Mid-America Apartment Communities Inc (MAA) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the Mid-America Apartment Communities second quarter earnings release conference call. The Company will first share its prepared comments followed by a question-and-answer session. At this time, we would like to turn the call over to Leslie Wolfgang, Director of External Reporting. Miss Wolfgang, you may begin.

Thanks Howard 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 as part of this discussion this morning, Company management will make forward-looking statements. Please refer to the Safe Harbor language included in yesterday's press release and the 34 X filings with the SEC that describe risk factors that may impact future results. These reports along with a copy of today's prepared comments and an audio copy of this morning's call can be found on our website.

I will now turn the call over to Eric.

Thanks Leslie, and good morning, everyone.

Mid-America's strong operating performance in the second quarter supports our belief that we are well positioned to ride out the current weak leasing environment. With unemployment likely to remain high through next year, we expect that leasing will remain challenged in most markets this year and well into 2010. I expect it will be late next year before we have an ability to meaningfully move pricing power back our way. However, as supported by the solid Q2 performance, we don't expect to see material deterioration from the current leasing conditions across our overall portfolio of markets and properties. Our priorities remain focused on protecting occupancy, aggressively managing expenses, protecting asset value and taking advantage of an improving environment for making new acquisitions.

As discussed during our first quarter call we made a real effort to ensure we entered the busy spring and summer season with strong occupancy in order to capture the best pricing performance and expense control we could in an environment of weak leasing fundamentals. We were pleased with the results. Overall, same-store average effective rent declined only 1.3% over the prior year and only 90 basis points from Q1. Our occupancy climbed 60 basis points over the prior year and 20 basis points over the prior quarter and importantly, the strong occupancy and lower resident turnover helped to drive same-store operating expenses down 1.1% as compared to the prior year.

As expected during the second quarter, our secondary markets continued to out perform our large tier markets. With physical occupancy in our secondary markets a very strong 95.9% at quarter end, revenues trended down only 10 basis point from Q2 of last year with average effective rent declining only 1%. We are also very pleased with the performance of our large tier market segment with occupancy at a very solid 95.3% at quarter end and revenues declining only 1.3% as compared to last year. As noted in the earnings release, occupancy in both our large tier and secondary market segments was up on both the prior year and a sequential quarterly basis. And, encouragingly, July same-store occupancy closed a very strong 95.7%.

While we likely have three to four quarters to go before we see meaningful improvement in overall pricing performance, we were encouraged by the fact that in Q2 the pricing on leases written for new residents was consistent with the performance achieved in Q1, declining by 7.2%. The prices on leases written for renewing residents remain positive with rents up a strong 2.1% over the prior year but as expected it is trending down slightly from the prior first quarter. It will take a return to positive year-over-year pricing on leases written for new residents before the overall policing tend really improves and as noted, I expect it to be mid- to late next year before that occurs. But the take away point is that market pricing within our portfolio at least seems to have found a bottom. And, we are encouraged with the ability to capture such strong occupancy in Q2 without further deterioration in pricing trends during the busy spring and early summer season.

We are also very pleased with performance in the area of collections. This is an area that we are keeping a very close eye on to ensure our leasing standards are not compromised in an effort to gain occupancy. In the second quarter, collection loss as a percentage of net potential rent was only 0 .36% which is actually slightly better than the same point last year of .39%. As outlined last quarter, we believe the right approach in this weaker part of the leasing cycle is to trade pricing for occupancy within reason and not compromise credit quality standards.

In the second quarter we also wrapped up implementation of our new web based access 24/7 platform. This program now performs a fully automated platform over the internet for prospective renters to access the information they need to evaluate and rent from any one of our communities. In addition our new on line resident portal provides a fully automated platform for existing residents to make payments and request work orders and communicate with our staff. We expect to capture increasing cost efficiencies from these new web based initiatives over the coming year. Implementation and rollout of our new bulk cable initiative and resident statement billing is also making good progress and on track for expectations we have for this year. So, in summary, we are pleased with our second quarter operating results. A combination of the portfolio strategy and strong operating platform coupled with the belief the economy and the loss job trends are nearing the bottom in most of our markets should enable operating performance to hold up and not materially worsen from current levels.

As outlined in yesterday's earnings release, during the quarter we formed a new investment joint venture with private capital and established Mid-America Fund II. We are excited about getting this new platform in place and believe it broadens our opportunity for value creation over the next couple of years. We have already closed on one new investment for the fund and are currently looking at several other opportunities. We continue to believe that the transaction environment is moving our way. As a value investor we are optimistic about the likelihood of an increasing number of buying opportunities.

As Simon will detail in his comments, our first investment for Fund II is a brand new property that was acquired on a very attractive basis in Macon, Georgia, just south of Atlanta. It is a market that we know very well. While the acquisition of a new lease-up property is outside the primary focus of the new fund which is aimed at older properties offering turnaround opportunity, given that we already have four other properties in the market and to avoid market concentration risk we elected to make this investment via our new Fund II. This is an example of another way in which Fund II platform will enable us to create value for our shareholders, create more efficiency in the operating platform and reduce risk for our shareholder's capital.

We also continue to pursue a number of acquisition opportunities that we would acquire on a wholly-owned investment basis for Mid-America. During the second quarter we closed on the acquisition of Sky View Ranch -- 232 units located in Phoenix, Arizona. Phoenix is a market obviously fighting through a tough leasing environment and we expect that the market may deliver additional opportunities over the next couple of years. New lease-up properties such as Sky View Ranch when acquired on a conservative basis with realistic lease-up expectation, offer a very compelling and attractive long term investment opportunity as Phoenix is expected to be one of the very top revenue growth markets in the country by 2011.

Mid-America's balance sheet remains in a solid position with $163 million capacity under our existing credit facilities -- a record high fixed charge coverage ratio and one of the better dividend coverage ratios in the sector. We remain committed to our current dividend level. We of course are also committed to keeping the Company poised to capture new investment opportunities. As noted in our first quarter report, any decision to raise additional new equity will be driven by the transaction environment and a belief that we could put new capital to work in a new timely matter. While we didn't issue any new common shares during the second quarter, our continuous equity program remains teed up and we continue to closely monitor our deal flow and the transaction environment. Should opportunities continue to emerge we are committed to positioning the balance sheet for growth but based on anticipated needs at this point we don't expect any significant shifts in the balance sheet to be necessary.

That's all I have got. Simon, I will turn it over to you.

Eric, thank you. Good morning.

Our second feather FFO per share of $0.98 was an all-time second quarter record -- $0.05 ahead of the mid point of our guidance and 3% ahead of the second quarter of last year. This is entirely due to excellent property performance with about half of the upside from our original guidance contributed by property revenues and the balance from favorable upgrading expenses. As Eric mentioned, high occupancy, strong reimbursements and excellent collections helped revenues. Expenses were helped by lower property taxes and lower turnover than we anticipated.

All of this contributed to great same-store NOI performance which was down just 0.2% compared to a year ago. Effective rate declined 1.3% from the second quarter of last year to $730. The average rent on all leases written was down only 4.2% over the same quarter a year ago. Rent on leases written to new residents dropped by 7.2% but rents on lease renewals were up an average of 2.1%. Same-store revenues declined just 0.6%, significantly better than our forecast on record occupancy which was a 60 basis point increase over the second quarter of last year. An increase in reimbursement fees and continued improvement to systems help boost our reimbursement collections contributing to the great collections performance.

Same-store operating expenses dropped by 1.1% compared to the second quarter of last year. Property operating expenses before taxes and insurance increase only 1.5% as reduced turnover and tight control for repairs and maintenance costs down 5%. Property taxes were down 6.6% for the quarter as we had some favorable results from last year's tax appeals as well as success in negotiating lower assessments. We also continued to benefit from the lower insurance rates we negotiated a year ago. So our initiatives to maintain strong revenues and contain expenses helped us generate substantially better NOI than we had forecasted at the beginning of the quarter. As I mentioned, limiting the same-store decline of NOI to a normal 0.2%.

Traffic levels for the quarter continue to be good. Walk in traffic was at almost the exactly same level as last year which is excellent considering that our properties began and ended the quarter with record occupancy and that the number of move outs declined by 9.3%. Traffic from internet sources increased 43%, reflecting the strong impact of our internet initiatives.

Resident turnover in our same-store portfolio decreased 9% for the quarter compared to the same period a year ago, mainly because residents leaving us to buy a house dropped by 22%, from 25% of move outs in the second quarter of 2008 to 21.5%. On a trailing 12 month basis, resident turnover is only 59.1% compared to 62.6% a year ago. House rental continues to be a very small part of our competition. The number of residents moving out to rent a house increased slightly from 4.3% of move outs a year ago to just 4.8% of move outs this quarter.

We had a couple of one time items that cost us almost a $0.01 per share of FFO in the quarter. Firstly as Eric mentioned, we acquired Sky View Ranch. As required under new accounting rules, the expense of $107,000 in acquisition costs that we incurred. Secondly we prepaid a tax free bond and as a result, wrote off $140,000 in deferred finance cost -- a noncash charge.

We have one of better dividend coverages in the sector despite the dividend reductions and cash dividend cuts in some of the apartment REITs. For the quarter the FFO was $0.73 a share, well ahead of our $0.615 dividend. We continue to feel comfortable with the current dividend level based on our internal projections for this year and for 2010. On the transaction front, we announced the formation of Fund II. We anticipate the fund investing up to $250 million over an 18 month period, of which 30% to 35% will be equity. We are one-third owner and will receive normal fees acting as managing partner which helps our returns. We anticipate a six year hold period for each asset and return to Fund II's equity of 13% to 15%. We are eligible for a promote after Fund II returns reach a threshold IRR.

As Eric mentioned, were pleased to be able to buy Sky View Ranch, a 232 unit apartment community in Phoenix and I will provide a little more information about the underwriting. We acquired the property in mid-June for $17.5 million or $75,000 a unit. To put the price in perspective, the tax assessor has this property appraised at $108,000 a unit which we think is reflective of development costs in Phoenix. The property closed the month at 81% occupied, up from 78% when we acquired it two and a half weeks earlier. Because of the difficult state of the Phoenix market we underwrote it pretty conservatively, even projecting it to take five years to reach 94% occupancy at which point we project it to be more or less stabilized at a 9.5% NOI yield.

At the end of July, Fund II acquired Ansley Village, a 294 unit high-end property in lease-up that was completed at the end of 2007. Fund II acquired it for $16.5 million or $56,000 a unit from a bank who had taken it back by deed in lieu of foreclosure. And we understand the property was developed for $85,000 a unit. The property is currently 70% occupied and we are projecting it to stabilize in year four with an 11% NOI yield. Fund II financed it with a non-recourse bank loan at approximately 65% LTV and anticipates replacing this loan with more permanent debt after the property reaches 90% occupancy.

We completed the sale of Riverhills, a 96 unit property in Grenada, Mississippi in May. This 36-year old property was part of our IPO and sold for $2.7 million at around a 6.4% cap rate. We have one other property under contract for sale, River Trace -- a 440 unit property in Memphis which is now targeted to sell in September with proceeds estimated in the $15 million range, around a 6.9% cap rate. River Trace was listed as held for sale at quarter end. We have not forecast additional dispositions in 2009.

Even in this transaction environment, we anticipate that the blended cap rate for all three properties we sold or are planning to sell this year will be 7.1%. These properties are all in secondary markets and average 29 years of age -- almost double that of our portfolio average. That's an interesting perspective when we consider that these assets are obviously being held off the bottom of our portfolio, yet the entire Company is creating at a cap rate only slightly better than these sales.

We continue to have one the stronger financial positions of the apartment REITs. On April 1, we paid off our only 2009 debt maturity, a $38.3 million bank loan. As of the end of the quarter we had $163 million of unused capacity available under our credit facilities. In 2010 we have only our $50 million bank credit facility that matures and we expect to refinance with our current lenders, although we have capacity to take it out if needed. At June 30th, our debt to total gross assets was 50%, the same level as last year and about 300 basis points below the apartment sector medium. Our fixed charge coverage in the quarter was 2.71, well ahead of 2.51 a year ago and also well ahead of the sector median of 2.39.

In 2009, we expect to pick up two sets of share of interest expense savings from debt repricing opportunities on the $38 million of refinancing we just completed. We have $65 million of debt, which resets to variable rate on December 1st and based on our refinancing assumptions expect to pick up $0.07 a share of savings on a full 12 month basis. As we previously indicated we have not been active with our continuous equity program. Our balance sheet is in great shape and we have no need to issue equity for defensive purposes. However, as Eric mentioned we continue to monitor the capital markets and the investment environment and are encouraged that we managed to locate and acquire two very attractive investment opportunities in the past couple of months.

To provide a little more color on some of our expense items for 2009, as a result of our proactive efforts to reduce assessments as well as appeals pending from 2008 we expect same-store real estate taxes to be approximately flat substantially less than a 4.5% increase that we forecasted earlier in the year. We have also had good success in negotiating better insurance terms than we projected for our July 1st renewal. Our loss control initiatives helped to offset the impact of what is a hardening insurance market and we now expect same-store insurance costs for the balance of the year to be up less than 1% compared to our prior expectation of a 5% increase. Because of our efforts to control expenses, we expect our combined G&A and property management costs to be down about 2% to 3% on a full year basis compared to 2008.

The significant improvement in our outlook for property operations causes us to increase our full year forecast of FFO per share by $0.08 to a range a $3.55 to $3.75. For 2009, we are now projecting a 2.5% to 4.5% reduction in same-store NOI compared to our prior guidance of a reduction of 4% to 6%. At the mid-point, the decline in NOI is reduced from 5% to 3.5%. This forecast is built on a 1% to 2% reduction in same-store revenues and an increase in expenses of approximately 0.5% to 1.5%. We project our average interest rate for the year at 4.4% compared to average of 4.9% for 2008. We see agency interest rates continue to be favorable overall and compared to LIBOR.

At the end of the quarter, 78% of our debt was fixed or swapped and the further 9% was capped. Excluding the development program -- excluding the redevelopment program -- the quarter's total property capital expenditures at existing properties was $11.2 million for a year to date spend of $16.6 million compared to our full year budget of $29.5 million or $0.97 a share. Recurring CapEx is budgeted in the region of $21.5 million or $0.70 a share for the full year. We anticipate total expenditures on our redevelopment program of $9 million, about half the level of last year, of which $6.8 million is budgeted for the interior upgrade of 2000 apartment units. In addition, we project full year development funding of $9 million, down from $25 million last year of which only $3 million remains to be funded. We continue to anticipate that we will invest approximately $75 million in new acquisition and contribute about $9 million for our share of the equity in Fund II.

Eric?

Thanks, Simon. Second quarter results provide further evidence that Mid-America remains well positioned to deliver stable results during this weak part of the cycle. A combination of our investment disciplines, portfolio strategy and strong operating platform and conservative financing strategy all play a part in Mid-America's ability to deliver stable performance during this phase of the cycle. We remain committed to the belief that part of the process in delivering superior long term value growth for shareholders is to ensure that existing asset value and performance is protected during stress periods.

Mid-America's ability to avoid the significantly diluted equity issuances, dividend cuts and asset value writeoffs that have been required by a number of REITs is validation of this strategy. However, while we take comfort from an ability to ride out the current downturn in strong fashion it is the prospects over the next few years as the economy and employment markets recover that really excites our team. Mid-America's in a terrific position to capture new value growth and a significant recovery in operating performance as markets condition improve. With new supply trends expected to be very low over the next several years, with the focus on the most vibrant job growth region of the country and with a sophisticated and efficient operating platform that puts us in a strong competitive position in our markets, we are excited about the prospects for Mid-America.

We expect to deliver operating performance from our markets and portfolio that will continue to compare very well with the operating performance captured in the traditionally lower cap rate and higher investment cost markets and as a result, deliver more attractive returns on the capital invested. At Mid-America, our approach to creating value for shareholders is a straightforward model, based on being a valued investor and disciplined buyer with an aggressive focus on operations geared towards property redevelopment and strong property management that matches the operating profile of our high growth markets. We believe the window of opportunity for this strategy continues to broaden and we look forward to capturing new value growth for our shareholders.

And, Howard, that's all we have in the way of prepared comments, so we'll turn it back to you for any questions.

(Operator Instructions) Our next question or comment comes from the line of Mr. Michael Levy of Macquarie. Your line is open.

Good morning. Great quarter and congratulations. Eric, the staple rents right now seem really great. I have a couple of questions of your thoughts on the market though. What sort of drop do you think will happen from now until pricing power returns to the market and when will those drops occur? And do you think today's jobs report changes the way the Company thinks at all?

Let me give you some broad based answers on that, then I'm going to let Al give you a little more specifics on our forecast but generally speaking, no, I don't think today's job reports really changes our outlook. I think it really more or less confirms what we already believed was likely to occur.

We think what is going to happen is that the pricing on new leases for new customers moving in will continue to get a little better than what we have seen earlier this year. Meaning it will still be down but not down as much. We certainly saw evidence of that in the second quarter and continue to see support for that. And we are hopeful that as the year plays out and into next year, that we will see pricing on new leases for new customers starting to approach back to zero as compared to prior year and then we'll get perhaps probably slightly positive early next year.

What is happening on the other side of the equation is the pricing on renewal transactions and that continues to show a decline just as our existing customers understand what the market is and they comment that they want to stay with us and we will concede on their request for some relief on pricing -- within reason. We certainly are mindful of not trying to drive turnover up in this kind of environment. So, at some point if you will, the two pricing trends converge and then the pricing on new leases begins to -- is positive and then we are able to start marking rents up on both renewing transactions as well as new leases coming in.

You have to recognize that we already repriced a significant component of our portfolio so far this year. And broadly speaking we have got another nine months to a year to work through those existing leases before we get a chance to reprice them again. So on balance -- Al, why don't you give some insights on what we expect for pricing broadly speaking, same-store basis for the year.

Michael, this is Al. Even with the state loss pricing environment that Eric is talking about going forward through the back half of the year that we are projecting, you are going to have some tough comparisons on NOI for the back half and really in the first couple of quarters of next year. And, really if you think about it, that's a function of sometime in the third quarter of last year we were about at the peak of our pricing performance and in the new market that came in the quarter -- two quarters following that -- we're in a new pricing paradigm. And as those rents begin to work through our portfolio -- right now we priced probably about half of our portfolio and we've got another half to go. And so what that is going to create in the second half is some tough comparisons in a couple of our toughest quarters compared back to a couple of our strongest quarters in the prior year as we are coming off that peak. And that will continue a little bit into next year and first, maybe second quarter as well on a NOI comparison.

That is helpful. Can I ask one follow up, if I could.

Sure.

And it's actually not a follow up -- it's unrelated. Could you please talk a bit more about the acquisitions. Can we assume that the conservative underwriting for the Phoenix asset as an example is what we'd see for similar deals? And, does Mid-America see acquisitions only it its primary markets or also in the secondary markets which right now seem more a lot more stable.

We see acquisition opportunities in both primary and secondary and are interested in opportunities in both segments of the portfolio. Certainly I think -- obviously our underwriting will vary quite a bit by property and by market. Broadly speaking, we think that certainly in the Phoenix market, that that's a market that is going to be pretty tough for a couple of years and made what we think to be reasonable to conservative assumptions reflecting the market environment there and hopefully we'll do better than the details than what Simon alluded to. We assume it will be five years before we get to 94% occupancy. I am hoping we will beat that. I would certainly think we would.

But, broadly speaking, I think that we have always tried to be pretty conservative and pretty realistic in what we expect these investments to do for us when we acquire them. And, on a repositioning opportunity, where we are going to go in and do some CapEx improvements and interior improvements and what have you. We may have to hold off on that for a year waiting for market conditions to really show enough improvement in pricing performance to really get positive enough to dial that into our assumption. It is hard to give you a specific answer other than to say it will vary a lot by market and by property and by the specific opportunity associated with any individual transaction we look at. If it is a non-stabilized brand new lease-up deal that's just had poor execution on the initial marketing and leasing, that is going to have a different set of dynamics applied. Versus a property where we will go in and if you will, renovate the interiors or renovate the common areas and make significant capital investments up front. The dynamics on that kind of investment opportunity will differ quite a bit.

But broadly speaking, we think this year and next year, things continue to be reasonably weak in terms of our ability to push pricing. But in most markets I would expect that we begin to see the sun come out a little bit late next year and certainly into 2011.

Michael, I have one comment. I think we tend to be more conservative where markets are in a lot of disarray like Phoenix. That is something where we would take a more conservative approach.

That is really helpful, thank you very much. I will get back in queue so other people can ask questions.

Thank you.

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

Good morning, as a follow up to Michael's question earlier. Can you talk about asset pricing -- what you've seen in trends over the past call it three to six months?

Well, it is hard to really form any strong opinions about trends broadly speaking. Obviously these two deals we've acquired were distress situations where the financing was really forcing a transaction to take place and also, in both cases, the properties were very -- not stabilized if you will -- still in an initial lease-up. So you're not really looking at any reasonable year one NOI assumptions from which to base an assessment of cap rate or value. But I think that we were encouraged that if you will, looking at stabilized assets that we are selling -- we are getting roughly a 7% cap rate on -- as Simon alluded to -- on stabilized assets that are easily financeable through the agencies which I think in all cases -- the two that we sold, we know that's how they got financed.

And secondary markets, older assets, it is 7%. That to me indicates that market values are not really showing signs of severe strain that perhaps we may have thought was potentially going to happen late last year and early this year. NOIs are really not that bad and financing is still available and thus I think asset values -- at least what we are seeing -- are holding up reasonably well.

Where the opportunities really emerge are some of these non-stabilized investment opportunities where the agency financing is not readily available. And where frankly then, you don't have as many buyers trying to compete for those deals and we are able to come in -- with the track record and relationships that we have with these folks -- where we have shown the ability to execute due diligence and close in a very timely fashion -- with certainty. We can come in and offer value for them that enables us to frankly acquire these deals on a pretty attractive basis.

So, I don't think you can necessarily take these two acquisitions and assess that's where cap rates are or anything. Because the properties themselves don't really lend themselves to that kind of an analysis. I would just point you more to what we sold as more an indication of where pricing is.

Question for Tom then. Can you talk about what that contribution was from the bulk cable program for the quarter and also if there are any plans to roll out further service offerings here in the second half of this year or early next year.

Mike, I appreciate directing the question to me. Drew is the point guy on that. I'm going to defer to him if that's all right.

Hey, Michael, it is Drew. We rolled out -- just backing up a little bit -- rolled out 21 properties in the bulk cable program in the first quarter. Another 28 in the second quarter expect to do. Another 40 or so in the second half of the year. And so really we are just starting to see the impact from the bulk cable program. We had $50,000 in the first half of the year but we really expect that to start to ramp up in the second half of the year -- about $350,000 or so contribution. And, then certainly continues to increase as we get into 2010.

Okay, then finally, Eric, probably the bigger picture question. You as well as a lot of your peers have had a great deal of success in cutting expenses. How much of those expense cuts -- obviously real estate taxes bounce around -- but how much of those expense cuts can really stay if we start to see a turnover pickup here. Should we expect as you look at to 2010 and 2011 expenses that you should see a big jump back up in expenses or do you feel most of these can maintain even in better times.

I certainly think as we get into next year, expenses are going to pick back up. What rate, it is hard to say just yet. And certainly, I think that the benefits we are capturing from lower resident turnover do bottom out at some point. And, on an annualized basis, we are running just over 59% right now. It may trend a little bit lower than that. But at some point we begin to compare to a prior year where the turnover is going to be higher than it was in the previous year and that will create some pressure.

But, I think that all the various companies will see -- I think -- some like and consistent pressure from rising costs. Just operating costs as a function of turnover will begin to -- on a year-over-year basis - begin to pick up, normalize in some form or fashion. As long as we don't go back to an undisciplined mortgage financing environment, which I don't think we will, I don't think it's going to be a big jump up.

But the other variable of course that drives turnover down is the fact that we are losing fewer of our customers to job transfer. And seeking new jobs. As the employment market picks up, I think that will create a little bit more turnover as well. So, you have got those trends that are going to definitely change and create some increasing pressure on costs at some level and you're back to more of a -- as a minimum I would think on more normal inflationary type run up in expenses -- as well as a function of having to turn more apartments.

The other thing though that I think you have to look at is how the individual platforms approach -- with their systems and the way they do things. Some will be able to drive a little more efficiency than others in terms of how they manage days between vacant and manage the term process. And then how they use -- and what we are doing in an effort to drive traffic. All of these things can impact -- and how we use the internet -- can really impact operating efficiencies to a large degree and as we continue to source more of our leasing traffic via the internet and do away with print advertising, that's going to continue to -- there's more and more benefit to capture in that regard as well. You have a lot of cross currents going on but clearly, the phenomenon of a lower turnover does bottom out at some point and you see it move the other way.

Thank you.

Our next question or comment comes from the line of Mr. Rob Stevenson from Fox-Pitt Kelton. Your line is open.

Thank you, good morning. Eric or Tom, can you talk which markets during the quarter -- that change either deteriorated or improved probably the most?

I think primarily Rob, it's a story of our best and worst and our best weakening a tad and our worst getting a little bit better. I think we've depended on and ridden a horse of our last region in our Houston, Austin and Dallas areas.

There is a little bit -- because their job numbers frankly are flat to a little bit positive or little bit negative depending on the market which is relatively very good -- those are beginning to see a little bit of pull back from the legacy construction that is occurring. So we are seeing a little bit of construction that had been planned coming on line. And causing a little bit of draw backs. There's some slight weakness there. But, again, I think they are still relatively better than most markets.

And then on the same side, looking at Jacksonville and Atlanta which have been tougher places for us to operate, we are beginning to see occupancy pull back up a little bit and rents stabilized there. That doesn't mean rents are going up. It is as Eric mentioned a little bit earlier. Rents are bottoming out to doing a little less bad in the markets. That's an around the horn on that.

On the turnover question, what are the hard costs that you are averaging per turn and then also what is the average time a unit is vacant between turns these days?

This is Drew. The average turn cost now depends on what you put in there but it generally runs around $800 to $1,000 and we are typically running about between 20 and 30 days. I don't know what it is exactly on the turn right now. I think it is close to 30 days from the time that somebody moves out until the time that somebody moves into an apartment. That includes the leasing time and all of that.

Then one for Simon. How much dry powder do you think you have on the balance sheet to make an acquisition before you would need to either sell additional assets or raise equity to come up with equity component to financing it.

The way we looked at it Rob is to say that we could execute our business plan this year which is $75 million of acquisitions which would be about $50 million more than we have done already this year. And plus, fund equity contribution to Fund II for this year which would be about $9 million and that would raise our leverage level about 100 basis points or so about 50% gross assets, about 51%. We would be comfortable at those levels. Beyond that or if we saw the potential to go beyond that, we would be looking to go back to the well again.

Okay. One last one for Eric. Given the cap rate that you have sold assets here to date, is there the temptation to market a couple more from the bottom end of the portfolio to see if you can get some more pricing and move them out?

Well, it is certainly something we are looking at, Rob, and we don't have any -- other than the one on the contract right now -- we don't have anything active in the market for sale but we are looking at it. And we are -- frankly, we have been on a steady diet for the last five or six years and continually culling off if you will, the bottom two or three. Pretty much each year. And I am sure we likely will do the same for next year. But we are looking at it, and more to come on that.

Thanks, guys.

Thanks Rob.

Our next question or comment comes from the line of Miss Carol Coople from Hilliard & Lyons. Your line is open.

Congratulations on a great quarter guys.

Thanks.

One of the things that you've talked about on a call in the past is job gains and your primary and secondary markets and how those markets compare to the national employment levels. Are there any thoughts on that on this point? Are they still performing better?

They are still hanging in there well. It shifts from quarter to quarter. And again, the primary markets were a little weaker driven by places like South Florida and Phoenix. And the secondary markets were a little bit less bad than that. But not a major tradeoff between the two.

Okay. And I am not sure if this is a demographic that you all track, do you know how this year's 2009 graduate leasing has been compared to 2008 graduate leasings in the second quarter of last year? Are you seeing more college students come into your units or does that demographic seem to just be moving home with mom and dad.

I will be honest with you. We don't track graduate move ins quite that way but I would agree with you. We are excited about that demographic and they are coming out of the school at larger rates as the echo boomers come through the pipelines but I think the general plan is not a job moving in with mom and dad right now. Or bunking up -- and with other friends. So, I don't have a stat to back up your suggestion but I think absolutely the case is those echo boomers are often -- are moving in with parents or family at a higher rate right now. And we are excited to tap them as job growth rebounds.

Okay. Thank you.

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

Thanks very much, good morning. I might have missed this, did you say what the price was of the Ansley phase and the Fund II acquisition?

Yes, we did, but it's $16.5 million, Paula.

Thank you, very much. And I think you said, Eric, in your prepared comments you are still pushing renewals on rents of about -- increases on rents on renewals by about 2%. What is the average spread in the portfolio to new leases now?

The average spread to what, I'm sorry?

To the new lease -- the rentals -- the rates you are getting on new leases.

Broadly speaking, the rent rate on new leases being written was down 7% and the rate increase on renewing residence was up a little over 2%. So, the spread is about 9%, 900 basis points.

But that spread is narrowing and what we are seeing take place over the last 60 to 90 days is that our decline in rents if you will on new leases is trending better. So, instead of being down seven it is down five, as an example. And the rent on renewing residence, instead of being positive two, it is maybe going to be positive one. What will happen is at some point, they will both cross and we will be back into a more normal situation where the rent growth on new leases being written will exceed those of renewing residences and you get into normalized situations.

I think it will probably be the end of this year, maybe next year before we really start to reach that apex and things start to get back to a normal trajectory for both renewing pricing as well as new leases. And it will take awhile, if you will, for that to work through the portfolio and for the overall rent growth to manifest itself in the revenue trends that we typically see.

Thanks. Then I wanted to follow up on Mike Salinsky's questions about the expenses. With the repair and maintenance costs down on the lower turnover, do you think those dollars are actually saved or are they just being deferred and will the deferred amounts be greater than they normally would have been otherwise.

They are not being deferred. That is just money we are not having to spend because people are staying with us.

And I think -- I may not understand your question exactly but I wouldn't call it deferred. I think at some point, we do see apartments go vacant at a greater velocity just as a function of some rise and turnover and obviously we will have to be spending a little bit more money when that occurs. But we are not, if you will, deferring any.

And, Paula, on a simplified basis, if somebody renews with us in July, we would have sprayed their apartment and painted it. We're not going to do that in July. Now, they may move next year. We'll paint it then, but we won't have to paint it twice then if that makes any sense. So we've saved a paint job. That's really where you see it. And none of the repair and maintenance savings has anything to do with not fixing broken air conditioners or deferring maintenance or not keeping our capital spending rolling.

That's what I was asking, thank you very much. That's all I have.

You bet.

Next question or question comes from the line of Mr. Buck Horne with Raymond James. Your line is open.

Good morning. I was wondering if you could talk a little bit about replacement costs in your markets -- in the primary markets versus secondary markets. Have you seen them bottom out and maybe the numbers you threw out for the Phoenix property and the Macon property -- the $108,000 and the $85,000. Are those decent proxies for what you are seeing out there?

Yes, I think they are. But I think the variable in the overall replacement cost model that I think is shown some decrease over the last year or so is land costs. But I think broadly speaking construction costs are holding up fairly well. And so, I think that I would put for that high end stuff we bought in Phoenix in that market, at least something -- it appraised on a tax basis at $108,000 or $109,000 so I put a replacement value on that deal at probably something closer to $115,000 or $120,000.

And then $85,000 in the secondary markets for what the developer spent. I would say somewhere between $80,000 and $90,000 is a pretty good rate. Certainly for the deals that we built in St. Augustine and finishing up in Dallas. And what we are spending on those deals that we built -- they all fit within those parameters.

Thanks, guys.

Our next question is a follow up from Mr. Michael Levy from Macquarie. Your line is open sir.

One follow up. It is pretty much been answered with the subsequent questions.

Simon, you mentioned that turnover is being helped by lower move outs to home purchases and you talked a little bit about how that will change once the economy gets better. Right now though, how should we think about how much of this is based on the fact that fear pervaded the market earlier this year and it takes time for a renter to consider buying a home, putting in a bid and getting that bid accepted and then having to wait until the lease expires because their lease expires before they could then move into the home.

Well, this is Eric. I think it is going to be awhile before you really see home buying, if you will pick back up in any meaningful way for a lot of the reasons that you just said. We have been inundated in the news over the last year or so about some tragic stories and some real tough situations where people get put in a pretty difficult financial situation as a result of being a homeowner.

And then frankly we are doing our part to be sure people understand some of the issues. And some of the problems in being a homeowner. We have marketing piece that is we send out as part of our renewal process to talk about the advantages of renting versus owning. And so, we are trying to keep that in the front of our existing resident's mind.

The mortgage financing environment is showing signs of being much more disciplined. I think it's going to be that way for quite some time -- the documentation requirements and the income requirements and the down payment requirements are all significant. Those are really the hurdles that are pretty significant for our folks that our communities have to clear. And then you throw on the mind set issues that you are talking about. I think it is going to be awhile before we see that really change a lot in the home buying trends.

That's really helpful. Thank you very much.

Our next question or comment comes from the line of Mr. Andrew McCulloch from Green Street Advisors. Your line is open.

Good morning everyone. Most of my questions have been answered. I have one question for Simon.

You have had as good a relationship with the agencies as really anyone else in the space and I was just curious to get your take on the announcement of Lockhart stepping down from it's FHFA and what you think that means for the agencies going forward. If it means anything at all.

I will make a comment and then Al Campbell who is with us is actually more in daily contact. Clearly Lockhart was on board with the concept of multi-family being a key part of the business model for Fannie and Freddie and indeed [if you like civil model]. My senses is that that is not just coming from the regulator but is coming from the administration and the congress. And so, my sense at that point is that that's not going to make a huge change. I have not personally been in contact with the agency since that announcement. Al, do you have any follow up on that?

No, I would just add similar -- don't expect it to have a significant impact. They are very much still committed to the multi-family space. We're certainly not seeing them back off that as it makes sense to do that. So really, there might be some -- a lot of discussions about what's going happen as we end [conservatorship] technically. But really there's at this point to think that the commitment to multi-family will change.

Right. Thanks, guys.

I am showing no additional questions in the queue at this time.

Thanks, Howard and thanks everyone for joining the call. Let us know if you have any other follow up questions. Thanks.

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