Mid-America Apartment Communities Inc (MAA) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Mid-America Apartment Communities third quarter earnings release call.

At this time, all participates are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require operator assistance during the conference, please press star then zero on your touchtone telephone. As a remind, this conference call is being recorded.

I would now like to introduce your host for today's presentation, Ms. Leslie Wolfgang, Director of External Reporting. Ms. Wolfgang you may begin, ma'am.

Thank, Howard. And good morning, everyone. This is Leslie Wolfgang, Director of External Reporting for Mid-America Apartment Communities. And with me this morning with 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 34F 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. Good morning, and thank your joining us. Simon and I will provide a few comments and insights not covered yesterday's earnings release and then open the line for your questions.

The third quarter's record high FFO per share result and strong operating performance is encouraging and sets the stage for what we expect to be a strong finish to 2007, and a solid start to 2008. Mid-America's results can be attributed to a few key points.

First, the changes that we have made this last few years to the market profile and asset quality of Mid-America's portfolio have clearly positioned the company to drive better operating results in this environment of strong market fundamentals.

Second, the numerous changes we have made to Mid-America's operating platform have put the company in a position to generate internal growth that will exceed what I believe many have historically come to expect from this region and the markets where we are invested.

Third, and not be overlooked, the commitment we have always maintained to our employees, training, and leadership is key to optimizing what our markets and systems can deliver. With the top 21 executives of our company now averaging tenure of over 11 years with Mid-America, we capture stability, expertise and focus that are necessary to excel in this people-intensive and very competitive business.

And finally, the significant improvement to the balance sheet over the last few years has enabled Mid America to better support the initiatives and proper repositioning and new growth that are contributing to current performance and importantly lay the foundation for continued good progress.

Third quarter leasing activity supports our belief that market fundamentals remain stable. Leasing traffic increased 10% over the third quarter last year. New move-ins increased almost 6%, and same- store occupancy grew by 60 basis points. The only region where we have seen a meaningful moderation in revenue performance is in Florida which achieved overall revenue growth on a year over year basis of just under 1%.

However, it's important to note that occupancy within ur Florida portfolio continues to hold at a very satisfactory level and ended the quarter at 95.7% and effective pricing, which is a combination of increased rents and reduced concessions, grew by 3.7%. So while the transition from supercharged to normal occupancy levels will pinch revenue growth for one year, all the worry about significant weakening of the Florida region market should not in our view be applied to Mid-America's Florida portfolio. We are simply not as exposed to those markets and submarkets that are at risk from heavy condo reversion or a prolonged period of weakness in leasing fundamentals. Elsewhere, our properties in the Texas markets, the Carolinas,Tennessee, Kentucky, and Mississippi are generating very strong year-over-year results.

We believe it's also reasonable to think that part of the reasoned for continued solid revenue performance is due to the tightening mortgage market. It's likely they we are at the beginning of a multi-year trend where home ownership will decline to levels that are more in line with long-term performance and not artificially induced by overly aggressive mortgage financing.

These has the potential to be a very meaningful impact to the apartment business, a move down from the peak ownership level of 69% to the more normal 64% translates in to approximately 5 million households finding their way back to rental housing. With leasing traffic, applications and move-ins all up in the third quarter versus last year, it seems likely that the tighter mortgage markets may be finally starting to impact Mid-America's front door. We are working with our credit (inaudible) to ensure we are in the position to capture credit worthy renters who are going to be increasingly be coming back our way. As far as the back door benefit, or holding on to our residents longer, it's worth noting that in the third quarter, move-outs attributable to home buying, which has always been our number 1 driver of move-outs, declined by close to 300 basis points as compared to last year. Move-outs in the third quarter due to home buying dropped 25.5% of all move-outs. This is the lowest level we have seen since 2001.

With the renewed discipline on mortgage financing in the single family housing market, we believe Mid-America is well positioned to catch the increased demand side wave from fewer home buyers over the next few years. With this outlook of stable fundamentals coupled with our new operating system initiatives expanding unit interior renovation program, and the upside to capture from a number of the new properties we currently have in lease-up or under construction, we remain optimistic about another year of solid internal growth and the ability to drive higher results through 2008. On the transaction front, we're in an environment where sellers are adjusting to a different financing market, and as result there has been some hesitancy and more of a wait and see approach being taken. The net result has been a slow-down in transaction volume over the last 90 days or so. There is clearly a lot of capital still interested in deploying in apartment real estate in and in our market, and debt financing is readily available.

At this point, we have not seen any evidence a real shift cap rates, neither overall or between the large and secondary market tiers. With fundamentals in property NOIs remaining strong, I do not believe we're headed for a material shift in pricing or valuation, except potentially in submarkets where condo reversion or busted condo deals are bringing more pressure to potential sellers.

In summary, while encouraged by the solid third quarter results, more importantly we remain optimistic about the prospects for strong internal growth into 2008. We believe that the underpinning of stable market -fundamentals are in place for Mid America's unique platform, and while we certainly plan to remain disciplined about how we grow the company and deploy new capital, we believe we are approaching an improved window of opportunity to generate more transaction activity and capture new growth both through core holdings from our own account and through our new joint venture fund. We're excited about the company's prospects headed into 2008. Simon.

Thanks, Eric.

We are pleased that we are able to report record quarterly FFO of $0.91 a share, $0.04 above the midpoint of our guidance range, driven by strong same-store growth. Our same-store NOI growth for the third quarter was 7.1%, that was 50 basis points ahead of our internal forecast, and on top of the exceptional growth rate of 8.9% for the third quarter of last year. To put it in perspective, we have only had three quarters in the last 10 years when our same-store NOI growth has exceeded this growth rate. Same-store revenue growth was 4.2% but with 4.8% prior to the accounting adjustment to straight line concessions and fees, a pretty strong performance.

Similarly, same-store NOI growth was 8.1% prior to the same accounting adjustment, 100 basis points ahead of the growth rate we recorded. Our same-store pricing performance for the quarter was strong, but would have been still better but for two important factors. Concessions have dropped rapidly as apartment demand has improved, and we have rolled out the yield management software. On a cash basis, same-store concessions dropped by an astonishing $1.1 million, from 3.2% of net potential rent in the third quarter a year ago to 1.8% in the third quarter this year. The average concession per move-in almost halved, dropping from 3$51 to $188.

Secondly, the accounting adjustment to straight line on concessions reduced our reported same-store revenues by $350,000 versus a credit last year of $109,000. So although average rent per unit increased by 2.1%, effective pricing rose 3.4% or 4% before the straight line concession adjustment.

Revenues were also driven by strong physical occupancy which on a same-store basis ended the quarter at 96.4% compared to 95.8% a year ago. Again an exceptional performance bearing in mind the excellent comparable quarter. The increase in traffic and number of move-ins contributed to greater growth in repair and maintenance marketing and leasing costs. Operating income for property taxes and insurance costs increased 4.4% over the same quarter a year ago. Same-store NOI benefited from the renewal of our insurance program on July 1st when our property and liability insurance premiums were reduced by 20% on a same-store basis.

We recorded a 3% reduction in real estate taxes, which was mainly due to a roll back in proposed tax increases in Florida and some successful appeals in Texas. We're currently forecasting an increase in real estate taxes of approximately 2.5% for the full year, compared to our prior projection of over 4%. We had a number of markets with 7% or greater same-store revenue growth. All three of our Texas markets, Dallas, Houston, and Austin were in this category, as was Memphis. Some of our smaller markets also performed well, such as Lexington, Kentucky, and Jackson, Mississippi, where revenue growth was 8%. Our Corral Springs property just outside Fort Lauderdale grew revenues 5.7%.

The only areas of weakness were Jacksonville and Tampa, where the outstanding growth over the last couple of years has made year-over-year comparisons very tough, and Columbus, Georgia, where we were impacted by troop deployment.

Some additional comments about the third quarter. Interest expense was $500,000 below our forecast because of a decline in rates and in borrowing costs relative to our swap reimbursement rates. As reported in our press release effective with the third quarter we reclassified property bonuses from property management expense into property operations. Prior periods are reported on an equivalent basis and we'll post the amount of the reclass on our website. We expect full-year combined property management and G&A expense to be in a range of $27.5 million to $28.5 million, with several items contributing to the increase over last year including the cost of yield management and accounts payable software and additional asset management costs.

We completed the acquisition earlier in the quarter of Chalet at Fall Cree,a 268-unit community in Houston built in 2006 for approximately $87,000 a unit. We also bought the brand-new Farmington village in Charleston, South Carolina for approximately $105,000 a unit. Farmington Village is currently 78% leased and is leasing off rapidly. Stabilized NOI yields on the two properties will be about 6.2%. We also executed an option to by another property, Cascade at fall Creek, a 246-unit property currently under construction in Houston, Texas. Closing is anticipated in January of 2008.

Following the sale in the second quarter of two of 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 anticipate dilution in the range of $0.015 per share as a result of this year's dispositioned, and about $0.035 in 2008. The leveraged IRR of properties sold this year is 15.5% during the whole period.

We continue to be very active looking at acquisition prospects for Fund One, including a small portfolio that was pulled off the market when the disruptions in the credit market began. Park Place, which we bought on our own account prior to the inception of Fund One, was initially offered the fund, but the hiatus in the credit market caused our partner to delay kicking off the fund's acquisition program. As a result, we were able to retain 100% ownership of the property but our acquisition program is back on track and we anticipate that we'll tee up something for closing in the next few months. 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 rose to a quarterly record of 2.3, also above the sector medium.

Our balance sheet has continued to strengthen as our debt to gross asset value dropped to 53.5% from 55% a year ago, and we have about $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 plan planned redevelopment over the next 18 months and our commitments to acquire a construction property. You'll notice that we reclassified $11.9 million of our series F preferred into debt on September 30th after we called it for redemption on October 16th. Our FFO forecast for the fourth quarter of 2007 is a range of $0.87 to $0.95 per share with a midpoint of $0.91. On a full-year basis, FFO is forecast to be $3.49 to $3.57 with a midpoint of $3.53. This includes the $0.02 per share non-cash charge to write off the original issuance cos of series F preferred. It assumes a continuation of strong same-store NOI growth at the upper end of our prior guidance.

Market conditions continue to be favorable with new supply at moderate levels and apparent traction from the reduced competition from single family housing which we're currently discussing. We are projecting same-store revenues for the fourth quarter to increase in a range of 4.5 to 5%, in line with the U.S. trend. We expect expenses to increase less than 1% because of our much-reduced insurance costs and the moderation in real estate tax increases.

Also, in the comparable fourth quarter of last year, we experienced a spike in maintenance and repair costs and in property bonuses, which we don't expect to reoccur this quarter. This indicates the same-store NOI growth should grow in a rage of 7 to 8% for the fourth quarter.

Although we're expecting our same-store performance for the fourth quarter to be at the highend of our prior projections, we expect a penny less FFO from Fund One because of our delay in starting the acquisition program. For the full year we're projecting same-store revenue growth to average 4.5 to 5%. And we continue to project full-year NOI to grow at the high end of our original guidance of 5.5 to 6% close to the 6.4% average we reported for all of last year.

A couple of points about next year. We have some refinancing opportunities in 2008, including the $155 million of 8.3% series H preferred which is redeemable in August. If we were to call this preferred there would be a charge to FFO to write-off the original issuance cost for approximately $0.18 per share. It seems likely that at this stage we will call the series H in the third quarter of 2008, but the refinancing plans are a little fluid at the present time given the disruption in the credit markets. Also, we have a total of $180 million of debt in fixed-rate swap maturities in 2008, mostly in second-half year which should be earnings neutral based on the current yield curve. Eric?

Thanks, Simon. In summary, we remain optimistic about market fundamentals headed into 2008. Leasing conditions within Mid-America's particular markets look stable and the tougher environment for single family housing will, we believe, net out to generate continued solid occupancy in pricing performance for our properties. Opportunities to further leverage our existing property investments through new system initiatives and repositioning our upgrade projects will further support this performance.

Our focus for external growth remains buying on a realistically underwritten basis and operating aggressively to drive in ternal rates of return for our shareholders' capital. While cap rates can bounce around and serve as a volatile measure of spot-market pricing, internal rates of return are what really matter over the long haul in deploying capital. It's worth noting that of the 23 properties we've sold, or if you will gone round trip on across all market shares of our portfolio, Mid-America shareholders have captured an average internal rate of return of 19.5%.

We continue to believe that by investing in a disciplined fashion, and operating aggressively in our sun belt markets, it is entirely possible to deliver returns to capital that will compare very well with investing in other regions of the country or in high-barrier markets. The execution process and how various variables contribute to the value-creation cycle may differ, but the overall result can be very competitive.

We believe our business plan for capturing new growth and leveraging the expertise and platform we have in place will deliver higher FFO performance and value creation for our shareholders. We think the results will continue to be very competitive within the apartment [lease] space, and of course, we would argue, at a much lower level of risk and volatility for our shareholders. Our long-term focus remains to steadily build high-quality and recurring earnings and continue to position the company for higher company valuation.

Howard, that concludes our prepared comments, and we'll open the line now for any questions.

Yes, sir. (OPERATOR INSTRUCTIONS) Our first question or comment comes from the line of Mr. Bill Crow from Raymond James. Your line is open.

Thank you. Good morning, guys another great quarter.

Thanks, Bill.

Eric, just -- the decision not to pursue fund one acquisitions and then your statement that you have seen no change in cap rates. I'm just trying -- it sounds like maybe it was the partner who made that decision, and what brought the partner back to the table this quickly to -- you know, to go ahead and start making the acquisitions? Have you -- just give us a little insight into that.

Well, actually, you know, I wouldn't say it was totally the decision of the partner. Frankly, we just saw a number of deals that we were in the midst of chasing and talking to sellers about and as the markets began to change, we began to think about revising our underwriting a little bit and obviously our pricing.

We saw a lot of deals being pulled off the market, and so, you know, we had transaction volume begin to materially slow more than anything, but also, I think in talking with our partner, they thought also that, you know, we ought to just maybe let things settle out a little bit and -- with the belief that perhaps, you know, there may be more distressed sellers, if nothing else just because the timing is not going to work in their favor in terms of they are just going to be strung out that much longer.

But I can tell you, as an example, we were chasing an opportunity just a few weeks ago in Newport News up in Virginia that we really liked. We know the property pretty well. 20-year old asset that was a great repositioning candidate that we lost out on based on our underwriting, which we felt was pretty -- pretty strong. That property sold at a 5.5 cap rate for a 20-year asset.

So, you know, from our perspective when good assets come to market, cap is lining up still pretty aggressively, and again, you know, I think the transaction volume has slowed a little bit, but when they do come there's still plenty of capital, so you know, I think -- the last few months, it's kind of hard to say that there's a material shift in cap rates underway, but certainly, we're keeping an eye on it.

That does it for me. Thank you.

Thanks.

Our next question or comment comes from the line of Mr. Matt Ostrower from Morgan Stanley. Your line is open, sir.

Good morning, guys. Just in terms of single-family dynamic, can you comment on -- is this really about choosing the most important markets? And I guess, more importantly, to what degree is this about what price point an owner is operating at from a rental perspective? Is this about the fact that you guys have low enough rent that you're below the radar screen there and not competing with the housing? Or are you going to tell me that it's as much about picking the right geographies?

Honestly, I think it's a little of both. When you look at our portfolio and in particular you look at some of these markets where the single-family housing or the condo reversion has just decimated the market, places like South Florida, Orlando, Tampa, and Phoenix, we really have minimal exposure in these markets at the present time. And thus, to some degree, we are in a different position than a lot of our peers just because of the market difference. And then on the price point comment, I -- you know, I think there's probably some -- some truth to that as well, in that we're just -- we're a little bit unique in that regard in terms of our asset -- you know, the price point that we have relative to some of the others. But again, you know, we continue to see the -- Tom, why don't you provide a little color on the move-outs due to home buying and renting and things like that.

Sure. The -- you know, as Eric touched on the exposure issue, ground zero for this is really South Florida, where we have one property NOI performance there was about 9.7%. We have seen home buying in both Tampa and Jacksonville drop close to 20% in both markets in terms of move-outs for home buying. And in those markets, as you look at Tampa, Orlando and Jacksonville, the bulk of the condo conversions occurred in the Tampa and Orlando market, and we look kind of closely at three-bedrooms as direct competitors as a possibility there.

In Tampa, we have two properties to the North that are sort of out of that area in garden locations, which don't compete with that infill product that is typically overbuilt on the condo side. And our move-outs in the one property that is in the -- in more single-family home area, is -- we really haven't seen any effect on three bedrooms at all. Overall we have seen move-outs to three bedrooms in the company as only 4% and only 40 more people have moved out to -- for that reason, looking for three bedrooms in the idea that they are renting existing single-family three-bedroom homes. I can go on a bit about this. But I may be overanswering the question a bit. Is there something more specific you would like to know about Florida?

Not, but it's really interesting -- it sounds to me the reason you are still going okay there is that you are operating -- even though you got these three bedrooms right -- you are operating at a price point that's not so competitive with the single -- you're still below the level of single-family cost.

Absolutely and generally where we are in Florida is 80% or less of the cost of owning a home in the 25st percentile of the market. In Phoenix, which is the other place where it's an issue, it's even lower, where 60% of the cost of a sing-family home in those areas.

Okay. Just as a follow up. You were talking about the lesser move-out for home buying, what would you explain -- the annualized higher turnover rate was am issue Can you talk about why that is still happening?

Absolutely. And good question. That drop -- what we have seen is two things.

We have seen -- we had about 400 more units move out this quarter than the quarter a year ago, and about 40% of that is due to military. And you may notice that the turnover number in Savanna and Columbus, Georgia, and Augusta is related to that, primarily the 3rd Infantry Brigade deployment. The other part of that I think is a positive. The remainder of it really is we have seen an increase in the number of people that have moved out because of rent increase, which is -- I think speaks well of the markets. We have got good traffic levels, we have got good demand, and we are able to push price a little more than we have. And I think the LRO deployment has helped to get (inaudible) with that. And now we're beginning to see people leave us for rent increase and replacing them with stronger residents which is net positive for us.

I know you are not giving '08 guidance, but just -- could you try to give us a sense of -- what would it take, economically I guess, what kind of backdrop would we need to allow your sort of same-store growth numbers to at least stay flat over the course of '08? What kind of a context does that require?

Well, you know, I think that it generally requires -- I think somewhat of a similar environment to what we have right now. I think that short of any sort of cataclysmic collapse in the job-growth environment, I think that even a little moderation, perhaps in job growth trends we think will more than offset that based on what is happening -- in terms of just making it harder for people to buy a home. And we think that's going to net out to a positive for us. Based on what we see from the market fundamentals that we have in our markets and stability that we continue to see be -- continue to exhibit itself, and it' phenomenon of we're losing less people now to home buying, you know, we think that as long as the economy remains relatively where it is right now, that we're set up for another pretty solid year next year.

Okay. Thank you.

Our next question or comment comes from the line of Ms. Sheila McGrath. Your line is open.

Thank you, good morning. Simon I was wondering if you could give us insight on G&A for the quarter. It was the lowest quarter in a while.

Sure, I'll dodge that question and give it to Al here. Al Campbell who's our ace forecaster.

Sheila first let me just point you to the comments Simon made about our reclassing our property-level bonuses from G&A into our property operating expenses this quarter.. It's a bit different. I'll point to our website to give you details on that, and that would help, I think give you a good comparison. I think looking at what G&A is for this quarter and what we expect for the year, we normally take those two lines and put them together, the property management expense and G&A, we expect about $27.5 million, or 2$8.5 million for the full year, which makes the run rate for the third quarter a little lower than you would need for the fourth quarter to get to that, but that's the main things that were going on. Was there a specific question about the change?

No, the REIT classification, I thought was from property management to property operating, not out of G&A.

Well, we -- and that's why I say -- when we look at those, Sheila, mainly we tend to put them together because it is easier for us to manage and explain those expenses on a combined basis if we describe it that way. It was property management item into --

Property management expense is in G&A.

Right.

Got it. Okay.

G&A.

Okay. And then could you also give us an update on leasing progress at the various expansion properties?

Those continue to go well, Sheila. We're -- Phoenix is the main -- Simon touched on a few of these in his comments on Farmington Village in the Houston properties. I'm going to skip those and i'm going to give you an update on those, but in Phoenix, we're about 82% leased there, 81% occupied and expect it to stabilize on schedule, which would be late fourth quarter, early first quarter of next year. And then the St. Augustine at the lake, and copper ridge, those are not rolling yet, and then farming -- or excuse me, Briar Creek is about 64% leased. And it's slowed down as we hit the seasonal calm. But it has just been -- as we showed on the investor day, it has roared along, and we've also maintained -- importantly maintained occupancy there at phase 1.

Farmington, Village the one in South Carolina is 78% leased right now.

Okay. All right. Thanks a lot.

Our next question or comment comes from the line of Mr. Richard Anderson from BMO Capital Markets. Your line is open.

Thanks, good morning, everyone.

Good morning.

Good morning.

I just want to understand the straight line impact on your same-store results. The operating includes concessions or is it the reverse?

The -- Rich, the same-store result, basically -- you know, if you look at the schedule, which I think is like page 11 of the supplemental data, which reports our same-store NOI, if you go down to the operating same-store line, you'll see that NOI over the-- NOI increased by 8.1% over the same quarter year ago. That is before the impact of the straight line adjustment. We then put in the straight line adjustment, which is mainly the straight line concession, but also we straight lined fees that are paid, which is a pretty small impact, and that brings it down by 100 basis points to 7.1%, so the 7.1% is what we recorded on a GAAP basis.

Really, it seems to me the 7.1 is the right number, right?

That's right. That's the GAAP number.

That's the number that, you know, takes into account concessions and should be the one to be focused on.

That's right. That is the GAAP number and that is the number that should be focused on.

Okay. In terms of your same-store outlook, it seems to me that, you know, you had a nice little boost this quarter on real estate taxes, and maybe to a degree greater than you expected, and yet you maintained your same-store outlook. I guess why wouldn't have your same-store outlook maybe actually boost it up along the lines the -- you know, the positive surprise, assuming it was a surprise on the real estate tax?

I think, Rich, pe nut a little more seasonality into the fourth quarter numbers than we have before, which is really just a refining of our modeling, and I would say that is really the primary effect. The -- so the same-store effect wasn't that big. We also took out a little bit -- not in the same-store numbers, but in our overall forecast, we took out a little bit from the lease-up of the Phoenix property, which has been a little slower than we predicted a quarter ago. And so the combination of the two is really the reason why, you know, we had a little bit, we didn't have more of a kick in the fourth quarter than we projected before in addition to the fund one reason, which is the fact we're getting less fee income.

Okay. So then maybe backtracking to real estate taxes one last time, my last question.

Yes.

Was that -- that was, obviously it was a surprise to you or, you know, a good thing obviously, relative to your -- now assuming real estate taxes will be lower in terms of growth versus what you said last quarter.

Yes.

But do you still consider real estate taxes as -- I think what you sort of characterized the last quarter as like the wild card, is it still, you know, forefront in your mind, do you feel like you sort of put at it lot of it to bed for now?

It is always forefront in my mind, but seriously a lot of it is put to bed now, a lot of the uncertainty is left. The uncertainty was primarily driven by Florida, and there was a legislative action which caused the municipalities to roll back the tax increases, and indeed some of the reassessments that they made earlier in the year. And secondly, we have resolved a lot of -- our appeals and activity in Texas. And so that's a long-winded answer to say, yes, a lot of the uncertainty is now gone from the real estate tax situation.

Great. Thanks very much.

Thanks, Rich.

Our next question or comment comes from the line of Mr. Nap Overton from Morgan Keegan. Your line is open, sir.

Good morning. A couple of things. First, could you tell us what the estimated timing of the completions of the expansion at St. Augustine and Copper Ridge are, the timing and estimated project cost for those two projects?

Yes, Nap, this is Drew Taylor. We expect construction to end at St. Augustine in the third quarter of 2008, and we expect our costs there to be around $13 million. The Dallas property, Copper Ridge, we expect construction to end in the fourth quarter of 2008, and I think our all-in costs there is just slightly over $19 million.

Lease-up will have started well before then.

Right.

As the units come on stream.

Okay. And then could you give us some color on what -- what has -- what is going on in Memphis that you are able to produce a 19% increase in NOI?

No, I mean, obviously you are familiar with the Memphis metro area, and this is Tom, by the way, Nap. And the key here, Memphis is relatively steady as she goes on the growth standpoint. And life in Memphis seems to be determined by new supply, and we have just really muted new supply over the last couple of years, and I sort of think the demand side of the equation is driving some growth.

As you snow, and I might make a comment, often the macro numbers for Memphis, especially for occupancy show oddly low, and that is because a lot of the national firms pick up a good bit of deleveled housing in South Memphis that is currently unoccupied or carried at a low rate, so Memphis has been a little stronger than I think the national market shows in our -- we're just not exposed to the weakness in that CD-level housing.

Okay. Thanks.

All right. Thanks Nap.

Our next question come or comment from the Tony Howard from Hilliard Lyons.

Good morning everybody.

Good morning.

Good morning.

And congratulations on a good quarter.

Thanks.

I want to go back to Sheila's question on G&A. I'm somewhat confused. In the press release, it says the property bonuses went from property management expense to property operating expenses. This as far as I can tell did not change G&A, so I guess I'm somewhat confused why G&A was down.

Yes, Tony you are absolutely right, and I think the problem really is in explaining is internally we tend to combine property management expenses and G&A in one lump sum for our internal analysis and we don't segment it in the manner that you are looking at it. Why don't -- if we can, we'll walk through that with you after the call if that's okay, and we can go through some of the differences, but basically, we -- the reclass from property management to property operations (inaudible) was about $300,000 --

$380,000.

$380,000.

It was $350,000 last year.

And it was-- it was $350,000?

Yes, we made the adjustment on, you know, made both years comparable on an apples-to-apples basis. We took about $385,000 on property management expenses in third quarter of 2007 and about $350,000 in the third quarter of 2006 if that helps.

Okay. Maybe you have expressed this before, is there a stock buyback authorization in place?

There is one outstanding, yes.

What is the amount and how much has been --

Well, we have not -- I'll tell you we have not repurchased any stock for quite a period of time, but we did repurchase about 8% of our shares during a period about five years or so, six years ago. But we have not been buying back stock recently. And frankly, you know, we have got -- you know, we're preserving our powder at the moment for the pipeline that we have got.

Okay. So this -- then you are talking about a pretty old authorization?

Yes, that's correct.

Okay. Similar question as far as dividend and dividend policy outlook as far as the potential increase.

The -- yes, we -- you know, the Board considers the -- the dividend once a year, and we're getting to hat period of time. We have not issued any guidance on -- on that, but, you know, I think internally we're hoping for -- you know, as Eric has said in the past that we've hope that we started on a process we can have moderate increases as-- modest increases over a period of time. We feel very good about our payout ratio and where we're going, but --

We'll be talking to our Board about it at the November Board meeting, and, you know, see where they want to go from there.

Okay. Thank you. I guess I'll see you in Las Vegas.

Looking forward to it.

Yes, we'll be there.

Thanks.

Thank you.

Our next question or comment comes from the line of Thayne Needles from Robert Baird. Your line is open.

Thanks. Good morning, guys.

Good morning.

Simon, just one question. With with LRO now being fully implemented, are you running concessions everywhere or are you now running on a net basis so he concessions we see -- I guess -- that they will be declining over time and actually be out of the system, you know, I guess no more than a year from now? Or are you still running -- not running on a net basis everywhere with LRO?

I'll make just one quick comment and then I'll hand it over to Drew.

In our forecast and the guidance we have given we said we pull about $0.025 to $0.03 out of our revenue stream from these straight lining impact this year, and we certainly saw that in the third quarter. And I would think we would see a like amount in the fourth quarter, but now I'm going to defer the question to Drew, who's (inaudible).

Well, let -- but -- take note that -- the level of that -- of that $0.03 charge that you are losing on the concession that will decline as you move in to '08?

Yes, that's correct. It will tend to flatten out by the beginning of second and third quarter, Al?

Yes, once we all have had a chance to price through all of the lease --

Right.

In the third quarter, it will kind of flatten out. There will be some concessions in our structure probably, but on a much smaller level for sure.

And Thayne, it's Drew. I think LRO has tended to move it pretty quickly to a net pricing model, and I think -- one thing I think is pretty interesting, if you look at our annual concessions, we had this year through nine months, we had half of our annual concessions occur since we turned on LRO in the third quarter. So it's really, as I said, LRO is quickly moving us toward net pricing.

Okay. Great. That's all, guys. Thanks.

Thanks.

Again, ladies and gentlemen, if you have a question at this time please press the one key on your touchtone phone.

Our next question or comment -- just a second, please. Our next question or comment comes from the line of [Andy McCollough] from 9Green Street Advisor], your line is open.

Hey, good morning, guys.

Hey, Andy.

I just have one good question. On your 5.5 to 6% NOI growth for '0,7 how much do you think of that is directly attributable to LRO?

That's a good question, For the full year, Andy is probably going to be -- well of revenue what do you think, Drew, because we have had it really full bore for, say, three months, you know, this year so far.

We haven't really seen the full impact on lease renewals --

On renew also, correct.

So I'm going to say -- I'm pulling that out of the air, Andy, but I'm saying for revenues maybe .75 of 1%. That's what I'm sort of thinking.

You give a guess for what that would be in '08?

Well, probably -- what do you think? 1.25 -- 1.5% or something?

Yes, I mean, I would think this year -- my sense for it is at this point without having priced through all of our renewals and not -- you know, and having the system on for about, you know, just a little over a quarter right now, we might have, sort of 1.25, to 1.5% this year and we'll certainly pick up some more next year as we continue to cycle through more renew also and repriced leases. It's a little hard to probably pin down exactly.

Sure. Appreciate the color. Just one more quick question. I know you guys didn't give too much color on '08 on the expense side, but can you give any idea on what your sense is for insurance and property taxes going in to '08?

Of course, our insurance -- you know, we -- the program renews on July 1st, so we have got another six months, so once we start '08, the benefit of that on a relative basis. And, you know, I think that, you know, we hope for a moderate increase in our insurance program beginning on July t1st of 2008, but, gosh, you know, that's -- we don't know. We -- we don't burn buildings down, and we don't have hurricanes and earthquakes and things, a lot depends on that. But I think we're expecting some kind of moderate increase. Real estate taxes, I think we're not expecting as aggressive a program as was initiated by the Texas authorities this year.

Now we achieved, as I mentioned some rollbacks this year, so I think, you know, taxes should be in the sort of more moderate, you know, 2.5 to 3%, is what I'm hoping, and I think probably what we'll dial in to our forecast, Andy, but as we said it is kind of a bouncing ball. It will be a more of a bouncing ball this year than in most years. Hopefully be it a little bit clearer next year.

Thanks, guys.

Thank you.

Our next question come or comment comes from Michael Salinsky of RBC Capital markets. Your line is open.

Good morning, guys.

Hi, Mike.

Simon, real quickly with your fund. At the end of the second quarter you mentioned that you were looking to possibly contribute to the Park Place asset you bought in Houston.

Yes.

Is there a plan still to contribute to that at some point down the road?

No, we pulled out, once -- as we mentioned we bought that asset before the inception of fund one. We felt morally obligated to offer it to the fund once we kicked it off.

But with the kind of hiatus in getting the acquisition program kicked off, we thought it was really honestly fair to our shareholders not to -- you know, not to continue to offer to the fund, you know, when they are not getting a return on their investment. So we mutually agreed with our partner that we would pull that off the table and continue to have a chance to (inaudible) it. So that's where it stands at this point.

Secondly, you mentioned you are sitting on the sidelines until the market settles out here. When would you anticipate beginning to add assets to that fund?

Right now -- we met with our partners, had a real good meeting a couple of days ago, and we're aggressively looking for opportunities, and we think we got our feet on a property right now, so I would think that in the next three months, we would -- within the next three months we probably starting to add -- starting to add properties.

Okay. Secondly, you kicked off both St. Augustine and Copper Ridge during the quarter, but those don't complete until the Q3, Q4 of '08. What are you anticipating as you look ahead to '08, as the drag in developments relative to-- maybe quantify it versus this year?

Of course, one thing to kind of throw in, Mike, into that equation is the fact that Phoenix was a pretty big drag on us this year. And we expect Phoenix as Tom mentioned to be kind of in a fully leased up position by the end of the year, going into the fourth quarter. So we lose that drag.

I think we were looking at about -- this year, at about $0.11, $0.115 or so in terms of drag from development there from all of those. So it should be significantly less next year. What do you think, Al?

During the peak of the drag, we can probably talk about $0.005 to $0.01during the peak period of those.

For a quarter?

On a quarter, Mike. But that won't last, but one or two quarters and it will turn pretty quick, particularly the St. Augustine property.

So we may be looking at, you know, half as much.

Right.

-- as we saw this year, Mike.

Real quickly, I don't know if you addressed this in your prepared comments, but with the full roll out of LRO, you mentioned it basically outperformed in your markets there. Can you quantify what the impact from LRO was versus -- you know, versus what your expectations were?

Mike, it's Drew. You know, if you look at the third quarter restatistics, they indicated a revenue change in the markets that we operate in of about 2.4%, and we did 4.8%, so we certainly believe that LRO contributed to sort of that outperformance. You know, it's a little bit difficult to put a number on it. My sense is that it --you know, the list was something at this point without cycling through and with the system only being on for three or four months, that, you know, something like 150 basis points, but, you know, certainly what I think -- I feel best about is just sort of the pricing and optimization and the discipline that we get from LRO as we move forward.

The other thing to keep in mind is that differentiation between our performance versus the market. It's not just LRO, it's some of this redevelopment initiative, and a lot of the other system automation improvements that we have made. Trying to figure out how much is LRO versus how much are all of these other components is a little tough. But clearly, it is part of it. And clearly, it is just getting started.

Great. Finally, I know you mentioned you hadn't seen cap rate moves for most of your bigger markets. Can you talk about what you are seeing specifically in some of the smaller markets? You know, have you seen any, you know, pricing trends or do you have any kind of concerns about those markets?

Well, honestly, we have not really been actively looking at any deals in some of the more tertiary markets, so it's hard to give you any real perspective on it. But, you know, it -- again it's something we'll keep an eye on, but I don't really have any basis to give you, any perspective on any changes going on in those markets as of yet, because we're not looking to buy or sell at this point.

The logic to me is that there will be some moderation of -- just because some of the supercharged money is left, but the other side of it is that treasury rates are down, swap rates are down, spreads have widened. But basically borrowers sort of in the 70, 75% range, there's still plenty of money available for them from the agencies at about the same cost that they had before or maybe lower. So I don't see for a sort of serious, you know, kind of real money kind of buyer, that they are going to be backing off pricing.

Yes, I think the only change to the environment that we see right now is those guys that were willing to leverage up 85 to 90%. You know, they are out of the market, but all of the other players are still there, and there's a lot of them, and Fanny and Freddy are wide open for business, so it's hard to really believe, at least from where we sit that we're looking at some kind of material shift in pricing.

Great. Thanks, guys for the commentary. And congratulations on a great quarter.

Thanks.

Once again, ladies and gentlemen, if you have a question or comment at this time, please press the one key on your touchtone phone.

Operator, if we don't have any other, I think -- do you show anybody else calling in yet?

No, sir. No additional questions or comments at that time.

Thank you very much for joining us this morning and let us know if you have got any more questions. With that, we'll end the call. Thanks.

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