By Lorna Pappas

Bryce Blair on beating the down turn in the residential market

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AGE: 49 EDUCATION: B.S., civil engineering, University of New Hampshire; M.B.A., Harvard Business School FAMILY: Married his high school sweetheart and has three sons HOBBIES: The great outdoors, including biking, camping, hiking and skiing FAVORITE VACATION SPOT: New Hampshire FAVORITE SPORTS TEAM: Boston Red Sox MOST INTERESTING BOOK: "Good to Great: Why Some Companies Make the Leap... and Others Don't," by Jim Collins COMMUNITY INVOLVEMENT: Church; assistant scoutmaster, Boy Scouts of America PROFESSIONAL ACTIVITIES: Member of the Young Presidents Organization (YPO); member of the National Association of Real Estate Investment Trusts (NAREIT), serving on the Executive Committee and Board of Governors; Trustee of the Urban Land Institute (ULI).

Bryce Blair's love of competition, combined with a lifelong attraction to building design, ignites the steady passion driving AvalonBay Communities, Inc. (NYSE: AVB), a developer, owner and manager of high-quality U.S. apartment complexes. Blair's competitive spirit has guided AvalonBay into its third straight year of FFO growth exceeding 10 percent. It also carries over to his love of outdoor sports and passion for skiing, hiking and biking—just some of the activities Blair enjoys during his off hours.

"I love to compete," Blair says. "Competition keeps a person fresh, makes each endeavor more fun and helps people grow both professionally and personally. It keeps me alert, responsive and motivated to push myself and the company to do better—each day, each quarter and each year."

Recent milestones for Alexandria, Va.-based AvalonBay are achievements to celebrate: Earnings per share for 2007 were up 28.1 percent over 2006. For the quarter ending Dec. 31, 2007, earnings per share also increased 184.5 percent from the same period last year. Additionally, FFO per share for 2007 was up 13.4 percent, adjusted for land sales, in 2007 and 2006.

Portfolio sat down with Blair to see where his passion for a good challenge is taking AvalonBay, and learn more about the personal and professional background of the company's spirited, competitive leader.

Portfolio: Tell us more about AvalonBay's key markets and the company's strategies over the last few years.

Blair: We have a very clear and focused strategy: quality apartment communities in high barriers-to-entry U.S. markets characterized by a low supply of zoned apartment land and a lengthy, difficult entitlement process. Our core markets show good job and household growth and are clustered in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest and California. AvalonBay is unique because we are the only apartment REIT with a presence in all major supply-constrained markets.

In our targeted mature markets, the rate of growth in new rental housing under construction is approximately 50 percent less than the nation's as a whole. Together, with limited apartment supply and challenging approval processes, these areas help generate higher revenue growth over time.

Demographically, we see a new trend within these markets. For the first time in two decades there is significant growth in the prime rental segment known as the echo boomers, children of the baby boomers, who are entering their prime renter years. This age group is expected to grow by almost 2 million renter households within the next five years, making a very significant and positive impact on the apartment segment.

Portfolio: Can you elaborate on what differentiates AvalonBay from its peers?

Blair: Our focused market strategy clearly is a key differentiator. Additionally, AvalonBay is one of the most active and prolific U.S. developers of new apartment communities. We have more than $6 billion of new construction either underway or in planning, which is more than double that of our nearest competitor in the public sector. This development capacity generates tremendous value for our company and its shareholders.

AvalonBay has built a well-recognized, high-value brand that's been strengthening for more than a decade now. Our customers understand the significance of the established AvalonBay name, and know what to expect from us. Positive public recognition also helps us in the approval process, with contract negotiations, with new hires and with other significant business concerns—including shareholders, who appreciate the value of our well-developed brand.

Portfolio: The first two months of 2008 has been challenging for many companies across a wide range of industries. What is AvalonBay's outlook for the rest of the year?

Blair: It's been an interesting year so far. The slower economy is rippling its way through all facets of real estate, including apartments. However, the weak housing market and challenging credit environment has helped the apartment sector as many potential buyers postpone new home purchases and rent for longer periods. Additionally, the supply of apartments is expected to be moderate in 2008, with some additional competition from unsold housing inventory made available for rent.

Given these elements, we expect to be an active seller of apartments in 2008. We expect to sell up to $1 billion of assets this year, which will be the largest amount of sales for us by a long shot, more than three times that of our typical yearly sales.

We will do this because we see a disconnect between public and private company valuations that has allowed us to sell assets at very attractive capitalization rates, while our stock continues to trade at a sizeable discount to our net asset value. We've been selling assets and recycling capital into new development activities and share repurchases.

Overall, our theme for 2008 as a whole is agility. With the weakened economy and upcoming election, we see a volatile time in the capital markets. This calls for a flexible strategy. If market conditions warrant, we will continue to sell, or discontinue aggressive sales if prices don't justify this approach.

Ours is a well thought-out plan, but I would be surprised if we followed it without significant adjustments to react to the dynamic economic times for the rest of 2008 and likely into 2009.

Portfolio: Where are you looking to take the company over the next five to 10 years?

Blair: Tomorrow's customer—the younger renter—will have a different preference in terms of apartment size and services expected, and less ability to pay the same amount as older renters. Our task now is to draw on our size and experience to understand and deliver what this new customer wants. We'll create more studios than two-bedroom units, and focus on locations with greater proximity to mass transit, major employment centers and entertainment venues that cater to a younger market.

Portfolio: What is your background and your prior involvement with the real estate industry before joining AvalonBay?

Blair: I come from a tight-knit New England family led by parents who emphasized hard work and humility. I am the third of six children and still live within 10 minutes of my siblings. I was an average high school student and a below average athlete who married my high school sweetheart.

I graduated from college with a degree in civil engineering, which reflected my interest in the physical process of building environments and sharpened my problem-solving skills. After a job in construction management, I decided to move beyond construction to a full understanding of real estate development and its business challenges, including finance and accounting. An MBA was the natural bridge, which I acquired from Harvard in the mid-1980s, just as Trammell Crow Residential was opening a local New England office. It was an exciting time.

In the late 1980s, an economic slowdown forced us to cut our staff by two-thirds. This was a very painful experience, yet a valuable lesson on real estate volatility and how to grow and prepare an organization to be an evergreen company that can weather business cycles.

In the early 1990s, as our division of Trammell Crow Residential was actively developing apartment communities, the capital crunch led us to an IPO and more plentiful capital sources. We transformed the division's leadership and assets from a private to a public concern called Avalon Properties in 1993. In 1998 we merged with Bay and doubled our size, creating AvalonBay, a presence in all supply-constrained markets in the United States. I became CEO in 2001, and in 2002 I was named chairman.

Portfolio: What are some of your favorite interests outside of the office?

Blair: The great outdoors. I have a tremendous love for outdoor activities such as skiing, biking and camping. I've passed this interest on to my three sons, who also enjoy these sports and related outdoor activities: one son majors in environmental sciences and is an Eagle Scout, another is about to become an Eagle Scout. Additionally, all my sons, as well as my wife, Kathi, and I enjoy skiing and boating.