Mid-America Apartment Communities Inc (MAA) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen and thank you for participating in the Mid-America Apartment Communities First Quarter Earnings Release Conference Call. The Company will first share its prepared comments followed by a question-and-answer session. At this time, we would now like to turn the conference over to Leslie Wolfgang, Director of External Reporting. Please go ahead.

Thanks, Kevin. Good morning. This is Leslie Wolfgang, Director of External Reporting for 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 we begin, I want to point out that as part of the discussion this morning, Company management will make forward-looking statements. Please refer to the safe Safe Harbor language included in yesterday's press release and our 34X filings with the SEC, which describe risk factors that may impact future results. These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, can be found on our web site. I'll now turn the call over to Eric.

Thanks, Leslie. Good morning, everyone. Thanks for participating in our call.

Mid-America had a terrific first quarter performance. FFO per share growth was a strong 6.3% or 8.9% before considering the refinancing charge incurred in the quarter. This quarter's solid performance was achieved as a result of very good growth and net operating income. In other words, our better than expected performance was not caused by or to be confused with any sort of non-recurring gains or condo conversion activity. The major operating metrics, occupancy, rent growth, concessions, collections, residence turnover, all had positive year over year performance and underscores what we believe will be a growing trend of strong operating results for some time to come.

We expect Mid-America to generate continued very positive NOI growth from our existing portfolio of properties for three primary reasons. First, market conditions throughout our Sunbelt markets are clearly in a recovery mode. We expect year over year gains in occupancy, followed by steady gains in pricing, will propel strong revenue growth for some time to come. Improving job growth trends that typify most of the markets within our operating region, support our belief that market demand for apartment housing is growing. And given the very steep rise in the cost of construction materials and labor, along with rapidly escalating land cost, we believe that we'll be in a window of muted supply pressure in a majority of our markets for some time to come. The significant amount of repositioning to our portfolio profile and market allocations over the last three years have positioned Mid-America to deliver more robust performance as we move into the recovery and strong operating markets cycle in the Sunbelt markets.

Secondly, as we've been reporting for the last few quarters, the enhancements made over the past 18 months for operating systems and asset management platform will also further boost operating results. We continue to capture improved performance in rent collections, utility billing, and the overall inventory management, which has a very positive impact on vacancy loss and expenses associated with turning apartments. Ow new pricing programs are in place and we expect continued improvement in rent growth over the course of this year. Beyond the various system enhancements made to date, we expect to be underway with a test of the LRO yield management program in the last half of this year and are optimistic that this additional revenue management tool will position us for even more robust pricing performance into 2007 and beyond.

Thirdly, we're optimistic about the prospects for continued strong growth in NOI as a result of our growing contributions from our new kitchen and bath upgrade initiative. We're very encouraged by the early rent growth results being captured through this initiative and expect as the program expands and penetrates a larger percentage of our portfolio, the long-term impact will be meaningful.

In addition to our enthusiasm for internal growth prospects, we're also increasingly encouraged about the prospects for new or external growth. With 79 million of acquisitions closed year-to-date, we're well ahead of last year's pace and are well on track toward capturing the $170 million of acquisitions we've targeted this year. Certainly, the pricing environment remains competitive. However, our deal flow is at an all-time high and the aggressive condo converter acquisition market appears to be cooling. We expect to find increasing opportunities that meet our strict underwriting criteria over the course of the year. As noted in our last call, we have three expansion development opportunities that we expect to get underway this year and look for this new growth to also make a growing contribution to our external growth performance over the next two years.

Three years ago, we established as a primary goal, to improve and strengthen our dividend payout ratio. Our dividend payout ratios for last year were in the top 1/3 of the apartment REIT sector and we expect to see continued steady improvement in this important metric. This recovery provides us with increasing flexibility to add new initiatives to further improve our portfolio performance characteristics for the long haul. We're proceeding with the three property expansions just mentioned and we're also continuing to selectively sell older assets. We've just listed for sale two of our Memphis properties and expect to have the sales completed by year end. All of these transactions are considered in our updated earnings guidance which Simon will cover for you in a moment. With that introduction, I'm going to turn the call over to Tom to give you more insights on our operating results for the quarter. Tom?

Thanks, Eric. Good morning, everyone.

We were pleased with the broad strength of our revenue-driven, record same store NOI growth. We've seen improvement in occupancy, collections, and cash concessions across the board. As you'll note in our supplemental release, our NOI gains came not just from our large markets such as Dallas and Tampa but also from our middle tier markets like Austin and Jacksonville, as well as our small markets group. We're seeing recovery in all three of our market tiers.

Dallas was a particular highlight with NOI growth of almost 21%. With job growth building steam, this market seems to be in full recovery mode. This translated into a 5.5% increase in traffic which drove a 351 basis point increase in occupancy.

Pricing also improved. Cash concession levels dropped 6.4%. We're seeing some early signs of rent growth there.

While 96% of our markets showed positive revenue growth including Memphis, NOI was hampered in this market by higher turn-related costs isolated at three communities which we expect to return to normal levels by the second quarter.

Good job growth and limited new supply across our Sunbelt markets combined with our enhanced operating platform, are driving performance. This has been reflected in our traffic level for the same store group which increased 3.2%. Our associates closed on 38.6% of this traffic which pushed same source occupancy to 95.3% which was a 160 basis point increase over the prior year. Dallas, Tampa and Austin showed most of the improvement but as with revenues, we've seen solid results in all three market tiers.

A reduction in turnover by 1.2% from the prior year also contributed to occupancy increase. Our occupancy recovery has allowed us to shift from a period of preserving our rent structure to an offensive strategy of pricing growth. Our new pricing program enables constant upward pressure on rent and concessions in each of our communities. Thus far, the results have been encouraging. Our average rent per unit increased by 2.1% from the prior quarter. Our rent growth has been driven by our medium and small markets up 2.4 and 2.2% respectively. As we expect, with the exception of Florida, our large markets are still in the early stages of recovery and their increases in revenues are coming primarily from occupancy gains. Benefits from rent growth in our large markets group are still to come.

In addition to driving rents higher, our focus on pricing is driving cash concessions down. Cash concessions decreased from the prior year about 26% with much of the improvement coming from Atlanta, Tampa, and Jacksonville. While this is a solid improvement over the prior year, we feel we still have significant improvement available in concessions.

We outlined in earlier calls that we retooled our submeter utility collection process to capture what we felt was an opportunity to improve the collection rate on the amount of utilities billed to our residence. That transition is complete and our collection percentage jumped from 87% last year to 98% of our submeter Billings. This improvement to our operating platform drove a 23% increase in our reimbursement revenues.

Finally, our new interior renovation project has started off very well. We completed 144 units in the first quarter on 17 properties with an average per unit investment of $4200. Our average rent increase on renovated units is $108. This is less than a four-year payback and is obviously a very accretive use of capital. We monitor this by unit on a property by property basis and in a disciplined manner against our goals. Al?

Good morning, everyone. I'll spend a few minutes providing a little more detail for the acquisitions captured during the quarter as well as discussing the changes to the right side our balance sheet from recent financing activity. As you've seen in our press releases, we did acquire two properties during the quarter, the 250 unit Brier Creek in Raleigh, North Carolina and the 312 unit Silverado in Austin, Texas. We acquired one additional property late last week, 390 unit Grand Courtyards in Dallas, Texas. All three are high quality assets, less than three years old on average, located in our target markets where we expect to benefit from strong growth rates and improved performance from our management presence and focus in these markets.

As Eric mentioned, our investment in these three communities total $79 million which is about half of the $170 million projected investment for the full year. The combined purchase price represents around $83,000 per apartment unit which is well below our estimated replacement cost of between $90,000 to $110,000 per unit for this quality of asset really in all three of these markets. The first year NOI yield is around 7% for these three communities combined. Pricing continued to be competitive but we remain active in our markets and we expect to find additional selective opportunities during the year. Our investment plans continue to include the development of three new communities as expansions of current properties, total cost for these three projects is projected to be about $50 million, with $17 million to be funded in 2006. There were no significant outlays through the end of the first quarter and we plan to present more information as these projects progress during the year.

Our balance sheet continues to improve and is in very good position to support our business strategy. Looking at financing activity for the quarter, our debt increased $41 million as we funded the two acquisitions reported. At the end of the quarter, our debt to market capitalization was 44% and our fixed charge coverage improved at 2.12 times, just above the sector median.

Since our last report, interest rates have climbed 40 to 50 basis points across the entire yield curve, which will obviously affect our borrowing costs. However 81% of our debt was fixed at quarter end with another 3.5% hedged against significant rate increases. Also over the remainder of the year, we have $60 million in fixed rate debt maturing at rates averaging 95 basis points above expected refinancing rates. Our interest cost did rise a little during the first quarter, averaging 5.4% and we expect those to continue rising to around 5.6% for the remainder the year.

We continue to use agency credit facilities to fund the debt portion of our acquisitions. We currently have a combined borrowing capacity of around $85 million under our current arrangements. We've completed the initial negotiations for an additional $200 million commitment which we expect to close in the second quarter. We also issued $19 million in common equity through our direct stock purchase program during the quarter to fund the equity portion of our acquisitions.

As mentioned in previous reports, we gave the required one year notice of redemption for our $10 million Series G preferred securities last May. The series were reclassified to debt on our balance sheet at that time and we plan to redeem these shares which have an 8.6% dividend in May using current debt capacity. Simon?

Thanks, Al. FFO for the quarter of $0.84 per share is a record high for any first quarter. And it is $0.02 above the top end of the range that we projected when we issued guidance last February. Results include a charge of $0.02 per share for debt extinguishment attributable to the refinancing tax free bonds. Excluding the charge, we would have reported FFO per share of $0.86, almost 9% above the first quarter of 2005. We reported an all-time record AFFO of $0.72 per share, an increase of $0.05 over the same quarter a year ago. Eric mentioned previously we're pleased that our growing dividend coverage has improved our flexibility and the future growth prospects.

As we stated in the pre-release, very strong revenues were the primary reason that we reported higher FFO than we had originally projected for the quarter. Delinquency dropped more than we anticipated across the portfolio and was 0.4% of net potential rent compared to 1% a year ago of $370,000 improvement. As Tom mentioned, reimbursement revenues, especially from utility billing, increased up $640,000 over a year ago. This, about one third was due to high price but the balance was due to the improved collections, less due to the improved systems and procedures we've talked about in prior conference calls.

Physical occupancy was also higher than we projected, ending the quarter at 95.3%.

On a cash basis, our lease concessions dropped by 685,000 for the quarter compared to the same period a year ago. But because we straight line our lease concessions, we actually reported only a $68,000 reduction. Said another way, the non-cash lease concession adjustment cost us almost $0.025 of FFO for the quarter.

Our forecast for the balance of the year has several components that have changed from our forecast of three months ago. Obviously our same store NOI is significantly greater, driven by higher revenues. We're expecting same store revenues for the year to increase 4% to 5%, up 100 basis points from our prior forecast.

While we grew same store revenues by 5.5% in the first quarter, we're coming off on some tough comparisons. Beginning in the third quarter of last year, our properties began to fill up. So, by the second half the year, we'll be relying less on improved occupancy for our same store growth, and fortunately, we've shown there are other area where is we can show impressive growth, such as rental rates, fee and [INAUDIBLE] income and through our interior upgrades.

Affecting our fourth quarter relative year over year performance will be the one-time concession accounting adjustment in the fourth quarter of last year which increased our revenues by $1.2 million. In an improving market as concessions decline, the non-cash concession adjustment reduces our rate of revenue growth as it did in the first quarter by 60 basis points.

Two other areas that are under pressure are insurance costs and real estate taxes. Our insurance renews in July and our latest expectation is that our same store cost will increase by about 15%. As a result, in our latest forecast, we've added $0.01 per share to our expense forecast for both the third quarter and the fourth quarter to cover this probable increase.

The secondary concern is real estate taxes. Despite a very active and difficult tax environment, at this point, we're leaving our forecast protected unchanged, believing a 3.5% to 4% increase in same store real estate taxes is realistic. There are also legislative initiatives Texas and in Tennessee which may affect our real estate franchise and excise taxes, and which we're working hard to address. The impact, if any, is impossible to assess at this point but my best guess is that on the downside, it could be up to $0.03 per share unfavorable, and on the upside, maybe up to $0.01 favorable.

With our improving balance sheet flexibility and dividend coverage, we've elected to list for sale two of our IPO properties located in Memphis, Hickory Farm and Glen Eagles. The total transaction should be in the range of $13 to $17 million and we anticipate dilution in the range of $0.01 per share this year as a result of the sale. At present, we've not reached a point of actively working any contracts.

We've increased our forecast of FFO per share for the full year to a range of $3.20 to $3.38 with a midpoint of $3.29. The fundamentals to our business seem to be the best we've seen in years in the prospect of continued strength and same store revenues. We've discussed several areas of cross pressure especially of insurance, taxes and interest expense. We think that our forecast range is realistic, we'll have greater visibility on some of these variables in a few months.

Finally, a detail about our reporting same store results. We've excluded from the same store group of properties those that are undergoing extensive upgrades, which we've defined as those properties where we're investing more than $5,000 a unit. At the moment, this is six properties consisting of 1727 apartments. We're including in our same store group all of our properties that are undergoing less extensive upgrades, currently 11 properties and 4,823 apartments. We're planning to add supplementary schedules to our quarter end reporting package so that you can see the progress of the upgrades and the non-same store group of properties where upgrades are occurring. We'll also begin to report progress in the supplementary schedule on the three extension development projects once construction starts.

Eric?

Thanks. Wrapping up, we hope you'll take away from our call this morning a couple of key points.

First, we believe Mid-America is poised to capture continued strong internal earnings growth as we move throughout this year and into 2007. Significant changes to our portfolio profile and significant enhancements to our operating platform coupled with supply demand trends moving our way position the Company to continue to deliver delivering solid FFO growth and certainly capture performance exceeding the historic norms for Mid-America and will, we believe, remain very competitive within the sector.

Secondly, note that we're more optimistic about external growth prospects and encouraged with the deal flow we're seeing and the success we've had year-to-date in securing new acquisitions. Clearly, pricing remains competitive. And I can assure you we absolutely intend to remain committed to our investment disciplines. But with higher deal flow, a slightly broader market focus, and more internal resources dedicated to this aspect of our operation, I'm encouraged by the trends we're seeing.

That's all we have in the way of prepared comments. Kenneth, I'll now turn the call back to you for any questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is coming from Bill Crow from Raymond James.

Good morning, guys. Congratulations. Great job over the past few years. The one question I have is on Houston and new supply. We've heard from a couple of other apartment companies this quarter that they've got some concerns about the level of activity there. Could you comment on that and maybe how you're positioned vis-a-vis where the new supply is coming in?

Sure, Bill. This is Tom Grimes. I think we're relatively protected from that. We're seeing the same thing in 2006 and 2007 with a few units coming on. Our product which is out west in the [KD] Market and the Woodlands area, there is not a heavy amount of pressure coming in that area.

Okay.

Houston is such an unusual market. You really have to look at it on a submarket basis. As Tom mentioned, those two areas, we do see some pressure -- we don't see the pressure like when you think about Houston and aggregate. We feel that we're a little better positioned. Having said that also, the big question of course on the Houston market is with the tick up in supply, what's going to happen with job growth and more importantly, what's the net result going to be? What's absorption going to be? If you look -- we get information from [Reese] and if you look at what the Houston market is expected to be on a net absorption basis, it actually continues to look fairly steady through the next couple of years.

That's helpful. Are you seeing any change in construction costs and how might the rapid increases we've experienced the past year impact your renovation projects that you have.

Yes, clearly, there's been a run up in construction cost. I've heard numbers anywhere from 25% to 35% in the last 12 to 18 months. You know, from our perspective, as far as our renovation effort goes, we've not seen a significant bump up. Most of the renovation costs -- renovation product we're talking about is appliances, cabinet fronts, countertops, carpet, things like that. A lot of the run-up is going to be in the more fundamental construction materials that we really are not involved with in a big way and then as far as our expansion projects are concerned, we're under guaranteed cost contract on the deal in Raleigh and just now getting into looking at the pricing -- the contract on the deal and Jacksonville and in Dallas and certainly we're taking a hard look at it. At this point, we don't see for our size, amount of construction we're doing, we don't think it will be that big a deal.

Okay. Paul Partner is here, he has a question here as well.

Hey, good morning.

Hey, Paul.

How closely do you look at the rent versus the own equation? Do you actually calculate that as you -- in any specific markets and sort of think in terms of how much upside you've got in your rents?

Well, you know, we don't look at that time a whole lot to be honest with you. I do think that clearly, we're seeing that -- two things. One is that homeownership is at an all-time high. I think it has plateaued. I think it's going to start to come back our way a little bit. And certainly, two, you know, the cost of homes have risen considerably, just like everything else in real estate, it seems. I think the spread is bigger now than it has been in quite some time between where rents are versus homeownership cost and you know, I think that will work in our benefit. I think that with all of the supply demand trends moving in our direction as it relates to rental housing, and the spread at an all-time high, I think we're going to see a lot more on the demand side back our way for the next few years.

All right, thanks. Good quarter.

Thanks.

Our next question is from Robert Stevenson from Morgan Stanley.

Good morning, guys. Couple of questions. Simon, what was the aggregate acquisitions during the first quarter for modeling purposes?

We bought -- the total was $52 million, Rob, that we acquired in the first quarter.

Okay. And is the -- was the cap rate -- you said it was 7% cap rate I think for the three acquisitions. Was it dramatically different for the 52 versus the 27?

As a matter of fact, they were very, very similar.

Okay. A question on the development. What do you guys anticipate? Sorry if you went over there, development yield there on the properties?

Hey, Robert. This is Drew Taylor. We've looked at all three and we think, from an NOI yield point of view, all three are sort of in the 7.5 to 8% range.

Okay. So, this is basically, you know, 50 to 100 basis points higher than where you guys are acquiring these days?

Yes. I would say that's a pretty fair estimate.

Okay. And is that the sort of range we should be thinking about before -- for you guys to do any incremental projects? It would have to be a spread of at least that level?

Well, we are -- as you know, IRR driven. But I think generally, we've looked at a couple of hundred basis points spread over the acquisition hurdle rate to do a development project. From an IR -- from a leveraged IR perspective.

What happened during the quarter in Columbus? I was looking through the numbers and turnover was almost 95% there during the quarter. It was rental rate pushing and everyone moved out?

No, as a matter of fact, Rob, at the same time last year, our turnover in Columbus was 124%. Columbus, Georgia is one of our few markets that is -- has a strong military presence and Fort Benning is just a machine at bringing in -- and moving people out. It is growing at a really strong rate right now. But we've actually seen some improvement in the turnover there as the transfers have dropped down a little bit and they've picked up and they're in the process of picking up about 10,000 troops through the base realignment commission changes or the BRAC stuff as well. That's what drove the expenses down as well is we turned a lot fewer units. On a relative basis to its peers, it is a big number. But it is what we're used to in Columbus.

The physical occupancy in Lexington was down 120 base points sequentially. Anything in particular going on there?

No. It is primarily market driven. We regressed a little bit to the market average in Lexington, we're seeing some job growth but it is sort of the inverse issue of Houston where we're seeing lots of great job growth with more supplies and deliveries coming on for that area. It is right now about an 89% to 90% market.

Okay. What was move outs to home purchases during the quarter? Where is that versus the last few quarters?

We're at about 26% this quarter on a rolling basis and that's about exactly where it was last quarter, slightly higher than the same time last year.

Okay. Then last question, for you, Simon, you guys did $0.84 in the first quarter and that included $0.02 of debt prepayment charges so, if I think about the number, you know as sort of an $.086 number rolling forward here, and you said that there was $0.01 of dilution. Was that for the year or for the quarter from the Memphis sales?

That will be beginning -- you know, as a result of the sale which we anticipate to be a third quarter item.

Okay. So, if I'm thinking from an $0.86 run rate going into the second quarter which is a seasonably stronger quarter for you, what's the -- what are the things that I'm missing from a standpoint to why you know, earnings would come in sort of at the $0.80 to $0.85 range during the quarter?

Rob, the primary reason is that the expenses rise during the second quarter and you know, we would expect a 50 to 100 basis point as a percentage of revenues, our operating expenses to be up that much because of the higher turn activity marketing cost during the second quarter. So whereas we definitely expect higher revenues, we expect expenses to be up commensurately. The other aspect, of course is that we do, as Al was talking about, we do have this headwind with our interest rate and we have some of our DMBS rolls that begin to hit us in the second quarter so we're expecting as Al mentioned, a slightly higher interest rate. That frankly sucks up their improved top line.

Okay. Thanks, guys.

Hey, Rob, one other thing on Lexington. I wanted to mention as we head into the summer leasing season, we're picking up some steam there. They're 92.6 leased in Lexington today. So, it is a little more encouraging than it was.

All right. Thanks, guys.

Our next question is coming from Thayne Needles From Robert W. Baird.

Good morning, guys. Good quarter. Related to the Katrina evacuees, some of these leases, I expect will be rolling very shortly. Do you have an expectation of any pressure to any markets from the evacuees moving on and I guess in particular, original thought was that maybe after this first wave that they might move to more job growth centers. Is there any expectation or any pressure in some of your smaller markets from Katrina evacuees moving on to new environments?

This is Tom, we really haven't seen any mass out-migration on that, it's basically trickled out. Our focus where we had the most Katrina folks were Houston, Jackson, Mississippi and Memphis. They've moved out of those markets and we've been able to replace them -- you know, we've probably lost I would guess about 40% of our folks that were short-term evacuees and basically, what it did was just sort of sped up the recovery in those markets. Then we've been able to replace them as it's gone. It has gone fairly well. We don't expect anything dramatic from that.

In your comments about the acquisitions environment, you made some reference to a broader market focus. Could you define further what you meant by that?

We're looking a little more southwest. We've been spending time exploring opportunities in Phoenix, Denver, just looking to continue focus and some of the more southwest markets. Markets with fundamentals that are similar to the market fundamentals that we're comfortable operating within these commodity markets. We feel like -- we feel like we can operate in these commodity markets as well or better than most. And in an effort to broaden the portfolio and broaden the diversification a little bit, we're looking a little more west and southwest.

Okay, thanks. Simon, question for you. Related to the G&A, is anything unusual in the first quarter or is that a reasonable run rate to think about for the rest of the year?

We're still thinking for the year, G&A plus property management, we'll still be on the original guidance we gave of around $22 to $23 million, which, another way of saying our G&A was a little higher in the first quarters than the run rate would imply and that was due to some one-time items. We will see our G&A and property management expense toward the higher end of the $22 to $23 million just because, as you know, we capture our property level bonuses in the G&A property management expense and since our profit has been performing well, we'll be paying out more bonuses as a result of that. But still, thinking you know, for the guidance purposes, you know, 22 to $23 million now edging toward the $23 million number.

Great. Just one more question. If you guys have it available, can you offer additional breakdown of the revenue change for the quarter in addition to the 2.1% of rate and the occupancy change. How much concessions and/or the reimbursement collection activity added up and contributed to the overall revenue growth?

I tell you what may be easier on the scramble on the call, why don't you and I catch up after the call if that's okay.

That's very good. That's great. Thanks, guys.

Thanks a lot.

Our next question is coming from Tony Howard from Hillard Lyons.

Good morning, everybody. Congratulations for on a good quarter. Simon, I would like to spend more time on the interest expense going forward or guidance. I lost on the call the -- you talked about the preferred [INAUDIBLE]. Give me more details on that?

Sure. We have a $10 million preferred series that we called a year ago and it is actually prepayable May 26th and that is -- Al, what is that?

An 8.6 --

8 5/8. It is classified in debt right now but it is a preferred. And it was a private placement so we'll call that this month and so we'll pick up the favorable spread from 8 5/8 to our refi rate which should be 6.25. So, we'll pick up that spread immediately this month.

Now, you know, that's included in the -- in our supplemental schedules. We've got -- we detailed I think $59 million of debt maturities this year. We've included that in the $59 million. You'll notice that we expect in aggregate, that $59 million to be refinanced at about 90 to 100 basis points more favorable rate than is currently on that debt. So, that helps us offset to some extent the rising short term rate environment that we've got.

But taking that in account, would you expect your costs to go from 5.4 to 5.6?

That's correct.

Tony, this is Al. The rising yield curve as we talked about, since we talked last time, it is just across the curve, increased 40 to 50 basis points. We are 81% fixed in our debt but we do have over $200 million rate and so that will affect us a little bit going through the back half of the year. Also, the other two components on the $60 million, just wanted to mention to you real quickly that Simon was talking about, our two main refinancings in that are $25 million swap coming to you in September and a $20 million fixed portion of our Fannie Mae financing coming due in December. We expect to save around 75 base points combined really in the third and fourth quarter.

That's kind of a late year thing. We really get the benefit next year.

Okay. So, you're getting some improvement, you still expect overall your cost of debt to go up some.

Just as a function of the rising yield curve. We don't make predictions about where interest rates are going. We just take the yield curve.

Okay. Got you. One final question. Back on to the follow-up on the G&A question. Simon, is stock options -- some REITs are putting it in as a separate line item. Are you considering that and how much of that was part of the G&A increase?

Tony, we did implement FAS 123R effective 1/1/06. I don't have the number in my head but I'll get it to you. It will be disclosed in the Q which we filed this morning. But I don't have it in my head. I'll get it to you after the call.

Okay. Thank you. Again, congratulations.

Thanks.

Our next call is from Nap Overton from Morgan Keegan.

Good morning. Just a couple of things. First, 95% occupancy is getting to a pretty strong level. What do you consider, you know, pretty much fully occupied? How much additional upside is there from here?

You know, I think practically speaking, on a portfolio-wide bathe, when you get to 95, maybe 96, you're sort of effectively full. I think we're kind of reaching there. We're still trending on a year over year basis, we're still running about 100 basis points above prior year. But as Simon alluded to, by the time we reached the end of the third quarter, we were pretty consistently performing close to 95% last year. So, we'll start to compare pretty consistently to prior year, but 95 to 96% is effectively full occupancy. Florida last year, and Florida continues to be this year, hovering in the 96 to 98% range but that frankly is a fairly unique situation down there in general. But that's effectively full, 95 or so.

And that certainly is a big part of the reason why for Eric's comment that you believe that you can continue to accelerate the growth rate in same store revenue growth throughout the remainder of this year?

Yes. What's going to happen, of course, is if you will, sort of max out physical occupancy year over year comparisons, then what you're left with in order to capture and manage revenue growth, primarily, is you know, really three things. One is pricing. And pricing, I'm referring to both the ability to pull back on concession levels as compared to the prior year and then certainly, of course is pushing rents. In the second category, the thing we're really focused on is once you capture improved year over year occupancy and physical occupancy, then you start to do some things to get you a little more aggressive in terms of how you manage effective occupancy. And through some things we've been able to introduce with our new systems, the lease expiration management, the way we manage our term processes, what you're really looking to do is squeeze the days vacant between turns. And whereas a 95% physical occupancy may effectively be a 93% effective occupancy, there's still upside in an effort to squeeze down the average days vacant between terms through your inventory management practices. And then of course the third area is the things we've been able to do with our changes in operating platform for billing out utilities, trash, pest control, and efficiencies we've picked up in billing on that area, coupled with ancillary income. All three of these things we think will generate opportunities for us.

Okay. Simon, do you have -- we get the same straight line rent adjustment on the same store basis. Can you tell us what the whole dollar amount straight line rent adjustment was for the whole quarter?

I believe that was right around $600,000 for the whole company. Right around $600,000.

Okay. And kind of following up on a former question about the run rate, $0.84 reported plus the $0.02 from the debt extinguishment charge gets you to 86. Did I understand you correctly to say that the straight line rent adjustment in the first quarter cost you $0.025?

Yeah, that's correct. Companywide. That's right.

Do I understand that correctly enough on apartments with one year leases that over a four quarter period, all things being equal for a static portfolio, you would expect that to equal zero?

That's correct. If nothing is changing year over year, that's correct.

Right. And so really, you might actually think about a run rate of $0.88 to begin with instead of 86, right?

On a static portfolio, that would be basically correct. That's right. Really, what happened of course is that a year ago when some of these leases that were written were -- had a lot of concessions in them, and those concessions are rolling off.

I think the one thing impacting your forecast, our forecast though is that moving in next quarter, we expect concessions to continue declining as part of our pricing structure, so it will be being a negative or headwind from this concession adjustment for next quarter.

On a cash basis, it is positive but the accounting takes some of that back.

Next couple of quarters for sure.

Right. Okay. And then could you comment -- your recent acquisitions have definitely been concentrated in Texas. Could you just comment as to your thinking there?

Well, we just -- we're very comfortable with those markets. We have a great management team in place. That we've beefed up frankly over the last few years and we really believe that there was some value in sort of filling out our capacity in those markets. Honestly, we feel like we're about where we want to be in Dallas. We would continue to look in Austin. But you know, we're at a point now where, you know, we're chasing a number of opportunities in some other areas right now and I would hope that we're going to continue to be successful with the expanding our presence over along the East Coast and then I mentioned some of the new markets that we're also looking at as well. We have done a lot in the Dallas area in particular, and in Austin over the last few years, just because we've found what we believe to be some very attractive opportunities to go in and depressed operating times and believe this market is going to respond well over the next few years. And we with we think these investments will prove to be very good investments for us over the next few years.

Okay. And then one last thing. General question. What, other than potentially higher interest rates do you think could kind of rain on the party over the next four to six quarters that look awfully good based on current trends? What keeps you up and what do you think about there?

Well, I'll let Simon answer as well. I know the things he's going to mention right off the top of his head is real estate taxes, as he alluded to. We have a big insurance renewal coming up on July 1. So, those are two variables. What's going to happen with interest rates is always a worry. But you know, I think that we're early. We're still early in the year. We've got several things coming up over the next 90 to 120 days. I think we'll begin to shed more light on where things may head and hopefully, you know, we'll get some relief beyond what we -- where we certainly currently have guidance. But I think it is too early to start to believe that things are going to be incredibly better than where they are right now. Simon, anything you want to add?

No. I think, obviously Nap, we've had a couple of really strong quarters. We're all working hard to keep the momentum going. We're concerned and aware of what might bite us.

It is the expense side of the P&L we're more focused on in terms of worries. I do agree with your point about the revenue side. We're feeling pretty bullish about where things are headed there.

I said that was the last thing. One other thing. Has the shift in the fuel curve caused you to reevaluate your hurdle rate minimum return requirements on new investments?

Well, you know, our huddle rate is a moving target based on what we think our cost of equity is. We use a cost of equity hurdle rate since we apply a leveraged return. So, to the extent that when we evaluate a transaction, it's got a higher interest rate component, then that's factored into the -- automatically into our investment decision. And so you know, we pick the yield curve that exists on the day we evaluate the transaction is how we look at it.

That's offset a little bit now by the declining percent of preferred in our capital structure. We're paying off this $10 million this month actually and that will have a positive impact on the total cost of capitals.

Um-hmm . Okay, thanks very much.

Thanks, Nap.

We have a follow-up question from Thayne from Robert Baird.

Not even going to try the name this time. That's okay. Your comment about East Coast, Eric, it sounded like those [possibly] might be new markets and if so, can you offer any -- are you at liberty to say what markets those are that you're looking at?

We continue to look up in the Virginia area, Hampton area, we like very much. We're look aggressively in the Charlotte area which would be a market that we would be re-entering. We were in Charlotte many years ago and got out before things got bad there. That's a market we continue to like. For the next few years, we might make another run at. We continue to look in our small market there. Two small markets, Charleston, Savanna. we think have some very positive things going on. But those would be really when I'm talking East Coast. That's what I'm referring to. We continue to like Jacksonville and the markets along the east coast with Florida. But it has been very difficult to make the numbers work there still.

Last question. Maybe this is directed to Tom. Do you have any -- Tom, a number that you could give us a sense of what you think you've -- how much you've trimmed your turn cost through the better management systems you've put in place over the course of the last year? How much less expensive it is for you to turn a unit now than it was a year ago?

The key measure that we use for that would be the average days vacant which has improved and Thayne, if I can call you back or catch up with Simon and give you exactly what that improvement on it but we've gotten more efficient in those turns. The processes that Eric alluded to and talked about really allowed us to begin to improve reducing that number of days vacant through better planning.

We do measure. We have a director of engineering and measures. We have a metric that we use, PPM or something like that. I can't remember off the top of my head what it is.

PUPM.

Thank you. PUPM, and I'll get that information to you.

Great. Thanks, guys.

I'm not showing any further questions in the queue at this time.

Thank you very much for joining us this morning and any questions, just follow up. Thanks.