Mid-America Apartment Communities Inc (MAA) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. 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 will turn the call over to Leslie Wolfgang, Director of External Reporting. Ms. Wolfgang, you may begin.

Thanks, [Sean], 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 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 our 34-X filings with the SEC, which describe risk factors that may impact future results. These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, can be found on our website.

I will now turn the call over to Eric.

Thanks, Leslie. Good morning, everyone. As reported late yesterday, Mid-America delivered another quarter of solid operating results. Based on this strong performance, as well early signs that leasing conditions across the portfolio are beginning to stabilize, we now believe that FFO for the year will be higher than our prior guidance. Our ability to deliver stable results, despite the weak economy, is a result of Mid-America's investment strategy aimed at delivering superior full cycle performance, as well as the strength of our operating platform and a disciplined approach to growing and financing the Company. We're confident in the Company's ability to continue to weather this weak economic cycle. Importantly, we expect that as leasing conditions rebound next year, Mid-America will deliver result that is continue to compare favorably within the apartment sector. We believe that our submarkets will generate some of the strongest leasing fundamentals in the country over the next four to five years. A combination of very limited new supply along with a region's record of historically strong plummet recovery that typically out paces national trends, will drive robust leasing conditions across our portfolio.

It is interesting to note that 85% of the properties owned by the apartment REIT sector are concentrated in just 25 markets. As most of you know, while Mid-America's portfolio is meaningfully allocated at just under 60% to many of these same 25 markets, our approach is to also diversify a number of the secondary markets across the high growth region. If you take a look at employment growth projections for 2011 through 2013, our markets are an aggregate forecast to outperform this group of 25 markets where a REIT sector is significantly concentrated. On the other side of the equation, if you consider new supply projections between now and 2013, likewise our markets are forecast to outperform both national and other regional trends, with a more dramatic fall off in new supply as compared to historical trends. We think this combination puts Mid-America in a very strong position coming out of this recession.

While the weak employment conditions will cause leasing fundamentals to remain somewhat anemic over the next few quarters, we're increasingly optimistic that Mid-America's portfolio has likely seen the worse of the pricing pressure. In the third quarter, we saw improvement in the pricing trends on leases written for new customers. Pricing for new residents in the third quarter posted a year-over-year decline of 6%, which was improved from the 7.6% decline posted in the second quarter and the 7.3% decline in the first quarter. Importantly, within our portfolio pricing or renewal transactions for existing residents has remained positive on a year-over-year basis with renewal rents up 1.1% in the third quarter. While we expect there may be some seasonal pressure over the next few months, we are increasingly comfortable that pricing trends have stabilized and should begin to show recovery next year.

We have been very pleased with the strong occupancy capture year-to-date. This strong occupancy performance, coupled with very good progress from several new fee initiatives, has combined to offset some of the pressure on rents. However, as a result of the growing impact of repricing at greater percentage of the portfolio to today's market rent level, the math will cause us to continue to post negative revenue trends over the next several quarters. Once we're able to start meaningfully moving rents back up, which we believe will get under way at some point in the latter half of next year, we expect to then build positive momentum and overall revenue results. Until then, our focus remains on keeping occupancy high, capturing increased penetration and upside from a new fee initiatives, and minimizing the number of vacant days between apartment turns. Occupancy continues to remain very strong across the portfolio. Overall same-store occupancy in the third quarter was up on both a year-over-year basis as well as on a sequential basis to the second quarter.

We have seen a little weakness develop in Dallas and Houston as compared to earlier this year, as some new supply from projects started before the credit crisis came online over the last six months or so. Even with that new supply pressure our properties in Dallas and Houston in aggregate captured above 95% occupancy, while average effective rent declined by only 1.9% in both markets. Our properties in Atlanta have done a terrific job in building occupancy and are much improved from the same time last year. Likewise, very have been pleased with improved occupancy from our Florida properties and continue to believe that we have reached a point of more stable performance going forward out of Florida. We expect it will be awhile before pricing trends move significantly or meaningfully positive, but broadly speaking, we certainly don't expect to see trends materially worsen in order to hold good occupancy across the portfolio. It is worth noting that our same store portfolio occupancy last week at October month end was 95.3% and 80 basis points ahead of last year.

A large part of the strong performance and ability to out perform our markets this year has been a result of the significant upgrades and changes we have made to our operating platform over the last few years. While these enhanced capabilities, which we continue to refine and expand, have enabled us to compete very effectively in our large tier markets, the ability to outperform is also evident in our secondary market segment, where local owners and management firms typically don't have the efficiency and capabilities that we're able to drive into property operations, thus providing our properties a real competitive advantage. With our web-based access 24/7 leasing program we're continuing to drive more cost efficiency and effectiveness into the process of capturing new prospects and residents. Our new statement billing platform is driving more efficiency into rent and fee collection practices, as well as freeing up onsite staff time. Our automated inventory management program is driving more efficiency in the important area of turning apartments between residents, and despite the weak market conditions we have captured great progress result from our new ancillary fee initiatives this year.

We believe Mid-America's operating platform is a large part of our ability to drive value and capture performance that tends to outperform the perceptions of what many believe our markets can deliver. By creating value through both the acquisition process and strong property operations, we believe our approach will continue to capture results that, over time, exceed the performance expectations implied in the higher cap rates some use in assessing current value in a number of our primary and secondary markets. As noted in yesterday's release, we completed two acquisitions since our last call. One for our own account, and one for our new Fund II joint venture, as compared to a few months ago I can tell you we are definitely seeing more deals. I can also tell you that we're seeing a lot of competition from other interested buyers, especially for stabilized and more easily financed deals. We're routinely seeing well located, high quality and stabilized the properties going under contract in the low six cap range.

Given the costs of financing and the fact that operating metrics are holding up reasonably well, we certainly expect to see cap rates for the type of stabilized and higher quality properties represented in Mid-America's portfolio to hold much closer to a six cap than a seven cap. With financing readily available for stabilized properties, strong NOI recovery trends likely emerging in another four quarters or so, and clearly a lot of investment capital anxious to deploy in apartment real estate, it is not hard to conclude that values are firming up, and that there is more likelihood that cap rates move down from where we are now and not up. For the moment, we're finding the most success in attractive opportunities associated with non-stabilized properties that are still in lease up, or transactions requiring a very short fuse where timing and assurance of a close are critical to the seller. We're also looking at a couple of fractured condo properties that offer meaningful long-term value opportunities. We expect the volume of new investment opportunities will continue to grow as we head into 2010, and we're optimistic about our chances to capture additional attractive investments over the next year.

With that, I will turn it over to Simon.

Thanks, Eric. Good morning, everybody. Our third quarter FFO per share of $0.89 was $0.04 ahead of the midpoint of our earlier guidance and just $0.01 behind the third quarter of last year. As property operating results were a lot stronger than we anticipated. Revenues were higher on increased occupancy, excellent collections performance, and success with the initial rollout of our bulk cable program. Expenses were helped mainly by reduced utility expenses and property taxes. These contributed to great same-store NOI performance, which declined just 2.1% compared to the third quarter of 2008 on a revenue reduction of 1.7%.

As Eric said, we saw early signs of bottoming in rent trends. The the average rent on all leases written in the quarter improved approximately 100 basis points from the second quarter, almost down only 2.8% compared to the expiring leases. Same-store revenues declined only 1.7% on physical occupancy, which was up 70 basis points over the third quarter of last year. As I mentioned, we were also helped by strength in our collections, with delinquencies slightly improved over last year at 0.5% net potential rent, and an increase in reimbursement fees and cable revenues. Same-store expenses dropped by 1.3% compared to the third quarter of last year. Before taxes and insurance, property operating expenses decreased 0.3% as a result of reduced turnover, tight control over repairs and maintenance, and reduced utility expenses. Property taxes were down 3.4% compared to the third quarter of 2008, and insurance costs were down 4.3% as a result of the favorable renewal on July 1.

You'll notice that the Houston same-store group showed a significant decrease in same-store expense. This is mainly because in the third quarter of 2008 we expensed $240,000 relates to hurricane Ike, along with our success in lowering property taxes this year. Traffic levels for the quarter reflected our reduced turnover and declined slightly over last year. With occupancy beginning and ending the quarter close to record levels and the number of move outs declining by 5.5%, we were able to reduce marketing activities appropriately. We continue to see a reduction in the number of residents leaving us to buy a house, which was down by 4% compared to the same quarter of 2008, and it is reasonable to think the reductions are beginning to bottom out. Some of this is probably due to the home buyer tax credit, but it is most likely because in the comparative quarter of 2008, we had already seen a shore downturn in home buying. Move outs to buy a home were 22% of our total, almost a one third reduction from the peak levels of 31% we saw in the second quarter of 2007.

On a trailing twelve-month basis, resident turnover is only 58.1% compared to 61.5% year ago. House rental continues be to a very small part of our competition. The number of residents moving out to rent a house increased slightly from 4.1% of move outs a year ago to just 4.8% of move outs this quarter. We continue to feel comfortable with a current dividend level based on our internal projections for this year and for 2010. Although we have seen some of our peers improve their dividend coverage through reduction in their cash payouts, we continue to have one of the better coverages of the sector. Year-to-date AFFO was $2.25 per share, up from $2.19 last year and well ahead of our dividend paid during the quarter.

As we reported in our last call at the end of July, Fund II our joint venture in which we have a one third interest acquired Ansley Village, located in Macon, Georgia, located just south of Atlanta. Ansley Village is a 294 unit high-end property and lease up that was completed in 2007. Fund II acquired it for about 65% of its development costs from a bank who it taken it back by deed in lue of foreclosure. The property is operating significantly ahead of our projection and is currently 86% occupied, up from 70% when we acquired it. We have projected a 10% NOI yield once is reaches stabilization. Fund II financed it with a nonrecourse bank loan at approximately 65% LTV and anticipates replacing this with more permanent debt after the property reaches reaches 90% occupancy.

After the close of the quarter in October, Mid-America acquired Park Crest at Innisbrook, a 432-unit up-scale apartment property in Palm Harbor near Tampa, Florida, directly across from the main entrance to the Innisbrook Resort and Golf Club. Park Crest was built in 2000 and was acquired for $31 million or $71,800 a unit. We plan to reposition and renovate the property once the Tampa market recovers. There is one remaining property we have under contract for sale, River Trace, one of our older properties located in Memphis, which is now targeted to sell in November 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 one of the stronger financial positions at the apartment REITs. As we discussed in last quarter's conference call, we decided to issue a small amount of equity based on what we believe to be an improving acquisition environment. Early in the quarter, using our continuous equity plan, we raised about $25 million by selling 591,000 shares at an average net price of $41.60. Absent a further improvement in our acquisition opportunities, we don't plan to issue additional shares this year. Yesterday, we filed a new continuous equity agreement with the SEC because our current plan is almost fully taken down, but this does not indicate an immediate plan to use it. You will recall that our only debt maturity in the next twelve months is our $50 million bank credit facility maturing next April. We're in discussion with our current lenders about replacing it and don't anticipate any issues. At the end of the quarter, we had $177 million of unused capacity available under our credit facilities. At September 30th, our debt to total gross assets was 49%, 200 basis points below the level of a year ago, and about 300 basis points below the apartment sector medium. Our fixed charge coverage in the third quarter was 2.59%, 10 basis points ahead of 2.49% a year ago and well ahead of the sector medium of 2.41%.

In November, we reset the rate on $65 million of fixed rate debt, which carried a 7.7% fixed interest rate with floating rate debt of which we plan to cap a large majority. The rate on the new debt is approximately 1%, so we expect to pick up almost $0.02 a share of interest expense savings for the balance of this year and $0.08 to $0.10 per share of savings in 2010. You'll notice that we have increased the share of our our debt that we have fixed, swapped or capped to 90%, up from last year's level of 81% which we think is prudent, given the current environment. The strong results in the third quarter and the significant improvement in our outlook for property operations for the fourth quarter again causes us to increase our 2009 forecast of FFO per share, with a new midpoint of $3.74, $0.01 ahead of our 2008 full year FFO, and up $0.09 from the midpoint of our prior guidance of $3.65. For the fourth quarter, the midpoint of our guidance for FFO per share is $0.87, up from our prior midpoint of $0.82, with a range of plus or minus $0.05.

For 2009, we're now projecting a 1.5% to 3% reduction in same-store NOI at the midpoint down 2.25%, which is 125 basis points better than our prior guidance. This revised forecast is built on a full year 1% to 2% reduction in same-store revenues, and a decrease in expenses of approximately 0% to minus 1%. We project our average interest rate for the year at 4.4%, compared to an average of 4.9% for 2008. At the end of the quarter, 78% of our debt was fixed or swapped ,and a further 11% to 12% was capped. Excluding the redevelopment program, our year-to-date total capital expenditures that existing properties was $26.4 million, compared to our full year forecast of $29.8 million or $0.99 a share. Recurring CapEx is budgeted in the region of $21.5 million or $0.70 per share. We anticipate total expenditures on our redevelopment program of $9 million, about half the level of last year, of which just over $7 million is budgeted for the interior upgrade of 2,000 apartment units, with a balance for external upgrades. In addition, we project full year development funding of $7 million, down from $25 million last year, of which only $1.5 million remains to be funded.

For the full year, we continue to anticipate we'll invest approximately $75 million in new acquisitions, indicating that we'll make probably one more wholly -owned acquisition. We expect our equity contribution for 2009 to Fund II will be $6 million, again with one more anticipated acquisition. Eric.

Thanks, Simon. To summarize, we like where Mid-America is positioned. We expect over the next few quarters as the economy begins to slow recovery cycle, we will continue to deliver operating results and FFO performance that will hold up comparatively well. We're excited about the new investments we're capturing and the growing opportunities emerging. They will add additional upside to Mid-America's performance down the road. Beyond the next few quarters, as we begin a more robust recovery cycle for apartment fundamentals, we're excited about Mid-America's prospects. We believe that our markets and portfolio strategy, supported by the high quality of our properties, the strength of our operating platform, and the capabilities of our folks here at Mid-America, will continue to deliver strong long-term results.

Before we open it up for questions, I want to take a moment to acknowledge Simon, who has per announcement early September, will be retiring as our CFO at year end. Simon's steady hand and thoughtful management of our balance sheet and our accounting and finance operations over the last 16 years have clearly been a huge part of our success and a significant shareholder value created. And just as important his development in leadership of his staff puts our finance and accounting operations and capabilities surrounding financial strategy planning and execution in a very strong position as we move forward. While in the future he will be devoting more time to grandchildren, travel, tennis, and believe it or not scuba diving, Simon will continue to support our mission at Mid-America and will remain on on our Board of Directors. Al Campbell, a key member of our strategy and financial planning team over the past 11 years, will be formally assuming the CFO role at year end, and we want to congratulate both Simon and Al.

And now after 16 years of earnings calls, I think Simon is ready to move to Q&A. So, Sean, with that we're going to turn the line back over to you and answer any questions you may have.

(Operator Instructions). Our first question comes from [Sarupt Galba] with Morgan Stanley.

Good morning, guys.

Good morning.

I would like to ask whether you're seeing more of these distressed opportunities like the one in Atlanta, and if you can comment upon the spread in terms of pricing between distressed and what we call normal properties? Is there a delta there in terms of discount or replacement costs?

Well, we are clearly seeing more deals emerging out of some of these distressed loan portfolios with some of the regional banks and others that we have been talking with. There absolutely is a bit of a delta or difference in terms of pricing between the more stabilized assets that are more easily financed through the agencies versus the properties that have not yet reached stabilization or have some other issues and maybe a condo component or something of that nature, but some of the issue that causes the asset not to be as easily financed in the current -- with the agencies. As far as -- and that's resultingly why we're able to get a much better buy, and frankly, a much deeper discount to replacement value. I would tell you that for the stabilized assets that are easily financed, trading at what we see at least high quality properties trading at around a six cap, there may be a little discount to replacement value on the table. but not a whole lot, a little bit, maybe 5% to 10% at most, but on the more distressed situations not easily financed where the buyer competition is not nearly as fierce, the discounts and replacement value is going to be north of 20%, probably pretty routinely.

I see. And just to focus on your number which you gave about house rentals, people moving out to rent a house, yesterday we heard about Fannie Mae's deed for lease program, where they going to be renting foreclosed homes back to the borrowers. Do you see that a big factor in affecting demand in your sub markets like Phoenix?

We really don't. I mean, that -- I don't know whether Fannie and Freddie, those guys, will be better at leasing individual housing than Craigslist and individual owners, but I sort of suspect not. They still have challenges with driving traffic, and I think we'll see the same level of competition with that. Those houses have been empty and trying to rent them, and they're just sort of going with a different group trying it, so I don't see a single-family home renting becoming significantly different as a competition for us with that than it has been.

Okay. Thank you.

Our next question comes from Michael Levy with Macquarie.

Good morning. Congratulations. Just to touch up on the first question as a follow-up, do you have a personal preference, Eric, to the distressed assets over the stabilized assets, and can you please remind me about how -- which bucket, whether it would be wholly owned or for the JV, each of those acquisitions might fit into?

Well, in terms of preference, not really. I think in terms of whether we have a preference for something that's more distressed or not, for us it really is first and foremost we're looking to buy high quality real estate in the markets we believe offer the best long-term opportunity, and from there it is about just conservative underwriting and if on that basis we can get the return we're looking to get and achieve hurdle requirements, then we'll pull the trigger. Whether that's a stabilized asset or not stabilized, it really doesn't matter now. We certainly think that for some of those that are non-stabilized, and are deficient in some form or fashion, particularly if they're deficient from CapEx or from an operating perspective, we think we can come in and really create some value with that sort of exercise and thus sometimes the returns are a little better in that regard.

Then with reference to, or with regard to the which bucket. if you will, our acquisition is going to, broadly speaking what we're looking to do is direct the redevelopment projects, and we define those as being anything of seven years of age or older, to our Fund II acquisition platform. We basically have a very sort of bright line test, and really it is an age definition. If the assets seven years of age or older, we will show it to our Fund II partner and make a decision together as to whether or not we want to buy that as part of our Fund II initiative. If it is less than seven years of age, we're under no obligation to show it to our joint venture partner, and we're free to move ahead and buy it as a wholly-owned asset for Mid-America.

Now, frankly, we find that there are other factors that sometimes come into the underwriting and into the thought process, such as the deal we bought not too long ago in Macon, Georgia, where it was a fairly new asset, in fact brand new and still in lease up, and we elected to buy that with our partner through the Fund II. And really that was driven by the fact that we already are a number of assets in that market and felt like the portfolio management and need for diversification, we felt it would be more prudent to not buy that 100% owned for Mid-America's balance sheet, so it gives us a lot of flexibility to think about how we deploy money, but as far as the clear bright line test, that seven year requirement that's the real definition.

I think just to sort of add one brief comment, Michael, it is easier on Mid-America's balance sheet to buy the generally these lease up properties, and it is because we don't have to put in place new bank financing, which we have to do within the joint venture, so sometimes we'll -- that's sometimes that's a factor, but we're -- like I say, there is no general rule.

Got it. Sounds like you're typically seeing higher risk adjusted returns for the distressed assets.

Yes.

May I ask whether the improvement in effective rents being down 6% year-over-year instead of 7.5% or so in the first half of the year relative to the first half of last year, is related to easier comps relative to the third quarter of last year, or is it improved pricing since the end of June? I guess I am asking how effective rents are changed in the past three or four months.

This is Drew. Over the last three or four months really, we have seen effective pricing stay pretty stable from the -- we're comparing versus the prior renters, so new renters over the last quarter ,and frankly longer than that, have been paying -- those rates have been pretty consistent over the last -- really over the last six months or so.

Okay. Also, Eric, so when Eric noted that rents might come down a bit with the summer leasing season having passed, I guess that hasn't really happened yet, but you guys are anticipating that it might sort of later as we hit the winter months?

That's true. I think we think it is likely to just as the season function of the seasonal pressure that typically sets in around the holidays that we may have to go a little bit more aggressive, but we don't think it will be anything materially bad or significantly down, and we think that as we get past the holiday season likely things begin to pick up a little bit.

I think in aggregate we would expect total pricing to be down 3% to 4% in the fourth quarter. That's sort of where we're expecting it to go.

That's really helpful. Can I ask one last question? Can you please talk about the expense increases in Jacksonville and I guess Ft. Lauderdale?

Sure. Tom again. They're related. Jacksonville, if you watched last quarter, really the increase I assume you're talking about in Jacksonville's sequential quarter, it popped up pretty good, and we had in the first part of the year there over accrued for taxes last and then last quarter made an adjustment, so last quarter was oddly low, so it went back to normal and should be normal for the rest of the year there. n Ft. Lauderdale, it is really the same story, slightly different. We had under accrued for our taxes in that market and there we corrected that at a higher rate this go around. So not an operating driven issue, but I think in aggregate taxes have been solid, but one off market here or there, they will be up or down.

Any markets where expenses have been rising for operating reasons?

No. Really, though, overall theme on expenses is that we have seen this lower turnover really driven by home buying has been the largest variable cost improvement, and largely that's across the board, so we're seeing good expense control there because of lower turnover as well as some of the cost saving initiatives that the asset management team has put in place.

Okay. Thanks a lot.

Sure, Michael.

Our next question comes from Rob Stevenson with Fox-Pitt Kelton.

Good morning, guys. Simon, you guys have done a pretty good job of controlling expenses year to date. When are you thinking forward for the next few quarters at the very least, on the controllable expense side, where do you expect to see the most upward pressure?

I will start. Obviously Rob, I am always fixated by real estate taxes and obviously that's a big unknown as we go into 2010. We obviously are having a good year this year, so I expect we will have a little bit of upward pressure there. Our insurance programs are well set. I think I will let Tom talk about some of the other operating items.

Rob, I think the longer term and we don't know exactly when it will occur, but we would expect the turnover, as driven by lower home buying, would change a bit over time. As you will remember, it was sort of insanely high driven by limited credit underwriting standards where sort of we would evict people into houses that banks would loan them money to and it got up as high as 30% of our move outs.. Generating higher turnover. Door has slammed shut, and we have gone from insanely high at 30% to insanely low at 19% back in March. I would expect that to return to sort of normalized levels, which would be around 25% or so, but we don't really know when that will occur, but frankly ,I sort of welcome it. If home buying gets back to normal, we have always competed with home buying in our markets. It is a healthy part of our business, and frankly it means jobs have come back and the economy has come back. I don't think it means credit standards have been lowered again. Hopefully we won't see that again, but that will signal the time that we can really get back in the business of raising rents aggressively, and we're excited about that opportunity.

Okay. Where was bad debt expense this quarter?

It was about, Rob, this is Al, about 52 basis points compared to about 55 last year, so slight improvement and very strong long-term history.

That's a percent of net. (inaudible).

Where was it last quarter?

Year-over-year it was last year's quarter 55%. Last quarter it was a little lower, much lower.

A little bit lower.

Okay. So you're not really seeing any significant bump up, it is just a marginal bump up, even sequentially?

That's 0.58 of 1%, not paying. That's pretty solid. Good debt in the last quarter was 36 basis points.

Okay. Great. And then question for you, Eric. If I generally think about development, you got to have, at least as a public company, maybe might be something different for the private companies, but for the public companies to develop you're looking at somewhere in the neighborhood of 150 basis points or greater spread versus where acquisitions are. If you think about your assets in the top 25 markets, how long do you think that you're going to be sitting here with not a lot of development coming online? I guess another way to say it is how long before you think that you can get, if acquisition cap rates are in the low to mid-6's, that you're going to be before you see development cap rates approaching 8%?

Well, to some degree it is a function of underwriting sort of the Capital Markets and getting a sense of when the regional banks and some of those types of lending institutions are interested in getting back in the business of lending to developers, and certainly I think that that's going to be a ways off. I think there is -- it is going to be I think over the next 12-24 months, a lot of these lenders are going to be dealing with a lot of legacy issues associated with that activity that they started four or five years ago, and re-engaging in that process anew is probably not something that is going to be met with a lot of receptivity and enthusiasm. My guess is it is going to be, I am strictly guessing here, but 2012 or later begin the banks even begin to think about it.

Also, I would add that after a period of fairly declining pricing and likely continued anemic pricing performance next year, my guess is it is going to be 2011 or better before we start to get back to pricing trends that, even if you will, justify because construction costs I think have actually remained fairly stable, and I just don't think deals are going to pencil out in any sort of a appreciable way until probably 2011, maybe even 2012, at which point maybe the banks are ready to get back into it. So I think it is conceivable it would be late 2012 and 2013 before you begin to see supply coming back into the market in any sort of meaningful way.

Okay. Thanks, guys. Appreciate it.

Thanks, Rob.

Our next question comes from Carol Kemple with Hilliard Lyons.

Good morning. Congratulations on a nice quarter.

Thank you.

I had a question on the Park Crest property that you just acquired. What's the story there, and what was the occupancy when you all received it?

Carol, it is Tom. That's one of those stabilized opportunities. It was 93% when we bought it, and it is about 93% right now. Literally we're talking a matter of days frankly, and we -- the staff is saying sort of opportunity will have a reposition opportunity there that we like over time, but there is no sense in jumping on that capital. We'll do that in year two or year three, so solid location. Innisbrook resort has been completely recapitalized, and we're frankly their front entrance. US 19 that runs north and south along there that's the main traffic artery you have to go through our property, their entrance actually splits our property in two, and so you sort of hit this great landscaped corridor, so we sort of feel it is a built out area, and has upside over time as rents strengthen.

This is a two-phased property. We accidentally bought one phase of it. The other phase was sold out as condominiums, and very successful condominium conversion project that took place a couple of years back, and so we think, as Tom says, a combination of just great structure to the property and the units coupled with a very attractive area offers a tremendous sort of interior renovation, repositioning opportunity here as the market conditions begin to improve in Tampa, and we have assumed we don't really get started for at least another year, year-and-a-half, before we'll start that process.

What's the average rent on those units currently?

Carol, we don't have that just right in front of us. Let us get that and we will get back to you on that.

Okay. Do you all have any thoughts on 2010 guidance at this time?

The short answer is no.

Okay.

Basically we think that 2010 will be a year where I think the numbers bottom out if you will. I mean, clearly we have dialed into our 2010 performance, the effect of the price practices that we had to implement this year, so we have sort of built in as I made reference to the math, we built in some revenue pressure next year as a function of that, and we'll be comparing against obviously very strong occupants we have in 2009, very good expense performance that we have in 2009, so I think 2010 will be a year that has some challenges associated with it as a function of just continued recovery in the economy, but I don't think -- we're encouraged by the fact that from a sort of pricing trends perspective that we have sort of bottomed out and it is easy -- it is not one where we believe that 2010 fundamentals are going to be significantly worse than what we saw in 2009. I think 2010 is actually ,particularly the last half of 2010 things began to look a little bit better, but we have some tougher comparisons and math on the pricing we have to work through, and that will really kind of set the tone for what ultimately drives our guidance.

Okay. Thank you.

Our next question comes from Michael Salinsky with RBC Capital Markets.

Good morning. Scuba diving, huh?

That's what he says.

Quick question here. Sticking with the theme of looking ahead to 2010 right now, you have had a lot of success in rolling out various programs, utility billing, things of that nature. Can you talk about plans for rollouts in 2010 at this point, and anything you think will provide an added benefit to the numbers?

This is Drew. We have really rolled out I think a number of things this year as you said, and there is a few that are going to continue to carry over and add impact in 2010 and help us in 2010. I will just run through them real quick. First is our trash and fee increase that we pushed through in February of this year. That's going to continue to help us in 2010. That's probably a $600,000 to $800,000 sort of help as we continue to get the impact of rolling that out to new residents and renewals. Our bulk cable program, as we talked about, is helping this year and continue to help next year. It is another $800,000 plus help in 2010. Our statement billing project is going to continue to add value next year, as well as our reduction in our screening costs by going with the second screening company, so really in aggregate, I think the impact to next year is something on the order of $2 million from those four projects.

And that's a good point that Drew is making. We've got sort of the full year carry, continued penetration opportunity in some of these programs, and quite honestly, in some other areas, we can continue to capture some real efficiencies and growing efficiencies and how we lease and how we drive traffic to the properties. We think this there is going to be opportunities in print advertising reductions next year, and so we're just now going through pretty detailed budget process at the property level right now. And while we think that, back to Carol's question, while we certainly think that there is sort of macro challenges, if you will, that we're going to be working through, we're very excited about some of these various initiatives and some of the operating platform capabilities we have that are going to, again we think to some degree, offset a lot of that and of course we'll have a lot more to say about it as we give guidance for -- in February.

That's helpful. Park Crest in Innisbrook. What was the purchase price and cap rate on that?

About $31 million, Mike, and cap rate about 74%.

Okay. Perfect. And then also, if you look at the guidance, the expense guidance I think you gave, Simon, seems to imply a little bit of a rise in fourth quarter expenses. Anything in there that we should be looking for? Any catch ups or anything like that?

Mike, this is Al. That's a very good point. I think it is not really so much -- I mean, we expect control of expenses to continue into the fourth quarter. I think it is really comparing to the prior year. As we came out of a third quarter and entered a difficult environment last year, we had very good expense control in the fourth quarter prior year, so this year's fourth quarter we have tough comparisons, it is really what's driving that number.

And then finally just being interested to get your expectations for the new line in terms of maybe rate, or as you plan to expand that at all, or kind of what you're looking at at this point?

That's a good question, Mike. We're really not looking to expand it right now. We're keeping it fairly two year deal this time to try to wait and see what happens in the marketplace overall. We have done a lot of heavy lifting on that and we expect to have that thing completed the first of next year. The rates and spreads definitely have gone up, and they're well within what we had expected. Probably LIBOR plus 275 to 300 range, something like that.

Okay. Thanks, guys.

Thank you.

Our next question comes from Paula Poskon with Robert W Baird.

Thank you. Good morning.

Good morning, Paula.

The 7.4% cap rate you quoted on Park Crest. What's that based on?

That's based on NOI minus 4% management fee and 350 CapEx.

And that's trailing twelve month NOI?

It is and place. No, I am sorry, first year, excuse me.

Thank you.

And I would also add, while the property, if you will, is stabilized and from an occupancy perspective, that's a property that has been shopped pretty aggressively over the last couple of years. I know there have been a couple of different contracts on it that hadn't gone through, and as is often the case, we happen to be in a position to be buying from a very motivated seller that needed to move very, very quickly, and so it is a combination of -- we think we have a very, very good price on the deal as a function of both a very motivated seller that had a real need to get something done very, very quickly, coupled with quite frankly, the operating numbers were not nearly as good as they could have been, simply because that property had been on the market for so long and any time you keep a property on the market for that length of time, operation dues begin to suffer a little bit. They weren't nearly as aggressive with pricing as they really could have been. There was some expensed opportunities they weren't taking advantage of, so I think there was weakness in NOI numbers there we were able to capture as well, and it is going to take a little bit to recover.

I appreciate that extra color. Thanks. Are any of the acquisition opportunities that you're seeing, would those take to you any new markets?

Possibly, yes. We are looking at some opportunities in San Antonio at the moment, as well as Charlotte, which would be two new markets for us. So that would be a possibility, but you're not going to hear us announce anything in California or anything like that.

Fair enough.

We'll keep it in the Southeast.

A couple of questions on the operations front. When I visited your Austin properties in September, the properties there said that they were seeing some rising credit scores in the applicant pool based on tenants trading down to save money. Are you still seeing that trend continue, and are you seeing that in other markets very prominently?

I think everybody out there is being a little more conservative a bit, and people that have good scores aren't waiting into the market at that point and then Austin also has a benefit, and I don't know which community it is, they had a big gaming company come in between one of the properties that brought in sort of some great high wage jobs there, so our credit scores across the portfolio haven't frankly dropped as far as the people coming in. Our reject rates are a little bit higher, so I think more out there you see the stress of the economy pushing our reject rates out there, but the people that we are getting are pretty darn qualified and are paying well. Does that answer your question, Paula?

It does. Thanks. And then in looking at the reasons for move out, are you seeing any differences in the changes in relative markets on the reasons for move outs. For example, job loss related move outs increasing or decreasing in any particular market?

Paula, they lineup about where you would expect. The job loss skews towards Atlanta, and Jacksonville, and Phoenix particularly, and then on what I would say sort of on the positive side, is we're beginning to see home buying pick up and in a few markets which I think is a decent sign, nothing major, and a few markets we're beginning to see that pick up a little bit. That's primarily in places like -- Austin it has been a little bit better.

And the pick up being a positive in terms of -- it essentially just gives us confidence or it is a signal we think that people are getting increasingly confident about their jobs and their situations and the economy in general, and frankly we think that that eventually conveys into pricing opportunity for us as the markets show increasing strength and ability for us to hold onto or to go out and get new residents and reprice them at a higher level.

The data point is Dallas, Raleigh, and Little Rock where you would sort of where you would expect to see a little bit better position, especially Dallas and Little Rock have been good.

Thanks. I appreciate all the additional color, and, Simon, I will simply say it has been a privilege and honor, sir.

I enjoyed working with you, Paula.

Our next question comes from Buck Horne with Raymond James.

Good morning, gentlemen. Congratulations, Simon, as well, and most of my questions have been answered, but maybe -- you talked a little bit about Austin there. I was just wondering maybe you can put more color on what's going in say Houston and Dallas, some of the other Texas markets. Hearing a little bit of diversion commentary across the spectrum, and just wondering if there is signs of stabilization, if there is still a little bit more to go in terms of rent declines or pricing pressure from the new product entering there? When do you think Texas might stabilize?

I think stabilize in Texas are sort of tough for me to say because frankly they have been more stable than anything else we have had, so Texas has been in the sort of best job growth, sort of best rent performance bucket for us with the pressure on Austin a little bit and Houston on the delivery. On Austin we sort of see deliveries there going for $8,000 to $2,000 in 2010, so that one has the best job growth numbers, and it's got sort of a bubble of supply coming through, but we're encouraged by the 2010 numbers. And then Dallas I think will continue to hang in there at about its rate. It has more deliveries coming in 2010, but again it is jobs numbers are less bad than every where else, and then Houston's deliveries drop in half. It is unemployment is just 8.5%, which that's a few years back, so we're encouraged. I don't think it will go off of a cliff for that matter. We'll still have downward pressure, but the future is bright.

Buck, this is Eric. I really think that we can very well have a fairly good leasing season next spring and next summer in those markets because the pressure that we have seen build over the last four months or so is really a function of just the supply, I will call it legacy supply that came online in a market that's just not creating any new jobs obviously, but I think that the Dallas, and Houston, and Austin markets are going to continue to be I think some of the first markets coming back as far as employment recovery. We know that the supply is shut off, and I believe that we're likely to see pretty good leasing fundamentals there next spring and summer.

Perfect. Thanks, gentlemen.

Thank you.

Our next question comes from Mark Biffert with Oppenheimer.

Good morning. Eric, I was wondering if you can expand a little bit about your comments in the beginning of the call about cap rates possibly compressing, and I think you had given a number around 6%, and when you look at QR's deal in D.C., and some of the Essex comments on the West Coast of cap rates being in the low 6%, I am wondering when you look across the country what you think the spread should be between say a higher quality asset and what I would consider EQRs assets to be probably one of the top deals this year, to what maybe some of the markets in Atlanta or Florida and some of your markets are trading at?

Well, I would tell you that broadly speaking, let me just preference my comment first of all by suggesting that we don't pay a whole lot of attention to cap rates to begin with. Frankly, our whole thesis is built around trying to put capital out and drive an internal ready return that exceeds the hurdle requirement that is we have identified, and the going in cap rate for us is not a particularly meaningful metric. So the thing I would tell you is that from our perspective, with no new supply essentially of any meaningful nature coming into our region over the next so -- in fact if you look at the projections, I think it is restated that we use and look out to 2013, our region is actually going to see a steeper decline in new supply delivery than any other region of the country based on historical trends over the last ten years. So we think that that fact with dramatic drop off in new supply coupled with what arguably has always shown to be very good job growth, markets in our region of the country and every expectation that these markets are going to come back likely quicker and stronger than a lot of other regions of the country, I think it sets us up for very strong dynamics over the next four or five years in a lot of these markets.

When you take that and you add on top of that the ability for particularly well located assets and good quality assets such as in our portfolio that are easily financed through the agencies, and again we see all kind of evidence that people understand what sort of the long-term next ten year demographics look like and what the demand for apartment housing is going to be. There is a lot of investor interest in the sector, certainly based on what we're seeing, so should -- when I roll all of it together does that mean that a high quality asset in D.C. or high quality asset in San Francisco should trade at 75 or 100 basis points lower than what a good quality asset in Dallas should trade for, I don't know. I can't really answer the question. What I can tell you is that Dallas is going to put out I think over the next four or five years very good performance, and I think that if you -- to suggest there is 100 basis points cap rate differential that ought to exist between say Dallas and San Francisco, based on that the next four or five years, based on the supply demand dynamics likely to take place, I would put Dallas ahead of San Francisco quite frankly, and certainly as good and so if you're thinking about the next five years, should there be 100 basis points spread cap rates, no would be my answer. If you want to look out over ten years, I don't know. So that's really the way we think about it.

Okay. And then just related to the Fannie and Freddie, how long do you think Fannie and Freddie can continue to support these low rates? I mean, kind of equals the playing field for a lot of people in terms of where pricing is going to come in. I am wondering whether or not you think that will change over time given the rise in delinquencies they're seeing in the multi-family space or if you think rates will stay low for some time?

Mark, this is Al. I would think certainly reason to believe they're going to stay low for quite some time. I think you're beginning to see both agencies certainly ready, beginning to use the Capital Market execution which is basically a CMBS program, so the market is telling them what the rate should be. Certainly it is going to depend on what investors appetites are and certainly to reason right now there should be a significant increase in those rates for one to two year period, obviously.

I will throw out, Mark, I don't know if you have seen the latest delinquency numbers from Fannie or Freddie, but they're negligible, below 50 basis points on Fannie and 50 basis points on Freddie on their apartment loans, so that's not correct that the delinquency issue at Fannie and Freddie when it comes to their apartment lending program.

It is not a problem for them. It is not a problem business line for them. It is a good business line for them.

Right.

Okay. Thank you.

I am showing no further questions at this time. I would now like to turn it back to Mr. Bolton.

Thank you very much, and if you have any follow-up questions, just feel free to give us a call. Thanks.

Thank you. Ladies and gentlemen, thank you for participation in today's conference. This does conclude the conference. You may now disconnect. Good day.