Mid-America Apartment Communities Inc (MAA) 2006 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, Director of External Reporting.

Ms. Wolfgang, you may begin.

Thanks, good morning.

This is Leslie Wolfgang, Director of External Reporting for Mid-America Apartment Communities. With me are Eric Bolton, or CEO, Simon Wadsworth, our CFO, Al Campbell, Treasurer, and Tom Grimes, Director of Property Management.

Before we begin I want to point that out 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 34X filings with the SEC which describe risk factors that 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 website.

I will now turn the call over to Eric.

Thanks Leslie, good morning, everyone. Thanks for participating in our second quarter earnings call.

As reported in our press release yesterday afternoon Mid-America posted another quarter of very strong operating results. For the second quarter year-over-year same store net operating income grew by 7.2%. This result continues a trend of strong operating performance that Mid-America has captured over the last few quarters. Adjusting last year's second quarter FFO result for a gain on sale and a one time incentive fee included in results, FFO per share in the second quarter grew by a very strong 11.8%.

Performance was solid across all three of our portfolio market tiers with our large tier market group reporting exceptionally strong results with NOI growth of almost 15%. As we've been discussing for some time, we believe that we have significant revenue and pricing up-side to recover across not only our large tier market segment but within our middle and small tier market segments as well.

And given that our recently expanded large tier market segment is still in the early stages of recovery, we believe we will continue to capture solid operating results for some time to come. We remain convinced that the Sun Belt markets will deliver strong results with lower volatility over the long-term.

Our goal of delivering stable, predictable and growing returns for shareholders through investing in the high growth Sun Belt Region is best accomplished by executing well on three principles. First, we believe it's important to be diversified across three market tiers throughout this region. It's clear that each of these market tiers deliver differing performance characteristics during various phases of the market and economic cycles.

Our goal is to capture the highest risk adjusted returns within the sector over the long term through full economic and market cycles and this three tiered diversification is important in meeting that goal. Secondly, we're committed to maintaining a very strong operating platform that is continuously refined and up-graded in highly competitive commodity markets that focus on productivity and efficiency is operation is crucial. And we believe that Mid-America continues to excel in this area.

And finally, our strict disciplines and capital deployment decisions have provided investment practices and protocols that we believe will serve us well over the long haul by remaining realistic and disciplined in our under writing we're able to battle periodic new supply pressures while protecting existing shareholder value. There is no good remedy for over paying in an effort to chase growth, and it's a mistake we don't intend to make.

In evaluating second quarter performance for Mid-America it's also important to note the high quality of earnings that we continue to build into our balance sheet and performance profile. We remain focused on identifying and pursuing capital deployment opportunities that will build upon Mid-America's recurring and sustainable cash flow stream. Our goal of delivering a secure and growing dividend and value growth is best accomplished by establishing recurring cash flow and thus our focus on maintaining a high quality earnings profile.

We continue to feel very good about prospects for strong NOI performance from our existing portfolio, not only as a result of recovery under way in the Sun Belt markets but also because of the opportunity to reposition a number of properties to higher performance through our unit interior upgrade program. We are making steady progress on this program and expect through planned expansion of the initiative, Mid-America will capture increasing levels of robust rent growth that will further propel revenue performance over the next few years.

We'll also continue to make several significant upgrades to our operating platform, highlighted by a kick-off in July of a test of the LRO yield management pricing software. If the results are as positive as we expect them to be, we anticipate rolling this program out across the entire portfolio next year.

Mid-America's balance sheet continues to build capacity and is well positioned to support steady new growth. We're convinced that as a result of the overheated condo conversion market and the increasing pressure on the higher leverage investor, the acquisitions environment will improve over the next 12 months or so.

Our acquisitions team is extremely busy with 350 million of properties currently in due diligence or offers outstanding. While the environment for deploying capital remains competitive we will continue to be patient and look for opportunistic buying situations that have defined our record of performance in this area.

With over 50 million of new expansion development under way or planned, approximately 40 million of redevelopment opportunity identified and 130 million of acquisitions planned for this year, we remain confident that we will capture competitive levels of new growth to supplement our strong internal growth prospects.

I will now turn the call over to Tom to discuss property management. Tom?

Thanks, Eric. Good morning everyone.

Record NOI was supported by strong same store performance and our occupancy turnover pricing and collections across the portfolio. As you will note our NOI improvement was not just driven by our large markets group as we saw significant gains in our middle and small tier markets.

I will touch on the overall trends first and then highlight a few specific market performances. Good job growth and limited new supply across our Sun Belt markets combined with our enhanced operating platform and driving performance.

Same store physical occupancy at the end of the quarter was 95% an improvement of 90 basis points over the prior year. Dallas, Houston, and Raleigh have shown the most improvement in our occupancy, but as with revenue we've seen solid results in all three market tiers.

A reduction in turnover by 2.6% from the prior year contributed to the occupancy increase from the same period last year as well. The strong occupancy results have continued into the third quarter with July closing at 95.5% occupied, 100 basis points in July a year ago.

One sign of our stability was a modest 2% decrease in traffic on a year-over-year basis. It's not often that I will point to a decrease in traffic as a mark of stability, but bear with me a bit.

Last year, we used our marketing dollars aggressively to drive additional traffic to our communities in order to speed up our recovery. With markets stabilizing and occupancy high, we've been able to reduce our marketing costs and make more effective advertising decisions.

For example, 33% of our leads now come from cost effective internet sources and our marketing cost per application is down 7%. Our associates still closed on 40% of the total traffic. Instead of forcing improvement as we did last year, we are now solidly in recovery and working to maximize up-side.

Our occupancy gains have allowed us to shift from a period of preserving our rent structure to an offensive strategy of pricing growth. Our net price increase, which is the average rent per unit plus per unit improvement and concessions increased by 4.3% for our same store group. Our 2.9% average rent per unit growth came from consistent increases across our small mid tier and Florida large markets group.

Cash concessions decreased from the prior year by 25% with the bulk of the improvement coming from the remainder of our large markets group. As we expect with the exception of Florida our large markets are still in the early stages of recovery and their increases in revenue are coming from occupancy and concession gains. Benefits from rent growth in our large markets group are still to come.

As Eric mentioned our LRO yield management test is underway and on schedule. Early results are encouraging and we look forward to evaluating this pricing tool as another enhancement to our operating platform.

We see more signs of progress in our collection of rent and submetered utilities. Our enhanced screening deposit and collection procedures resulted in a net delinquency improvement of a strong 24% over the prior year. Our retooled submetered utility collection process is complete and our collection percentage jumped from 87% last year to 98% of our submetered billings.

We feel this is one of the best performances in the sector. This enhancement of our operating platform drove a 10.4% increase in our reimbursement revenues. This improvement in our reimbursement revenues has more than off-set the increase in utility rates across the portfolio.

Moving on to some brief market highlights. Dallas was a particular point of interest with revenue growth of almost 10% which our growth building steam, this market seems to be full recovery mode. This translate into a 7% increase in applications which drove a 380 basis point increase in our occupancy.

This market stabilization allowed us to improve pricing, we're able to reduce concessions by 30% in Dallas. Our Florida communities continue to post record results which have been the product of solid fundamentals in our market rather than a significant bump due to condo conversions of their comps.

There's been some concern expressed in industry press that the cooling of condo mania will increase rental supplies, condo owners put their units out for rent. We feel our portfolio is well insulated from new supply of this type. The condo conversion phenomenon was strongest in South Florida where we have only one community.

The majority of our Florida communities are in suburban locations in north and central areas of the state and not materially exposed to this issue. Tampa is a good example. We've maintained physical occupancy of our 97% and pushed rents through 5% and growing. Rent increases that have generated 14% year-over-year NOI growth.

We feel that our exposure to condominiums returning to the market will be limited in our sub-markets and we feel we have a distinct competitive advantage over condominium communities run by multiple individual owners with varying degrees of service levels and the resident qualification hurdles.

Finally, I'd like to mention Raleigh. This is a middle market city that has several attributes we find appealing. The stability and work force produced by excellent education centers, a growth engine in the technology industry and a high quality of life. We've increased our exposure to this market substantially over the last year with the additions of Waterford Forest and Preserve at Briar Creek. NOI in that market is up 23% driven by a 360 basis point increase in our occupancy and 6% rent increase.

I 'll turn it over to Al to give you update on our expansion plans at Briar Creek among other things. Al?

Thank you, Tom, and good morning, everyone.

I'm sure you've noticed the expanded disclosure for our development and interior renovation programs, but if not, I will refer you to the supplemental information in our website. I'll spend just a few minutes this morning discussing the activity and future plans for these initiatives and then finish by highlighting the significant changes to our balance sheet during the quarter to fund our business.

As Tom mentioned, we broke ground during the quarter on Phase II of our 200 unit Briar Creek community located in Raleigh, North Carolina. We are very excited about the strong and improving fundamentals in the Raleigh market which should provide solid support for the initial unit expected to be delivered in late spring of next year.

Our total cost is fixed for this project at just over $22.5 million and we expect to stabilize NOI yield between 7.5% and 8%. We do have two additional projects in initial stages of development, both our St. Augustine property in Jacksonville, Florida, and Bolder Ridge in Dallas, Texas are expansions on existing communities and are expected to break ground in the first half of next year. The cost of these two projects are not yet fixed but are expected to be about $30 million with anticipated NOI yield similar to Briar Creek.

Our interior renovation program is progressing very well. As you can see from our expanded disclosure we spent just over $2.5 million during the first half of the year and completed 495 units for an average investment of about $5,100 per door.

93% of these completed units were leased at quarter end and net of rental increases of almost 17%. We plan to invest a total of about $4 million this year and we expect this program to expand next year.

We believe somewhere between 6,000 and 8,000 units or about 15% to 20% of our portfolio are potential candidates for this program over the next few years. And just one note, to maintain the integrity of our same store reporting we have removed 6 of these communities with significant renovations underway from our same store portfolio and we plan to report on these separately later in the year.

Our balance sheet continues to strengthen. Our debt is now just over 40% of our total market capitalization, and as a percentage of gross assets has dropped by over 300 basis points in the last six months. Our fixed charge coverage at 2.15 also continues improve and is at the accepted median.

At the end of the quarter 89% of our debt was either fixed other hedged with only about 45 million or 4% maturing through the end of the year, now only 138 million or about 12% maturing over the next 18 months. Our average interest costs for the quarter was 5.5% which we expect to rise only slightly to around 5.6 by the end of the year.

Agency credit facilities continue to serve as our main barring platform. In June we completed a $200 million expansion of one of our facilities which we will use to fund the debt portion of our acquisitions.

Also during the quarter we raised a total of $70 million in additional common equity which we used to fund the acquisition of Grand Courtyards in Dallas to pay down the 8 and 5/8s series (inaudible) and to reduce barrings under our credit facilities providing additional capacity.

Under our current barring agreements we have over $150 million in immediate bar capacity with room for another $175 million in cost effective expansion. With that, I will turn it over to Simon.

Thanks Al.

FFO for the second quarter is $0.85 per share, was $0.01 ahead of midpoint of our forecast and was primarily driven by stronger than anticipated same store performance. FFO per share equalled the record level of last year's second quarter, but last year included $0.08 of one time FFO including $1.7 million from a promote fee related to our joint venture and $334,000 from the sale of some land.

Adjusting for these one-time items our year-over-year growth of FFO per share for the second quarter was about 11.8%. Results for the first six months were also solid with reported FFO per share of $1.68. Excluding the same one-time revenue items that we recorded last year, our FFO growth rate for the first six months is approximately 8.5%.

We've reported this strong performance despite expensing $1.5 million or $0.06 per share of previously capitalized concessions, a non-cash charge relating to our straight lining of concessions across the life of the lease. A FFO for the quarter was $0.58 per shares compared to $.066 last year reflecting a $2.5 million increase in recurring capital expenditures.

This is due to timing mainly painting contracts which tend to start in the spring and is not indicative of any major rise in recurring capital expenditures. Our G&A costs increased partially due to an increase in our accrual for F&E taxes caused by lower changes in Tennessee and Texas that we talked about last quarter and which were offset by reductions in real estate tax rates. We also accrued higher bonuses for our property personnel due to the strong operating performance.

As Al mentioned, our balance sheet continues to strengthen. An important consideration is that our business strategy is much safer than most apartment rates. We don't have lot of capitalized overhead and interest expense or a major commitment to development.

Our earnings quality is high since our FFO is not dependent on the cyclicality of the condo market or other businesses that carry a lot of transaction risk. We believe that our prior forecast of FFO per share for the full year of a midpoint of $3.29 seems to be realistic. With a high of $3.37 and a low of $3.21.

We're forecasting FFO at $0.76 to $0.84 for each of the third and fourth quarters with a midpoint of $0.80. Our forecast assumes strong operating conditions continue to drive results. Year to date our same store NOI growth has been 7.2%.

For the full year we are projecting same store growth to be in the range of 5.5% to 6.5% up from the 4% to 6% previously projected. The increase would be 6.5% to 7.5% after adjusting for the one-time $1.2 million concession adjustment made in the fourth quarter of last year.

This is at the high end of the average of the other REITs whose projections we have seen. We are expecting same store NOI to increase 4% to 5% in the second half which would have been 5.5% to 6.5% before the $1.2 million one-time revenue adjustment that I just mentioned.

Looking at some of the factors that offset some of this strong operating performance, forecast interest rates as reflected by yield curve are about 15 basis points above our prior projection.

The impact of this on the second half year is almost $0.04 per share. We also increased our forecast G&A and property management expense for franchise and excise taxes. Costs for testing our yield management system and higher property bonuses associated with this stronger operating performance.

Our combined property management and G&A expense should now be in the range of $24 million for the full year. The sale of two of our IPO properties in Memphis, Hickory Farms, and Gleneagles is expected to be completed in the fourth quarter with net proceeds from the sale of approximately $15 million. We anticipate slight dilution in the range of $0.01 per share next year as a result of the sale.

We continue to forecast recurring CapEx for the full year at $17.5 million or just over $450 per unit and approximately $0.67 per share. This is at the higher end of normal recurring capital program due to the timing of some exterior paint contracts. Based on the midpoint of our FFO guidance this indicates the FFO of $2.62 per share for the full year compared to $2.55 last year.

Finally, we 're excited to announce an institutional Investor Day to be held in Jacksonville, Florida starting on the evening of Tuesday, October 17th through 18th. Jacksonville represents one of our largest market concentrations with 10 properties along with one of our new development expansion projects and is a good cross cut of our portfolio.

We plan property visits, updates on the Florida residential apartment markets, a live demo of LRO, visits to our redevelopment properties, and a review of the apartment acquisition environment. We posted a press release about this on our website and welcome institutional investor participation.

Eric?

Thanks, Simon.

To recap our comments this morning, let me reiterate that we feel very good about the prospects for continued solid internal growth from our existing portfolio. Recovering market fundamentals, a repositioned portfolio, attractive repositioning and upgrade initiatives, and opportunities associated with new pricing tools all set the stage for continued solid revenue performance.

Our constant focus on driving efficiencies and productivity into Mid-America's operating platform helps to ensure we capture this revenue trend in our bottom line. Our balance sheet continues to build capacity and is in an increasingly strong position to support more robust external growth.

We expect increasing opportunities to grow our FFO from new acquisitions and selective new development and remain confident in our ability to also deliver on this important component of value creation for shareholders.

That's all we have in the way of prepared comments. I will turn it back to you for any questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Rob Stevenson from Morgan Stanley, your question, please.

Good morning guys.

Hey, Rob.

Simon, you went through a bunch of things a minute ago that could put a drag on quarterly earnings in the back half of the year. If I'm summing all this up it looks like $0.03 or so of sort of drag from the $0.85 that you did in the second quarter. Is that about right?

That's probably about right. Maybe about $0.04 or so, Rob. That's correct.

So, then to get to down into the 70--76, 79 range of your quarterly guidance, you would have to see a deterioration in operations?

That's correct.

Okay. What is the acquisition guidance for the full year now?

It's 130 million.

Okay. And that's down a little bit from where it was last quarter?

A little bit. About 20 million or so we were at 150 before.

Okay. And then running through your markets, there were a couple that sort of stuck out during the quarter.

You had some slightly negative sequential same store revenue growth, in Austin, Nashville, Columbus, Jacksonville, Little Rock, and Macon, is that basically you guys just pushing rents there? Is that what's wound up happening and you wound up seeing some occupancy there? is there anything particular going on in those markets?

No. It's really a different reason almost for each property. In Nashville we lost a building to a fire and some water damage, so we have fewer units in Nashville. That's expected to come back on-line in end of third quarter.

Columbus had zero net delinquency in the prior quarter, and we returned to a normal 0.5% in that potential. Jackson, Mississippi might have some sort of more normalizing trend. We saw occupancy there drop from 96.4 to 94.7.

And that's really, Jackson was one of these places post-Katrina that went from a pretty good market to you can't find a place to live and now it's returning to its sort of normal area. We've only got 9 residents in Jackson right now that are Katrina relos, so we're sort of through that and we've returned to a normal environment.

Little Rock is really more flat than down, it's really just down by $7,000 for the whole quarter, and that had to do with a slight change in net delinquency.

I think--did I tag them all? Rob, is that enough?

Yeah. That was fine. And then I think that there was comments made earlier about you guys looking at another $30 million of development projects?

Yeah, we've got an expansion opportunity in Dallas as well as one in Jacksonville that we are currently planning and under design with two different development groups right now and expect to break ground on those next year.

All right, and when you're looking at those as well as the three that you have under construction now, what are returns looking like given construction costs and land costs and stuff these days?

I think NOI, yields we're looking at 7.5 to 8. Al?

Yeah.

And at this point we still feel pretty good about that.

Okay, and then last question. What do you guys see in terms of move-out to home purchases with what's going on in the single-family housing market these days?

That's one that we've watched for a long time. And honestly as long as we've been tracking the data it ranges from 24%--24.1% to as high as 25%.

Move out reason.

Excuse me. That's of our total turnover. It's also been and continues to be an affordable option for many of our customers. But we 're not really seeing a runup any differently than we did five years ago.

I mean, interest rates drops at a good bit and that's off. So home builders are offsetting that with some incentives, but we are not seeing a material change. It's sort of the same as it always has it has been, within our sort of normal band of 24% to 25%.

Thanks, guys. I will let somebody else ask a question.

Thank you. Our next question comes from Bill Crow from Raymond James, your question, please.

Good morning, guys.

Rob got a couple of my questions, but let me ask a big picture question. That is, are we at peak NOI as you look forward to 2007?

Or kind of the lagging performance of the large markets give you an opportunity to out perform your NOI from this year as we look to 2007? Or frankly, does Houston's performance early this year because of Katrina off-set that?

Well, we haven't made our plans yet and budgets and forecasts for 2007. But I would tell you that when I look at the opportunities we have from our current performance platform, I feel pretty excited about it frankly.

We still have a fair amount of concession dollars imbedded within our frame work right now that we think we will get back taking a look at it we actually have close to--when you back out the balance sheet carry that we have because of the way we are accounting for now, we still have about $6 million worth of concessions in the system to be recovered over the next 12 to 18 months.

We have this LRO pricing software system that we are very excited about that we're just now starting to test that we think offers some real opportunity. These large tier markets are just now starting to get back on their feet. I think there's a lot of pricing recovery opportunity there.

When I look at the rehab opportunities and the success we're capturing there, averaging 17% rent bumps from what we've done so far, I feel pretty good about the next couple years.

I think another thing, Bill, is we think that supply pressures may be a little muted because of the inflation in construction and development costs that is seen. I would think that with what's been happening in home building that will begin to mitigate. We still may have 18 months or a couple years of some insulation from the development pressures that we have learned to expect in our sector of the country.

That's helpful. How does Atlanta shape up for you guys? It's been a lagging market for a number of companies for a while. Are we at the point where it's set to turn the corner?

I think we're feeling pretty good about Atlanta. One thing in our supplemental income that gives it a bit of a negative tinge in ours is the negative ARU growth. That's a result of our--it's a result of two properties switching in the same store that were acquisition properties where developers had spread the concession in.

And we just called a rent cut a rent cut and dialed it into our numbers. Without those two properties we're at like 2.7% ARU increases. The first time we began to really get traction on rents in Atlanta as well.

Those two acquisition properties are combined doing like 17% NOI growth. Those things are turning for us. Our sense is in our markets in Atlanta that we are beginning to turn the corner.

Great. Thanks guys. Appreciate it.

Thank you, Bill.

Thank you, our next question comes from Nap Overton from Morgan Keegan, your question please.

Good morning.

Good morning, Nap.

A couple of things, last quarter you talked about you thought capitalization rates in general for the properties you were looking at were rising. Would you still say that that's true?

And I'm also kind of surprised to hear the acquisition guidance pulled down a little bit given what you seem to speak of as a pretty full pipeline. Can you add some more color to that?

Cap rates and what we're seeing are actually I would call them kind of holding firm right now. I don't think there's a lot of movement one way or the other from what we've seen really over the last couple of years. It still is is very competitive.

We've done--as far as the 130 versus the 150. We've done 80 million so far this year. And just given where we are at this point of the year, we just think it's prudent to assume a couple more deals this year and thus that gets you in our estimation about 130 million. It may be a little more.

But at this point we've got--as I mentioned in the comments--we've got a very full pipeline. And I 'm looking at two more properties next week. We've got a lot going on in that area.

But we just think that better to be nailing these things down and really estimating them are very, very difficult. We tend to be hopefully I think a little conservative in this area. But we feel like that assuming a couple more at this point makes sense. We may do more than that.

Okay. Could you tell us--did you--was the green shoe exercised on the million share stock offering?

Yes, Nap, it was. Full green shoe was exercised.

Can you tell us what the total straight-line rent adjustment or concession adjustment was for the quarter?

Yes, absolutely. How much was that, Al?

I think in the supplemental data, Nap, you can see it's 475,000 in the quarter.

475-- That's for--on a same store basis, correct?

You want the total?

Yes, sir.

The total adjustment was for --was 700,000.

Okay thanks very much.

Thanks, Nap.

[OPERATOR INSTRUCTIONS]

Our next question comes from Tony Howard from Hillard Lyons, your question please.

Good morning to everybody.

Hey, Tony.

Simon, a couple of clarification might have been because it was Friday and I don't hear as well. On G&A, it was up year-over-year but down sequentially and you were giving as far as some of the issues underlining the increase in G&A. Can you go over that again and what you were talking about as far as the run-rate going forward?

Yes, absolutely.

First of all, I forecast G&A and property management expense for the year to be about $24 million. Some of the items that have impacted the inquiries over our prior projections was the--we capture our property bonuses, property level bonuses, and because of stronger operating performance, we--more was earned and more will be earned.

The second thing is we had a change in the franchise and excise tax laws for Texas and Tennessee, particularly Tennessee that affects this year, and so that increased our--for a total of about $300,000 this year that increased--that we capture in G&A expense.

First thing is we have added some staff and plan to add some staff and some costs associated with test of LRO, and now obviously we think we are going to get significant pay back from that next year but it won't be until we roll it in next year. Those are the three major items, Tony, that are kind of driving our G&A expense and property management. I will also add and say--

Can you break down the 24 million into what G&A and the line item itself?

I can do. Can I do that off-line and will be glad to do it. I don't exactly have it in front of me. I will be glad to do that with you.

Okay. Good. Similar kind of question Simon, on CapEx, obviously was up a lot this quarter. You were talking about as far as guidance going forward. Can you go over that again also?

Yes, absolutely. Recurring CapEx with forecasting for the year being about 17.5 million, I think that's about $0.67 a share or about $450 a unit. In a more normal year we have been running 380 to 450. So this is at the high end.

And the reason that it is at the high end is because of the timing of some paint jobs and it just kind of is what it is. We would expect in a normal year for recurring CapEx to be at the midpoint of that 380 to 450, but it is a little higher this year.

Now if those paint jobs happen to get started up in the second quarter and so we just incurred more recurring CapEx in the second quarter than we normally would do. But we are forecast and we feel pretty confident about it is that our recurring CapEx will be within the range I just mentioned on a full year basis.

Final question, Eric I know you haven't done the budget yet for 2007, but can you kind of go over some line items? What you would see that would concern you as far as getting into 2007?

Well, I mean, in broad terms I would tell you for 2007 the up-side for us is going to be primarily in the area of pricing where we're going to be continuing to pull back on concessions and pushing rents in a more aggressive fashion.

We have been running fairly consistent in the 95% or so occupancy range. Year-over-year gain in physical occupancy is not going to really be the opportunity. I think there may be a little opportunity in year-over-year gain in what we refer to as effective occupancy which brings in the churn component of people moving out and just turnover.

Some things we are doing in the area of managing lease expirations and managing that churn component may drive some opportunity in effective occupancy. For us--and collections are running in a much better rate this year than we've seen. My guess is we are running at a fairly optimum level right now are consistent with historical performance.

For us really next year it's all going to be in the pricing arena for the most part. And as far as operating expenses are concerned, we don't see anything at this point that is of a particular concern.

We think that our normal kind of 3% range expense growth is probably what we will be looking at. Again we will get into that. The one thing that may draw some increasing benefits for us on the operating expense side is this unit interior rehab initiative is going to ultimately enable us to see lower costs associated with turning apartments.

Because we are not having to repair as many things. I think that in the long term has positive implications on the expense side.

One other just final thing on that front is we have relatively little refinancing, I think about 40 or 50 million scheduled for next year.

Al?

Refinancing brought 45 million this year and then about 140 million--I mean 100 million next year total of about 145 in the next 18 months.

We think that based on the current yield codes that we won't see a lot of change in our average interests costs.

Yield coverage is really flat right now and that's just what we use, we are not trying to guess an interest rates, we use the old curve to project it.

So we see very little increase over the next 18 months.

Okay. Thank you very much.

Thank you, our next question comes from David Rodgers from RBC Capital.

Few questions and I had to jump off so if they've been asked, let me know and I'll just read the transcript.

The first following up to Tony's question on the interest rate. Simon, what was your comment in the prepared remarks about the increase in the second half for interest expense? The impact on FFO?

We are looking at about--it should be about $0.02 a quarter or so of the impact of interest rate increases over our prior forecast. So, the yield curve moved about 15 basis points or so. That's kind of our expectation, Dave.

Given the swaps in the caps that you have, that seemed to surprise me in terms of the up side move. How much exposure do you have left under those caps?

Well, we've got approximately only about 15% of our debt is floating. We've got 89% total that's hedged or capped, about 85% swapped or fixed.

You get 15% of 1 billion, almost 1.2 billion and with a move--we've got two things. Of course, the main thing is just the interest--the rise in the fed funds rate. That's driving LIBOR.

Of course the yield curve did move from our original forecast. And that did affect our refinancing a little bit.

Okay.

But it's just--you've got a 1.2 billion just a few basis points can make a significant difference.

That's fair. Question for Tom Grimes.

In terms of the utility--the better collections lower delinquencies, it sounded like by the numbers you quoted you were kind of reaching the top of that program which I think is a good thing.

Tell us how that compares or what that does to the top-line same store growth over the next couple of quarters, what type of impact that might have?

It will certainly help for the next couple of quarters, no question. And it will be probably until we begin to see that tighten in the middle of first quarter of this year.

So the next couple of quarters that gap will still be there. We will be able to--I mean, the difference between 87% and 98% dollar wise I don't have right in front of me. But we are going to have that gap for the next two quarters.

I would say, Dave, that as we achieve full penetration rollout and establish the collection success that we've established, any pressure or any hesitancy that we've seen on pushing rents and pulling back on concessions because we were trying to capture the full benefits of the utility billing, that subsides, meaning that we think that the very top-line pricing has free to be as aggressive as we want to be on that without worry about the implications to rolling out any kind of utility program.

Okay, last question maybe again for Tom or for Eric. New leases in the quarter. I didn't hear if you indicated what new versus renewal leases were up actually priced during the second quarter.

We didn't split new versus renewal prices--total ARU is up 2.9%, if you include the decreasing concession for units, 4.3%.

And then just in July to give you a bit of a leading indicator, we don't have it summed up for the whole portfolio, but it's ranging from 15% in some of our markets in Florida to slightly more than one where we are seeing concession burnoff there.

But we're 2.9 in ARU increase right now and the end of July just ARU alone was already up over 3%.

I think on average we did--on asking rents being higher than in place rents we're averaging about 4%.

Sorry. That's correct.

We're getting about 4% asking rents above where current rents are at right now.

Should be a good leading indicator of ARU.

But that net excludes concession burnoff.

Right. Just on the rent component.

Right.

Okay. That was helpful. Thank you.

Thank you. Our next question comes from--is a follow-up question from Nap Overton from Morgan Keegan.

Yeah, I believe it was Eric who mentioned that you estimated $6 million in imbedded concessions still in your system that you thought you could ring out. That's a pretty sizable number.

Is that the total concession that would represent getting them to zero or is that an estimate of the amount that you might recover to get things back to kind of a normalized level what you consider to be a consistent ongoing level?

That's really the total. We have--well, in total we've got 9. But we've got 3 of it already if you will carried on the balance sheet. So we're backing out the balance sheet component, and you get to 6.

And then if the markets stay as strong as they are likely to be, and then quite honestly this LRO pricing system and the tool is going to enable us to probably approach the whole concept of concessions in a much different way, moving to net effective pricing as opposed to the use of concessions in general.

So it's a long answer to your question. I think over the next couple years it's very conceivable to believe that we 're going to get the majority I will say if not all that 6 million.

My sort of intuition is on this, Nap, and it is intuition because we really don't know, it depends how strong the markets get. We probably got the $9 million of concessions that we'll grant this year. As Eric said we got 3 million that's capitalized on the balance sheet.

Excluding that, maybe $3 million or so is going to be a tough amount to ring out over the long run. Maybe we've got 6 million or so that we can kind of ring out over the next couple years perhaps.

Okay. And that is, of course, an annualized figure?

Yes.

Thank you.

Thank you.

Thank you. This does conclude the question and answer session in today's program. I would like to turn it back to our host for any concluding remarks.

No concluding remarks, we appreciate everyone joining us and we'll talk to you next quarter. Thank you.

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