Mid-America Apartment Communities Inc (MAA) 2007 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 we would now like to turn the call over to Leslie Wolfgang, Director of External Reporting. Ms. Wolfgang, you may begin.

Thanks and good morning, everyone. This is Leslie Wolfgang, Director of External Reporting for Mid-America Apartment Communities. With me this morning is 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 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 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 will now turn the call over to Eric.

Thanks, Leslie. Good morning and thanks for joining us. Simon and I will provide a few comments and then we are going to open the lineup for your questions. We're pleased with the quarter's results. The wame store performance exceeded forecast and FFO results were ahead of the midpoint of our guidance. The strong performance continues to reflect a environment of solid market fundamentals as well as changes made over the last few years to create a more robust performing portfolio and further strengthen our operating platform. Positive momentum continued in the second quarter as year-over-year growth in same store revenues and NOI before the impact of straight line concessions were ahead of the performance captured in the first quarter. We expect continued positive momentum, as Simon will outline for you. We remain optimistic about the outlook for the year and prior guidance provided.

The solid operating results for the second quarter were driven by strong top line growth as occupancy remains high across the portfolio. In fact, occupancy at the end of the quarter was an impressive seven-year high for second quarter performance. Perhaps more importantly same store economic occupancy which represents that occupancy that we actually get paid for, was also very good at almost 91%. This performance represents the highest economic occupancy we've captured since the first quarter of 2000, over seven years ago. The second quarter occupancy was supported by a 14% increase in leasing traffic as compared to the prior year. As you can see in our supplemental schedules to yesterday's earnings release, occupancy performance was strong across most all of our markets. Of course the Florida markets continue to show some moderation from their supercharged levels of last year but this year's occupancy is nevertheless strong by historical standards.

The only market of any notable weakness was Columbus, Georgia, which is home to the Army's Fort Benning where troop deployment generated higher than normal move-out. However, we're already seeing solid recovery with occupancy at our two properties in Columbus closing July at 94% occupancy. In fact, our same store portfolio closed July at 95.3% occupancy which is slightly higher than where we closed the second quarter. Further supporting the solid revenue results for the quarter was continued good progress on pricing, with leasing concessions down a significant 33% and net effective pricing up a solid 4.3%. The rollout of LRO was completed during the second quarter and we're excited about the opportunities for continued robust revenue performance as this system works its way into our current leasing activities. The use of LRO on lease renewal transactions is just now beginning to occur, and this is an area of opportunity where we are particularly bullish.

Our property repositioning and unit interior initiative made solid progress in the second quarter with almost 900 units renovated year-to-date, capturing rent increases averaging 15% and generating unleveraged investment returns programmed to date of 14% based solely on the rent bump being captured. We expect this program with the total of 14,000 units targeted for possible repositioning and upgrade will further support our ability to drive year-over-year growth in NOI that will outpace market level performance. As Simon will detail for you we completed a number of acquisition and disposition transactions over the last few months. This activity along with the new development projects underway continues to upgrade both the quality and the performance profile of the portfolio. The acquisition market remains competitive. The only moderation we've sign take place is a squeeze-out of the very high-end leveraged buyer or those depending on the aggressive conduit loan programs to make their deals work. Both the high-end institutional quality asset as well as value-add acquisition opportunities are still generating a very active level of interest on the part of more disciplined buyers. As a result, we aren't really seeing any meaningful shift in cap rates at this pointed. Our acquisition group is quite busy and deal flow remains very high.

We remain focused on carefully and thoroughly considering the best use of available capital and balance sheet capacity for creating long-term net present value for our shareholders. While the ability to capture attractive investment returns for routine 100% owned one-off property acquisitions is a challenge in today's market, and it is certainly has been made more difficult given the recent weakness in the REIT sector pricing. Our knowledge of markets and significant network of relationships in the region and record of performing for sellers continues to drive a very active pipeline of opportunities. We have a long established and had very disciplined process we go through in analyzing all capital deployment decisions, including full consideration to current costs of equity. We certainly do not plan to compromise this process or overly complicate our business model with poor quality revenue or drive unacceptable risk levels into our balance sheet and platform in an effort to reach for new growth in the currently challenging acquisition environment.

We do remain optimistic about the current results being captured and future upside to be realized from those investment opportunities involving redeveloping a number of our existing properties, the value-add new development projects we have underway, and the opportunities to deploy capital through our new joint venture acquisition fund, all of which provide attractive investment opportunities that are well in excess of our current cost of capital, exceed our investment hurdles and importantly are accretive to long-term net present value per share. Simon will now go over a few more details on the quarter's performance. Simon.

Thanks, Eric. We're pleased that we were able to report second quarter FFO of $0.84 per share, $0.02 ahead of the midpoint of our guidance driven by strong revenue growth. Our same store revenue growth was 5.1%, which was ahead of our internal forecast and close to the exceptional growth rate of the second quarter of 2006. Revenues were driven by strong physical occupancy, which in the same store group ended the quarter at 95.2% compared to 95.0% a year ago. Again an exceptional performance when compared to such an excellent comparable quarter. Our concession rate dropped to 2.7% from 4.1% with the average concession per move-in dropping from $356 in the second quarter last year to $250, and our average rent per unit increased by 2.8% to $729, an increase in our effective rental rate of 4.3%. Controllable operating expenses increased in the second quarter by 4.5% on higher marketing and leasing costs largely attributable to the increased traffic and the related 3.7% increase in number of move-ins.

We also incurred additional marketing costs in Florida where leasing has been a little tougher compared to the very buoyant markets of the prior two years. We saw some moderation in our turn costs from the first quarter when we incurred costs to reduce number of days it takes to get a unit market ready from 21 in January to 15 for all of the second quarter. We also experienced some additional costs due to the drought in Florida and repairs prompted by the rain storms in Texas. Operating income before property tax and insurance costs increased 5.3% over the same quarter a year ago. Our NOI which increased by 3.9% continued to be impacted by the big increase in insurance costs we experienced when we renewed our insurance program last year. Beginning in July this year we'll have much more favorable comparisons as we were able, on this year's renewal, to reduce our property and liability premium costs by $1.5 million, a 17% reduction while improving coverage. Going forward, this is equivalent to a 1% reduction in our same store expenses.

Last year we had a great year for property taxes with no year-over-year increase, but this year has been a lot tougher, and we're projecting a 4.5% increase to same store taxes. We continue to be very active in dealing with threatened tax evaluation increases in Florida and Texas where we have close to 40% of our portfolio, and where values and tax rates remain fluid. In the last few months, we added $0.04 per share to our full year tax expense forecast. Fortunately, this additional expense was offset by a strong revenues and by savings from our insurance renewal. In the second quarter, if our insurance and real estate taxes had increased at a more normal 3% rate, NOI growth would have been 5.7%. As Eric mentioned, we're encouraged by the continued momentum in our same store revenue growth this year. Same store revenues grew faster in the second quarter on a year-over-year basis than they did in the first quarter. Before adjustment to straight line concessions and fees, on a year-over-year basis, total revenues grew 18% faster in the second quarter compared to the first quarter.

Similarly, before the same concession and fee adjustment, NOI grew 22% faster in the second quarter compared to the first quarter. In other words, we're seeing an improving environment as we implement our operating initiatives. We had a number of markets with close to 8% or greater revenue growth compared to the same period a year year ago. Two of our Texas markets, Houston and Austin were in this category, along with Memphis and Nashville. The only areas of weakness was some of our Florida markets where the outstanding growth over the last couple of years have made year-over-year comparisons very tough and, as Eric mentioned, our Columbus, Georgia market where we were impacted by trip deployments plus a view individual markets with single assets with specific issues. Several markets in Florida countered the relative softness that we saw at our four properties in Tampa and our single property in Orlando. Tallahassee and Gainesville at 12% each, and Carl Springs in south Florida at 6.5% all experienced excellent revenue increases compared to a year ago.

As Eric mentioned, we completed the rollout of our yield management software in the second quarter and are encouraged by the early indication from the full rollout, as well as by the earlier test results. Our analysis indicates the growth in revenues across our portfolio is about 2.5% ahead of market, and of course we've yet to really see the impact of NRO on lease renewals. We believe it is reasonable to think that part of the reason for our strong revenue performance is due to the tight mortgage market and the reduction in available subprime mortgages. Our traffic applications and move-ins were all up over last year, and the continued strength of demand for our partners makes it seem likely that the tighter mortgage markets may be impacting our front door. People may be elected to rent instead of buying a house, and as others have speculated we may see some of the benefit as the year progresses. As far as the back door is concerned, alternative to the quarter year-to-date have been similar to the the same level as last year. But we're optimistic that we'll pick up further benefit from the tougher mortgage environment as the year progresses.

There were three items that were a drag on FFO in the second quarter, compared to the same period a year ago, we're carrying a bigger development lease-up load, which cost us over $0.03 of FFO in the second quarter. Also you'll remember we sold our pro joint venture assets in the first quarter, and that cost us almost $0.01 of lost FFO per share on a comparable basis this past quarter. Although we think we're close, we've not yet added any investments in our new joint venture (inaudible) fund one. Our combined property management expense in G&A increased over the second quarter of last year by $1.2 million. The bulk of the increase was in bonus expense associated with property operations and a $150,000 dollars increase to franchise and excise tax expense, related to a change in the the tax structure in Texas and new taxes in Tennessee. Also we expensed the costs of setting up fund one in the quarter, and incurred over $150,000 of costs relating to operating NRO. We continue to project the full year of total combined G&A and property management expense to be in the range of $29 million to $30 million.

As a percent of FFO or AFFO our dividend coverage is well above the sector median. Despite having a much more conservative business strategy than most of the sector, our fixed charge coverage is 2.2, also above the sector median. Our balance sheet has continued to strengthen as our debt to gross real estate assets dropped to 53% from 54% a year ago and we have over $200 million of unused debt capacity. In short, we have more than enough capacity to fund our anticipated total investment in fund one, the balance of our development pipeline, our planned redevelopment over the next 18 months, and our commitments to acquire two construction properties. We're focused on these high return investment opportunities, joint venture investment in fund one, development and redevelopment. As Eric has pointed out, acquisitions of existing properties on 100% owned basis continues to be highly competitive. As we've discussed in the past, the underwriter investment's based on our estimate of our cost of equity on the day we complete the underwrite, and we add a 20% premium to determine our investment hurdle rate. So regardless of stock price we're always targeting investment returns at above our cost of equity.

Our disciplined approach to investing, coupled with our conservative balance sheet and business strategy, has enabled us not to experience balance sheet pressure even during this difficult period in the capital markets. Following the sale in the second quarter of two our IPO properties in Memphis, we completed the sale in July of two of our older properties in Jackson, Mississippi which have an average age of 23 years for $14.6 million. We averaged a cap rate of about 6.9 for the Memphis assets and 7.9 for the Jackson properties. We anticipate dilution in the range of $0.015 cents per share as a result of this year's disposition and about $0.035 cents in 2008. Our forecast for 2007 is based on continued market strength with same store NOI growth towards the upper end of our prior guidance of 5 to 6%. We're projecting same store revenues to increase 5 to 6% for the full year helped by the continued strength in our markets, our fee initiatives and the installation of our yield management software. At the midpoint of our guidance, FFO per share is predicted to be $3.50 representing 5% growth.

Strong same store results help us to achieve better than anticipated first and second quarter results, but we're maintaining the midpoint of our FFO guidance for the balance of the year at $3.50 while narrowing the guidance range to $3.43 to $3.57. Although we're expecting our same store NOI increase to the second half of the year to be very close to our prior projections, we expect almost a couple of cents reduced FFO from fund one, due to the slower than anticipated investment rate reflecting the continued tough acquisition pricing. We also anticipate closing on the acquisition of a lease-up property, Farmington Village, at the end of September, which should dilute us $0.005 in the fourth quarter before it becomes accretive to FFO in the first quarter next year. The midpoint of our third and fourth quarter guidance are $0.87 and $0.92 respectively and as for the full year we narrowed the guidance range. We expect improvement in Q3 and Q4 results, both from the reduced dilution from the lease-up of Talus Ranch and Brock Creek II, as well the growing impact of the yield management software on our revenues.

As a reminder as a result of LRO over the next couple of years, we expect that we'll increasingly migrate to net pricing, that is reduce concessions. Since we amortize concessions across the life of the lease we expect this transition to reduce reported FFO by a combined $0.02 in the third and fourth quarters and a like amount next year. Of course this is a noncash item. And finally, as a reminder, we anticipate calling our 9.25% series F preferred in October, which will result in a noncash charge of $580,000 dollars to write off the original issuance costs.

Thanks, Simon. In conclusion, I would like to just tell you we believe the elements are in place for Mid-America to continue delivering solid operating results. Our focus on the high growth sun belt markets, uniquely diversified across the region, coupled with the upside to be realized from our property redevelopment program and opportunities to be captured from new technologies such as LRO will deliver continued steady and strong operating results. While fears that the slowdown in the single-family housing market and tightening credit markets may dampen growth in the economy, these same factors will drive more rental business our way. As Mid-America demonstrated a few years back when the economy hit a soft spot, were we to see a significant slowdown in the economy, our approach to diversifying capital across steady income markets coupled with the generally conservative business strategy provides stability and performance not captured by other apartment REIT platforms.

New development of projects and various lease-up processes under way, while pressuring this year's FFO growth, will begin to produce benefits starting next year and into 2009. Our new joint venture acquisition fund holds potential for meaningful FFO contribution and very attractive investment returns on the capital deployed. We have a solid balance sheet and coverage ratios are strong. We're optimistic about the prospects for steady growth in Mid-America shareholder value. As a final reminder, we will be holding our institutional Investor Day meeting in Raleigh, North Carolina on Monday, September 10th. After registration, during lunch, we will be conducting property tours beginning at 2:00 that afternoon and, as part of the tour, we'll present details on our technology platform, our redevelopment program and the new development projects we have under way. We will have a dinner that evening along with a brief update and overview on the company strategy. Registration information and more details are available on our website. With that I will turn it back to you and open the line up for any questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from Rob Stevenson.

Good morning, guys.

Hi, Rob.

Eric, what are you targeting in terms of number of units in the second half of '07 in the redevelopment program?

Total for the year is about 2,000, so we've done 900 through the first half of the year, so about another 1,100 to go over the second half.

Okay. And at this point, are you expecting that the returns and the investment will wind up being similar to what did you in the first half of the year?

At this point we don't see anything suggesting that anything is deteriorating on that initiative. As you know we watch it closely but we continue to get great results out of it.

Okay. Other than a couple of your big markets, like Dallas, Atlanta, Houston, what markets are you seeing any sort of noticeable uptick in construction?

You know, there has been a little bit of a flurry in Jacksonville, but in general -- and in Phoenix also, but in Phoenix we've seen, and that may be one of the big markets you're referring to, but Phoenix most of that development is to the south and in those submarkets where with one property up to the north a bit and a little protected from that. In general, as we've mentioned in the past, we have seen the development pipeline remain in check or at least places where we see it in line with absorption, in other words, absorption is positive in that we're taking on units in a digestible manner in most of our markets.

Okay. And then what markets are you seeing the greatest headwind today in terms of the single-family housing market? Is it those same markets?

It is really in Phoenix and Florida, Rob, and it is challenging for us to quantify it exactly. What we know is that it is out there in some effect. It is hard to tell exactly what the single-family and the condo overhang, which is essentially the same thing, is doing. Where we think we're exposed to it in the most is where we -- south Florida and Tampa where we're somewhat limited. Those markets have traded down a bit on occupancy as we've shifted from a white hot market a year ago to 94%, 95%, but even in Tampa we're seeing very solid rent growth. Tampa occupancy ended the quarter at 93%, and 93.5% in July, and we still saw an effective rent increase of 4.4%, so what we've seen is that trade off from this peak, but we're really pretty steady, home buying remains steady, it just isn't as good as it was a year ago, which is driving me nuts, but it is still on a relative basis, it's a pretty solid market.

Okay. I guess you guys talked about leasing traffic being up substantially as applications and move-ins. Have you seen in the last quarter any noticeable change in credit quality of the people putting in applications?

Not really. I think, Drew, do you want to add anything?

I would say our safe rent scores, which we use to measure really credit worthiness, have remained steady. We haven't seen really any drop off there at all, so, no -- As far as collections go, what I would say is I think we're 0.76 bad debt as a percent of our net potential, which for us is sort of historically low, so we're doing very well in terms of our bad debt collection. And July seemed to be a little bit tougher, but we're taking some steps to deal with that, and so I think the short answer is, no, all is well with our collections right now.

And, Rob, one more window into that is our -- the number of rejected applications, those that we would say hit the the road, don't move in with us, is actually down 19%, and we've made no significant change to our credit screening criteria, so we're not seeing a bunch of unqualified folks that show up at the door at this point.

Okay. And last question, Eric, what's the thought about stock buybacks? You were talking about not wanting to lever up, especially if things get more difficult out there. But what about the other side of the equation, is that -- is there a thought about selling some more assets here and raising capital to buy back stock?

Well, something -- it's certainly something we take a hard look at and think about probably every day right now, to be honest with you. And we do feel like that, given the very strong opportunities that we have in front of us to capture some pretty attractive returns via our joint venture fund and our redevelopment and new development initiatives, that we would like very much to keep our balance sheet intact and believe that that's the best use for that capacity. So as you are mentioning, what we would really need to do is look at selling assets in order to create the liquidity to capture some buyback opportunities. And of course what that means is essentially at our leverage level, selling $2 worth of assets to buy a $1 worth of equity back in, and you know it is not an initiative obviously to be taken lightly. There is a lot of sticky fixed overhead that is -- we have as a company that all companies have and so -- but at some point it becomes compelling enough that you're certainly willing to do that, and we're looking at it, and I can't really obviously comment on where the price points would be for us to get into that sort of activity, but we're looking at it.

One sort of other, sort of add just to that, is as you know, Rob, we're an IRR net present value shop, and so we're very, very driven by that, and so we're kind of running those models pretty frequently, as Eric says.

And the other thing I would mention is remember we have a 4 million share buyback authorization in place. We've used about -- we bought back about 1.9 million shares some years back or almost 8% of the company, so it is certainly something we understand, and are familiar with and have done, and we're looking at it.

Thanks, guys.

Thank you.

Our next question comes from Bill Crow.

Good morning, guys.

Hey, Bill.

Along those same lines, Eric or Simon, have you curtailed the drip program so you're not selling equity at these prices?

That's correct. We did. We did --

We didn't curtail it, we turned it off. It is off.

We did sell early in the quarter we sold about $5 million worth of stock at about $57.50 or so average price I think it was, Bill, but once the stock got below that level we shut it off.

And you talked earlier about no real discernible change in cap rates and I assume that's across your portfolio. There have got to be some specific markets, whether it's Florida, Tampa, Phoenix, where things have moved a little bit more. Is that fair and what's the the greatest movement you've seen?

Well, you know, honestly, Bill, we were visiting with our acquisition group earlier this week on Tuesday and honestly we haven't really seen anything in terms of any noticeable movement. As I was mentioning in the prepared comments, it is really the 90/10 guys or the 80/20 guys that have been squeezed out at this point, but there is still an unbelievable amount of equity capital out there. And unfortunately Fanny and Freddie really did not participate in this very, very aggressive lending practice that's been going on for the the last couple of years, and some conversations we had earlier this week, both of those operations which you know are huge debt sources for our sector are wide open for business at this point. My guess is that they're reconsidering their fees and some of their pricing because their biggest area of competition has gone away. And so you may see some price increases on some of their fees and so forth, but at this point both on the debt side and on the equity side there is still a lot of very -- a lot of liquidity, and looking for very modest returns that's causing a lot of capital chase these deals and we're not seeing any real movement as of yet.

Speaking of liquidity and capital chasing deals, is it your perception based on phone calls, inquiries, etc, that the market here is acting like all deals have been shut down on the M&A front. Is your perception maybe that the market has gone too far the other way, that we will still see some consolidation? Do you have any feel for that?

I think one thing I would throw out on that front, Bill, is the point that Eric made is that multi-family, Fanny and Freddie are still very much open for business, and I would suspect, I have no knowledge, but I would suspect they would love to participate in placing a large chunk of debt.

I think it is just really to the extent that the deals that have been going on were a function of just the conduit financing that was underpinned, supported by just incredibly low fees and costs with -- and willing to accept incredibly optimistic assumptions. Some of those sort of fringe opportunities I think are gone, but I think there is still so much liquidity out there, looking for a place in the sector I think is going to continue to attract it. When you look at the disparity that continues to exist in today's market between how private real estate is being priced versus how the public companies are being priced, that's quite a gap, and capital markets have and liquidity has a way of feeling those gaps, and I don't think that this arbitrage will exist forever. Either public companies get repriced or real estate gets repriced, but one or the other gets repriced. It is just liquidity at this won't allow that arbitrage to exist like it is forever.

And then one final operational question. You mentioned or I think that was Al that mentioned that credit stats did -- credit defaults or weakening results occurred in July. Was that market specific?

No. You know, we just got right now this is Drew. We got real early indications July and we're start to go take a look at it, but I would say that we are seeing a little more weakness in Florida than what we've seen other places and so I guess --

We're taking a hard look at it right now, Bill, because we were actually looking early this week and did see delinquencies spike just a little bit at some of our Florida properties and we're doing research on it, and we know that the going in credit scores were not a problem. We are seeing perhaps a little pressure result of some job loss and things of that nature that may be causing a little bit of the issue, but we're taking a hard look it at right now, and it did seem to be where it was occurring mostly Florida related.

Okay. Terrific. Thanks, guys.

Thanks, Bill.

Our next question comes from Nap Overton from Morgan Keegan.

Good morning.

Hi, Nap.

First, make sure I understand the acquisition, you talk about four acquisitions in your press release, three in Houston and one in Charleston, and all but three of those -- were three of those for your own account and one being considered for transfer into the fund?

That's correct. Of the three in Houston, two were for our own account, one is likely going to go into the fund. The Charleston deal is actually still in construction. We'll be buying it at 75% which should occur in September, maybe October.

Okay. And then could you -- on the insurance, reduction in insurance costs, did you maintain the same coverage or was there a change in coverage in the insurance?

Actually, the program did change, Nap, this is Simon, but we increased our limits substantially from reduced limits last year, so we did increase our limits substantially, and -- but in terms of retention, that basically did not change. We restructured it a little bit, but the amount of retention would be the same.

Okay. And then could you kind of break down your expected capital spending for the year for me and the categories that you think about it in?

Sure. Go ahead.

Nap, it is going to be fairly consistent with what we've seen in the past on (inaudible) recurring capital, which should be $400 to $425 per unit, and in the enhancing capital should be $200 to $250 per unit, so total -- expect around $650 per unit let's say in those two categories. You have additional spending that we'll have for the interior program for the rest of the year I think we plan to spend about $4.5 million as Eric mentioned earlier, so that kind of rounds that out.

And the new development?

New development is about $13 million we expect to fund the remainder of this year.

That's second half.

Second half, that's right.

Okay. One other thing. I know that $69 NAV you put out in the presentation is not something you plan to update all the time, but would you say that any changes to your estimates and assumptions and determining that value would change at this point in time from when you did it?

No. Obviously the biggest factor in that is the cap rate one assumes, and on the blended basis, that 69, that implied a 5.75 cap rate, and of course the other variable in the equation is your NOI that you're capping, and so as we sit here today I would tell you NOI is as strong or stronger, and from our perspective we haven't seen as I was saying a moment ago, we haven't seen a material shift in cap rates. Is one going to occur at some point? I don't know. It is logical to believe that, at some point, if you get the incredibly aggressive high leverage buyer out of the marketplace, that we will begin to see some slight drift up in cap rates. When and to what degree I don't know, but it is hard as we sit here today to suggest that we've seen a fundamental shift in how real estate is being priced out in the open market at this point.

As recently as about six weeks ago Al and I met with one of the executives in the Fannie Mae lending side, and they were saying that they're still seeing -- of course that was six weeks ago but very low cap rates for portfolio transactions.

I think it is reasonable to assume that the collapse of the sort of the CNBS and the conduit sort of loan programs is going to have an impact to some degree. I still think it is a little bit early to make an assessment of what impact it will have. It will have some. It's got to.

One thought additionally, Nap, is if you look at where we're treading right now, we're treading about a 7% cap rate which to add onto that is not what we're seeing in the market for acquisitions right now obviously.

Thanks.

Thanks, nap.

Our next question is from Dave Rodgers from RBC Capital Markets.

Good morning, guys.

Hey, Dave.

Notwithstanding your comments about Fanny and I Freddie earlier, I wanted to follow up on the investment fund. It's taken a couple months to put the first property in there, the acquisition that you made early in the quarter, the 1997 construction on that community was a little bit outside of your historical range. I was wondering if you had bought that for the fund and I guess my overall question is you had said in your comments, Eric, that the fund is maybe going to be not as accretive because it is filling up more slowly I think is what I heard. Can you clarify that and does that intimate that maybe you're partner in that joint venture, Fanny, is not really as excited or is there some issue there or not really?

There is no issue at all, Dave. Really, I think the couple points I would make, the fact that we only got one acquisition in the fund thus far is really a statement more about how competitive the marketplace still is for buying deals out there at this point. I do think that where we have seen some of the most aggressive underwriting and financing take place has been in this value-add product category, and so if there is a segment of the market that is due to have some sorted of recalibration in terms of pricing, I would argue that it likely is going to be in this value-add area. So we remain pretty optimistic. We're seeing a lot of those kind of deals right now and underwriting quite a few of them, but I think that area of the acquisition market is due to get better probably quicker than -- better in terms of less competition and able to secure more deals. I think that product category will get better quicker than say the upper end, high-end institutional quality assets, so we remain quite optimistic about our ability to execute that fund, and to fully deploy all the capital that we've got committed to it.

And our expectations for returns is still just exactly where they were. We're both operating with same hurdle rates and it is just really a timing issue that we're pushing back when we expect to get the FFO benefit.

Okay. That's helpful. Simon in your comments you talked about two development acquisitions, Farmington being the first. Is Talus the second one?

No. There is another one we're looking at as a matter of fact that we don't actually have it under contract, but it is close, and it is kind of a very accretive deal because it is tied into another property that we own so -- which is why we're taking a strong run at it, but that will be the second one.

Okay. You haven't announced that yet.

We haven't. It will be an end of year event probably, Dave.

Okay. Thank you, and then Talus, can you give us update on where that is? I realize you have it here as a still dilutive project. Update us on that.

Sure. Dave, Tom Grimes, it is rolling along on plan for us. We're 76% occupied and over 80% leased and good progress, we've got a good relationship with a major employer in that area that we have an exclusive relationship with them. That's helped. We're seeing some softening in the Phoenix market as condos revert back to the rental pool. I mentioned that had a little bit earlier. However, most of that pressure is happening in either in-fill area stuff like Chandler or Tempe and a little in Scottsdale, but really as our exposure to the Phoenix market, it is moving quite nicely up on that northern edge.

In terms of the dilution, David, just to add to that I think we expect we had about $0.03 in the second quarter. We expect somewhere around $0.02 in the third quarter, $0.005 to $0.01 in the fourth quarter with it contributing to FFO in first part of next year.

Okay. And the final question, you've got Copper Ridge also in here with respect to dilution. I think you're referring more to the sales being dilutive than the actual investment back you in Copper Ridge. If Copper Ridge is dilutive in 2007, can you help me where that comes from?

Copper Twe're going in the ground on that in Q3.

We've broken ground.

Broken ground in Q3, so there might be a modest amount of dilution I would say Q4 possibly.

Begin to take unit deliveries and (inaudible) first of next year.

Probably very modest in Q4.

More just the sales being reinvested is more the dilution because you're not getting the income today.

That's absolutely correct.

I just wanted to follow up on that thought. Thank you, guys.

Thank you.

I would like to turn the conference back over to our moderator.

Thank you very much, if you've got any further questions obviously feel free to call us. We hope to see everyone at our Investor Day in September. Thanks. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.