Mid-America Apartment Communities Inc (MAA) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And thank you for participating in the Mid-America Apartment Communities second quarter earnings release conference call. The Company will first share its prepared comments followed by a question-and-answer session. At this time I would like to turn the call over to Leslie Wolfgang, Mid-America's Director of External Reporting. Ms. Wolfgang, you may begin.

Thanks, Jonathan. Good morning. This Leslie Wolfgang, Director of External Reporting from Mid-America Apartment Communities. With me are Eric Bolton, our CEO; Simon Wadsworth, our CFO; Al Campbell, Treasurer; Tom Grimes, Director of Property Management; and Drew Taylor, Director of Asset Management. Before turning the call over to Eric, I want to remind you that as part of the discussion this morning, Company management will make forward-looking statements. Please refer to the Safe Harbor language included in yesterday's Press Release and our 34F filings with the SEC which describe risk factors that may impact future results. We will post a copy of our prepared comments, as well as an audio copy of this mornings call on our website. Further details surrounding Mid-America's second quarter results may be obtained from the 8-K that was filed with SEC yesterday. You may also obtain a copy of our Press Release on our website. I will now turn the call over to Eric.

Thanks, Leslie. Good morning, everyone. And welcome to our second quarter earnings call. Mid-America had another good quarter. As you will note from yesterday's earnings release, we reported solid operating results for the second quarter and improving trends in revenue performance. Same-store revenue performance was the highest it has been in four years and for the third quarter in a row Mid-America set a new record for FFO per share. I believe the results support that the stronger leasing environment we expect to develop over the balance of this year is indeed taking shape. Leasing performance for the quarter was driven by both an increase in leasing traffic and higher closing ratios. As leasing activity picks up and occupancy stabilizes, we expect to capture increasingly higher levels of pricing through lower concessions and growing rents. I think it's worth noting that in the second quarter 45% of our same-store properties captured both higher occupancy and rent growth as compared to the prior year. As Tom will detail for you, second quarter results reflect broad based improvement across the major variables that drive revenue performance.

As market conditions continue to improve, we believe Mid-America has meaningful revenue upside to capture across all three market tiers of the portfolio, large, mid-size, and our tertiary markets. While it's clear that over the last couple of years the large tier markets incurred the most falloff in revenue as a result of weaker occupancy, it's important to recognize that we experienced sluggish pricing performance in many of our middle and small tier markets as well. It's interesting to note that in fact during the weak market environment of 2004, it was actually our small tier market group that had the largest increase in lease to concessions from the prior year. It's that combination of solid pricing recovery in all three market tiers of the portfolio, coupled with meaningful occupancy recovery in our large tier market segment that gives us confidence we have meaningful revenue performance to recapture throughout the portfolio.

I continue to be optimistic about the early progress associated with the number of our new initiatives under way within our Asset Management operation. Implementation of a new water billing and on-site collections program continues to go well and we expect to see higher recovery of our water billing revenues later this year and into next year. Our new Regional Marketing and Pricing operations is also beginning to make a positive impact. As Tom will detail for you we are capturing improved leasing trends and leasing traffic and closing ratios while our advertising cost per new lease decline. Additionally, we expect this new function will further enhance pricing performance and our revenue growth as occupancy continues to build. Our early focus in testing and developing and implementation plan for a significant push on kitchen and bath upgrade opportunities with the objective of capturing above-market rent growth continues to look promising. We were initially focused on a group of properties representing roughly 2500 units and expect to have this project fully rolling next year. Overall, I feel very good about the progress on our various initiatives designed to boost revenue growth from our existing properties and we expect results to continue trending in a positive fashion.

On the external growth front, the acquisition environment remains challenging. We've completed roughly 210 million of acquisitions over the past 12 months and I continue to believe we will be successful in achieving our 150 million target for this calendar year. Our deal flow pipeline remains active and we are currently underwriting a number of opportunities. We remain committed to our investment hurdles in a discipline of realistic underwriting of future expected property performance and pricing. Our focus to steadily reposition the portfolio towards a more balanced market allocation, as well as continually upgrade asset quality, remains on track. We believe the high quality properties and the strong growth markets added over the last three years will deliver very good results for us in the recovering market cycle. With that introduction, I'm going to turn the call over to Tom to discuss property management results. Tom?

Thank you, Eric. And good morning, everyone. Before the adjustment of straight lining concessions same-store revenues for the quarter were up 240 basis points versus the prior year generating same-store NOI growth 220 basis points. This is the best quarter-over-quarter revenue performance we have seen in four years. Revenues were boosted by improved occupancy, modest rent growth, and better collections performance. Same-store fiscal occupancy for the end of the second quarter was up 120 basis points from a year-ago, 50 basis points from the prior sequential quarter, and we ended the quarter at 94.2%. This is the best second quarter occupancy we have seen since 2002. We were pleased at both revenues and occupancies showed improvement over the prior sequential quarter. The second quarter is a planned period of high turnover and generated 25% more units to lease punch and return to earnings status. With high turnover, both vacancy loss and expenses are under pressure. It was encouraging that not only did we post revenue improvement over the second quarter of last year, but also versus the prior sequential quarter.

As you will note from the supplemental data included in our earnings release, this improvement was evident across all three market tiers. In our large market group, we have seen significant improvement in occupancy in Houston, Tampa, and Dallas. In the middle markets group, Jacksonville and Nashville showed the biggest improvement, which combined represent 15% of our same-store units. Our small markets group was up over the prior year by 110 basis points led by Columbia, South Carolina; Augusta, Georgia; and Aiken, South Carolina. Overall, 68% of our market saw occupancy gains versus the prior year. The positive occupancy trend for the same-store group has carried beyond the second quarter. At the end of July our occupancy was 94.6%, up 150 basis points from a year-ago. The improvement in occupancy was a result of higher traffic levels and lower turnover than the prior year. Our marketing processes continue to drive improvement. Both traffic and applications to lease were up versus the prior year. Our traffic levels increased by about 15% and our applications increased by about 10%. Closing ratio was a solid 41%.

Our Inventory Management and Resident Retention programs continue to aid revenue and expense. Revenue turnover improved by 5% as we turned 339 fewer units in the second quarter of 2005 than in the prior year. The implementation of our Web-based property management system 12 months ago has improved our pricing information. On a real-time basis we now know daily in multiple levels what our pricing decisions are, what pricing decisions were made, and how they affect our pricing goals. We have new tools in place that aid in pricing each unit in an optimal manner. And we can identify quickly when the decisions are made that do not maximize our opportunity. As occupancy builds, markets stabilize, and concessions burn off, we feel the additional information in personnel will allow us to achieve performance beyond historical levels.

Early results of this focus are encouraging. Portfolio-wide rents have improved by 120 basis points versus the prior year and 40 basis points versus the prior sequential quarter. Concessions remain our preferred method of price competition leaving our rent levels intact, thus, preserving the value of our communities. Concessions were most heavily used in Houston, Dallas, and Austin. On a per move-in basis same-store concessions were about $404 per move-in, slightly more than half a month's rent for the quarter. Our process geared towards preserving resident quality and credit standards are showing good results. On a dollar basis as compared to last year, collection performance improved by 9%. Net delinquency as a percent of net rent potential improved by 12 basis points from the prior year to 1.14%. This is a result of rigorous resident screening and we still reject over 22% of our applicants and aggressive on-site collection practices. This focus preserves the long-term value of our communities and is now also producing positive revenue growth.

Same-store expenses were up just 2.6% from last year. Our marketing efficiency program is encouraging better advertising decisions, as a result our advertising cost per lease dropped from 147 per lease to 126 per lease from the prior year. Utility costs are pressured by our current oil pricing and while we've passed most of this on through to the end-user, reimbursement revenues were up by 7.2%. The increase is felt in house accounts. Our on-site manager turnover levels are still well below industry averages. We feel this stability gives us a significant advantage in our ability to focus on new initiatives and processes that can drive additional growth in our existing communities. Al?

Good morning, everyone. During the second quarter we took several important financing steps which both increased our financial strength and reduced our refinancing risk for 2005 and 2006. We took advantage of the current interest rate environment to lock the rate on $150 million of our debt for new interest rate swaps. The first $75 million in forward swaps replaced current instruments maturing between now and the first quarter of next area, and maturing instruments bear an average rate of 6.1% compared to the average rate 5.1% in new swaps, which produced annual interest savings of $750,000, which is slightly better than our previous forecast. We also took advantage of the flattening yield curve to enter an additional $75 million in forward swaps, which become effective in December and effectively reduce our unhedged debt to 10% of our total at the end of June. Now these swaps mature in 7.5 years and also bear a low 5.1% total rate. Thus, we ended the quarter with our debt well-positioned for the upcoming year and we expect to end this year with our fixed rate debt at about 85% of our total, with our maturities well laddered through 2013.

Simon will discuss in more detail later, we purchased two properties during July for a total cost of $56 million. The debt portion of these transactions, which is about $36 million, was funded by our agency credit facilities with the remaining 20 million funded by recent asset sales and issuance of common equity. We do continue to use our direct-to-stock purchase program to fund the equity portion of our transactions and we issued an additional $4 million through this program during the second quarter. In May, we also gained a required one-year notification to redeem our $10 million Series G preferred securities which carry an 8.625% coupon rate. We plan on using a combination of debt and common equity to fund this retirement in the second quarter of next year.

As mentioned last quarter we plan to refinance $8.5 million in tax-free bonds during the fourth quarter under our Fannie Mae tax-free credit facility. But we will write-off about $0.005 per share during the fourth quarter related to this refinancing. But based on the current yield curve we expect to benefit from annual interest rate savings of more than $140,000 of the remaining loan term life of the new bonds. All-in the funding of the two new acquisitions we have around $50 million in current market capacity with room for another $100 million in cost effective expansion under our current credit agreements. Our Fannie Mae and Freddie Mac credit facilities continue to be our preferred platform for external growth because of the low cost and the flexibility that they offer us. And we expect to begin negotiations by the end of this year to expand our capacity under these credit facilities. Our average interest rate during the quarter was 5.2%, up a little from the prior quarter due to the recent short-term rate increases. We continue to expect our average interest rates to rise over the remainder of the year, but average about 5.4% for the back half of the year. Simon?

Thanks, Al. As we announced in our Press Release, FFO for the quarter was $0.85 per share, our third record in a row. It was $0.06 above the prior record we set last quarter in-line with our projections and $0.01 up First Call. Our AFFO for the quarter was $0.56 per share. As you know our quarterly dividend is $0.585. Straight lining our incremental concessions reduced our FFO for the quarter by $0.0025 per share. On a same-store basis, the impact was to reduce year-over-year same-store revenue growth from 2.4 to 2.2%. Although this is a non-cash charge for the sake of simplicity we do not add the concession adjustment back to AFFO, which we continue to define in the accordance with NAREIT FFO less recurring capital expenditures.

We announced in June the successful sale in the quarter of two remaining properties from our first joint venture with Crow Holdings. We received just over $14 million in cash from the sale of the two properties, including the promote fee of $1.7 million. As part of the closeout of the J&B credit facility, we recorded $0.01 per share in one-time debt extinguishment expense in reduced FFO from our joint venture. We completed the sale of Eastview in Memphis on April 1st, as we previously described, this was one of the properties that we've owned since before our IPO and we recorded an impairment charge and write-off of deferred financing costs totaling $0.01 per share associated with the sale.

During the first 10 days of July, we completed the acquisition of Waterford Forest, Raleigh/Durham Research Triangle, and Boulder Ridge in Metro Dallas for a total investment of $56 million at a blended average cap rate of 5.9% and an average investment of $65,000 a unit. FFO from these investments has projected to more than offset the loss of FFO on a per share basis from the closeout of the joint venture. These properties have been borrowed on weak operating numbers and offer a lot of upside potential. During the quarter we completed the sale of a piece of land associated with a par acquisition which generated almost $0.015 per share of FFO. This offset the FFO impact in the quarter of the modest deleveraging that occurred from the sale of our joint venture asset and the delay in reinvesting the proceeds and the impairment loss from the sale of these two.

We continue to forecast our combined G&A and property management expense to be approximately $21 million for the full year. You will notice that our second quarter combined property management expense in G&A was $475,000, below the level of last year. This was mainly due to the $580,000 charge we made in the second quarter of last year to accrue for a senior management incentive plan. We completed a very successful renewal of our Property and Casualty Insurance program effective July 1st. We expect our cost of risk on a per unit basis to drop just over 12% representing $1 million of annualized savings which was incorporated into our forecast. We've taken a detailed look at our forecast for the balance of 2005.

Our same-store results seem to be on or slightly ahead of projections and our latest forecast continues to be close to our prior forecast. As we projected at the beginning of last quarter we are forecasting same-store NOI to grow in the range of 3% for the balance of the year with momentum building in both our market and our operations. Through July, we've completed $103 million of acquisitions. As Eric said, the acquisition environment continues to be challenging, but it's reasonable to think that later in the year we will complete additional acquisitions. So we are reaffirming our FFO per share projections for the balance of the year. We previously projected a total FFO range of $1.40 to $1.52 for the second half of the year and we believe that this still seems to be realistic. However, our projections indicate that we need to move $0.01 per share of FFO from the third quarter to the fourth quarter, and so our indicated range is $0.70 to $0.76 in each of the next two quarters and a midpoint of $0.73 for each quarter.

Our capital expenditures for the year should again be close to our expected norms. We forecast total recurring capital expenditures to $15.3 million, or $0.53 per share, about $410 per unit. For the first two quarters our annualized recurring capital expenditures were below the full-year expectations, only 7.2 million or $0.30 per share. Our plans for the year calls for total recurring and revenue enhancing capital expenditures of $23.4 million or approximately $630 per apartment unit. At the end of the quarter, our debt plus preferred ratio to gross assets have dropped a little primarily due to the cash received from the sale of our joint venture assets. With the purchases that we completed in July our leverage returned to our more normal comfortable levels. Eric?

Thanks, Simon. Before turning the call over for any questions, let me highlight a few points that I hope you will take away from our report this morning. First, operating results reflect steady improvement. We believe Mid-America is better positioned for a recovering market and will generate growing revenue performance in the more robust operating environment to which we were headed. Our portfolio is better positioned for an improving leasing environment. We have a number of upgrades to the operating platform that we believe will drive performance beyond those levels historically delivered by Mid-America's portfolio.

Secondly, the balance sheet is in good shape and well-positioned to withstand a rising rate environment as 90% of our debt is now either fixed swapped, forward swapped, or capped. Mid-America's dividend payout ratio continues to be better than average for the sector and we expect continued improvement in property performance that will further boost this important variable for our shareholders.

And lastly, we continue to feel that relative to how the private and public markets are pricing multifamily real estate and REITs in particular Mid-America priced at roughly a 10 to 15% discount to the apartment sectors average FFO multiple offers and attractive upside pricing opportunity within the sector. That's all we have in our prepared comments. And, Jonathan, I'm going to turn it back to you for any questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Bill Crow from Raymond James.

Good morning, guys. Nice quarter, again.

Hi, Bill.

The question really has to do with valuation. The 65,000 per key that you sold -- or you acquired the assets at, you indicated they are upscale assets. Obviously, Dallas is a big market city. How would you compare that value with the overall Mid-America portfolio? Is that a fair representation on a per-key basis?

I think it's a fairly -- it's a pretty fair representation. Yes, we bought prior to these two assets I think it was something close to 300 million that we've bought over the last three years at pricing closer to 75,000 a unit. I think that the pricing that we have been buying at roughly around just under -- around a 6% sort of cap rate. I think all of those metrics tend to sort of be in-line with how we would value the portfolio overall. And the properties overall.

That was my next question. You paid a 5.9 cap rate, but you indicated that those properties were mismanaged or underperforming. Assuming they were performing well and stabilized, would you look for what, 25 basis points difference? A 50 basis points? What do you think that would be?

It's hard to say. I would say probably 50 basis points maybe is the right number there.

50.5ish type?

Yes.

All right, great. Well, good job, guys.

Thanks, Bill.

Thank you.

Thank you. Our next question comes from Tony Howard from Hilliard Lyons. Your question, please.

Good morning, guys.

Hey, Tony. [multiple speakers].

And congratulations on a good quarter.

Thank you.

I missed part of the presentation because I forget what the difference is between Central and Eastern time. But my question, I've got several questions. G&A expense was down, seemed like you were doing a good job controlling expense. And can you kind of go in more detail on what you expect that as a run rate?

Yes, we -- Tony, and the reason it was down was that we had in the second quarter of last year $580,000 charge related to a management incentive plan. And so although our G&A -- it's doing well. It's not quite as good as it might seem on a year-over-year basis. And that includes, of course, I'm including in the numbers that I quote are, we combine our G&A and property management expense together as one number and we are forecasting just a little under $21 million as a full-year -- with a full-year run rate.

Okay. CapEx seemed a little high in the quarter.

CapEx, yes, it begins to pick up in the second quarter as the season goes. But, again, on a run rate basis, we are right on -- excuse me, on a full-year projection basis we are right on track. For the first half year we were a little behind budget. But, again, that's normal because our momentum builds in the summer time when a lot of these activities take place. So right now we are right on plan. We anticipate about $630 total CapEx, about $410 recurring CapEx per unit for the year and that seems to be on plan.

Third question, you mentioned that about 90% of your debt is fixed if you include the variable month and it's hedged. Kind of go over with me because I don't see where on -- for the hedge position that -- was there any gains or losses that you had to recognize because of the rate environment, or the rates have ticked up recently?

Well, the change in the -- the change goes through other comprehensive income, which goes straight to the equity section because these are highly effective hedges. So they don't have a P&L impact. The impact for the quarter that went through equity, I think, Al, was about $2 million? I think was about right. And -- but, again, because we're very careful about our hedging, we don't -- we believe we have zero risk of having a P&L impact.

Great. So did I hear you correctly you said 2 million in total for the quarter?

Yes, we went through other comprehensive income straight to equity.

That's correct.

Okay. How much of the -- I don't see in the Press Release, how much of it is hedged?

We have -- Al, you want -- I think it's $590 million of current swap?

That's correct.

That's correct. And then we thought additionally our forward swap?

Yes, $150 million in forward swaps, 75 million which replaced swaps that mature at the back half of this year and beginning of next year. And we took our [indiscernible] during the quarter to do an additional $75 million in swaps because we felt that it was a good time in position of the yield curve.

Thanks, Al. Final question, Eric, can you talk a little bit about as far as the -- what you are seeing as far as cap rates, as far as the -- within the apartment sector? I mean especially now that -- with the strong job reports that rates are going up. Would this change your opinion as far as maybe start being a net seller of some properties?

Well, let me answer this -- maybe answer that in two ways, are two questions there. First on what's happening with cap rates in general. We don't really see any changes taking place. If anything, frankly, we see them continuing to perhaps go down in selective situations. Austin, Texas is a market, in particular, that comes to mind where we have almost become somewhat of the opinion similar to Florida, in general, where we just can't make the pricing make sense right now. It's very, very difficult to do so on what we consider to be realistic underwriting of future performance and pricing. So we don't really see cap rates in general for the product that we tend to be going after is still six below -- or in some cases we've seen some things trade closer to almost four in Austin. So pricing just continues to be very, very aggressive.

As far as Mid-America's approach, we have sold a few assets over the course of the last couple of years to either condo converters or just some very opportunistic transactions that were presented to us. But, in general, we believe that -- we are managing the Company for the long-term and really believe that the best thing we can do for our shareholders is continue to build an earnings platform that really is going to deliver a steady growing dividend and steady growing value. And while we certainly will look at opportunities to selectively, if you will, harbor some value from time to time, for the most part right now we -- our goal continues to be focused on being a net acquirer as opposed to a net seller for the moment.

Thank you. And, again, congratulations on a good quarter.

Thanks, Tony. [multiple speakers].

Thank you. Our next question comes from Dave Rodgers from Key McDonald.

Eric, one question to follow-up on that one with, given the cap rates where they are and kind of given the markets you're looking in. Are the cap rates forcing you to kind of look into maybe more rural areas, less urban or in-fill areas? And does that concern you at all?

Well, no, it doesn't concern me because we have some properties in those markets already. And are glad about it. We have said all along that our strategy is built around a concept of building an earnings platform that performs in a more steady state fashion than perhaps some of our peers through the full market and economic cycle. And so some of these secondary markets tend to offer some stability for our dividend paying responsibilities that we feel are very important to our shareholders.

Having said that, we continue to feel that we wanted to focus our acquisition and external growth effort on some of these bigger markets in an effort to just buy into weak operating conditions and create a little bit more of a balanced profile, performance profile for the portfolio. We've as I mentioned, Florida is kind of off the screen right now, and so is Austin, Texas. But we continue to look in Atlanta and in Houston and in Dallas believing that all three of these markets are going to show some pretty good recovery over the next three to four years. But we -- and we have made a lot of progress towards creating a balance in the portfolio over the last three years and we are almost reaching kind of that one-third, one-third, one-third profile that we had identified early on as our goal.

So some of the secondary markets, such as, the Raleigh/Cary, North Carolina area, Nashville, those kind of markets continue to interest us. And if we find the right opportunities in those markets we will jump on them. But, surprisingly, as aggressive as this market is right now in terms of capital looking for product, we're not seeing -- we are seeing the cap rates still very compressed between Dallas and say a Cary, North Carolina. There's just not a lot of difference there. And so it's -- we are finding it tough to buy pretty much in all the markets right now.

I've got a couple of questions for Tom Grimes. What were either -- I guess, either way I could ask it. But what were concessions per renewal, Tom, if you have that? Or maybe another way to ask it, what was your net effective rental rate spread on your renewed leases?

On renewed leases, Dave, first, we track it on a per move-in basis which was about $404 per move-in. We really work hard not to offer renewals. If we -- concession -- renewals on concessions. We really feel like if we take care of the resident, we provide a good service, that we shouldn't come hat-and-hand at renewal time. So really that's -- per renewal we really don't have any measurable concession on that level.

Okay. And I know that not all your markets are the hottest condo markets. Certainly we have seen several of those markets though experience condo pressure. Anywhere that you feel on operations that you are being pressured by maybe an entry-level condo community or in a particular market?

No, not from an operating standpoint. Obviously, condo mania is in sort of full swing in South Florida and Tampa. Most of our markets -- a little bit in Jacksonville -- most of our markets aren't affected by it much at all. What we would say is, there is -- it's really an opportunity for us.

I think we will begin to see those condos managed in sort of a fractured manner and they won't give all the benefits of a consolidated -- hey, we run in 250 units of professional service. We press the rental rates versus competing against a group that has perhaps as many as 250 different owners all with different strategies, all with different plans, all with different maintenance ideas. So if that -- if we begin to get real pressure on the rental side, which we are not right now from those guys, I expect it will be to our advantage.

You mentioned some collections numbers. I think you said utility -- was it utility reimbursements were up 7.2%? Did you say what the collection difference was or essentially the gain in collection percentage that you guys may have experienced?

Yes, on just regular collections they were up 9%.

And that was across water?

No that was the raw delinquency number. Revenue reimbursement numbers were up 7.2%.

That's the water. We are seeing, Dave, some improvement in our collections as a result of these initiatives. So we're just rolling out. And it was very encouraging to see in the utility reimbursement area our delinquency actually dropped from 85% to 92%. [indiscernible]. Our collection hopefully increased from 85 to 92% in the quarter and that was pretty encouraging. We have got I think now three of our six regions where this utility program has rolled out. We're only just beginning to see the impact of it. Probably will by the end of the year be able to get a real sense of whether this is going to be -- how real this going to be. But so far it's looking pretty encouraging.

Thank you. It was those collection numbers I must have missed earlier. And then the last question, since you are beginning to push rents for the first time in awhile given the economic condition, are you seeing move-outs related to pricing or single family homes change dramatically?

No, single family homes over the last year is essentially flat and our turnover is down. So we have been able to -- where we've been able to push rents, it hasn't generated a large turnover increase.

All right. Thanks, guys.

Thank you, Dave.

Thank you. Our next question comes from Thayne Needles from Robert W. Baird.

Good morning, guys.

Hi, Thayne.

Well, not much left to ask. Tom, let me just -- maybe just a number from you, do you have same-store concession numbers for the prior quarter or for the year-over-year period as a comparative to the 404 that you had for this quarter?

Thayne this is Simon. On the same-store basis our concessions were running about $100,000 or so more than the same quarter a year-ago.

Well, to put that on a per unit basis, do you have that, Tom?

Yes, we were 404, as I mentioned, this quarter. The prior year, that's down from 434 last year from [indiscernible], and actually a little better as well from the prior sequential quarter down from 486.

Those are concessions per move-in?

Per move-in, correct.

But we had fewer -- lower turnover, so therefore more move-in debt.

Okay. And, Eric, just on the Dallas market, any hope or I guess, what are your expectations for the next 12 months in that market? Does it stay where it is or are there signs or reasons to think that there is opportunities for that market to get better?

I think Dallas is probably going to windup being a 2006 story. I think that we were hopeful that we would see some meaningful recovery by now, but the good news is that it sure doesn't appear to be getting worse. But I just think that there was enough of an overhang there and the job growth has been anemic enough that it's still taking longer to dig out than what we thought. We continued to see slow progress taking place there manifesting primarily and just improving occupancy numbers. But it will be next year I suspect before we see pricing traction of any sort really to start to take hold.

And, Thayne, just to add a little bit, 2005 was the first year since 2000 where we saw absorption match completion. So there is indeed a large overhang there. And we're -- there is some job growth occurring at 1.5% but it's tough.

Very good. Good quarter, guys. Thanks.

Thank you, Thayne.

[OPERATOR INSTRUCTIONS]. Our next question comes from Nap Overton from Morgan Keegan.

Yes, could you remind us what your hurdle rate is for new investments and tell us whether you have adjusted that hurdle in light of recent market trends?

Though our hurdle rate -- and I will use that in a plural sense -- are really several things. First, we look at our -- an internal rate of return that is geared towards delivering a return that is at least a 300 basis points spread to what we define as our cost to capital, cost of equity capital. And so to some degree as our cost of equity moves up or down, that hurdle rate amount, this specific IRR hurdle, if you will, will change a little bit. The spread doesn't change. The spread of 300 basis points doesn't change, but the absolute number would change a little bit. We haven't really appreciably changed that over the last six months or so and we are just, frankly, not seeing a whole lot of things that make sense on that basis.

I will tell you that the other things that we look very, very hard at, of course, are our replacement costs. We just think that particularly in the Southeast and some of these markets where you do have low barriers to entry it's imperative that when we buy new properties, that we're buying them on a basis that is a discount to what it would cost to replace that product from new construction. Plus, in most markets you are going to get that, obviously, in the Southeast, and so we always want to be in there to discount to their replacement or new construction.

And thirdly, we look at -- we have sort of a two-year forward look on terms of earnings contribution from any capital deployment decision. And we want to get at least a 20% improvement in FFO per share. On assumed incremental new shares we would issue equity, we would issue to fund the acquisition. Not that we necessarily will fund new equity every time we make an acquisition. But we just make that assumption and model it on that basis. And we want to ensure that every time we put capital out that we are getting enough of an earnings pop for our existing shareholders two-years out.

Okay. Thanks. And then would the acquisition -- it would be safe to imply that the acquisition assumption and implied in your second half forecast is that you will do another $50 million in the second half of this year?

That's exactly right.

Okay. And then you have in the past on occasion quantified the upside that you think that there are still remaining to capture from several years back based on several factors and in an improving market. Do you care to quantify to that estimate now or not?

Well, we've -- in the metric that we've made reference to in the past is a recovery opportunity in revenues from concessions. We have made reference in the past to taking our same-store portfolio and taking it back three years to say 2001 where we had a more normalized market environment. And there was $0.18 of FFO per share in concessions that we conceded in 2004 that we did not concede in 2001. Now, exactly where that number is sort of, if you will to date based on sort of a run rate of where we are performing, it is probably a little less than that because we are seeing -- the same-store portfolios changed a little bit. But things -- I don't have an exact update on that for you, but I think it's still meaningful.

I would think that it would still be pretty close to that.

Yes.

Okay. And then one more technical question. The straight line rent adjustment in the quarter was a negative 95,000. What was it for the six months?

That's exactly right. That's exactly the right number. And, of course, that is a little counterintuitive because we would have expected it to have gone the other way.

No, what the answer is?

For the six months, Eric, how much was it -- negative 310 for six months.

Okay, thanks very much.

Thanks, Nap.

Thank you. There are no further questions in the queue at this time. I would like to turn the program back to management for any further remarks.

Okay, well, thank you very much. We appreciate you being on the call. Let us know if you have any questions. Thanks.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.