Mid-America Apartment Communities Inc (MAA) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the MAA first-quarter 2011 earnings release conference call. As a reminder, this conference is being recorded. 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. Ms. Wolfgang, you may begin.

Thank you, Mary, and good morning, everyone. This is Leslie Wolfgang, Director of External Reporting for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; Tom Grimes, Director of Property Management; and Drew Taylor, Director of Asset Management.

Before we begin, I would like to point out that as part of our 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 risks 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, will be available on our website.

I will now turn the call over to Eric.

Thanks, Leslie. We appreciate all of you joining our call this morning.

Operating performance in the first quarter was highlighted by strong growth in rents, with effective pricing on leases written for new residents increasing 7.4% as compared to last year. Renewal pricing in Q1 was also strong, increasing an average of 4.1% as compared to the expiring lease. Importantly, the average rent being captured for new resident leases now surpasses the pricing on renewal transactions, further supporting efforts to increase renewal pricing as we enter the busy summer leasing season.

We continue to capture high resident retention with move-outs remaining near all-time lows. Effective occupancy, which considers the turn of units during the quarter, averaged a very strong 94.9% as compared to 94.8% in the first quarter of last year. While we do expect to see an increase in move-outs over the summer months, at this point we believe that our properties are well-positioned to capture the pricing growth that we are forecasting for the year without giving up much in occupancy.

As presented in the supplemental schedules to our earnings release, revenues increased across all of our markets in the first quarter. Our secondary markets continue to slightly outperform our large market segment with Greenville, Little Rock and Memphis posting strong rent and revenue increases as compared to prior year. With the employment markets recovering and new supply well below historical standards, within our large market segment, we expect to capture improving pricing trends in both Dallas and Houston during the commerce summer leasing season.

As outlined in our report to you in February, we plan to increase our unit interior renovation program this year after pulling back during the last two years. During the first quarter, we completed over 600 unit upgrades, or about twice as many as we did over the same period last year. We continue to capture significant rent increases and very attractive investment returns on the capital deployed with unleveraged returns of around 11%. Given the outlook for strong leasing conditions, we expect to see continued growth in this program. Our current plans call for repositioning 2600 units this year.

We continue to capture increasing efficiency in our operating platform as we are able to capture more of our leasing prospects in existing resident transactions through our various web-based applications. During the first quarter, close to 60% of our leasing leads originated via the internet. It remains our fastest growing source of traffic. We remain active in the transaction market, closing on four properties since the first of the year, one of which was closed in our Fund II joint venture.

In addition, we closed this week on the acquisition of a new development site in Little Rock that we expect to have under construction during the current second quarter. Little Rock has remained a very stable and well performing market for us over the years, and this is a market that sees very little in the way of new product delivery. We have got a terrific site and believe this project, encompassing 312 new units, will be a very good long-term investment for us with a stabilized NOI yield of just over 8% expected. The Little Rock project brings our development pipeline up to 950 units for $108 million.

Our Transaction pipeline is very active. We are reviewing a number of potential additional acquisitions. Our strategy remains firmly fixed on allocating capital across both large and secondary markets of the Sun Belt region. We continue to believe that our balance sheet, operating platform, extensive deal flow, and deep knowledge of the markets within this region enables us to generate a competitive advantage, and capture attractive long-term investment returns for MAA shareholders.

I'm going to turn the call over to Al now, who will give you some insights on our financing activity, and update on our earnings guidance. Al?

Thank you, Eric, and good morning, everyone. We reported FFO for the first quarter of $37 million, or $0.98 per share, which was $0.01 above the midpoint of our guidance. Same-store NOI growth of 4.9% compared to prior year was better than we expected, and added about $0.02 per share to our projected FFO for the quarter. This favorable operating performance was partially offset by some additional and non-recurring G&A costs recorded during the first quarter, and a higher share count as we used our ATM program to fund planned acquisition and development needs for the year.

Additional G&A costs were primarily related to adjustments to our health insurance and bonuses during the quarter, but we do expect the run rate of our G&A to decline to a more normal level in the remaining three quarters, which should put our total property management G&A expenses for the full year in the $34 million to $35 million range.

As Eric mentioned, we have been active acquirers, purchasing three wholly-owned communities since year end for a total of about $73 million, and one community for our joint venture for about $25 million. All of these properties are stabilized on acquisition, and have an average cap rate for the first year's projected earnings of just over 6%.

In order to fund our planned acquisition and development activities for the year and to manage our debt maturities, we were fairly active in the capital markets during the first quarter. We raised $91 million in net proceeds during the quarter by issuing 1.5 million new shares through our equity programs at an average price of $61.27 per share.

We also received $22.5 million in proceeds from a new mortgage we put in place during the quarter with a fixed rate of 4.6% over the next seven years. And we entered an agreement to lock the rate on an additional $128 million at 5.1% for 10 years, which we expect to close and fund during the second quarter. This new loan is aimed at refinancing the $100 million Freddie Mac maturity in July of this year.

We only have one additional maturity in 2011, an $80 million tranche of our Fannie Mae credit facilities, which matures in December. We are working now to replace this in the second half of the year.

Our balance sheet continues to be in very good shape. We have our EBITDA for the quarter was 3.7 times our fixed charges, which compares to sector average of about 2.5 times. Also, at the end of the quarter, 89% of our debt balance was fixed or hedged against rising interest rates, and we had $230 million in available cash and borrowing capacity under our lines of credit. Our leverage, defined as debt-to-gross assets, was 46.4% at the end of the quarter. And we plan to continue using our ATM program, and lines of credit to fund our acquisition and development plans for the remainder of the year, maintaining our leverage at or just below the current level through the year end.

As mentioned in the release, we are raising our FFO per share guidance for the full year to reflect results for the first quarter and the revised expectations for the remainder of the year. While we believe a range of 4% to 6% is still appropriate for our NOI growth assumption, our expectation is now 50 basis points above our initial guidance, which puts us just above the midpoint of this range. This revision, along with the improved expectations from our lease-up properties, adds about $0.05 per share to our projection for the full year, bringing the midpoint of our guidance to $4.00 per share.

That's all we have in the way of prepared comments. So, Mary, I will turn the call over to you for questions.

Rob Stevenson, Macquarie Research Equities.

Eric, can you talk about what your comfort level is with the continued growth of development pipeline? How much bigger would it need to get before you'd start to say -- hey, that's a little too big, and start backing off?

Well, Rob, I would tell you there's really two ways of looking at it, but the short answer is not much bigger to be blunt about it. I think that more than anything, I would not be comfortable making commitments, significant commitments beyond what we have already done to deliver a bunch of units beginning in call it late 2013, 2014. I just believe by that point in time, it is very probable that we will begin to see supply picking up and deliveries coming into our markets in our region.

As you know, our strategy is really built around mostly being an opportunistic buyer of properties as opposed to building them ourselves. We let others take the risk of development; and enough of them, particularly some of the merchant builders in our region, mess up, if you will, that creates the buying opportunities. So, I think that we are looking at a couple of other opportunities that we may or may not do, but at $108 million on our balance sheet is a fairly small component of what we are doing in terms of growth, and you are not going to see it get a whole lot bigger.

Have you started seeing much starts from the merchant guys these days, or is it still fairly quiet?

It's still fairly quiet. I think there is a lot of talk going on right now, and I think there's a lot of developers who are aggressively out looking for capital. A lot of them are knocking on our door, to be honest with you, but I think that -- and most of where you are hearing people talk about it is in the normal culprits of Dallas, Houston, some of the bigger markets. I think that's where you'll first see it.

I think it's important to recognize that a lot of the supply that comes into our region are the smaller merchant builders who tend to be not nearly as well capitalized and financeable, if you will, as some of the bigger guys. Most of the bigger guys have gone into, it really and are starting now on properties in the so-called high-barrier markets. So, I think we have got probably a little longer window of opportunity here than what you may see in some other markets in terms of supply coming in. It will come, and that's back to my original point why it's important not to get too far out in front of our skis on this right now.

Rob, just to add a little color. Permitting hasn't picked up at all, and deliveries for 2011 in our markets, they are supposed to be down 80% from peak levels. So, not a whole lot brewing out there right this second.

Okay. And then you guys have been fairly active on the acquisition side. Are these sellers just all wanting cash, or are you starting to see any incremental demand for OP units in some of these transactions?

We haven't really seen much in the way of OP units on one-off transactions. Where it has come up is in some of the portfolio deals that we've looked at; but honestly, most of the portfolio deals we've looked, we have not been that interested in them due to asset quality issues. I think that it's conceivable that as we move further into this year and into next year, some of these portfolio transactions representing deals that were built and/or bought in the last five to seven years, that there very well may be some folks with some deferred tax issues that may favor an OP transaction. Hopefully, the asset quality would be something that would make sense for us, but at the moment, we have not really seen any one-off transactions looking for OP units.

Okay. And then just last question, what markets or market surprised you the most on a relative basis relative to expectations in the first quarter, either strength or weakness?

Rob, I would tell you, the thing that probably jumps out to everybody has been the strength of Phoenix. It has come back both in occupancy and rents, and to see Phoenix post 7.5% revenue growth, while not totally unexpected, was certainly a pleasant surprise. And then I think the hope would be that the big markets like Dallas and Houston would have been a little bit better at this point, but I will tell you we are excited with the way the pricing has gone in those. They are not as strong on revenues but the average new rent price that we have gotten in Dallas over the quarter is 11% higher than this time last year, and in Houston it's about 7%. So, we are seeing those big markets really beginning to turn on the pricing side, and we are looking forward to those hitting on the revenues.

Okay. Thanks, guys.

Michael Salinsky, RBC Capital Markets.

First question relates to the pipeline at this point. It seems like you guys, if you looked at the year-to-date activity, has been focused more so on the secondary markets as opposed to last year where there was more focus in the primary markets across your portfolio. Is that a function of pricing or just trying to balance out the portfolio?

Also, just curious to hear what you are seeing in terms of core versus value-add type product in the market. It looks like you lowered your fund investment target by about $25 million.

Well, in terms of the target for the deals we are looking for, we like the balance that we have right now between our large segment and our secondary market segment which is roughly 60%/40%. 60% being in what we define as large segment markets. We have been there now for the last year or so. We are not trying to strategically make any sort of shift. We like where it is right now. And really the deals that we did last year and this year have been more a function of where we found the opportunity that made sense for us, and the best deals. So I wouldn't read anymore into it than that.

As far as core versus value-add, defining value-add as being properties that we define as being seven years of age or older that we are going to do some sort of repositioning on that goes into our Fund. I think that what generally is the issue is that those deals tend to be more heavily -- there is more competition to buy those. Because typically, those deals are more easily financed, and a buyer doesn't have to come with nearly the equity and the risk that they would have in buying something like the deal we bought in downtown Raleigh last year, the failed condominium project that was totally empty. That's very difficult to finance, obviously. So, we expect the competition to continue to be pretty fierce for the value-add deals, and so we are still optimistic that we will get Fund II fully invested. And our partner is certainly excited about continuing to move forward, but we just think there will be more competition there.

Second question for Tom, can you give renewals and new lease rates for April? I'm just curious what you're looking at in terms of renewal increases that went out for May and June at this point.

I'm going to turn that one over to Drew, who is going to add some color on that one, if that's all right Mike. Thanks.

Sure.

Hey, Mike. For April, new lease rates versus the prior year were up 8.5%. Our renewals were up 4.4% versus the lease they were replacing. And then, looking out into May, June and July, May's renewals went out at 6.1%, June's renewals went out at 6.8%, and July's went out at 6.2%. There is typically about -- for May, June and July, those are what we sent out; that's not what we've signed yet. There's typically about a 50 basis point haircut that we'll take off of that as we negotiate with our residents.

That's still impressive, nonetheless. Then finally for Al, not to leave you out, I've got a question. It looks like the ATM issuance is pretty elevated. Does that cover most of the bulk of your investment plans for 2011 at this point?

That's a good point. There's a couple things going on there. One is we have acquisition activity in the first half of the year that we've had plus expectations for the year. The development pipeline, we are trying to fund a bit of that and get a little bit ahead of that. And also just in general, beginning to prepare a little bit for our balance sheet and the work we are doing there. So, primarily that was paying for most of the activity for the remainder of the year.

Okay, that's helpful. I didn't see any updates on the asset recycling front. Are you guys still planning to sell some assets here in the back half of the year?

We have got three assets targeted for disposition. One is about to go under contract, and we are working two others. So, I think that we will get those done probably in Q3 for sure.

Great. That's all for me guys. Thanks.

David Toti, FBR.

I just wanted to talk a little about the occupancy dip in the quarter. Do you think that is directly related to your pushing rents pretty aggressively?

Drew's going to answer that for you, David.

Yes, David. I would say we're really not managing the business toward with an occupancy target in mind. Certainly, what we are trying to do is balance those two things, the short-term revenue via occupancy and the long-term revenue growth through rent increases. It can be a complicated trade-off, but ultimately, what we are trying to do, is manage for revenue through exposure. We typically are comfortable when our exposure is in that 6% to 10% range. That certainly depends on the time of the year, the time of the business cycle, et cetera, but that is what we are ultimately trying to do. Our yield management system is pushing rents in its most aggressive state when we are in that 6% to 10%, 60-day exposure range.

David, just to clarify, when we talk about exposure, we are talking about the current number of vacant apartments that we have plus the notices of move-out that we have received that have not been pre-leased. So, a combination of those two variables constitutes what we define as exposure. And so we are looking at exposure 60 days out at all times, and making assessments as to what we are comfortable with. Also, it's important to recognize that this time of the year is when exposure starts to crank up, and we expect it and we sort of manage our system to allow it to occur at some level.

Having said all that, if we see occupancy, and we are more focused on effective occupancy as opposed to just physical occupancy, and as I have commented, our effective occupancy was right at 95% for the first quarter. So, that is still pretty darn strong. So to get the rent growth that we're getting and carry that kind of effective occupancy, we still continue to feel pretty confident about continuing to push pretty hard on the rents and expect that that's what you will see.

The other point I will make is that it is important to recognize our turnover is still low; probably the biggest jump in turnover reason that we had during the quarter were people moving out due to rent increase, and we are okay with that at some level obviously.

That's helpful. Maybe this question is for Tom, can you give some data points around move-outs for home purchases, evictions, and then also a comment on traffic in recent months?

Sure. I was about to pile onto Eric's point. Turnover for home buying is still down. Turnover for the quarter was flat. Turnover for home buying continued to be down in the double-digit range, and it's somewhat offset by move-outs for rent increases as we push rents up. The move-outs for economic reasons or skips, evics continue to get better as they did last quarter.

Your second question was on traffic for the quarter. It was basically flat, but we saw a 3.5% uptick in April. So again, fitting with our strategy on exposure and pushing the rents, we expect to see traffic begin to push up this time of year, which of course it was, but more importantly, it's good to see traffic up year-over-year at 3.5% for April.

That's helpful. And then my last question, Eric, I just want to go back to a point you made on your secondary versus large market performance with that closing gap. At what point do you expect that to cross over or will these markets generally run parallel for the remainder of the year in your mind?

It's going to be actually pretty interesting to watch it play out. I think that it's very probable that we will see the revenue performance in the large-tier markets begin to outpace the secondary markets at some point this year, potentially this quarter or maybe even the third quarter. As Tom mentioned, we saw some very strong rent increases in both Dallas and Houston, and that will begin to impact a large market segment performance for us. I fully expect it to happen sometime towards the latter half of this year.

Having said that, we are very encouraged with what we continue to see as things happening in these secondary markets. Raleigh is doing very well for us. We expect good things to continue to take place in Jacksonville. Memphis is quite strong. We saw over 11% rent growth year-over-year in Little Rock. So, I think that these secondary markets are going to surprise folks a little bit. They're continuing to surprise us. I thought we would have seen it shift by now, but they keep coming on strong.

Great. That's helpful. Thanks for the detail today.

Mark Lutenski, BMO Capital.

Quick question for Al there. Who were the lenders for the loans you guys signed during the quarter?

Mark, that's a good question. Both of those were life insurance companies. We signed one mortgage we put in place, and we locked the rate on the other $128 million. Both of those were life companies. Those were both New York Life. We have done deals with Prudential and New York Life and have relationships with others. I think you put your finger on a good point. We definitely have seen the other capital providers step into the market, and provide good funding for the sector and that's been a very good thing. That's not to say that multi-family is not getting their share still from agencies. Fannie and Freddie are still there, but I would say providing a very good backstop, but the others are definitely stepping up now.

And what would you say the comparable rates would be for Fannie or Freddie for those?

I think what you're seeing for let's say a 10-year loan, you are seeing something between 180 to 200 from Fannie or Freddie, for a 10-year rate. At one of the life companies, if they have a particular need in their portfolio, or particular reason, they'll go a little south of that on the spreads. So, let's call it 165 to 180 range they may get to. So it's pretty close, but they are stepping up and providing a little better rate and some pretty good flexible terms, in terms of substitution rights, and things like that. So, it's a pretty good market right now.

Great. Thanks.

Sheila McGrath, KBW.

Renewal and new lease pricing was stronger than we had expected, and I am just wondering how much of you not upping the lower end of same-store NOI guidance is based on an unknown of real estate taxes?

Sheila, this is Al. I can tell you really our guidance for pricing that we put out at the end of last year or for the first quarter, the story there is really pretty much on target with our pricing performance. We did have in the first quarter a little bit of out-performance in the revenue section from the various things, a little bit on occupancy, a little bit on collections, a little bit on fees. But we had very aggressive pricing performance in our projections, and we are pretty much on track and we're encouraged by that. The out-performance was probably a third revenues and two-thirds expenses. So, the story is taxes were a little lower in the first quarter because of some things we had, some positive appeals we had come back, utilities were a little lower. So, mainly one-third revenues and two-thirds expenses. And for the full year, I will tell you that, as we have mentioned, we have raised our same-store NOI performance expectations about 50 basis points. That adds about $0.03 per share. And then we have added $0.02 raised to our lease-up properties, the ones that we acquired late last year that have come on really strong, a little bit stronger than we expected, adding $0.01 the first quarter, and $0.01 the second. So, really that is the math that comes to the $0.05 per share revision that we had.

Al, can you remind us what your expectation is for the real estate tax increase, and when you will have some more visibility on that?

Good point. We went into the year with about a 4% growth expectation because we do expect to begin to see some pressure from some of the municipalities this year because we had the favorable appeals in the first quarter that gave us the credit, and we did bring back some of our select valuation -- had some adjustments on some our valuations on specific properties after we got some more information from our consultants. But we still do project about 3.5% same-store growth in our taxes for the full year.

Okay. One last question. Eric, you mentioned the pipeline is pretty strong. I just wondered if you could give us some insight? Are there any portfolio opportunities that you are looking at, and also who the mix of sellers is dominated by?

Well, we have looked at a number of portfolios earlier this year. At the moment, there is nothing that we are looking at, but I do expect that we likely will see certainly some more over the course of this year. As I mentioned earlier, I think that a lot of what we have seen quite frankly in some of these portfolios is not the quality that we want to get involved with.

Sellers have continued to be situations where you've got developers who have started projects two or three years ago that are under some pressure with the looming refinancing requirements associated with construction financing. Typically, that is where we are seeing some of the deals from.

We are also seeing deals where the equity in the deals are really pushing it. You've got institutional investors that are pushing to go ahead, and get out of some of these deals. The developers sometimes are still in them, but the equity is really pushing for the transaction. So, institutional buyers -- or institutional sellers I should say are with the developer in tow, or being grudgingly brought to the market. We see a lot of these developers who really frankly don't want to sell right now, but their equity is forcing it to take place.

Okay. Thank you.

Paula Poskon, Robert W. Baird.

Thank you very much. Could you tell what percent of leases are expiring in the next two quarters?

We typically in the summer months have about 60% -- 55% to 60% of our portfolio expire.

What is the revenue management system telling you, and to what extent are you manually adjusting those recommendations?

Typically, we override about 5% to 10% of our pricing decisions where we see something out in the field that the system isn't taking into consideration, a new comp, a significant change in the competitor, something like that. Right now, we are seeing right in that range, 5% to 10% of our --

And Paula it is saying -- go, push rents. We are pretty bullish on what is going on, and it's saying push rents, and we are comfortable with what it is saying.

I would say our occupancy is in good condition. We've got low exposure. Our market comps have shown good resiliency. We are going into a higher demand part of the year. Our new lease rate is above our renewal rate. All things point to being able to continue to raise rents.

So, broadly speaking on the manual overrides, you are overriding a little bit down from recommendations versus up from recommendations?

I think it cuts both ways, but generally speaking, maybe down.

Okay. Are any of your B-properties seeing any trading down of tenants from A-quality assets?

No, we hadn't seen any of that to be honest with you Paula, in short answer; I could add some color, but I think that does it for you. We have not seen that happening.

Appreciate that. What is causing the turn to be so high in San Antonio?

Turn in San Antonio, that is a good question. We are out by Sea World and Six Flags in that left-hand corner, and we have got some exposure to the military base there. So that's primarily the driver, but it's just one property and we are still learning the basics of that. So, some of that on a 12-year rolling, remember that includes some of us getting adjusted to the property as well.

Anytime you see a single property that has a fair amount of military associated with it, they tend to carry a little bit higher turnover associated with that profile.

That makes sense. Any damage anywhere from the severe weather?

Paula, this is Al. No, we were very fortunate. We have obviously have some repairs on roofs and some cleanup that we have to do, but we were very fortunate in that we don't expect any significant cost. We didn't have any significant structural damage. So, very fortunate.

If you are watching headlines around Memphis, we are way out of the flood zone.

Thank you. Finally, Al, could you give us more color on what drove the spike in G&A expenses in the first quarter?

Yes, that's a good question. We obviously had a good bit of noise in G&A in the first quarter, as I talked about a little bit. It really boiled down to two main items in the first quarter, and that was related to our health insurance costs and to our bonuses. Our health costs, we had some high claims come in during the quarter, particularly in the month of March. I really believe it's somewhat of an anomaly, but it caused us to obviously -- to have a little higher expense in the quarter as well as it caused us to adjust our accrual. We have a six-month trailing liabilities incurred, but not recording calculation that we have to go through. So, it caused sort of an adjustment there, a double hit.

On our bonuses, we had a situation where we pay our bonuses and finalize our programs for the year at the end of the first quarter, let's say the end of March, which is a month later than we report year end. So, we had a situation. There's a lot of judgment involved in finalizing that program. So, we paid out a little more than we had accrued at the end of the year. The comparison year-over-year looks a little more difficult because we had the opposite of that in the prior year. In 2009, we ended the year with a certain accrual and our payouts were a little less than our accrual. So, it gives you a little bit of a double swing there.

I will say the good news is that after that noise, we expect second, third and fourth quarters to really revert back into more normalized run rates, Paula. Call it $8.25 million per quarter, and so, you can do the math and add that up, and that will leave is at $34 million to $35 million when you add our property management expenses and our G&A together. We sort of combine those together, and think about those when we are doing our forecasting. But $34 million to $35 million is total for the year we expect, and that's about in line with what we've seen in the last few years as a percent of revenue. I hope that helps you there.

That does indeed. That's all I have. Thank you very much.

Tayo Okusanya, Jefferies & Company.

Most of my questions have been answered, but Al just a quick question. On a going-forward basis, what should we expect in regards to the whole process of trying to hedge against rising interest rates, and your continued use of swaps?

That's a good question. Obviously, as you saw, the activity we had in the first quarter, we are doing a couple things. One, we are just taking the actions of doing more fixed rate. We did a single mortgage that was $22.5 million. It really took a property out of our unencumbered pool and did a mortgage to move our fixed rates for it.

And then on the other mortgage that we're -- the $100 million loan that we're replacing, we are putting it back in place at $128 million fixed rate note at a very good rate. So, what we are trying to do is do a little more activity to fix our rates around 90% fixed by the end of the year to maintain that as we move into a rising rate environment. So, we feel like that's a good position as we move forward.

You probably will not see use many interest rate caps or swaps moving forward. We are really migrating away from that strategy and using more fixed rate notes.

Got it. Thank you.

Carol Kemple, Hilliard Lyons.

What is your share count you all are expecting for the end of the year that you worked in the guidance? The shares in units?

Carol, let me just tell you what we have in our guidance for the full year is about 38.9 million shares on an average for the year, fully diluted.

Okay. And your last two acquisitions in Florida, were those marketed properties or how did you hear about those?

Well in both cases, we have a long-standing relationship with the broker involved that was representing both properties. This is a firm that we have bought a lot from. I know in one case the property had been under contract previously and fell out. As we have worked to establish a relationship with these brokers with an ability to underwrite and move pretty quickly and decisively, they brought it to us, and we were pretty motivated to make something happen. But it is really just a function of having established a pretty strong track record of getting things done pretty quickly and decisively, and having, secondly, a very deep relationship with the brokers, and in some cases directly to the sellers and developers involved in the decision to sell the property.

So, when they brought that asset to you all, were they showing it to anyone else, or did you all get to look at it and make your bid without competition at that point?

I think there had been some competition early on. In fact, as I say, it had actually been under contract. So, in both cases, these are stabilized deals. Those tend to get fairly actively shopped, and we typically wait for the dust to settle, and the deal either closes or it doesn't. And when it doesn't, it often creates an opportunity for us.

Okay. Great. Thank you.

Andrew McCulloch, Green Street.

On the new lease rates you guys are talking about, are those essentially the change in effective market rents over the last year, or are those 7%, 8% numbers you are calculating the actual increases you are getting on expiring leases on a lease-by-lease basis?

The number we quote for new leases is what people were paying. For instance in April, we said new leases were up 8.5% over the prior year. So, that's what the people who came in, in April paid for their rent versus what people in April of the prior year paid for their rent in April.

And for the quarter, it's the average over the quarter this year average over the quarter of last year. The same thing.

The increase in rent, though, so let's say someone had been in your communities for two years, left, a new person came in, what are they paying versus the person that left?

So, lease over lease?

Yes.

Lease-over-lease change for the quarter for new leases -- let's start with March, was 4.2%. Then in April, we saw it move up to 5%. Lease over lease change.

Great. Just on asset values, where do you think you are today versus peak values and how does that compare between your large and secondary buckets?

In terms of asset value, as you know, we don't spend a lot of time thinking about NAV. I can tell you at our current share price, the implied value for the real estate is roughly about $82,000 a unit thereabouts, call it a 5.5% implied cap rate. We are out in the market looking to buy deals. The quality of the assets that we are looking to buy in well-located areas, we are seeing cap rates generally in the larger markets somewhere between 5.5% to 6%, and there may be a 25 to a 50 basis point swing when you get into the secondary markets broadly.

There are some secondary market assets that we have been looking at that are very, very attractive in great areas that are trading at 5.5% cap rates as well. But broadly speaking, the 25 to 50 basis point spread between the large and the secondary is what we are seeing with prices ranging anywhere from 5.25% up to 6%, 6.1% kind of range.

Thanks, guys.

Swaroop Yalla, Morgan Stanley.

Most of my questions have been answered, but Al, I was wondering if you can comment on, you had mentioned $0.10 of FFO dilution from new lease-up properties. Just wondering if anything has changed in that guidance, how the lease-up is going for the properties which were acquired last year?

I think I would say it has improved a little bit instead of maybe $0.10, maybe $0.08 this year because what we had in the first half of the year, as I mentioned in our guidance change, we had about a $0.01 favorable performance from some of those lease-up properties coming on strong, stronger than we anticipated in the first quarter. We expect to maintain that in the second quarter adding another $0.01. So, I would say, it was $0.10 in initial guidance on that, I would say, Swaroop, maybe $0.08 at this point.

What are the occupancies currently on those properties?

Sure. I will just run through them real quick for you, Swaroop. The Hue is [com] is 56.7% occupied. We expected it to be about 48%. Times Square is 86.6%. We expected it to be 58%, and South Church, which is the third, is 74%. We expected them to be about 67%.

Great. I know this was asked before, but I was looking at the development pipeline. At some point are you thinking about building a platform in your own organization down the line as this becomes a priority, or are you happy with keeping it small and outsourcing it?

Swaroop, this is Eric. We are definitely not planning to build a development platform. That is not a business model that we believe makes sense for us for a number of reasons. And I think that our focus for development at the moment is really just trying to take advantage of what we see as a window of opportunity where developers are starved for capital. Obviously, the leasing fundamentals are very good. The ability to deliver units this year, next year, into early 2013, I think for those that can do it in certain markets, can probably do very, very well with those deals. But we have got our finger on the switch. We believe that we never want to have a scenario where we can't absolutely turn it off in a heartbeat, and that is the model that we think is the right strategic fit for us going forward. So, we have got no overhead associated with this. It's continuing to be outsourced, and that's the approach that we will take.

Great, thank you.

Thank you. I would now like to turn the conference over to Mr. Eric Bolton for any further comments.

No further comments from us. We appreciate you joining the call and if you have any questions give us a call. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a wonderful day.