Mid-America Apartment Communities Inc (MAA) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the MAA Second Quarter 2011 Earnings Release Conference Call. The Company will first share its prepared comments, followed by a question-and-answer session. At this time I would like to turn the call over to Leslie Wolfgang, Director of External Reporting. Ms. Wolfgang, you may begin.

Thank you, Jonathan, 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 want to point out that as part of the discussion this morning Company Management will make forward-looking statements. Please refer to the Safe Harbor language included in yesterday's press release, and our 34-X filing 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 will be available on our website. I will now turn the call over to Eric.

We appreciate all of you being on the call this morning. I want to start by letting you know why we were later than normal in making our earnings release yesterday.

We had a last-minute question come up concerning the accounting treatment surrounding a component of our long-term incentive program. It involves a highly technical area of accounting literature, and after discussion with our auditors, we made a non-cash adjustment in the quarter of $1.8 million as outlined in the earnings release.

This is a non-cash adjustment; it covers the last 4 years. It has no impact whatsoever on the amount of incentive opportunities that was available to be earned nor any impact on the awards to employees.

Al will provide you more detail in his comments, but I want to let you know what caused us to be late in making the release yesterday. As reflected in our second-quarter results, leasing conditions remain strong, with favorable pricing trends, low resident turnover and high occupancy. Overall operating results were little better than we expected for the quarter, and we forecast continued strong leasing conditions over the second half of the year.

In the second quarter, year-over-year revenue growth was driven by strong pricing trends with new lease pricing increasing 7.5% as compared to the prior year, which is up slightly from the 7.4% trend reported in the first quarter. With new lease pricing running ahead of in place rents, we are also capturing improving trends in renewal pricing, with lease renewals in the second quarter up an average of 5.1% over the prior lease.

With resident turnover at historic lows, vacancy exposure in acceptable ranges, and leasing traffic running ahead of last year, we expect continued strong pricing performance in the second half of the year.

Pricing improved on both a year-over-year basis and on a sequential quarter basis across all of our markets. Within our large market segment of portfolio, we captured the strongest pricing performance in Austin, Phoenix, South Florida, and Dallas. On a sequential basis, Dallas, Houston, and Austin all continue to look strong. We expect continued solid pricing momentum there.

Atlanta's performance in the second quarter remains sluggish, and has not yet captured the recovery trend that we are experiencing in Texas. However, new lease pricing is improving there, and we are encouraged with the trends that are starting to build. We expect Atlanta will be a stronger market for us over the second half of this year.

Our secondary market segment of the portfolio continues to perform very well, with strong pricing trends continuing in Memphis, Little Rock, Jackson, Mississippi and Columbus, Georgia.

While there is certainly more talk and effort being taken to get new development underway in a number of markets across the country, we continue to believe that meaningful new supply pressure is not a significant worry over the next couple of years.

Trends associated with new households favoring rental housing, plus existing rental households staying put in the rental market, on a combined basis, should have a significant positive impact on demand, and more than offset what new supply does get delivered over the next couple of years. In his comments, Al will give you more specifics on the balance sheet and the terrific progress being made there.

We are committed to a steady program of positioning the balance sheet to further access the unsecured debt market. Fortunately, in order to accomplish this, we are not facing any need to deleverage the balance sheet in a significant way or take actions that would require material dilution to our existing earnings stream or shareholder value. Our balance sheet metrics are strong and well-positioned to support our external growth program.

As outlined in the release, we were pretty busy acquisitions front during the second quarter, closing on 5 acquisitions. While there clearly is more capital than market in chasing apartment real estate, we continue to have very good deal flow and expect will be successful in capturing slightly more grow this year than we originally forecast.

Year to date, we've acquired almost 1900 units for total investment of $208 million, and are excited about earnings growth to be realized from these recent acquisitions. Construction is underway at our 3 development projects and proceeding according to forecast. We will carry most of the earnings dilution associated with the lease-up to activities on these development deals next year.

We expect to capture an NOI yield of just over 8% from stabilization from this development pipeline in 2013, and strong new earnings growth thereafter. We continue to feel very good about the Company's position at this point in the cycle and look forward to increasing value growth from our existing portfolio as well as additional new investment opportunities.

I will turn the call over to Al now for more insights on our results, financing activities, and an update on earnings guidance.

Thank you Eric, and good morning everyone. Excluding the non-cash expense related to the accounting adjustment Eric mentioned, we reported FFO for the second quarter of $38 million or $0.98 per share on a diluted basis. As mentioned in our release, we closed on over $150 million of acquisitions during the quarter, which produced upfront acquisition expenses of about $1.5 million or $0.04 per share.

Our forecast for the quarter anticipated only about half of this volume, or $0.02 per share of the acquisition expenses, but excluding both non-cash expenses and these additional acquisition expenses, FFO for the second quarter was $1 per share which was $0.01 ahead of midpoint of our previous guidance.

Our same-store portfolio performed well during the second quarter as our revenues grew 3.8%, driven by a 3.5% increase in effective rents for the quarter. Our turnover rate ended the quarter at a record low of 54.4% on an annualized basis as a percentage move outs to purchased homes remain well below historic norms.

Overall, our operating expenses were in line with our expectations for the quarter, increasing about 2.9% over the prior year. Real estate taxes and utility expenses produce most of this expense growth, making up over half of the total increase. We ultimately bill about 75% of our water cost to our residents, but the recovery is included in our operating revenues.

As we have outlined before, our real estate tax expenses have declined more than 8% over last 2 years as tax valuations have fallen throughout the portfolio. But we do expect growing multifamily fundamentals to begin producing pressure on real estate taxes for the current year, as many states and municipalities deal with budget issues.

We continue to expect a full-year increase of 3.5% for this line item, which importantly represents about one quarter of our overall operating costs. We should have much more information about the tax rates and final values at the time of our next quarterly release.

We were very active acquirers during the second quarter, purchasing 5 high-quality and wholly owned communities. All five properties were stabilized on acquisition with an average cap rate on the first years earnings ranging between 5.75% and 6%. Though we did incur $0.02 per share of unexpected acquisition cost during the second quarter, we expect additional contribution over the back half of the year from having these yielding properties in place earlier than anticipated.

We were also very active in managing our capital structure during the quarter. In June, we received an initial credit rating of BBB flat from Fitch, which we put to work immediately through issuing our first unsecured bond series. We priced $135 million private placement of unsecured senior notes with an average maturity of 9.1 years, an average interest rate of 5.15% in June.

Due to strong investor demand, the offering was upsized from $100 million, and the deal was closed and funded last week. The proceeds will be used to pay off the only remaining current year debt maturity, an $80 million charge on our Fannie Mae credit facility, and to fund the debt portion of our acquisition and development activity.

Given favorable credit market conditions, we moved earlier than we had originally planned to execute this transaction and this will cost us about $0.03 per share in FFO over the back half of the year, but represents a very good investment in our balance sheet structure.

In order to fund the equity portion of our acquisition and development activity, we raised $34.1 million in net proceeds during the quarter by issuing about 529,000 new common shares through our ATM program, at an average price of $64.53 per share, net of issuance costs. We plan to continue using our ATM program and lines of credit to match fund investment activity for the remainder of the year.

Our balance sheet was in great shape as we ended the second quarter with our leverage defined as debt to gross assets at 47% and with EBITDA for the quarter covering fixed charges 3.6 times, compared to the sector average of about 2.6 times.

At quarter end, over 87% of our debt was fixed or hedged against rising interest rates with well-staggered maturities averaging 4.5 years. We expect to end the year with our leverage at or just below current levels.

We had a very late question come up this quarter regarding the accounting treatment for our restricted stock plans. This issue relates to a prior Company practice, used for the convenience of our employees, allowing certain employees, not including any of our executive officers to sell their awarded shares directly back to the back to the company upon vesting.

Under AFC718, this practice triggered an implied requirement to purchase the vesting shares, which produced the cumulative $1.8 million non-cash adjustment, in order to change to the liability method of accounting for these plans. I think it is important to understand that this issue relates to matters of technical interpretation and very complex accounting standards, rather than have these plans actually created or managed by the Company.

Finally, excluding the non-cash expenses just mentioned, we are adding $0.02 per share to our earnings guidance for the full year. This revision is primarily related to an expected stronger contribution from our more recent acquisition of lease up properties.

While we still believe a full year NOI growth range of 4% to 6% is appropriate for our same-store portfolio, the combination of higher projected lease up property performance and the significant volume of yielding properties acquired during the second quarter, produces an additional $0.05 per share in FFO projection from the second half of 2011.

Of course this performance will be partially offset by the $0.03 per share in additional costs related to the recent bond transaction, resulting in the net increase of $0.02 per share to the full-year guidance. Excluding the non-cash expenses related to the adjusted of our stock plans, our guidance is now for full-year FFO per share in the range of $3.92 to $4.12 per share or $4.02 at the midpoint.

Including the non-cash expenses, FFO is expected to range from $3.87 to $4.07. That's all we have in the way of prepared comments, so Jonathan, we will turn it over to you for questions.

(Operator instructions). Our first question comes from the line of David Toti from FBR Capital Markets. Your question, please?

Good morning, everyone.

Good morning, David.

Eric, I have a question for you relative to your primary and secondary market performance. I know you touched on it a little bit, but I was imagining we are going to see a greater spread between those two markets in terms of the revenue performance in the quarter. Or at least a narrowing if not a surpassing. They seem to remain relatively stable, and the revenue growth, the growth rates in both buckets were sort of similarly ranged. Can you comment a little bit about the performance from the two buckets in this recovery, and maybe the two buckets don't really exist in this recovery?

Yes, let me start on that, David, and I'm going to turn it over to Tom to give you a little more color on some specific markets. But broadly speaking, first of all, we continue to be very optimistic about the secondary market segment of our portfolio heading into this recovery cycle. When you look at some of the job growth trends coming out of places like Charleston and Greenville, South Carolina and Nashville, and Memphis, and Little Rock, frankly they are pretty darn good. And then when you look at permitting activity, and any the early indications of where supply pressures may come from, frankly these secondary markets are seeing virtually nothing. In the way of permitting activity at this point.

So broadly, I would tell you that we continue to feel very good about the secondary market of the portfolio and I think it is going to surprise people in terms of how good it does perform in this recovery cycles. Having said that, the large market segment of the portfolio has begun to pick up momentum. And frankly, a couple of markets in particular in this large portion of our segment of our portfolio, namely Atlanta and Houston, have been a little sluggish in getting going. But trends are picking up quite nicely there. Tom, why don't you talk about those markets a little bit.

I will just touch on some pricing characteristics that we've seen. I mean with small markets, Savannah, 16% in price increases, Chattanooga 11%, Charleston 11.5%, all these are places where we didn't have any sort of supply issue to begin with. That has backed off even more, yet you have Boeing and Gulf Stream and Volkswagen pouring capital and jobs in the market so those are going well. And then on the larger markets that we expect to kind of get going with Atlanta and Jacksonville, those are both, and I don't want to overload the question here, I will answer broadly and let you follow-up if you've got a question, but those two are both coming back and recovering quite well. They are just lagging a little bit to places like Dallas and Houston and Austin that were in better shape on the jobs front.

Okay, that's very helpful. And then Al, just a quick question for you. Does your achievement of the rating on your unsecured debt in any way change your acquisition appetite going forward?

No, it does not, that's a very good question. It supports it. In fact, the goal and what it does is open up broader forms of capital, so we're trying to get the balance sheet in position of the long-term to have broader support, more supports and no it doesn't. It is very positive on all those fronts.

Is there still a need for as large an unsecured pool at this point or have you reached maximum?

I think that's the key question. If you look at us and why we have achieved that rating now and where we are going with it, if you look at our balance sheet in comparison to peers, and investment rating peers we stand up very good in all metrics, with the one metrics being standing out is unencumbered asset portfolio. So what you'll see us do over the next couple of years to get the full rating in the place we want to openly be is to work on that. So I think that's what you'll see is due in the next couple years, David, your point is funds, and certainly debt maturities and acquisitions, with some form of unsecured capital to grow that portfolio and certainly acquisition pace if it is faster than we are projecting, helps supports that move.

Okay, thanks for the detail.

Thank you. Our next question comes from the line of Rob Stevenson from Macquarie. Your question please.

Good morning. Can you talk a little bit about what sort of pricing strategy is at this point? If turnover is at your historical lows, guess the question begs are you really pushing renewal rates hard enough?

This is true. I will tell you a couple of things. First our trends are encouraging. We really continue to see good momentum on renewal pricing. Renewals are up 1.4% in July over June, our trends have moved up from around 4% in the first quarter to over 5% in the second quarter. We are sitting out renewals just over 6% for the last few months. So I think we are pushing aggressively in the area, and I think it is also important to recognize that on our renewal pricing in particular, it has remained very steady over time. And from 2008 to 2010, we really only saw a drop in renewal pricing from its peak of about 5%. So given that, and our good trends, I think we are pushing renewals appropriately.

Okay. Then Eric, I know you've got the one asset in Dallas that you are in the process of selling, but how are you thinking about dispositions going forward here? It seems like it is a great market to be selling this the value assets that might not be fitting and with your portfolio longer-term?

We have got two more assets in Houston that we plan to take to market later this year. We have got one in Memphis that we are going to be working on to take to market later this year. And we are also considering another one in a smaller market in Georgia as well. So we agree with the point, and we are teeing up a number of properties, all contemplated in our forecast. But we agree with the point.

Okay, and then lastly, does having a best-selling author of REIT reports on your board make you more or less likely to issue them going forward?

You know, that's a good question and no, it is part of the arsenal and time will tell. But we certainly have someone that can give us a lot of insight and guidance on that on our board.

And it is a great book which can be found on Amazon.com, Simon Wadsworth is the author.

It is gaining on The Girl with the Dragon Tattoo, I see. Thanks.

Thank you Rob, and Simon thanks you as well.

Thank you. Our next question comes from the line of David Bragg from Zelman, your question please.

Thanks, good morning. Al, couple questions for you. Given the recent market volatility, what's the latest that you've seen in terms of spreads from the GSEs and also the life companies?

I think we are seeing pretty much the same, that's a good question. You are seeing the life companies be very aggressive, particularly for the best credit companies. And the GSE's are coming in very competitive quotes still. And depending on the market, it is even more competitive. I think you see the insurance company more willing to be most competitive, some of the larger markets and for some of the highest quality deals, and the GSE's performing very good goal of coming in filling capital, and most all markets and having a very competitive price. So pretty much similar to what it was, I haven't seen a lot of change.

So last quarter I believe you said $180 to $200 and I know things are changing quickly, even this week, but as of the latest that you've seen would you say it is consistent with that?

I would say it is fairly consistent with that but I think one thing to remember though with treasury rates dropping and being so volatile, a lot of times what these guys do is to circle up a floor. Particularly the life companies and so you know what no matter what, spreads will just have to change and I want to fix coupon X, depending on what I'm doing. So you really have to look at a range of price if you're talking seven to 10 year deal, probably something in the 4%, 7%, up to a little over 5%, and ten year will be a little higher, and then they circle up that number and the spread can be volatile depending on that. So as treasuries decline, you may see spreads expand is my point. But all end prices will remain probably where they are at, and maybe go a little bit lower.

Got it. That's helpful and then just following up your point made earlier about working on growing the unencumbered pool, how can we think about the equity component of that process?

What you'd expect us to do, as I briefly mentioned, is we will look to fund our acquisitions and development, essentially on a match funding basis through our ATM this year. Ending the year with our balance sheet leverage at about -- maybe a little south of where we are right now. So we will fund it on a match basis, may be a little more equity than the balance sheet ratio, but pretty close at this point.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Swaroop Yalla from Morgan Stanley. Your question please.

Good morning. Eric, can you comment on the spread of cap rates between your markets and the coastal markets, how has it trended over the past year?

I think that, right now for the product that we are looking to buy in most of the markets that we are in, we are looking anywhere from 5.5%, 5.75% up to 6% range so call it 5.5% to 6% cap is generally what we are seeing stabilized assets. That's trading and the coastal markets, of course. Based on what I read, we are hearing sub 5 kind of numbers batted around. So it is what it is. From our perspective as we have long positioned the Company and terms of our strategy, I think for us it is all about just trying to deploy the cap in such a fashion as to drive a return to cap and IR that we think is going to exceed what our shareholder expectations are long term. And I think the markets will jump around.

I certainly think that we are going to likely see as capital continues to come into the space looking for investment opportunity and multifamily is these prices have gotten so rich in some of these coastal markets I think you are going to see the spread, if you will, between some of the more institutional coastal markets and some of these secondary markets -- I think that spread is going to continue to narrow. I wouldn't be surprised at all to see cap rates continue to compress a little bit in some of the secondary and southeast markets over the next year, because there is -- it seems like everybody I know has got a fund that they put together. And I think it is going to be a lot of money trying to figure out a way to get deployed.

Great, that's helpful. The other question I had for Al. Is the guidance and change -- I noticed that the same-store numbers have been maintained, so is that coming from the non-same-store acquisitions coming in earlier than expected?

It is coming really from two things, it is from the recent acquisitions we've had really over the last year we have several that were strong lease up properties, if you remember we talked about. And it performed better than we expected and we expect it to continue that positive performance over the back half adding a stronger contribution. And then the recent acquisitions we did in second quarter. We have the five deals, a very high volume of high-yielding deals, all stabilized and yielding. So together that growth is expected to add about $0.05 per share more than we had originally projected in the back half. Then you clip about $0.03 per share off of that from the financing that we did, which is a very good investment but it will cost us in the back half. We did it earlier than we expected and took the market off in order to move faster, but the net of that is about the $0.02 midpoint increase.

Got it. But the $0.03 in financing was guided earlier -- right?

No, it was not. We have put the financing impact in there -- that transaction occurred later in the year. So this is a $0.03 change from what we had before. We had it closing in mid-November, we closed it obviously the end of July. So that's a difference and we had some variable rate to fixed rate earlier than we expected. The transaction, good deal, very glad we did it, we just did it earlier than we thought.

Great, that's helpful. Thank you.

Thank you. Our next question comes from the line of Sheila McGrath from KBW, your question please.

Yes, good morning. Eric, your same store guidance is from 4% to 6% the first two quarters were in the mid-fours. Do think things are accelerating enough that the back half of the year might look better from a same-store NOI perspective?

Yes. I think the short answer is yes, and part of what is going to enable that to occur of course, is just as we continue to be price more of the portfolio you get the growing compounding effect of that in the results as the year unfolds. So as we alluded to, we are seeing very strong trends continuing to move up as far as new lease pricing. Our trends on renewal pricing are moving up and as we just repriced more of the portfolio it is just going to continue to have a greater effect on the revenue performance over the course of the back half of this year.

Okay and then a number of your markets had a pretty big year-over-year same-store expenses changes. Austin, Dallas, Houston and Raleigh, and I was just wondering what's driving that?

Sheila, in almost all those cases I think Al mentioned in his report is those are places where we've been fighting with municipalities pretty aggressively on the taxes, but the taxes are going up. Everything you mentioned there, is a tax issue.

Part of it we had -- we started last year, Sheila, it is a year over year comparison thing, with a pretty strong expectation to taxes, and last year, we didn't get it the increases that we thought may come, and so we had some credits in the second quarter so some of that is comparison issue. We think this year is the year we are going to have some of that tax firm up and comparing to a very low base last quarter.

As Al mentioned, we will have a lot more clarity on that in the third quarter.

Okay. And last question, Al, can you just give us some rule of thumb in terms of if we look at your old financing strategy with the GSEs, and what the all in cost were, and versus the new unsecured strategy, and then going into next year because you did say it cost $0.03 on the back half. Going into next year how much new unsecured issuance should we expect so we can kind of take that into account on the interest expense side?

Sheila, I would say the costs in the back half is really not related to the difference between the unsecured and secured cost and I will get back to that in a minute. It is really relates to the fact that we moved earlier to put more interest rate production in the balance sheet. We will end the year with more than 87% of our debt hedged. It will be closer to over 90%. That transaction was increasing our protection and did it earlier, and so that's why the $0.03 primarily. But it is very good question, what is the cost of transition in the strategy?

I'll point you to the fact that we did this deal, a 9.1 year average deal at about 5.15% coupon. Very good secure transaction, we did it closed. Recently we priced in the first quarter, was a ten year deal, life company, very aggressive deal and it was 5.1%. So that cost is very close, that's what was very good to see. So it is encouraging to me that we can move forward with the strategy and fund both our debt maturities and our acquisitions and debt portion over the next year or two with more unsecured capital, so that we can grow our unencumbered asset pool, and that's what we hope to see. At this point the prices are very close so we don't see a significant difference.

Okay, thank you.

Thank you. Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Your question please.

Good morning.

Good morning.

Eric or Tom, first can you give us a sense of where July came out? And also are August and September renewals been sent out? And then also curious as to where lost lease is in the portfolio at this point?

Okay. Tom?

Lost to lease on the portfolio answering backwards is about 5.4% right now. As far as where July came out, sort of a broad question is possibly traffic up significantly, 7% effective occupancy a little better than our occupancy and little better than first quarter. And pricing rolling along well, but I think Drew has a little more information just on exactly for the third quarter our renewals were.

That's right. Prices on average, Michael, from July really through October went out at just over 6% on our renewals.

Helpful. Al, in the guidance previously I think you suggested 50 basis points of upside to the arranges there. Just curious if you still see that 50 basis points upside, and also can you go through the expenses? It looks like there was some pressure on real estate taxes and utilities, just curious what you are budgeting there for the back half of the year?

Okay, Mike, I can cover those. First I think important to consider we started the year on our NOI guidance, we had a range of 4% to 6%, we maintained that range, but I think we started the year just south of that. Midpoint, let's say. Second quarter because of the strong performance in the first quarter, we kept that range, but it increased 50 basis points, and so now we are just north of that midpoint in our actual forecast. So, yes, we still think that 50 basis points is there. And we project the full year on that basis.

We have a strong performance in the second quarter, but we included that in our forecast, and we updated end of the first quarter and still feel very good about that. In terms of expenses, you are exactly right. The full year number, the two main items are real estate taxes and utilities. As I mentioned a little bit in the call, utilities, that is something that we pass on about 75% of that -- of our water cost, which is a large piece of that to our residents. So that helps, but that recovery is in the revenue line, and so the numbers are a lot larger impact on your expense ratio than on revenue growth ratio. I think it is like three to one, the expenses -- 9% of our expense line total, and the revenue is like 3% or less than the revenue total.

So you don't see that big of a ratio impact in revenues. So the real remaining item is taxes and as we talked about, we manage those very aggressively. We've got some use back on our appeal this year, and had some good news but we have many outstanding. And I think at this point it is going to come down to rate increases. We are seeing a lot of the states and municipalities begin to really move those rates up a little bit, and so we won't know that until the third quarter. We maintain at about what we had. Our consultants are telling us that's the right thing to do so that's -- we will definitely update that in the third quarter.

Mike, I would just add that it is important to recognize that we've seen real estate taxes decline 8% over the last two years. We are in an environment where clearly values are moving up and we are clearly an environment where a lot of these local taxing authorities are under all kind of budget pressure and so in that context it is hard for us to feel comfortable frankly, taking 3.5% real estate tax growth off the table at this point. We will know more as the assessments come in, in the third quarter, but basically everything that we are seeing and what we are hearing from our consultants it seems like a pretty reasonable assumption to make at this point.

That's helpful. I appreciate that, Eric. Then finally, can you talk a little bit about the acquisition pipeline at this point. Whether you are seeing -- we have seen a fairly decent amount of activity in secondary markets. Is that reflective of just the better opportunities in these secondary markets today? And then finally, just curious on the fund there. I believe that closes out at some point here in terms of the acquisition period, can you talk a little bit about the opportunities you are seeing there?

Yes. We have been seeing frankly a little bit better buying opportunity coming out of some of these secondary markets. That's -- several of the deals have been in those markets but frankly, we are looking at some opportunities now in Dallas that I know about, that we are working quite hard on right now. So it is really kind of all over the board, but broadly speaking, we continue to see, frankly, an ability to create a little bit more leverage with our balance sheet and our transaction capabilities in some of these secondary markets more so than in the larger markets, and that's where we are finding better deployment opportunities at the moment. You are right, on the fund but we are already in conversations with our partner about continuing the program. They are very anxious to do so. They've raised a fund, and so I'm actually confident that our JV program, if you will, with our existing partner is going to continue to move forward over the balance into 2012 and beyond. We are looking at some -- we have several deals we are looking at right now for the fund.

I would just add, by leverage the balance sheet, he obviously means speed in which we move.

Are the IRR targets -- is your underwriting the same for the secondary versus primary markets as well at this point?

You know, in terms of the IRR, yes, because our cost of cap was our cost of capital and we are looking to capture the same return on a cost of capital regardless of where we deploy it. Having said that, what we do -- where you see the difference between large versus secondary markets, is in the assumptions regarding rent growth in the assumptions regarding exit cap rate in some of the performance characteristics. We have to think about things a little bit differently sometimes in some of these secondary markets, not in all of them. So we really try to bring in those differences between the markets in terms of performance dynamics and what we expect to capture in terms of performance. Probably the only real area we make a real differentiation and terms of our yield requirements is in the area of development where as we are buying now at roughly around a six yield on acquisitions the three deals we have in the development pipeline right now are expected to be 8% yield. So that's where we make the real difference.

Great. I appreciate the comment Eric. Thank you very much.

Our next question comes from the line of Carol Kemple from Hilliard Lyons. Your question please.

Good morning.

Hello Carol.

Did the $1.8 million charge -- does that show up in G&A in the quarter?

It did. If you look at G&A, it was pretty significantly above the pressure and $1.8 million directly was that.

Okay and take you all give an exact number of how much in July your new leases were up year-over-year in renewals?

Drew can do that.

Okay.

I don't know that we did it earlier but in July, our new leases continue to show some good momentum. They were up 1.8% over June and for July year over year up 6.5%. Then on our renewals on a lease over lease basis are up 4.8% over the prior lease.

Okay, great, thank you.

Thank you. Our next question comes from the line of Paula Poskon from Robert W. Baird. Your question please.

Thank you good morning.

Good morning.

I wanted to follow-up on the earlier discussion about revenue growth and pushing rental rates. Clearly we are seeing in many places the phenomenon of new rates on new leases exceeding rate increases on renewals. Do you think that your historically low turn over in an absolute sense, and then also relative to peers, is constraining the potential revenue growth that your portfolio could actually generate?

I don't think so, Paula. I think as Drew mentioned, during the downturn over the last two years, arguably some real tough leasing environment, our existing renewal pricing only went down 5%. And I don't know exactly how that compares to the peers, but frankly that's not a dramatic fall off. But having said that, we also -- important to recognize -- carried very strong occupancy during that downturn, and went into this up cycle with very strong occupancy, if you will poised really begin to push on pricing. So when we see that on a year-over-year basis, our new lease pricing is running at 7.5% up, and where we see renewal pricing running, most recent renewals that went out, up 6%, it is hard not to feel good about that. And we think it is particularly in relationship to sort of where we are coming from so we felt pretty good about it and I think it is going to be competitive with the sector.

I don't know -- I haven't spent a lot of time studying their numbers and what they are doing on it, but I will also tell you that as I think many people appreciate about our story, our objective is to outperform over the full cycle. And our whole strategy built around how we deploy capital in these various markets around the Southeast, is all geared towards creating a performance profile that we believe is likely to hold up very well during the down periods and be very competitive in the up cycles and ultimately outperform over the full cycle. And we really believe in that approach. We think that is the right thing to do. We think that what lease rates are supposed to do, and we think ultimately, that drives the best performance for shareholders long-term. It is probably more than you wanted to hear--

Not at all.

But we feel very good about where we are at this point and feel very good about the pricing trajectory that we are seeing in a lot of these rents. Also understand to some degree as Tom mentioned in his comments, that some of our larger market performance we've gotten a fair amount of waiting in markets like Jacksonville and Atlanta that are just now really starting to get their feet underneath them, and we are seeing some very encouraging trends emerging there. We think we've got a lot of upside to go.

And just a point on a turnover, Paula, the reason turnover is low from our standpoint is not because we're begging people to stay on the rent pricing, it is home buying this quarter was down 25%. We actually saw a pick up in the number of people that were moving out because of rent increase, so we monitor that. It is still not a material part of move outs, but it is not like we are keeping people because we are not raising rents, we are keeping people because they are not buying houses. Then Eric mentioned recovery opportunity in Atlanta. Atlanta is sort of our weakest renewal story of the major market groups and renewals there were up almost 4%. So we feel like we are being aggressive on it but we spend a lot of time -- renewals is the place where we've got probably the most psychological challenge of pushing rents and we spend a lot of time looking our folks in the eye and giving them confidence to get out there and push those with residents.

To follow-up on that, Tom, the actual rent increases that you are pushing, how does that compare with what they suggested moves are from your revenue management system? In other words, are you overriding the guidance from the revenue management?

We launched the offers out there and then there's a period of negotiation that occurs between the resident and that trade off varies by market and by property and there is some trade-off that occurs. So we get most of what's offered out there.

I would tell you that when you look at our total recommendations out of our pricing system versus the override is about 5%. So it is not a significant amount of override that takes place.

Okay, thanks. And then just finally Eric, can you comment on what you are hearing among sellers -- clearly you've got a great track record of buying these off market opportunities. What are you getting a steady flow of inbound calls? Is it on the rise? Our people bringing product to market for different reasons than they were six months ago?

It is a lot of the same thing. If you're go a lot of it was pretty distressed financing situations and we're having a lot more conversations with lenders than we are today. And frankly to some degree, what has picked up in the last four or five months, are developers bringing deals to us where they are either fairly recently built, or they were built maybe three or four years ago. And they are looking to get their capital freed up so they can redeploy it right now believing that now is a good time to build. So we've seen a significant pickup in that particular area. Where developers with product in the brand new to three or four year range are bringing opportunity to us. And in many cases again, for us it is all about trying to take our strengths and go in to some of these markets where a lot of the competitors, frankly, are not as strong as we are, we are not competing against the other REITs, and we are able to come in and bring opportunity for a seller that creates value for them, and enables us to make a very attractive acquisition on pricing that makes sense for us.

Thanks, that's all I have today.

Thanks, Paula.

Thank you at our next question comes from the line of Omotayo Okusanya. Your question please.

Good morning Eric and Al, how are you?

Good morning.

A couple of questions. It sounds like you got guys are going to be definitely more focused on dispositions over the next few quarters, given the pricing environment. Can you give us a sense of what timing could look like for some of assets you mentioned earlier and what potential cap rates you like to do those deals that?

The one we have under contract currently in Dallas, we would expect certainly to close this quarter. We've got another couple of assets in Houston that we would expect to close in the fourth quarter before year end. We've got another one in Memphis that probably, we hope closes before year end. I would tell you that cap rates, I don't know. We are just going out with some of this, but I would tell you probably somewhere 6.5% range, these are going to be some of the older assets that we've owned for a long time. That have just reached a point where we see an opportunity to redeploy in a better way. So 6.5% to 7% probably is going to be the range that I would expect to see on some of those sales.

And all the sales happen, the total volume of sales will be about how much?

Around $40 million for all of those -- will be about what it is.

That's helpful. And then I'm just trying to understand the loss to these of 5%, your rent increases are 7.5% -- my understanding is that in most of your markets, because you are one of the few professionally managed guys, that your rents are typically higher than market rents, and so I'm just struggling with reconciling that notion versus some of these impressive numbers you are putting up and how you keep doing that against a backdrop of generally lower rent in your portfolio in all your markets?

In terms of how -- I think what you are saying is you are going to push rents, and how are you going to do that if the other guys don't have a sophisticated platform and they are also going to push rents, and the way I'd answer that is they don't have a sophisticated platform, but they see an opportunity when it is presented and we can go out there and push the realm and they are happy to follow along in our wake a little bit. So it is not like we are going to get $400 above the market rent in one of these secondary markets. We are going to be sort of pushing it -- realizing opportunity best but I think follow along and create a backstop on that.

I would also add, this is a bit of color too, don't forget that 60% of our assets are in markets like Dallas and Phoenix and Houston and Austin and Atlanta, and these are markets that have pretty sophisticated pricing mind sets as well. Not everything we have is in a cotton field in Mississippi somewhere. We are in some pretty sophisticated markets with some pretty sophisticated systems as well.

So you would say in those markets you are below market, and then your secondary markets you are above market and that's how everything averages out to this 5% loss to lease number?

I'm not sure where you are seeing the disconnect on loss to lease in the market but lost to lease is going to drag new rents simply because every time that the new lease gets assigned then our gap closes unless we are raising on our front end. Those two numbers are never going to come together.

We are constantly repricing the new higher --

We are constantly growing that. Both are moving. And we may just be having a bit of a communication error. I will be glad to follow-up with you off-line on that as well. I just get the sense that we're not really answering your question and we'd like to.

Okay, we will take it off-line and I will try to figure this one out.

You bet. Thanks.

Thank you.

Thank you at our final question comes from the line of Mark Lutenski from BMO Capital, your question please.

Thanks and good morning.

Good morning.

Eric, you mentioned briefly before that you are seeing some sellers come to the market from recently constructed developments. I was wondering if you could give sort of a 30,000-foot perspective on the supply picture in your markets right now?

Certainly we are seeing evidence of developers attempting to try to figure out a way to get geared back up to some degree. But the numbers are nowhere close -- if you look at where permitting activity was now currently in 2011 versus where it was at the peak, we are down about 67% across our portfolio and our markets. That's about equal between the large and secondary markets. It is down roughly call it 68%, 69% are almost closed to 70% down in the larger markets and low 60% range in the secondary markets from the peak.

But then you look at where we are today in terms of permitting activity versus the low point last year, 2010, permitting activity has begun to pick up a little bit and mostly it is in a bigger markets where you would think. And it is up close to as compared to the low point last year, it is up about 30% broadly in our larger markets in terms of permitting activity. But in our secondary markets it is up 3%, it is virtually of nothing from last year. So that's one of the reasons why I continue to believe that the secondary market component of the portfolio is going to be stronger than a lot of people expect it to be over the next couple of years.

Okay, that's very helpful. And just to switch gears, credit rating obviously forces a lot of flexibility with the balance sheet. I'm curious, as you think about your GSE -- its exposure right now, how does that compare to where you would like to be in the future and the long-term?

Mark, we definitely are going to over the next couple of years broadening our capital sources. So I prefer to think of it as we are going to grow into that. But I think you will definitely see the ratio of GSE debt on the balance sheet go down as we grow. And that's not to say we will continue to some secured debt and some GSE debt, that's very good partners and they are important part of our business and over the long-term we are going to continue using them and being with them. But for the short term we are growing and expanding our capital sources.

Great, thank you.

Thank you. This does conclude the question-and-answer session of today's program but I like to turn the program over back to management for any for the remarks.

We appreciate everyone joining us this morning and if you have any follow-up questions you know where to reach us. Thanks very much. Good-bye.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.