Mid-America Apartment Communities Inc (MAA) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the Mid-America Apartment Communities' fourth 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 like to turn the call over to Ms. Leslie Wolfgang, Director of External Reporting. Please begin, ma'am.

Thank you, Tony. Good morning, everyone. 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 Harbor language included in yesterday's press release and our 34-Act 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 website. I'll now turn the call over to Eric.

Thanks, Leslie. Thank you for joining us. We're going to change the format of our call a little this morning. As you can tell in reviewing our earnings release yesterday, we expanded the format and we're trying to get more details into the release. So this morning, Simon and I will cover just a few points in prepared comments and then we're going to go ahead and open the line to give you more time for any questions that you may have.

Mid-America had another terrific quarter of performance. Fueled by 7% increase in revenues, year-over-year growth in same store NOI of 8.9% is the best third quarter performance in the history of our company. Growth in FFO per share for the quarter was also very strong at 9.3%.

It's worth noting that as we have now clearly cycled into a period of strong operating fundamentals, Mid-America's same store operating results and FFO performance continue to compete very favorably within the apartment REIT sector. As we've said over the last few quarters, we feel the changes made to our portfolio profile, along with the significant enhancements made to the operating platform, place the company in solid position to continue delivering strong performance.

Third quarter results were strong across all three of our market tiers. Our large tier market segment captured the highest level of revenue performance as same store revenues grew by almost 12%, before the impact of straight-lining concessions. We expect this large tier market segment will continue to capture solid performance into 2007 as we recover lost concession revenue and move to more aggressively raise rents. You'll note that among our three market tiers of the portfolio, the small tier market segment actually posted the highest year-over-year gain in rents at almost 4%. As we've pointed out in the past, the small tier market segment avoids a lot of the volatility and pressure of recessionary and weak leasing environments.

As a result, we did not have as much pressure to offer concessions over the past few years in these markets and thus we're able to more quickly recover rent pricing momentum in this segment of the portfolio.

Mid-America's portfolio is now positioned in seven of the top 10 markets for projected job growth and household formation over the next 10 years. Our unique three-tier market approach to diversifying capital across this high growth region takes advantage of the overall benefits of the strong demand across the Sunbelt, while capturing lower volatility in performance and reduced long-term risks.

We remain optimistic about market conditions and same store performance heading into 2007 for several reasons. First, job growth is strong throughout our investment region and this will continue to drive higher population growth and household formation performance as compared to other regions of the country. Second, the single-family housing markets in the majority of the Southeast markets have not gotten materially out of line with historical pricing standards and we don't expect there to be any sort of impact to Mid-America's properties from a major correction in this segment of the housing market.

And given the rapid rise in construction costs over the past couple of years, we expect that the high-growth markets in the Southeast and Southwest will enjoy limited new supply pressure for the next year or so. Also, given Mid-America's largely suburban locations, with only minimal exposure to the over-developed condo market in south Florida, we don't believe our portfolio has meaningful risk from condo reversions back to the rental market.

We are excited about our entry into the Phoenix market that took place in the third quarter with the acquisition of Talus Ranch. We've been working for some time to find the right opportunity to enter Phoenix and believe this new upper end property will be a strong investment for us. As has been the case with a number of deals we've completed in the last couple of years, this was a failed condo conversion project that needed a very quick due diligence and close that we were able to accommodate. The Phoenix market offers similar performance characteristics as compared to our other large-tier Sunbelt markets and we believe the Mid-America operating platform can effectively perform in this environment.

'Mid-America's track record of buying right and operating aggressively provide the right disciplines to effectively combat periodic supply side pressures, and as a result, we like the long-term performance characteristics of strong growth markets like Phoenix. At the end of the quarter we purchased another high quality property in Savannah, Georgia called The Oaks of Wilmington Island. This transaction represents a repositioning and operating turn-around investment opportunity, located in a highly desirable sub-market of Savannah. Our Mid-America team has a long and successful track record of executing on these types of repositioning plays and were excited to also add this property to the portfolio.

We're encouraged by what we believe are improving opportunities to capture new growth. Including our just announced acquisition in Savannah, Mid-America has acquired $192 million of high-quality property real estate year-to-date. Our deal flow pipeline remains very active. We are clearly seeing more opportunity to acquire high-quality properties now that the condo converter market has cooled. We're excited about the results to-date, but more importantly, we're excited about the prospects for continued robust performance.

Before turning the call to Simon let me add a quick comment about another attribute that I believe differentiates Mid-America. Those of you who attended our Institutional Investor Meeting and property tour in Jacksonville a couple of weeks ago had an opportunity to meet a number of our management team. As you heard me mention, a lot of our company's ability to deliver stable, consistent and strong performance results is tied directly to the stability and expertise of the management team in place at Mid-America.

Of the 21 members of our management team at the vice-president or higher level, the average tenure with Mid-America is just over 10 years and roughly 85% of those folks were promoted into their roles from within Mid-America. This sort of commitment and stability in leadership are key components in our ability to deliver superior and stable returns to our shareholders. Simon is going to now recap some details on the quarter and provide an update on FFO guidance. Simon?

Thanks Eric. Morning. FFO for the third quarter of $0.82 per share/unit was $0.02 ahead of the mid-point of our forecast, and a record for a third quarter. Same-store revenue growth of 7% was also a record and drove the strong performance. Year-to-date, FFO per share was $2.50, compared to $2.38 a year ago, but up 9.2% before the $0.085 of one-time items that we reported last year.

In line with past trends, same-store expense performance was very good, especially in the light of higher insurance costs, which grew by 38% over the same period a year ago. Without the increase in insurance costs, our third quarter same-store NOI would have grown by 10.6%, 1.7% higher than the 8.9% we reported. Our G&A costs grew, partially due to an increase in our accrual for F&E taxes caused by the law 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 due to the strong operating performance.

Results for the quarter included exceptionally strong NOI growth by our large tier markets, especially Atlanta, Dallas and Houston, as well as significant recoveries in Austin, Greenville, and Raleigh/Durham, which underscored the success of our investment strategy. On a same-store basis, concessions dropped from 4.4% of net potential rent in the third quarter of 2005 to 3.1% this year, enabling us to make some of the significant progress on raising effective rents.

We acquired two properties in the quarter for a total investment of $83 million. This includes Talus Ranch in Phoenix, which we acquired for $62 million, or $129,000 a unit, a great condo-quality asset in lease-up. The property is presently 50% occupied, and should be stabilized by the end of 2007. These purchases have been funded by our credit facilities, and also by $24 million of equity raised through our direct stock purchase plan in the quarter.

Despite the significant investment program, we ended the quarter at 45% debt plus preferred to market capitalization. We have plenty of balance sheet capacity, but intend for now to keep the leverage within the current range. Our fixed charge coverage was 2.17, up from 2.0 a year ago, and at or about the sector median. When evaluating Mid-America's leverage it is important to remember that our business strategy is much safer than most apartment REITs. We don't have a lot of capitalized overhead and interest expense, or a major commitment to development. Our earnings quality is high, since our FFO is not dependant on the cyclicality of the condo market or businesses that carry a lot of transaction risk. And finally, we've seen that our three-tier market strategy provides additional stability in operating performance.

The sale of two of our older Memphis properties, Hickory Farms and Gleneagles, is expected to be completed in the first quarter of next year, with a sales price in the range of $15 million, which represents just over a 6% cap rate for these average 25 year old assets. We anticipate slight dilution in the range of $0.01 to $0.015 per share next year as a result of the sale.

As we said in the press release, we've received a verbal offer to purchase our joint venture asset, Verandas at Timberglen in Dallas, Texas for $110,000 a unit. We calculate this to be a 5.2% yield on next year's NOI before the management fee or about a 4.5% cap rate. As a point of reference, we purchased this property not quite three years ago for $85,000 a unit, and if the transaction closes as we think it will, we estimate that we will have generated over a 30% internal rate of return for Mid-America's shareholders. If the deal progresses, we expect a fourth quarter closing, although a delay until next year is possible, and we expect it will trigger a promote fee of about $0.03 per share, net of related expenses.

Our limited development program continues to be on track, with one property, Brier Creek Phase II in Raleigh-Durham, set to begin leasing in the second quarter of next year, with an all-in cost of $120,000 a unit. We've two projects set to commence construction in 2007 with a total investment of $32 million. We expect NOI yields of approximately 7.5%, about 100 basis points above the acquisitions we've been buying.

We've updated our forecast for the fourth quarter to take into account the continued strength in market conditions. For all of 2006, we forecast same store NOI growth of 6.5% to 7.5%, after adjusting for the one-time non-cash credit to concessions in the fourth quarter of last year. Since Talus Ranch is just under 50% occupied, we anticipate $0.02 FFO per share of dilution from this acquisition for the fourth quarter. We expect this to be offset by a net $0.03 from the joint venture sale, assuming that this closes in the fourth quarter. We're also expecting our combined G&A and property management costs to rise to about $6.7 million in the fourth quarter on higher franchise and excise taxes, and higher bonuses related to strong property performance.

Hence our forecast range for the fourth quarter of $0.76 to $0.88 per share, with a mid-point of $0.82, which drops to $0.79 if the joint venture sale isn't consummated. We've increased our forecast for expenditures on recurring CapEx for the full year to $18.3 million, or approximately $470 per unit and approximately $0.70 per share. This is unusually high due to the timing of some exterior paint contracts. Based on the mid-point of our FFO guidance, this indicates AFFO of $2.62 per share for the full year.

We expect to review our forecast for 2007 in our fourth quarter-end release. Some early comments are that we anticipate a continuation of the current strong market conditions, and continued opportunity for concession reduction especially in our large tier markets. Because of the strong occupancy performance achieved this year, we will be relying increasingly on rent increases, concession reductions, and several new programs such as LRO and further development of our amenity pricing programs to drive revenue growth.

We do expect FFO dilution from the three development assets. We expect to call our Preferred Series F in October next year, which will result in $0.02 per share non-cash write-off of original issuance costs. We anticipate losing up to $0.01 per share in fees from the sale of our last joint venture asset, but we are having initial conversations with a potential new joint venture partner. But it is too early to tell if this will lead to any agreement.

That's all we have in prepared comments. Tony, I'll now turn the call back to you for any questions that we may have.

[OPERATOR INSTRUCTIONS] And our first question comes from Rob Stevenson from Morgan Stanley.

Hi good morning guys.

Hi Rob.

Eric, can you talk a little bit about what really has you excited about Phoenix? And then also, I mean, if you make the next sort of leap, I mean, the market that is sort of out there that has the same sort of characteristics as Phoenix is Vegas, is that a market that you see also in the longer term as a attractive opportunity?

Well, first about Phoenix, we just really like the sort of, the growth prospects. Clearly that market is going to capture some of the highest job growth we believe over the next five to 10 years in the country and like so many of the markets that we are in, we go after the high job growth markets. And with Phoenix, we think, fitting the profile, we think we know how to operate in that kind of market. We think we know how to buy right in that kind of market and we think we can compete very effectively just like we do elsewhere against the periodic supply side pressures that we get in the Phoenix market.

As far as the Vegas is concerned, I'm not as excited about Vegas just because of the -- I don't think it offers quite the broad base, employment base that you get in a market like Phoenix. Actually Charlotte's a market that we're probably more likely to get back into before we would with Vegas.

Is the sort of deterioration of the single family housing market especially in a sort of bubble market like Phoenix provides you with either developers who would merchant develop or do a -- some sort of buyout at the end of a development or something along the development aspect in that market for you guys?

Yes. Absolutely. I do think that -- there is obviously some worry that you are going to see some of the condo product come back into that market as rental product in the next couple of years and we think that we are probably going to see better buying opportunities in Phoenix than what we -- over the next two years than what we've seen over the last two years.

And so we're going to continue to be patient as we work to build up a base of operation out there. And clearly as is the case throughout many of these Southeast markets that we are in, the merchant builder provides, we think a great way to add brand new product to the portfolio on a real advantage basis to what it would cost us to build it ourselves. We work with -- know a lot of these merchant builders and work with them and we're going to continue to look for opportunities to expand relationships with them.

Okay. And then a question for Simon. If I take a look at third quarter and you did $0.82, even if we assume that the joint venture promote doesn't happen and you sort of factor in the dilution from the third quarter acquisitions. You are sort of back to like an $0.80 number or something like that. And then, what else other than just having some substantial operating declines in your markets would cause you to come in toward the $0.76 end of the range?

I think that Rob, you are exactly right. We should not have any one time events that we are aware of at this point. The financing is pretty well teed up and we have got one small loan to refinance, about 20 million bucks. So nothing else really that we have got on the horizon. We -- I mean, for instance, any acquisitions that we might make would be at the end of the quarter rather than -- and so would be unlikely to have any impact. So we're not aware of anything else other than a weaker operating environment than we anticipated that could kind of take -- cause us to take a hit.

Okay and then lastly, you alluded to some of your comments, Simon, about still having capacity on the balance sheet. But where do you think you sort of -- I mean acquisitions start coming at you that you find attractive. What sort of fire power do you have without having to go back to the market these days?

Well, we have been pretty effective in using the DRSVP to raise equity in modest levels. So I think we're pretty well set to be able to fund a couple of 100 million bucks or so a year with maintaining our current level of leverage. Once we get much above that level, then we probably have to look at some kind of -- something sort of -- other than the DRSVP but the sort of continuous equity plans and the like, I think would enable us to keep a growth within -- roughly within the range, without going back to the market.

Okay. And then last, a question for Eric. I mean a lot of your competitors out there these days have been taking older sort of mature assets and dumping them into JVs to get rid of them but also still collect management fees and things like that. Is there a section of the portfolio that you would consider doing that with these days?

Well, as Simon alluded to, we have had and are continuing to have some conversations with some joint venture partners and clearly, we've got some of the assets in the portfolio that we are going to continue to cycle out of on the consistent basis as we have every year for the last several years. So I would tell you that anything is possible as we look to potentially put together another joint venture and we may or may not, just kind of depends on a number of the conversations we have at that time.

As a side comment and sort of follow up to that point, Rob, because we did that quite a few years ago with Blackstone, put 10 assets into a joint venture with them. I think a thing to be careful of is that you get the best price that you can for those assets when you go into the joint venture.

Right.

And that's always… It's a hard way to start a joint venture relationship across the table but we've done it. And not to say we won't do it again.

Okay, thanks, guys.

And our next question comes from Dave Rodgers from RBC Capital Markets.

Hey good morning guys.

Good day.

Wanted to follow up, in terms of the rent growth, I know you said that is kind of the next phase of growth as you move into 2007. In the quarter, rental rates up to 3 to 3 -- or 3.6%, concessions added 140 basis points but the overall revenue growth was substantially higher than that 200 to 270 basis points depending on which number you want to use with or without the concession adjustment. What is driving that additional component and when do you feel that you start cycling through that and it really comes back to just the rental rates.

Tom Grimes: David, it's Tom Grimes. The -- a lot of the gain in the last year -- there has been a little bit of occupancy pick up but that's been widely stabilized. We had improvement from utilities and improvement in delinquency and I think as we move forward into next year it really -- there is some opportunity for us in fees. And really, it is concession recovery and it is pushing rent growth and Drew and the team and asset management have some great initiatives that will be rolling out next year on the lines of the LRO stuff that they are testing and those kind of things along with our current pricing program to jump all over that.

In terms of maybe the concession reductions, I know you don't typically talk about [a loss to lease], but can you talk about where you are -- at least where you think you are relative to the market rates currently?

Tom Grimes: Well, I know that for the quarter just ended, the concessions essentially cost us 334 basis points in economic occupancy and I don't have the loss to lease number in front of me but I -- certainly it's probably another difference between net potential and just probably another, I don't know, I am going to guess, 100 basis points opportunity there. So, we think that if -- assuming the market conditions stay as robust as they are, plus, with the introduction of this new yield management tool, that there is some pretty good opportunity there for us over the next year and really into 2008 on pulling back concessions and really getting some pretty attractive effective pricing. And then of course we've got the unit interior rehab effort underway as well, which is again creating a pricing opportunity, increasingly so throughout the portfolio compared to what we did this year in '06.

So -- and we still think that even though the occupancy opportunity year-over-year is effectively gone at this point, there is a lots of opportunity on the pricing side that we feel pretty excited about. And then also a small amount of opportunity we think on sort of the management of the variable between physical and effective occupancy or what we refer to as the churn factor. I think there is a lot of opportunity there as well.

In terms of the new development program, the three phase II projects that you've got currently, you have a little more time now to just go through the portfolio, any opportunities to do more of that on a broader basis and have you started to work on those projects or take down any land to back that pipeline up?

We've got another couple of smaller opportunities that we've kicked around. No active plans to do that right now. We are though also looking at some additional new acquisition opportunities that often come with an adjacent land component as well. Often what we find is we talked to a lot of these merchant builders. We find some real interest in talking with us about coming in and taking down their phase I, if you will, with the understanding that we will work with them on the phase II development component and that really gets a lot of interest on their part and gets us the kind of pricing we feel like we need to get to. And so we are going to continue to pursue that. But again, it is going to be kind of a limited component of our external growth. It's still going to be fundamentally driven by straight up acquisitions.

Just two more questions. In terms of a fuller redevelopment program, the rehabs have been very successful today with the rental rate increases, do you see an opportunity to maybe do even some deeper redevelopment opportunities within the portfolio?

Dave, it is Drew Taylor here. Yes, the program has been successful. We've been real encouraged this year where we anticipate 1,100 units by the end of the year. Returns have been very good. We expect to do closer to 2,000 units next year and continue to ramp up that program. So, full year next year, we think the opportunities a million to a million and a half of sort of FFO.

Yes, and I tell you, Dave, the real challenge, and we are purposely trying to go about this in a very, very careful fashion. It is mainly seeing your labor component and the production side of it that really you have to be very, very careful about. We almost look at it just -- rather than taking it kind of as a corporate initiative, it's almost kind of a property by property initiative. And we really do think there's probably another three -- we can maybe go up if it's real successful and get the production component working very efficiently, there may be as much as 3,000 units we can do next year. We've identified today probably at least 7,500.

We've got about 7,500 units that we think right now that we could probably do. It's just a matter of how much disruption you want to create and how much dilution do you want to create and longer down time by pushing the program more aggressively than we're pushing it. There is a cost to pushing it more aggressively but we are going to keep pushing pretty hard and it will definitely be up next year versus this year.

You're going to continue to focus on that 4,000 to $5,000 per unit range?

Absolutely. That seems to be the right investment region for us to capture the rent growth that we feel like that we can reasonably capture. And as you know, we've talked about -- we don't factor in, in terms of the pay back opportunity, any sort of residual value and undoubtedly we would get -- in terms of how we value the property. We don't value any sort of lower turnover or lower turn cost as a result of ultimately renovating a lot of these units that we ultimately get. So again we're approaching it pretty conservatively.

Finally the incremental cost for the rollout of the technology initiative, Simon?

We think -- Drew, you correct me on this but I think with thinking that the capital is going to be about $2 million including the -- including both software and hardware and then the annual cost is going to be something over about a couple of cents a share, 600,000 bucks or so on an annual basis, of which we're of course incurring some of that right now.

Okay. Thank you.

And our next question comes from Bill Crow from Raymond James.

Morning guys. A question, Simon, if you can talk about where do you think CapEx goes next year from the -- I think you said 470 unit range this year? And then second, maybe, Eric, if you could kind of go through any changes, even subtle changes to deal flow and pricing transactions?

The -- on recurring CapEx, Bill, as you said we are about $470 this year. We put in our forecast a number on -- in the region of 440 to $450 for next year which I think is probably reasonable. To be frank we have not completed our capital budgeting process at this point and so I can't shed any more light on it than that but my best estimate would be a number in that range.

And Bill, as far as the question regarding sort of deal flow, acquisition environment, clearly the biggest change to date has been really -- just condo convert out of the equation and what that really is doing from our perspective is creating more opportunity for us to be a legitimate buyer of more deals that are sort of the condo quality high end product that we have been trying to acquire. It hasn't really -- the fact that the condo converter is out of the equation now has not really -- and from what we're seeing, affecting pricing so much because there is still a lot of capital chasing these high quality assets. It's just that they are continuing -- they're now being priced as apartment deals as opposed to a condo deal and we're able to compete it more effectively in that kind of environment.

And then in terms of any other subtle changes that may take place next year. Long -- I'll go back three or four years ago. We had a stated objective getting sort of an equal waiting across the large mid size or small tier markets and we are there now. And as I said, in my prepared comments we remained very committed to the three tier market allocation. So as a result now that we've got the balance that we were after as we look for increasing opportunities to grow the company, some of these desirable smaller tier markets such as Charleston and Savannah, become more active on our radar screen than they have been of late. We haven't really focused on some of these mid tier and small tier markets as much as we planned to going forward.

And what we find in those markets is frankly we can compete very effectively against some of the other buyers that come into those markets and what we also find is pricing and transaction processes are not quite as efficient in those markets and frankly we just think there's more opportunity sometimes going in and buying in those markets and as for the reasons that you've heard us talk about over the years, we like it in Charleston. We like it in Savannah. We like Lakeland, Florida and some of these smaller tier markets that we're in. We think they provide a very good performance profile to the portfolio.

Okay. Thank you. See you next week. Thanks Eric.

And our next question comes from Nap Overton from Morgan Keegan.

Good morning. How low can the concessions as a percentage of net potential rent go at the peak of a cycle?

Nap, this is Al. If we look at historical averages, go back three, four, five years, we were running somewhere between 1.5% and 2% of potential rents and right now we're -- our portfolio, we have about 3.1%. So you can see that there is a good 1% to 1.5% opportunity over the next year or 15 months or whatever and that would be somewhere between $0.15, $0.19 a share of FFO opportunity if we got to normal levels.

And then what do you use in the fad calculation as you show it? Are those actual maintenance CapEx and capital expenditures or is it a -- what is that number?

Nap, the only thing we deduct from FFO to get to AFFO is recurring capital expenditures and those are actual capital expenditures that have been accounted for as recurring capital expenditures. So we have a capital policy and I can kind of be happy to go over it with you. But if it falls within that policy then it's a recurring capital expenditure.

That's the real number.

Yes.

That's the real -- okay. And then, Simon, you went through several factors there at the end of your prepared remarks that could impact 2007. One of them was $0.02 of deferred write-off, deferred financial costs on a preferred stock you expect to call next fall and another one was $0.01 or $0.015 of dilution from a couple of property sales expected to occur probably here in Memphis. What else was in that list?

Sure. Nap. We've got a couple of things. One is the development projects the crew is working on, those will have an impact on us and Al, we can get back with you and shed a little more light on that -- more of the impact of that but we will be investing, say, we'll be cranking up two new projects next year and we'll have the impact of the lease up of phase II. Beginning coming on-stream in the first quarter of next year. The other thing of course is that we will be selling our last joint venture asset. We anticipate that we'll be losing a [inaudible] from that which is about 1p a share. And those were really the main items we'll be looking at that you didn't mention.

Okay. All right. Okay thanks very much.

Thanks, Nap.

Operator: Your next question comes from Thayne Needles from Robert W. Baird.

Hi guys.

Hey, Thayne.

Hey, Thayne.

Just two quick questions. Looking at your year-to-date NOI growth and then your projections, Simon, for the full year growth, it to me suggests that you are looking at maybe same-store NOI of closer to maybe 5% in the fourth quarter relative to the 7% that you've been running at. How much of that would you comment as being seasonality of the fourth quarter and how much is just a change in what we're going to see moving forward?

I think, Nap, of course, there are a couple of things I'd … Thayne.

Sorry, Thayne, sorry. Thayne, excuse me. I think there are a couple of things. One is that, remember, the fourth quarter of last year was a post-Katrina -- was a Katrina quarter and that really did make a big impact particularly in places like Jackson, Mississippi and Memphis. And for certain we had maybe 100 basis points of certainly a lot of physical occupancy anyway that came from that end.

Same store performance in Q5 or Q4 last year versus the prior year was what 8?

8.1.

8.1. So it is a strong base to come off of.

Really a strong base. The other thing with -- is that as I mentioned in the third quarter, insurance costs are going to cost us 160 basis points of NOI growth and you've got that to deal with as well. I think when we look at next year, what we are thinking about and what we are looking at is some of the initiatives that Drew was talking about. We got the impact of the redevelopment program which is really getting some steam up, we have got the impact of LRO which is really getting some steam up so I think we'll have some -- we'll feel pretty good that we are going to be able to maintain reasonable top line growth as a result of the specific programs that we have identified.

What is encouraging about -- to me, what is encouraging about Q3 when you look at it is that it was very strong NOI performance and it was really revenue based. Because we had a pretty reasonable level of expense growth in Q3. So we didn't get a real high NOI performance because we had some artificially low expense result for the quarter. It was kind of within the normal range, 4% or so, so it revenue based and what is important to note in Q3 is that that revenue performance year-over-year of 7% that we just reported was not because of big gains in occupancy. Physical occupancy was actually slightly -- on a same-store basis was actually slightly down. And so, whenever I see great NOI performances that are a result of some sort of artificially unsustainable expense performance I kind of discount it. Whenever I see really strong revenue performance that is a function of just big gains and physical occupancy, you know that is going to play out at some point pretty quickly. We didn't have any of those -- any of those two things in place in Q3 which gives me a lot of confidence as we head into Q4 and the next year because those same -- that same phenomenon will be in place over the next few quarters as we saw in Q3.

And sort of -- actually Eric that leads me to the next question which actually circles all the way back to Dave's original questions about revenue composition and that is, the revenue growth that we saw in Atlanta, Dallas and Houston, is that -- was that primarily concession driven or did it relate to utilities or what were the -- what were the components in those markets that saw the significant growth?

Thayne, those were primarily -- in the Texas market, it's primarily concession growth with a tad of occupancy. But we took concessions in those markets from something like 14% and net potential down to 7%, so still some opportunity there to go and that was on the Texas. And then Atlanta, it was really primarily offered to -- we cut the concession rate somewhat in half there too from 5% to about 2.5% with some recovery and they can see as well. We saw an improvement in vacancy loss there.

Great. Thanks guys.

Operator: Ladies and gentlemen, this concludes our Q&A session. Mr. Bolton, I would like to turn the conference back over to you.

Okay, thanks, Tony. And thanks to everyone joining us this morning. Just call us if you got any other questions. Thanks.

Operator: Ladies and gentlemen, this concludes today's conference. You may disconnect and have a great day.