Mid-America Apartment Communities Inc (MAA) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the Mid-America Apartment Communities' third 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 Leslie Wolfgang, Director or External Reporting. Ms. Wolfgang, you may begin.

Thanks, Christopher, and 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 (inaudible) 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.

Thank, Leslie, and thanks for joining our call this morning. We were pleased with FFO results this quarter. Despite continuing weakness in the economy, extraordinary volatility in the debt markets, very challenging prior year expense comparisons, and steps taken to further strengthen the balance sheet, FFO was better than we expected. FFO for the quarter was driven by stable revenue performance, lower G&A costs and lower financing costs. Excluding the expenses associated with Hurricane Ike, FFO was $0.02 above the midpoint of our guidance and equal to the record high third quarter FFO result reported last year. Revenue growth was driven by stable occupancy and strong results in collections. Same had-store occupancy ended the quarter at a very solid 95.4%. When compared to last year's exceptionally strong 96.4%, the 100 basis point decline did pressure year-over-year revenue performance; but given the more difficult economic environment, we are encouraged with the results. 95% occupancy is pretty strong, helping to offset some of the moderation in leasing conditions as lower resident turnover and vacancy loss from moveout as compared to last year. As we indicated would be the case in our second quarter conference call, we believe it will be difficult to push pricing aggressively on new resident leases over the next few quarters.

We were encouraged, however, by their performance in pricing renewal leases, as effective pricing on lease renewals was up 4% as compared to prior year. Capturing that level of price increase while at the same time reducing resident turnover by 6% is pretty strong performance and brings further support to our belief that revenue performance from Mid-America's portfolio should hold up over the next few quarters. It is also important to point out that two markets across the portfolio were largely responsible for the overall moderation in year-over-year revenue growth -- Atlanta and Jacksonville. Atlanta is a market where weak employment trends earlier in the year became more pronounced in Q3. Year-to-date, job losses in Atlanta are 53,000, with 35,000 of those losses coming in Q3. This pressure generated a 240 basis point decline in effective occupancy for our Atlanta properties. Jacksonville has battled a combination of new supply that came on earlier this year, and weak employment conditions with 22,000 jobs lost year-to-date. This generated a 250 basis point decline in effective pricing for our Jacksonville group properties. We expect both of these markets will show improving trends next year, as new supply pressure moderates and job loss trends bottom out.

While our outlook for revenue growth over the next few quarters will be impacted by weaker job growth trends, remember that Mid-America's portfolio is not materially exposed to the oversupply of single family home and condo markets; and given our investment in a number of secondary markets in the southeast that are not experiencing the volatility in employment conditions seen in the larger markets, we expect Mid-America's portfolio performance will not experience as much pressure as others. As reported in the earnings release, you will note that Mid-America's stable income and smaller market segment outperformed the other two segments of the portfolio. Overall, same-store leasing traffic was up on a year-over-year basis; resident turnover was down. Occupancy is holding up, and pricing weakness is largely isolated to new resident leases. As a result, we believe Mid-America is well-positioned to weather this slowdown in the economy. Longer term, the continued shift to more households to apartments and away from the single family market, along with the dramatic decline in new apartment starts, once we get some positive traction back into the employment trends, leasing conditions should turn positive, and do so quickly. As expected, same-store operating expenses in the third quarter reflected higher than normal year-over-year growth, as we were comparing against an unusually low prior year benchmark of only 3/10 of 1% growth in operating expenses.

In addition, the quarter's results were also pressured by expenses from Hurricane Ike. Simon will give you more details on the various components driving the expense performance, but we are comfortable that after another tough comparison in the upcoming fourth quarter, with a prior year benchmark of negative expense growth of 1.2%, we will see property operating expenses trends more in line with our historical norms. In addition to questions about the leasing environment, the other item under focus in this market is, of course, the balance sheet. This is another component of our platform and strategy that places Mid-America in a solid position. Of the total $1.4 billion in outstanding financing, we have only $39 million or roughly 3% of our total debt facing refinancing next year. Further, in 2010, we again have only another 4% of our debt facing refinancing. Mid-America has one of the strongest dividend and fixed charge coverage ratios in the sector, and we have raised 104 million of additional equity this year prior to the recent collapse in the capital markets. All together, this puts us in a solid position to be more disciplined in our management of asset sales, and in our pursuit of new growth opportunities. Mid-America does not have the pressure of liquidity concerns and the exposure to the current debt markets associated with securing financing for new development, and material refinancing requirements.

We are very pleased with the acquisitions completed in the third quarter, and we remain active in the market looking at a number of opportunities. Obviously, given the dramatic shift in the capital markets and the rise in the cost of capital over the last couple of months, we are being very careful in our analysis and decisions about any current use of capital. We continue to believe there are going be some terrific buying opportunities over the next year. In summary, we believe Mid-America is well-positioned to weather this period of moderating leasing conditions and volatility in the capital markets. With our exposure to a wide range of markets and a proven operating platform, we like our situation. We have several new initiatives underway for next year that we believe will further boost our internal growth prospects, including a new bulk cable program, a fully integrated online leasing program and new resident utility billing programs. Our interior redevelopment program continues to make steady progress and will make an increasing contribution to revenue growth. We have a number of lease up and new development projects underway that are diluting this year's FFO by $0.16 per year. These investments will all become productive next year.

The balance sheet is in terrific shape. We have the ability to selectively and carefully pick opportunities for capturing new value for our shareholders. In all, we believe that Mid-America is in a good position to play defense as needed during this period, with the added capability to jump on opportunities that these markets will undoubtedly create. That's all I have, and I'm going to turn it over to Simon.

Thanks, Eric. We were pleased that our third quarter FFO was ahead of our forecast, given the economic issues, the impact of Hurricane Ike and our reduced leverage. Our top line was softer than we anticipated, and property expenses showed a temporary spike; but these were more than offset by less G&A and interest expense. As Eric mentioned, revenues were weak in Atlanta and especially in Jacksonville; and excluding these markets, our revenue performance was more in line with our expectations for same-store revenue growth of 2.5%. We stepped up our marking efforts after the slowdown in traffic we experienced in June, and (inaudible) traffic was up up by 2.7% over the same quarter a year ago on a same-store basis. We saw leasing conditions become more challenging, as although our lease applications rose, the number of credit turndowns increased by 5%. Physical occupancy ended the quarter at 95.4%, which was solid performance, as the level we achieved at the end of September a year ago was exceptionally high. The effective rent increased by 1.6%, which was the major contributor to our same-store revenue increase of 1.4%.

Our bad debt expense continued to improve, with net delinquency down 9% to .5% of net potential rent; although we do think credit will become more challenging as we go into next year, and so we are taking early steps to combat this potential pressure. The same-store concession rate dropped from 2.2% to 0.8% of net potential rent, as we continued to migrate towards net effective pricing at most of our properties. We continue to see a reduction in the number of our residents leaving us to buy a house, down 22%, from 25% of move outs in the third quarter of last year to 21.5% this year. The number of our residents that left to rent a house is insignificant, at 4% of move outs. Quarterly resident turnover on an annualized basis dropped from 77% to 71%, or from 63% to 62% on a trailing 12 month basis. Same-store operating expenses were above the level we projected.

As mentioned in the release, two events -- Hurricane Ike and the large credit to real estate taxes last year -- contributed 2.5% of the increase. A further .8% was due to higher personnel and make-ready costs we discussed in the release. In other words, without these unusual or one-time items, our same-store expense increase would have been 3.6%, more in line with our normal expectations. As Eric mentioned, these issues should work their way through by the fourth quarter, or at least by the first quarter of 2009. We have noted before that expense comparisons with the fourth quarter of last year will be tough, the period when our same-store expenses dropped by 1.2%. As Eric mentioned, our balance sheet is in great shape, with minimal commitments; and all but $6 million of our developments are complete and funded. We have no further debt maturities in 2008, and just $39 million of debt maturities in 2009, which will prefund with new Freddie Mac debt during the fourth quarter. We're putting this prefunding in place four or five month ahead of a more normal schedule. We figure this will cost us $0.02 a share, including half a cent of share in the fourth quarter, but we are willing to pay this just to be doubly sure we have the financing we will need.

In 2010, our only debt maturity is our $50 million line of credit that we anticipate renewing in the ordinary course of business. And our major debt funding, which is through agency credit facilities, will begin maturing in crunches between 2011 and 2018. We use swaps on our credit facilities to reduce interest rate risks, and these are left to mature over the next seven years. At the end of the quarter, we had $174 million of combined capacity available in excess cash precommitted agency credit facilities and our bank line of credit. We have continued to strengthen the balance sheet using our continuous equity program. We raised $99 million of new common equity through the end of the third quarter, plus a further $5 million in October; and we have averaged a net price of $52.98 before we closed down the program when REIT stock prices dropped. Our debt stands at 51% of gross assets, down from 52% in September last year, and this compares to a second quarter sector median of 55%. At the midpoint of our 2008 guidance, our dividends were 66% of FFO and 83% of AFFO, both in the best 1/3rd of the sector. Our fixed charge coverage ratio of 2.5 is also in the top 1/3rd of the sector. Our cash flow and FFO are high quality, almost entirely derived from income related to apartment rentals, not from transactions or asset sales.

Our swaps, including rate debt, are either directly or indirectly tied to LIBOR, and increased volatility impacts our cost of funds. In the six week following the Lehman bankruptcy, LIBOR spiked, rising from 2.80 to 4.82% before dropping back down again. It seems that LIBOR volatility is declining and returning to more reasonable levels. We estimate that this spike will cost us around 1.5 cents per share of FFO in the fourth quarter. During the quarter, we acquired three high quality properties which represent the kind of opportunities we are increasingly seeing as sellers become more anxious and the acquisition environment improves. We expect a blended NOI yield of approximately 6.3% from these properties in the first quarter of our first year of operations. We have targeted four properties for disposition, totaling 990 units, representing a cross section of all the properties that no longer fit our objectives. At the present time, we anticipate that three of them will sell for about $28 million, 6.8% cap rate, around the end of this year or early next year. We are reviewing purchase proposals on the fourth, with a possible delay of the sale until the markets settle.

For the same reasons that acquisition opportunities are improving, disposition pricing is becoming a little less attractive. We are in the fortunate position of not needing to sell assets to raise cash to fund our business, and are entirely focused on the smart recycling of our capital. Our redevelopment program continues to generate attractive returns, with interior renovations on 3,100 apartments completed through the end of September. We plan to redevelop a total of 3,800 this year at an average cost of $4,900 per apartment. So far, we have seen the renovated units generate at average incremental revenue per lease of $95 a month, and at 10% unleveraged IRR. In addition, we have five exterior repositioning projects scheduled to begin this year totaling $2 million. We underwrite these exterior projects to generate the same kind of returns through additional rental rates as for our interior renovation. We are carefully monitoring our redevelopment program as some markets soften. It is likely that due to the tougher economy, we will tend to focus more on some of the renovation-light projects, lower investment per unit, where we don't need to achieve such a large revenue increase, and we may moderate the number of apartments selected.

The two new development projects -- Copper Ridge in Dallas and St. Augustine Phase II in Jacksonville -- are on schedule for completion in the fourth quarter, with total remaining investment of $6 million. Copper Ridge has started lease up, which is proceeding well; and at the end of October, 90 of 141 available apartments were leased. The first building of St. Augustine is just coming on line, and we have 19 apartments preleased. Due to the rapid lease up of Copper Ridge, we are exploring bringing forth the construction of 45 additional units, and will likely commence construction early in 2009, with a probable additional investment of around $4 million, partly built on 12 acres of adjacent land that we purchased during the quarter. We have dialed back our expectations for the economy, and for the balance of this year, we project slower revenue growth, partly offset by reduced G&A costs. In the fourth quarter, we expect increased interest costs due to LIBOR spike that I mentioned, and due to the early funding of the $39 million of 2009 debt maturity. We have taken the mid-point of our FFO forecast for the fourth quarter and for 2008 down by $0.03 from our prior guidance. We are now projecting same-store NOI growth for 2008 in the range of 1 to 1.5%. This is based on revenue growth of 2 to 2.5%, and expense growth in a range of 3.25 to 3.75%.

We have previously pointed out that we have tough comparisons in the back half of 2008, due to the very favorable insurance renewal and real estate tax adjustments that benefited us in 2007. The reduction in forecast same-store NOI is partially offset by increased NOI from acquisitions and by less G&A expense than we anticipated. We have a few more shares outstanding than we planned last quarter, which is modestly dilutive to FFO per share. Year-to-date, we have raised $104 million more equity than we originally forecast, costing us $0.04 per share of FFO dilution for all of this year. We expect about $0.16 of FFO dilution for the full year from the recent acquisitions of the properties in lease up, including Talus Ranch in Phoenix and from development properties. Eric?

Thanks, Simon. We hope that the key points you took away from this morning's call are the following: First, the fundamentals driving revenue growth, while moderating in Q3, are holding up. We expect to carry our current trends in occupancy and pricing into Q4 and 2009, at which point, prior year comparisons should turn more favorable towards the back half of the year. We believe Mid-America's market profile, quality of product, and strength of operating platform will drive stable performance over the next few quarters. Second, a significant aspect of the operating expense pressure in Q3 and and expected in Q4 is attributable to very tough prior year comparisons, one-time events and trends that we expect to moderate. And lastly, Mid-America's balance sheet's in good shape. We are fortunate to have raised $104 million of additional equity earlier this year. We have the capacity and coverage to be patient and disciplined with capital decisions during a time of significant volatility and opportunity.

And a final point that I want to make. With only a couple of months left to go this year, our revised FFO expectations for the year are within $0.03 per share at the midpoint of where we started the year. When you consider that our original expectations did not assume we would raise any new equity this year or that the economy would be this weak for this long, or that the capital and debt markets would be this volatile, and yet, overall FFO expectations are this close to where we started the year, it says something very positive about the stability of our strategy, the high quality of our earnings, and the strength of our operations. We believe we are well-positioned for this part of the cycle, and we look forward to executing on the opportunities before us. That's all we have in the way of prepared comments. And so Chris, I'm going to turn it back to you for any questions.

Thank you very much, sir. (OPERATOR INSTRUCTIONS). Our first question or comment is from the line of Michael Salinsky with RBC Capital Markets. Your line is open.

Good morning. Eric, you talked about Jacksonville and Atlanta. Are there any other markets right now that you're seeing really concerning trends?

You know, Mike, I would say, generally not, but I am going let Tom answer that question.

The good news is, generally not in a place where we have a high concentration. South Florida and Phoenix, though, on an absolute basis, have seen the most job loss with about, you know, 116,000 jobs year-to-date, and 100 in Phoenix and over 100 in South Florida. But we've help up fairly well in those markets because of location and, frankly, low exposure. You know, those are the two toughest.

As you know, we only have one property in South Florida and to two in Phoenix. So it's not a big component of our portfolio.

Okay, so the rest -- the Texas markets --

Yes.

And everything -- Memphis, Nashville -- they seem to be holding up pretty good?

Yes, those are -- it is all holding up fairly well. I mean, our big exposure on the tough side was really Jackson and Atlanta this go around.

Okay. Can you talk a little bit about acquisitions? I mean, are you seeing any distress out there? Where is asset pricing right now?

Well, yes, I mean, we are definitely seeing some distress out there. We are seeing a lot of deals that we passed on or that we put numbers, you know, out on that are coming back. And, you know, I couldn't begin to tell you where cap rates are right now. Things -- there's not a whole lot, as you know, trading hands right now -- not a lot of activity happening. There's still a spread, I think, between the bid ask. But I do think that the -- and there's still a sort of a point of you know, who's going to blink first, I think still -- is still out there. I think that if the fundamentals, you know, continue to hold up, I think we are going to continue to see transaction volume remain, you know, somewhat low, simply because I think there's -- if they can hang on, I think they're going to definitely hang on. But where we are seeing the best opportunities in and the most distressed are clearly in the lease up situations. Developers are having a very difficult time. Of course, there's some real distress out there with some of the failed condo projects and, frankly, just anybody that's facing any sort of refinancing requirement over the next year, tend to be a little bit more motivated to make something happen.

Where are your target rates at right now for new acquisitions?

Target rates?

Yes.

Our hurdle rate? Yes, hurdle rate, Mike? Well, obviously our cost of equity has risen dramatically. And, you know, we use this dividend discount model primarily to evaluate our hurdle rate, and I think our dividend yield is now probably 7.5%. So it takes -- using a long-term growth rate, we get up to 15, 15.5% hurdle rate on return on equity.

Okay. And finally, I know you haven't given guidance for 2009, but the bulk cable program you announced -- how much should we look for that to contribute to earnings next year?

Yes. This is Drew, Michael. I think, you know, we like bulk cable. It is something that we have got testing right now, and something that with our one-connect bulk cable program, it is generally good for us and good for our residents, but it is certainly not without risk. It is not a lay down deck, so we want approach bulk cable somewhat cautiously, much like we would do any other major new initiative. I think the long and short of it is right now we do -- we have about 1.4 million in cable revenue. Most of that is traditional. Next year, we expect to grow something on the order of $600,000, and then in 2010 another 750,000 or something like that.

Okay. So not a significant contribution next year, but probably the year after?

Well, 600,000 would be the number for next year, which is meaningful. That's $0.02 a share, and then maybe 750 the year after. So it is meaningful.

There's no expense associated with that, or?

That's net revenue.

Oh, that's net revenue, okay. Thank you.

That concludes your questions, Mr. Salinsky?

Yes.

Thank you very much, sir. Our next question or comment is from the line of Nap Overton with Morgan Keegan. Your line is open.

Yes, good morning. A couple of things. The $0.16 estimated dilution from development projects this year, do you think that stays about the same next year, or does it go up or go down? What's your gut feeling?

Nap, Al Campbell is going to answer that for you.

Yes, that's a good question. $0.16 here, that's going improve pretty significantly next year as some of these projects begin to become -- perform better, you know -- begin to meet expectations. We expect it to go down about $0.10 next year.

Go from 16 to 6/

16 to 6.

And does that response incorporate any new -- any anticipated new projects or unanticipated new projects?

No.

No it doesn't, Nap. That's the current projects in place now. It does include, you know, the latest ones we did in Atlanta that was somewhat lease up that we bought a couple of -- few months ago -- and it's at Lion's Gate, and it's slightly -- has slightly such remain, but that's it.

I mean, if we go ahead with this expansion of Copper Ridge, which is a couple of buildings -- 4 million bucks -- that would be additive to that, and then, you know, it is a good point. We might find some really good, you know, struggling lease ups that we mig try to buy, if they can be just knockout deals. And that would be added.

That would add to that as well.

Right. And so -- all right. I know you don't know the answer to this question, but if you were to take a reasonable estimate at acquisition volume over in 2009, what would a reasonable man estimate that might be?

My guess is, Nap, you know, in normal times, we'd be modeling 150 million bucks. We probably, I think, will be going in with an estimate of more like a hundred million next year, just because we have got to look at all of the alternatives when we go into next year. And so -- but I think that would be a reasonable man's --

And I would tell you that in this environment, you know, the acquisitions that we would be looking at -- I mean, obviously, as always, we are looking for an internal rate of return that's well in excess of our cost of capital. We are a little more sensitive to putting money out that has current dilution impact right now; and thus, if our acquisition volume next year was, say, 100 million, I certainly would hope that a good component of that would be break even to slightly accretive next year in terms of FFO. There may be some dilution associated with putting that money out, but we just don't know yet.

The other component, Nap, of course, which we haven't really talked about, is that we are going to be trying to go see if we can put the -- you know, fund two in a joint venture together, which again we would hope that we could -- which will be additive to earnings and obviously, we are just beginning work on that. And we don't know, you know, the demand for that kind of a value-add type of fund. But we are going to be working on that, and probably with a -- all of maybe $150 million of acquisitions in that next year if we can make it happen.

Okay. And then, Simon, what was it -- I think I understood you to say in your remarks that you had about $174 million in total capacity between cash and excess on the facility and your bank lines of credit. The difference -- if I understood that right -- between that and the 132 million availability that shows up in the text of the press release would be what?

The 132, Nap, was on the agencies alone, and the other was on our credit line with Commercial Bank at (inaudible, audio cutting out).

Okay. All right. And then, so when would you expect in this cycle -- when should we expect concessions to start edging up? They have been coming down for several quarters in a row, and when would you expect them to begin to edge up?

Nat, this is Drew. You know, we are really on a -- sort of a -- just to give you a yield management perspective on it -- we are sort of a net pricing operator now. We really don't employee concessions as part of our model. So I think what you would see really rather than concessions go up, you know, in a weaker leasing environment, you see front end pricing go down. I think what we have seen -- in the third quarter, we saw our new lease pricing go down about 1%, our renewal pricing go up about 4%, and you know, all the while maintaining, you know, an occupancy -- a stable occupancy -- at 95 plus. So I think that's what sort of LRO tends to do in a weaker leasing environment, which is hang on to occupancy and if there's a trade off needed, it is sort of to give up a little bit on the front end on rents.

But you see us refer more and more to what we prefer to call "net effective pricing" which is really the combination of rent change and any concession change, and we just use that metric now because it kind of brings everything into play. But the idea of going back and using a lot of concessions, that's not really in our business model any longer.

Okay, thank you very much.

Thank you. Our next question or comment is from the line of Paula Poskon with Robert W. Baird. Your line is open.

Thank you, and good morning. Could you talk a little bit about any information you might have, anecdotal or otherwise, about trading down trends among tenants or doubling up?

Yes. Paula, hey, it's Tom Grimes. How are you doing? Hey, Tom. Fine, thanks. How are you? We monitor that a little -- a bit, and let me just -- sort of the main thing that would indicate the trend down would be an abandonment of our one bedroom units, you know, as people double up. And they remain -- we monitor pretty closely -- they remain our highest lease percentage in the portfolio. So that is sort of the key thing. And then we also measure a number of resident quality metrics, but I don't think that's quite what you are after right now. It was really the trade down answer. Is that correct? And we are not seeing that right now.

Okay. And then just keeping with the tenant profile discussion, have you made any changes to your desired credit profile?

Hey, Paula. It's Drew.

Hey, Drew.

We have made, I would say, some targeted small changes. But you know, our credit profile is something certainly that we take very seriously, and you know, there are a lot of implications to, you know, lowering those and making any sort of dramatic shifts in the way that we approve people. So, I would say we have made some slight modifications in certain situations where we feel like we could give up a little bit in terms of our quality, in terms -- so that we can attract perhaps more people move in, more people. But I think, you know, in general the answer is no.

Yes, I will tell you that in an effort to maximize revenues and capture the best occupancy performance we can, we are willing to trade off on pricing as needed, but we're very unwilling to trade off on credit quality to get there.

And the results of, you know, net delinquencies 5/10 of 1% of total net potential support that pretty strongly.

Okay. Turning to the portfolio activity, some folks have mentioned to me that maybe you are -- have gotten into markets like Phoenix and Atlanta a little bit early given the projected downturn that's still to come. How would you answer that criticism?

Well, I think that when the markets are down, that's when you want to be in there buying, honestly. I think that the Edge at Lion's Gate, the we just bought, I mean, we bought it on a basis where we expect the market to be very weak for some period of time, and as long as you buy on those expectations and your model supports that kind of assumption and you're going to still, at the end of the day, you believe, capture an internal rate of return that is well in excess of our cost of capital, which is what really drives our decision, then we think it is a good decision to make. And so we bought that property with the full knowledge that that market is going to be pretty weak. I don't remember the specifics -- we can get them for you -- but I'm sure we're carrying pretty extensive vacancy assumptions, and minimal if -- and no rent growth for probably at least a couple of years. So, you know, I think that that is where some of the best buying opportunities in terms of your ability to buy at a discount to replacement value and to buy on a basis that's going to drive a very attractive IR. You want to go into these distressed situations. And as long as you understand you're going to have that kind of distress for a while and dial it into your assumptions, it is the right way to go.

And just thinking about the timing of those recent purchases versus where you think your hurdle rates have moved, just given the -- your dividend pricing model, do you think that those projects would still pencil out, given your new hurdle rates?

I think that they -- what we do is we take our cost of capital and then we put a safety cushion, if you will, on top of that. And so the answer is yes, I think that even with a cost of capital today versus where it was 60 days ago, I'm confident that it would still be in excess of our cost of capital in terms of the return we expect to capture.

Okay, and then just last question, can you just help me understand your approach, your philosophy, around utilizing the controlled equity offering? I know in your prepared comments you had said that you've ceased that recent sell off, but at what levels do you think you would like to see your share price get to before you'd consider reinstituting that?

Well, we obviously don't disclose that; but clearly, we would be -- we are very unhappy with the current stock price and we -- and you know, when the stock did start to, you know, go -- I mean you can, to some extent, gather from the average price that we sold that, which is about $53 net-net-net. That's sort of says something about where we are willing to sell at. But I think a lot would have to do with what we see on the horizon in the way of deal potential. And if we, you know, saw just a huge number -- I mean, not a huge number, but a flurry of really knock out deals, then we would be much more prone to do something. But clearly at the current levels, where we are - honestly, we're trading, the way we look at it, at about an 8 cap, about $61,000 a unit, you know, we are very reluctant to give away the Company at that price. So, it is a bit of a long winded answer, but --

Not at all.

Yes, if you can kind of get there, where we are coming from.

No, it just helps me understand how you are thinking about it. Thank you very much, gentlemen.

Thank you.

Thank you.

Thank you. Our next question or comment is from the line of Carol Kemple of Hilliard Lyons. Your line is open.

Good morning.

Morning.

Morning.

On your recently acquired Brookhaven asset, how much did you pay for that?

Sanctuary at Oglethorpe you're referring to? Yes. It was about 150,000 a unit I think.

38 million --

Al is looking it up right now.

It's 38.5 million.

Okay. And what kind of renovations are you expecting to do on that, and how much do you think that will cost?

It is about 8,000 a unit, I think, is what we have got scheduled over about three years, if I remember right.

I mean, what it starts wit,h frankly, is some upgrade to the amenity areas and the leasing center and some of the common areas, and then after the first year then our plan is to move into the unit interiors after that. This is a property that is very, very well located. It is about halfway between Brookhaven and Buckhead, right across the street from Peach Tree Golf Club, and the -- every unit has an attached garage to it. So there's huge floor plans, so we really think the -- that the opportunity here is quite significant, and we will get into the interiors in years two and three, which will involve the countertop, the cabinetry, light fixtures, the faucets and things like at that.

What kind of rent are you charging on that asset now?

You know, let us pull the information on it. We don't have that handy right now in term of the current rents at that property.

But it is probably much higher than some of your other assets?

Yes, no, that's a (inaudible, speakers overlapping). Just that real estate alone, location is -- far and away, that's probably our highest rent per square foot in Atlanta.

Okay. Thank you.

You bet.

Thank you. Our next question or comment is from the line of Richard Anderson with Investor Corp., Inc. Your line is open.

Yes. Thank you for taking this question. You didn't say anything -- I don't believe I heard anything about your preferred H stock?

Well, the -- Yes. Well, we put something in the press release about it, and we believe -- and we have no current plans to call that. And so it is callable, as you know, but we have no plans to call it.

I was wondering if you had considered at all buying any off the market with it selling at about a -- you know, around $20?

We have. And we don't have any current plans to do that either.

Okay. Thank you very much.

Sure.

Thank you. Our next question or comment is from the line of Rob Stevenson with Fox-Pitt Kelton. Your line is open.

Good morning, guys. Back to the Atlanta redevelopment asset, I mean, does it make sense -- is the rents that you can get out of that now still -- the bump still great enough that you would, in a weakening market, spend redevelopment dollars? Or do you think that you'd just wind up postponing that and waiting until the market will accept higher rental rates to warrant the investment?

I mean, the way we do any of these redevelopment projects is, you know, we sort of test the market. Particularly when we get into unit interiors, we will do a few units and make sure that we are getting the rent bump that we thought we would. Having said that, you know, clearly if Atlanta continues to show weakness throughout next year or maybe into the following year and we don't think we can get the rent bumps, we will hold off. We are not going put the money out unless we think (inaudible).

Okay. Eric, I mean, I know that it varies from market to market; but with -- you know, it is 70 -- call it a 750 average rent in the portfolio-- I mean, what is the gap between the cost of home ownership, especially something like foreclosed housing in the vast majority of markets relative to that rental rate?

Well, obviously, it does vary quite a bit by market. And in the southeast, we frankly -- single family housing has always been readily affordable. And the gap between renting and owning has never been as significant as you see in some of the coastal markets. And so my -- on average, you know, the gap is, I don't know, probably a couple hundred bucks, maybe more than that -- 500 bucks -- it will vary, again, by market. But for us, quite honestly, in a region where single family housing has always been readily affordable, the pressure point for us over the last few years has been the ability for people that -- renters to move into home ownership because they can do so with no down payment generally, with no established credit per se, or maybe even weak credit, and the ability to secure financing to buy the home was really the driver. It wasn't the pricing issue. It was just the ability to get the financing, and they didn't have to come out of pocket for it. So that, of course, has now changed, and the mortgage market is a little bit more disciplined about their lending practices, and we think it will be that way for quite some time.

Okay. And then Simon, what is the sort of maximum that Fannie and Freddie are currently out there lending on a LTV basis these days?

Al, what are you seeing?

I think the max would be somewhere around 75%. That's certainly not what we are going for, but I think they can get that high for the right borrower. We're typically in the 65 to 70% is what we're going for, Rob.

And Rob, they might put -- they might sort of --say it's 80% but it probably ended up being 75, Al?

The underwriting is much more disciplined and the coverage ratios and other things they're very tight on. So that's right (inaudible). They may broadcast at 80% and kind of work it back to actually 75 on the proceeds.

I mean, given the type of buyers you are generally sell assets to, can they really make the numbers work at 75% LTV?

Well, we have got, you know, four properties that we're -- that we've got being marketed at right now -- marketed right now. One of them is -- the buyer is using bank financing, and I honestly don't know what LTV he is using. But the other three that we are talking to are using Fannie and Freddie, and I guess the -- again, I don't really know the answer, but we've got -- of the four properties we've got three contracts actively working, and two of them have said they have got their Fannie and Freddie financing sort of lined up. But whether there are 75 or 65, I don't know. But I'm assuming they are -- right, they're probably at 75. And we found them now. Now, you know, clearly, as we said on the call, the disposition market is suffering from the same issues as the acquisition side of it, and it is not as easy as it was. There are fewer buyers, and -- but we have -- you know, there are a lot of people out there that are looking for -- looking for a bump in real estate.

Okay. Thanks, guys.

Thanks, Rob.

Thank you. Our next question or comment is from the line of Sheila McGrath with KBW. Your line is open.

Good morning. Simon, I was wondering if you could discuss the long term debt financing strategy? Are you still thinking that having the large facilities with Fannie and Freddie is the most efficient way to go?

Yes, we are very sold on the -- on these facilities as the way to go. I think the question that we have to see going forward is whether the pricing that Fannie or Freddie is going to put on those facilities is going to be competitive. I think we also have got to accept the fact that, you know, 2010, you know, we -- when we begin to think about the credit facility maturity at the beginning of 2011, we have got to visit our financing strategy. And I think everything is on the table because we don't know what the new administration is going to do or what their attitude towards Fannie and Freddie is going to be. Clearly, we have seen Fannie and Freddie spreads widen; and clearly, I think, Al, you would say that their credit facility pricing has become relatively unattractive relative to single asset pricing?

Yes, it has. Mostly treasury plus financing is best right now for us, but -- and I would also add to that, too, that in looking at our contracts, it's important to remember that we do have long term contracts. We are always looking at the best strategy for the Company. Our contracts are long-term, and if it becomes necessary, they allow for an orderly exit to find the right product, the right approach. So that supports (inaudible).

Okay, great. And one last question, Simon, also on percent of floating rate, what are you comfortable with now looking into next year? What percent do you feel comfortable left floating?

Well, I think while sort of the strategy we have used is to have somewhere between a low of 10 and a high of 30, we are right now at about 20 give or take a percent floating, and that would -- I think we would probably feel pretty good about keeping it about that level. And obviously, we are going to be looking at that. We have got, I think, probably about 100 million of swap maturities next year, and -- that we will be replacing. But I think one comment I would say is that we have seen that some of the -- Al's seen, I think, that some of the Fannie and Freddie products with a caps, as opposed to being just pure swapped debt. It has become pretty attractive from a pricing standpoint. And so it may be next year that we -- if we go with some financing in addition to our current facilities. If we were to find the need to do that, we might be looking at some floating rate product with caps. But otherwise, I would look to keep it at about 20%.

Okay. Thank you.

Thank you. Our next question or comment is from the line Michael Salinsky with a follow-up. Your line is open, sir.

Real quickly, just two follow-up questions. The cap rates on the 3Q '08 transaction were?

The NOI yield on the -- was about 6.3, on the three transactions, and the cap rate that would put the cap rate at about 5.6 or something like that.

Okay, and then, finally, Eric, one of your peers put up a presentation on a recently-suggested negative revenue growth next year. Just given what you are seeing with home ownership rates, job growth, I mean, do you think revenue growth was negative at this point or do you think you can hold in there at this point?

Well, I think for our portfolio, collectively, we don't think that we are looking at anything approaching negative growth next year in revenues. I think that, you know, we believe that with the turnover continuing to show positive trends, with the mix of our markets that we have, as you know, with a larger presence than a lot of others in some of the secondary markets across the -- across the region; coupled with you know, just absolutely -- supply has shut down, and we are not seeing any pressure from that. You know, we still had a little bit that came on early this year, and as I mentioned in Jacksonville and Atlanta; but on a macro basis, we don't think we are looking at anything similar to what we saw back in 2001 and 2002 the last time the market really took a stumble. And you know, at that point -- as you know, we are faced not only with job loss, but we also had the pressure of move outs due to home buying, as well as a new supply coming into the market. We are only battling the job growth trends at this point. And of course, as I mentioned earlier, we always don't have the pressure from the excessive exposure to vacant homes and condos that some of the other markets and some of our peers have big presence in. So the short answer -- I mean, the answer is no. I mean, we think we are going to hang in there on a positive note.

We think occupancies are going to hold in there where we are right now. We think we will continue to capture positive pricing traction on lease renewals. We think as we go out and try to bring in new residents, the competition will be a little more intense, and you know, probably we will be looking at sort of flattish rent growth prospects for the new resident, the new leases we write. But our renewals, they would be positive and our occupancies will hold in there. We are seeing terrific performance on our collections, and so everything that we look at this point would suggest that slight positive trends early part of 2009. And then by the time we get to Q3 and Q4 of next year, when we are comparing against this year, I think the comparisons get to be quite a bit easier.

That's very encouraging. Thank you.

Thank you. Our next question or comment is from the line of Steve [Redanovich] with BB&T Capital Markets. Your line is open.

Morning.

Hi, Steve.

Just focusing back on expenses for a little bit, I know you had some unfavorable adjustments year-over-year. As you look kind of into next year, next 12 months, are there any areas you think you could carve out some more expenses in light of, you know, what's going to be some tough sledding here? Are there any particular initiatives you have ongoing right now?

Well, I mean, certainly. Yes, I mean, we're taking a hard look at all of our expenses right now -- operating and G&A -- and you know, I am not prepared to give you, you know, any specifics on that right now, but some of the pressure we saw this year on the operating expenses was in the area of personnel costs. It is kind of a good news/bad news story. The good news is that our turnover -- employee turnover -- went way down this year. We are already below industry average, and it went down significantly below that this year. And as we've seen that kind of throughout the course of this year, that is the good news. We are holding on to our people and they're better trained and we think it's a good time to hold on to good people. The bad news is that we are carrying a lot less vacant positions at any time this year as compared to last year, and so that created some pressure. Now, we don't think there's -- you know, our turnover will go even lower next year than where it is right now, because we are already incredibly low. So I think that that pressure point that we had this year will not repeat itself next year. And so that, you know -- and that -- as you can imagine, personnel cost is a huge cost component of our operating structure. So that has been a pressure point that we will moderate. And then beyond that, you know, with just the continued trend down in resident turnover, that's going to be hugely helpful as well. Obviously, not turning apartments saves a lot of costs. So we are -- we'll continue to take a hard look at all of our expense structure, recognizing that in a period of weaker top line growth, you need to find ways to cinch the belt up a little tighter.

Okay, great. So -- but as you look at it now, I mean, most of the low hanging fruit you feel like has been taken care of? Or you are just going continue to look at each item and try to make improvements?

Well -- go ahead, Drew.

You know, I would add, there are a couple of specific initiatives that we've got planned for '09 that I think are going to add some value in terms of reducing costs. First would be an addition of a second screening partner for our -- when we look at residents coming in the front door, adding a second screening partner should save us around $300,000. A second real initiative that we were looking at and plan to do in 2009 is to bring the calculation of our billing in-house, and -- with what is really called statement billing you are starting to see occur with some other of the trusts, and it is something that we are looking at as well. We think that has potential to save us something on the order of $650,000 annually, you know. Right now, we use [Ista] to do all of our utility billing. We are looking at bringing that in-house, considering that. I think that has some real potential there.

Great. Thanks for the details.

Yes.

Thank you. There are no further questions if queue. I would like to turn the conference back over to you for any closing remarks.

Okay, well, thanks, Christopher, and thanks for joining our call this morning. If you have any follow-ups, just feel free to give us a call. Thank you.

Ladies and gentlemen, this does conclude today's conference. We again thank you for your participation. You may all disconnect at this time. Good day.