a "show me" market, and we get credit for it, it seems like in arrears, not an advance.

Yes, it's the problem -- every time you issue that share, what -- that share of that $20 gets split over a larger pool, so I just wanted to ask.

Yes.

And we'll take the next question from Vincent Chao with Deutsche Bank.

Just a quick question. Just -- we haven't talked about L.A. here, but just curious if you could comment on what you're seeing there. It does seem like, just looking at the rental rate growth year-over-year, it did slow down there a little bit more than average for the rest of the portfolio. Just curious if you have any commentary on that.

Yes. Vince, this is Sean. In terms of L.A., it really is a function of where you're playing. And for us, what's outperforming right now is really the eaves product, lower price point communities, as I mentioned earlier in response to another question. So we've got a number of communities in the Claremont and even some of the lower price point communities in the Pasadena submarket that are outperforming, one in Cerritos. What's underperforming a little bit right now is generally areas where we're getting a little more supply. It's a little bit on the west side: Wilshire, Marina del Rey. Some of those submarkets are under pressure a little bit in terms of supply. But in terms of the overall outlook for L.A., I'd say, pretty positive generally for us for L.A. And, frankly, for Southern California overall, it's trending in a positive direction. If you look at what's happening with rent change in that market. Southern California has improved quite a bit as we have moved through the quarter and we get into July. Just to give you some sense, Southern Cal rent change in the second quarter was in the mid-3s. And as we look at what's happening in July, and July is about closed out, it's trending about 5% in Southern Cal. So we're getting pretty good momentum, probably a little bit better momentum in Orange County as opposed to L.A., but L.A. is catching up, I'd say. So it's really a function of where you are as to how you're feeling about L.A. right at the moment.

And the next question comes from Tayo Okusanya with Jefferies.

Just following up on Boston, if you could talk in particular about the Assembly Row assets and just how those are leasing up relative to expectations.

Sure. Tayo, this is Sean. I'll talk a little bit about the general velocity. Overall, as you can probably tell from reading through the release, construction has been a little bit challenged at that particular asset. When we initially started the asset, part of the winter was challenged in terms of site conditions. It's also a community they we're building with retail in conjunction with the Federal. So construction has been -- it's probably been one of our more challenging construction executions in terms of the portfolio, in terms of what's happening there. In terms of leasing velocity, now that we have actually delivered product there, it's actually been pretty good in terms of actual leasing absorption velocity. We put 38 a month on the books at that community in terms of leasing velocity and 31 in terms of absorption. So now that we've actually got the product on the ground, it looks good, velocity has been healthy at the product there.

And on rent, kind of trending around $3 per square foot or so?

Rents for -- there's 2 different product types there, so I'm not sure which one you might be referring to.

The AvalonBay product, not the...

Yes. Tayo, this is Matt. I guess the -- what we're showing, this is one of our dual-brand communities. So I know there's been some talk about the rents, and I think even Federal talked about them. But the average rent that we're showing in the release this quarter is $2,405. That number reflects the Avalon component of the project, which is about half of it, which is substantially leased, and that's been running ahead of pro forma by more than that amount. Then the AVA building, which is the back half of the project, we really just started leasing there, and we have not yet marked those rents to market because we haven't leased 20% of the AVA component yet. So I guess what I would say is there's more lift to come in those rents there, and I would expect, next quarter, that number would move up as we mark those AVA rents to market. But we haven't actually -- we've leased 10% of the AVA building, but we actually haven't been able to show anybody an AVA apartment yet. It's all been -- that piece has all been off of plans. And the AVA story, you really have to see it and feel it to fully experience it. So I think that we have good momentum there, and you can expect further growth there as we complete the lease-up.

Yes. And Tayo, this is Sean again. I think they rents per foot are in the high $2 range. I'm not sure we put $3 yet there. But as we deliver the rest of the product and get the AVA online, we should have a better sense of whether we'll get through that or not and mark the rents to markets.

We'll take the next question from Karin Ford with KeyBanc Capital Markets.

Any changes in cap rates in recent months in your markets? And as you're weighing changes in construction costs, economic outlook and the decline in your capital cost, can you just update us on your latest thoughts on sizing the development pipeline over the medium term?

Karin, this is Sean. I'll take the first one, and then I'll let Tim and Matt comment on the second one. In terms of the cap rates, I'd say they're relatively level to slightly down in some markets, probably a function of supply, just availability of deals on the market more than anything else, as well as, obviously, the drip-down of the tenure has supported pretty good access to cheap debt capital, which Kevin showed on the heat map in terms of we can access on the unsecured markets, but also in terms of the secured markets. All of the options are pretty wide open in terms of the GSEs, which were once 90% of the market, are now pretty much about half or less. But banks, life companies, everybody else is pretty much wide open on the debt side and supporting relatively low cap rates overall and still generating nice returns on equity. So the debt markets are wide open. Supply of available deals has been a little bit constrained. So I'd say it's neutral to slightly down, down 10, 20 basis points, depending on a particular market and the availability of assets to trade. And then in terms of the development, Tim can take that.

Yes. Thanks to Sean. And in terms of targeted net levered IRRs, we're still seeing this kind of mid-6 or so range for core product at our market. In terms of deals that we're looking at, I mean, less are sort of hitting the target return, probably driven a lot by land cost. Matt had spoken to that before. But looking at returns, and target returns are only part of the equation, as you get deeper into the cycle, just the projected basis goes up when you look at the combination of land and construction cost. So just by -- just due to those things, less sort of get through the screen, if you will. And so we do expect it. And you probably notice, on the development right pipeline, it's actually come down by about $500 million over the last couple of quarters as we started to start deals and haven't replaced them at the same level. And that is partly by intention, and it's partly due to the -- frankly, due to the opportunity set. So we do expect, as we said at the beginning of the year, development underway to peak around now will slowly work its way down, I think, over the next couple of years. Probably not going to go to 0, but we're probably at the peak today in terms of what's underway.

[Operator Instructions] We'll take our next question from Michael Salinsky with RBC Capital Markets.

Just in the interest of time, I just had 2 quick follow-up questions. First of all, you gave new lease rents in the management letter. What were renewals that were actually signed during the quarter? And then also, Kevin, it looks like in July, you sold the last Fund I asset. I know you were holding the debt there to kind of repay that. Is there going to be a promote recognized on that when that's finally wound down?

Go ahead, Sean.

Mike, it's Sean. In terms of the rent change during the quarter, 3.6% was the blended. It's 4.8% on renewals and 2.2% on move-ins, if that was the highlight you're looking for.

Yes.

And Mike, this is Kevin. In terms of Fund I, yes, you're correct, we sold the last and 20th asset in Fund I in July. So there are no assets left in that vehicle. We'll be winding it up here, distributing final cash in the coming months. In terms of whether there'll be a promote, we do not expect there to be a promote on Fund I. As you may recall, we put that vehicle in place in 2005. So like many funds from that vintage, its returns were not strong enough to realize a promote, but they were still positive. And on a net levered IRR basis to our investors, we expect to give them a mid-single-digit net levered IRR, which would probably for assets -- for closed-end funds of that vintage, would place it in the top third or so of closed-end funds, all geographies, all product types.

Mike, if I can just add something to what Sean was saying. I mean, what Sean said was accurate with 2.2% on move-ins for the quarter. But the one chart that showed same-unit rent numbers going up through the course of the year, that is almost all coming from increases in new move-in rents, which I think is important when you're talking about health of markets. In fact, June and July are more in the 2.8% to -- and 3.3% range, so well above what the average was in Q2 and well above the 1% to 1.5% range that we saw at the beginning of the year. Renewals have actually been relatively flat -- healthy, but flat during the course of the year. So that, Slide 14, that upward trajectory is really coming all on the backs of new move-in, which is what we think it's important as you move into the second half of the year and part of what gives us confidence in terms of our outlook for the balance of the year.

And we'll take our last question as a follow-up from Nick Joseph from Citigroup.

Yes. It's actually Michael Bilerman. Just a couple of quick ones. Just on the $350 million of disposition proceeds in the back half of the year, I've got to assume if that includes the promote in Christie Place. The blended cost of that capital is extraordinarily low, call it, I don't know, 3%. Is that sort of ballpark where we should think about the cost of that capital?

Yes. It -- Michael, this is Kevin O'Shea. So in terms of the promote from Christie, the proceeds that we receive, the cash proceeds that we would receive from selling Christie, are included in that $350 million of net proceeds from dispositions that you referenced. In terms of the cost, in the case of Christie, it would probably be more because, as you'll see in the attachment in our supplemental work that detail NOI from our various ventures, we are and have been for some time in the cash flow promote portion of that promote for Christie. So we've been receiving a cash flow promote off of Christie for some time. So when you blend that all in, while the cap rate itself may be quite attractive from an FFO perspective, the cost of selling Christie is higher than what you are estimating. And from our point of view, certainly, that cost is something we thought about. It's not a positive, if you will. But promotes themselves are very dependent on current market values and are -- themselves can be short-lived and based -- and disappear with changes in the capital markets environment. So from our standpoint, on a net basis, it was desirable to monetize the position in that venture, from our perspective, in order to access that promote in the current environment.

Right. So on that $350 million, the cost of that capital is what?

This is Sean, Mike. One piece of it I can address is the dispositions that are in the pipeline. Just to give you a rough sense of those communities, setting aside Christie for the moment, the cap rate is probably in the sub-5% range for a blend of the assets, excluding Christie. And given the status of where we are in Christie Place, we're just not at a point to be too precise as to what we think the real cost of that is until the transaction closes and we can provide a little more detail.

And then just a clarification, just in terms of the operating expense change between the 2 pools, you've talked about taxes being an impact. But isn't it the weather impact in the first quarter that's impacting the legacy Avalon portfolio now that you've rolled that -- you've updated it, effectively inclusive of the high weather-related expenses in the first quarter that obviously don't impact the 2Q to 3Q -- 4Q in terms of Archstone. Is that the main difference between the 2?

Well, there's the difference in taxes, as well, so you have a difference in taxes. So if I had to separate them in terms of the expense growth, what's benefiting the Archstone portfolio the most is taxes. And it doesn't have issues associated with the change we have in our business practice related to utilities, which is the pressure that's coming through on the Avalon portfolio. So Archstone, main benefit, call it taxes. AvalonBay legacy portfolio is burdened by a number of factors, including the items that you talked about in terms of weather-related utilities, the change in the business practice that's putting pressure on utilities as well, as well as upward pressure on taxes. So it has the opposite of the Archstone portfolio in terms of taxes, more pressure on taxes in the AvalonBay portfolio that we've seen. Things start to shift as we move into the second half of the year, as you pointed out. The majority of the Archstone benefit in taxes has come through in the second quarter, but there is some remaining benefit in the third and fourth quarter. In addition, on the Archstone portfolio, because of when we acquired the asset and the way we treat certain expenditures, they were capitalized in the first portion of '13, and they were expensed in the first portion of '14. So that put upward pressure on Archstone that we won't have in the second half. So as you go through each one, there's different things driving the year-over-year comparisons. And if you want to talk about it in more detail, certainly, give me a call and I could walk you through it, but those are some of the main highlights.

Yes. And Mike, just one last -- I think, as Sean -- as you can tell from Sean's comments, there's just some noise -- there's going to be some noise in the Archstone portfolio for -- on a year-over-year basis, may have less of those as you get to the end of the year than we did in the middle of the year. But we thought it was still better to try to provide a more expansive same-store portfolio for the last 3 quarters, despite there are likely to be more noise in those numbers. But we'll do our best to explain the noise as we move through the year and so some people have good terms sense of it.

This concludes today's Q&A session for your program. I'll turn the call back over to Tim Naughton for any closing remarks.

Well, thank you. And thanks, everybody, for being on the call today, and I hope everyone has a great rest of the summer and look forward to seeing you at many industry events here once fall comes around. Have a great day.

This concludes today's program. Thank you for your participation. You may disconnect at any time.