Mid-America Apartment Communities Inc (MAA) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen. Thank you for participating in MAA third-quarter 2011 earnings release conference call. The Company will first share its prepared comments, followed by a question-and-answer session. At this time, we would like to turn the call over to Leslie Wolfgang, Director of External Reporting. Miss Wolfgang, you may begin.

Thank you, Howard. 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 as that part of the discussion this morning, Company management will make forward-looking statements. Please refer to the Safe Harbor language included yesterday's press release, and our 34-X filings with the SEC which describes 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 were pleased with the operating results as pricing trends and revenue performance continued to improve. Year-over-year, same-store revenue growth for the third quarter was 5.5%. Which was improved from 3.8% in the second quarter. And represents the highest revenue growth posted over the past 20 quarters. We continue to capture low resident turn over, good occupancy, and as a result, a continuing ability to put through strong rent increases.

As compared to expiring leases, rents were up 5% in the third quarter. Importantly with current lease renewals going on at increases averaging 8%, we continue to see positive moment from pricing as we have into 2012.

On the expense front, as expected, real estate taxes pressured same-store operating costs in the third quarter. Largely as the result of a credit booked in Q3 of last year. For the year, we continue to forecast that real estate taxes will increase around 3.5%. After capturing 2 straight years of 4% decline in real estate taxes, and clear evidence that apartment real estate values are quickly recovering, we fully expected to see this level of growth and taxes this year.

Leasing traffic in Q3 was essentially flat, with the high-traffic patterns we saw at the same time last year. We expect that normal seasonal leasing traffic patterns will hold, and we'll see some slowdown during this upcoming holiday leasing period. But certainly in line with expectations to cover the lower-volume of turnover that usually takes place during the winter months.

In our earnings release, we included an announcement regarding a new $250 million unsecured revolving credit facility, that was closed just earlier this week. Al will give you details on this new facility in his comments. But as we've been discussing since early this year, we are focused on continuing to position the balance sheet to support continued steady growth. And this new unsecured credit facility is another important step towards positioning the Company to fully access the unsecured debt markets.

Our transaction pipeline remains very robust, and as outlined in a release, we have once again raised our expectations for new acquisitions to a range of $350 million to $400 million for this calendar year. We continue to see a lot of properties being brought to market, as both institutional owners and developers look to recycle capital and position their balance sheets for the strong up-cycle in apartment real estate over the next few years.

MAA's extensive network and long-term relationships in the region continue to drive a number of opportunities our way. Our ability to provide sellers execution capabilities that are superior to what many of the buyers in a number of our markers are able to provide, will, I expect, to yield an active external growth program next year. As we begin to consider the leasing environment for 2012, we continue to feel that pricing and internal growth will remain strong.

The 2 biggest variables that have impacted our same-store performance over the last 6 or so quarters, has been the very low turnover resulting from the sharp fall-off of single-family home buying. And a lack of new construction in multi-family housing. We continue to believe that any meaningful trend back toward our residents buying single-family homes will depend on both a significant recovery in the employment market and some moderation in the current hurdles associated with securing mortgage financing, neither of which we see as likely in 2012.

And, of course, any meaningful recovery in the employment markets would also have a positive impact on our leasing fundamentals as new household formation will likely pick up as well, driving higher levels of demand for housing in general. So, overall it is hard to see any significant shift in this dynamic for our business for the next few quarters.

On the question of new apartment development, we continue to believe that the overall volume of permitting activity is reasonable, relative to growing demand. And as a result, we expect to see continued, solid, positive absorption across our portfolio in 2012 and into 2013. As expected, permitting activity is picking up more quickly in several of the larger markets such as Dallas, Atlanta and Houston. But it's important to note that a significant component of this activity is focused on in-field and inner-city locations where we tend not to compete.

Further, our secondary markets continue to see very little in the way of new permitting activity. And as a result we expect this segment of the portfolio will perform all through this particular up-cycle. In summary, we believe that MAA is very well-positioned to continue to capture strong results in this up-cycle for apartment real estate as we head into 2010. And that is all I've got, so I am going to turn it over to Al.

Thank you, Eric. And good morning everyone. I will provide a few comments on our earnings performance for the third quarter. As well as a few highlights regarding significant investing and financing activities. As reported in the release, FFO for the third quarter was $39.2 million or $1 per share, meeting the mid-point of our guidance for the quarter. This earnings performance was driven by solid growth from our same-store portfolio, which produced 5.7% NOI growth for the third quarter. Our revenues grew 5.5%, primarily due to 4.9% increase in average effective rents and continued strong occupancy. Which ended at 96.2% for the same-store group. Resident turnover remained historically low at 54.8% on a trailing12-month basis.

Operating expenses grew 5.1% during the third quarter, with the largest portion coming from -- last year from growth real estate taxes, which was expected. Timing of prior-year accrual adjustments, really largely credits recorded in the third quarter for last year, produce an unfavorable real estate comparison for the third quarter, this year. Real estate tax expense for the quarter increased 8%, but as Eric mentioned it's projected to increase about 3.5% for the full year, which is near the original guidance for 2011.

Overall performance from our same-store group and recent acquisitions produced earnings results $0.02 ahead of our forecast for the quarter. This favorable operating performance was primarily offset by additional acquisition and health insurance expenses during the quarter, bringing earnings results to the mid-point of our previous guidance. The solid acquisition pace continued through the third quarter, as we purchased 2 new properties for a total investment of $78 million, about $50 million more than projected for the quarter. In October, we purchased additional property for just over $33 million.

And all of these acquisitions were stabilized and represent an average CAP rate of about 6% on the first year's projected cash flows. And since we do include acquisition costs in the calculation of FFO, per the NA-REIT definition, the additional volume in the third quarter added about $0.01 per share in acquisition expenses, as we mentioned.

Also, reflecting this pace, we increased our full-year guidance of wholly owned acquisitions to a range of $350 million to $400 million, an increase of $125 million over the previous mid-point. Though we expect to incur an additional $0.02 per share in acquisition expenses related to this projected volume increase, we also expect additional contribution from these and recent acquisition properties, effectively offsetting earnings impact for the fourth quarter.

Also during the third quarter, we sold a 28-year-old property located in Dallas for total proceeds of about $11 million. Our disposition plans continue to include 3 other communities, 2 in Houston and one in Memphis. Estimated to produce combined proceeds of about $40 million. These transactions are excited to occur late in the fourth quarter or early in the first quarter of next year.

Progress continues on the 3 communities currently under development, which we still expect to cost around $110 million on completion. We funded $11 million during the third quarter and expect to find an additional $20 million to $25 million during the fourth quarter. We also expect initial unit deliveries and occupancies at 1 of these communities, Cool Springs, located in Nashville, during the fourth-quarter.

Turning to the balance sheet, we continue to make solid progress to our long-term financing plans, completing several important transactions during the third quarter. In July we closed on the $135 million private placement of unsecured notes, which were marketed and priced back in June. The proceeds were then used to repay an $80 million tranche of our Fannie Mae credit facility, which was set to mature in December and then to fund the new acquisitions.

The release of these secured mortgages combined with the new acquisitions increased our unencumbered assets to around 25% of gross foot-value, at the end of the quarter. As you saw in the release, early this week we closed on a new $250 million unsecured revolving credit facility. The new facility includes an expansion feature to $400 million, and has a 4-year term with an additional 1-year extension option.

The facility will initially price based on a leverage grid, but revert to an investment grade grid once the Company achieve an additional rating for Moody's or S&P to accompany the current BBB flat rating from Fiche. We are very pleased to be expanding our banking relationships and to be producing additional capacity and flexibility for growth. We remain very focused on further diversifying our capital structure over the future.

In order to fund the equity portion of our acquisition and development activity, we raised $44.2 million in net proceeds during the quarter, (inaudible) about $657,000 in new common shares through our ATM program. The new shares were issued at an average price of $67.35 net of issuance cost. We plan to continue using our ATM program and lines of credit to fund investment activity for the remainder of the year. Our balance sheet remains in great shape, with leverage, defined as debt-to-gross assets, at 47% at the end of the quarter. And EBITDA for the quarter covering fixed charges 3.5 times, compared to the sector average of close to 2.5 times. At quarter end about 90% of our debt was fixed our has against rising interest rates. With staggered maturities averaging 5.3 years. We expect to end the year with our leverage in the 46% to 48% range.

And finally, looking at our earnings guidance for 2011, we are narrowing our FFO range for the year, while maintaining the mid-point. We continue to expect same-store NOI growth of 4% to 6% based on revenue growth of 4% to 5% and expense growth of 3% to 4%, presented with the bulk-cable program netted in revenues. Excluding the non-cash charge reported in the second quarter, which are about $0.05 per share, our guidance is for FFO the $3.97 to $4.07 per share for the full year, which remains $4.02 per share at the mid-point.

That's all I have in the way of prepared comments. Howard, I well turn the call over to you for questions.

(Operator Instructions) Mr. [Swaroop Yalla] from Morgan Stanley.

Hello. Good morning.

Good morning.

Your peers reported -- moderation in growth headed into September, October. Just wondered if you could give us some stats on new releases and renewals from, maybe by month headed into October and maybe even November.

Well, I can tell you on renewal pricing, Swaroop, we had sent out our renewals in October -- for October renewals up 7.6%, and November at 8.3%, and December at 8.4%. So, we will see how those renewals come in. Obviously, during the negotiation process we usually get something a little bit off that, probably somewhere approaching 100 to 150 basis points off of that. But broadly speaking, we continue to see upward momentum on a renewal pricing -- as we look into the fourth quarter. We haven't sent January renewals out yet though that will be coming up pretty quickly. But, we don't see anything that causes us any concern for the momentum that we see. And, on new lease pricing, of course -- this is the time of year where we tend to be a little bit more focused on protecting occupancy. So, I suspect we will see a little moderation on new lease pricing. Tom, you want to add anything to that?

Yes. Frankly, you covered the waterfront on that. But, the fourth quarter will adapt to the season a bit on pricing, but nothing out of the ordinary there.

Okay great. And then, just turning gears on supply. I mean multi-family starts have come in pretty strong in the last couple of months. Just wondering, if you are seeing -- which markets really a cause for concern headed into 2012 and 2013?

Well, Swaroop, let me give you a little context on the supply question first, and then I'll talk more about the markets. But -- it's interesting, if you look at the top 25 markets we defined as being where the majority of the REIT sectors investments. If you take all 12 of the REITS, roughly 80% of all the apartments are just in 25 cities. So, we refer to these as the top 25 cities. And, if you look at permitting activity in 2011 and you compare that permitting activity in 2011 to the low point -- and the low point for these top 25 markets was actually in 2009. Permitting activity is up almost 70% -- it's up 69%, compared to 2009 and 20 11.

But then, you look at our markets -- MAA markets what's interesting is that we actually bottomed out in 2010, just last year. Because -- we were still delivering supply in places like Houston and Jacksonville in particular, in 2010. And I think we are about a year behind if you will, in terms of the curb. And, if you look at 2011 permits compared to our low point and our markets, which is 2010 -- so 2011 to 2010 for our markets it's up about 56%. So, it's not up as much, to be honest with you compared to the low point for these top 25 markets.

Then, what is interesting, is if you [bifurcate] that, and if you look at our large markets and our secondary markets -- our large markets are up consistent with what you are seeing the top 25 markets -- up about 69% in 2011 versus 2010. But our secondary markets, they are only up about 35% or 36% versus the low point in 2009 in our secondary markets. So, we continue to see that -- where permitting is picking up, it's in the bigger markets. It's in the top markets. And in our region if -- of course, is the normal culprits it's Dallas, and it's Houston, and it's Atlanta to some degree.

But the secondary markets were you tend to see more of the merchant builder -- the smaller builder that tends to dominate development in those markets. They still are not getting very active. And so, permitting is still very muted in the secondary markets. Which I think is going to be a large part of why this secondary segment is going to continue to do quite well over the next couple of years.

Swaroop, just a little color. Dallas is probably the unit that we are expecting -- the market, rather, that we are expecting the most deliveries in 2012. And that's like 6,000 units, and that's 63% off at the peak. Houston will see about 3,900 units. That is also about 60% off of the peak. So, that's a little color on the large markets. And on the small markets, you have got to look hard to find any. San Antonio, we'll expect 800 units in next year. And that far and away of the secondary market group is the largest delivery, just on constraint financing we would assume.

Great thank you, that's very helpful.

Mr. Rob Stephenson with Macquarie.

Good morning guys. Can you talk little bit about your average rent in the same-store portfolio is a little under $760 a month. What point during 2011 did it get close to that level? I mean, when does the year-over-year momentum where you are just marking up low rents to current, subside. And then you had to be continuing to push market rents in order to continue to see strong same-store rental rate growth, on a year-over-year basis?

Well, I well tell you the gap, if you will, between new rents and in-place rents and the loss to lease, if you will. We have seen that band narrow little bit over the course of this year. Just because we have been so aggressive on renewal pricing. And then on new lease pricing what we've seen, is -- we have been raising new lease pricing at roughly 8% or so, really going back as far as last year. And so, the cost become more difficult. But -- we continue to believe that when you look at some of these other metrics -- and I'm going to turn it over to Tom to give you more perspective -- and you look at rent-to-income, and some of these other metrics that they focus on, that we certainly focus on. We continue to believe that the market is going to tolerate, continued momentum -- upward momentum in both on new and certainly on renewal leasing, as we head into next year.

And when you factor in what we were just discussing, very manageable supply levels. Broadly relative to what we see as continued steady demand. We think that we are setting up for pretty good momentum going into next year. Tom you want to --?

Yes, and it's chugging along. As far as affordability goes, Rob, our rent-to-income ratio peaked in '09 around 19%. It has trended down into 17% for the last 2 years. So, with higher rents and tougher economy, our resident profile seems to be getting stronger and stronger. And you need some more detail there or clarification. I don't want to over answer the question here Rob, but I want to get you what you need.

No, no. I mean if I look back at your supplement -- and obviously the same-store portfolio changes around a little bit -- I go back to the fourth quarter in your same-store effective rent was like $723 and change. Then it goes to $735 in the first quarter, $744 in the second quarter, and is now just under $760. So, if I look at this -- am I thinking about this right? That, basically, the big jump for you is basically sometime during the summer. And so, that you still have -- call it another 8 months of fairly strong imbedded rental rate growth, just marking expiring leases to market?

Sure, but the momentum is still pretty strong going. So, we just need to keep the asking rent number well ahead of that and re-pricing --

But you are certainly right, in that we tend to be a little bit more aggressive on new lease pricing in the summer months when traffic levels are high, and the environment is more supportive of it. We tend to be a little bit more cautious about pushing new lease pricing this time of the year. Only in that, we don't see traffic levels, typically, during the holidays quite as robust as we do in the summer. But -- as Tom says, certainly, just marketing to market, if you will, our existing portfolio we got some pretty good momentum in front of us. We think over the next 2 to 3 quarters. And then, by the time we get to the spring, hopefully -- we will be able to continue to be pretty aggressive on new lease pricing and keep moving that spread.

And, the piece of the puzzle that was missing that will begin to help, is that new lease prices have caught up with and now past, renewal prices. And that gives us a whole different level. And, that's reflected in the higher renewal rates increases that you're seeing us give out. For a while it's just -- hey, keep paying higher rate than market. Now, it's, foot in the gas in renewals.

When did that cross?

That crossed back in June-ish, in the second quarter.

Okay. And then --

The difference is, when that crosses -- about $10 it doesn't help you much. I mean, it's building phenomena, Rob.

Okay. And then, I guess if I think about MAA. You know, you guys aren't a big developer, but you do have embedded redevelopment opportunities within the portfolio. When you take a look out over the next couple of years what do you guys see as the opportunity there on the redevelopment side? In terms -- can you help us qualify what that might wind up being?

Sure. We'll do about 2,600 this year, which was very much our plan. Next year -- we will grow that, probably in the 3,000 range. But there's a reasonable amount of opportunity out there, Rob. We are cautious with our redevelopment program. And we want to be able to turn on and off based on opportunity, and market conditions, and push back and go-ahead. We can ramp it up pretty quickly and we can slow down pretty quickly.

I just don't have the crystal ball to tell you what the 2 or 3 year prognostic is, but we will be more aggressive with it next year.

I know we have looked at in the past, Rob. And as Tom said, we'll -- our initial planning is built around 3,000 units next year. But, we've looked at it in the past and we felt like we had something approaching 7,500 maybe as many as 10,000 units that, we felt like candidates for this. But, as Tom says, we are pretty cautious about it. We have our approach were we go in and do the renovations, and we will see what the market well bear. If we get it, we keep going if we don't we stop. But, we think given the strong pricing environment we are in, that we are going to continue to get some good organic growth of the portfolios as a result of this influence. I would just add real quick there, Rob to what that looks like if we do 3,000 units -- spending $10 million to $12 million of investment at 10% rent increases is what the financial impact that would have for your model.

Okay. So, you guys are still targeting 10% returns on that?

We are and we spend -- if you take 3,000 units -- we tend to focus on the lighter renovations right now 3,500 to 4,000, let's call it. And so, $10 million to $12 million a year is what we've been spending and 10% rent increases, you can roll that in and have a pretty good impact.

Perfect guys. Thank you.

Thanks Rob.

Mr. Rich Anderson from BMO Capital Markets.

Good morning, everyone.

Hello Rich.

Hello RIch.

So, I wanted to get back to your comments about the change in permitting, you compare the top 25, up 69% over 2 years from the low point. And your markets up 56% versus 1 year. And so, I'm curious as to why that is not troublesome. In other words -- it's like me getting a head start on Carl Lewis. Eventually he's going to fly by me, even though I got a years head start. So, the pace is quicker in the sense that it's 56% over a year, instead of 69% over 2 years. Can you just tell me why that isn't a problem?

Well, because we're -- I'm talking about 2011 versus, as I say, 2009. The fact of the matter is, is that in the top 25 markets, they ramped up last year. So, they jumped up about - I hadn't done the math yet -- but it looks like about a 25% to 35% increase last year. And then on top of that, then they went up a bunch, again, in 2011. So, you got 2 years of permitting momentum that is going to come into the market in 2012 or 2013. So, yes, they are out in front of us and -- because they have been running for 2 years. And the rate of growth is in aggregate much more.

Right. But on an annual basis you're going faster than they are, from a permitting perspective.

No, not really. Again, you've got building momentum starting in 2010. And then, they threw another 20% in 2010. And then, on top of that you had another 30% or so, coming in 2011 on top of 2010. So, you just -- that is just a lot more supply. Now, the question becomes does -- in the Dallas and Houstons of the world, do they -- in 2012, if you will -- do permit accelerate at the same rate. My sense is that -- and we're already seeing this to some degree -- I think there is some moderation that is going to start to happened, because I just think people are starting to get a little bit more cautious about this build up in supply. My -- point is that, I think the supply issue is more ominous in those top 25 markets, than it is in our markets. Because they been going at it pretty hard now for 2 years, on getting permit and getting construction tee'd up. And so, I think that has more of an implication -- negative implication of 2012 and 2013.

Okay. Turning to the topic of the quarter traffic, you said it was -- flat versus this year, or last year and in line with your expectations. Can you -- how is that calculated? Can you -- walk through the process of calculating traffic.

I mean -- ours is pretty simple. And it's won't take long. It is, if you walk in the door and we fill out a guest card and document your visit, you are traffic. And that is how we calculate traffic. And -- I mean there is so much interest in the area. I well clarify Eric's slightly down comments. It was slightly down, nine-tenths of 1% in traffic for the quarter.

I wonder if, in the age of technology I wonder if we could do something better than guest card for traffic. I mean, I think it's really an important metric, right? It's a leading indicator of demand. And, it just -- seems --

We can, and we do, and we track leads and we track our Internet eyeballs. We do all that stuff. But at the end of the day the best apples-to-apples comparison is feet through the door. Because all of that -- I mean I could give you spectacular demand numbers on our Internet traffic stuff, but it all has to do with the fact that we are doing different stuff and new stuff. So, that apples-to-apples comparison for us that gives us consistently, how did we do this year versus last year, is how may people walk to the door.

Maybe you could zap them with a laser when they walk through, or something?

We are trying to arrange for barcode scanning on people's phones, which actually -- I mean, the brave new world is here. Google probably knows how many people walked in the door. But, we don't know that yet.

But [also,] making a good point, as you say, Rich, the traffic has been a big question. We differentiate between traffic and leads. Lead are just -- people looking at us over the Internet and phone calls, and things like that. And -- the lead volume is up a lot. But frankly, unless somebody walks in the door, it doesn't really matter.

Right.

That is why we think about traffic the way we do.

Okay. Last question is to you Eric. When -- 3 months ago when you were thinking about your 2011 guidance, did you think at that time that -- not that you were sand-bagging, but you can let yourself some room to maybe approach the top-end of the range. And then, events since July, August have maybe muted the business a little bit, in terms of your guidance? Or is it working out the way you expected, despite the macro events going on around us?

Yes. Honestly I think it's working out about like we thought it was. I mean we -- our guidance has been pretty consistent throughout the year. And we had really changed anything. I think that, certainly, the worst economic news that started coming out in late July and September timeframe. Some of the comments from Fed, and others, suggesting that the outlook was going to be weaker in 2012, than perhaps we were thinking. If I were thinking about 2012 back in July of this year versus thinking about 2012 today, I might be a little bit more cautious. I mean, it's hard not to be. Given all the macro news and information that we see out there. But, as far as this year is concerned -- frankly, it's playing out pretty much like we expected.

Now, having said all that, again am I nervous about 2012? Absolutely not. I mean, we continue to see -- based on everything that we are looking at, in terms of permitting activity, within our markets and within the regions. What we're able to achieve on pricing performance and where we see turnover continuing -- all of the things I was saying earlier. I think 2012 is going to be a pretty good year. And well had a lot more to say about that, obviously, when we talk about earnings next quarter.

Sounds good, thanks everybody.

Okay, thanks Rich.

Miss Sheila McGrath from KBW.

Hello, yes. Good morning. Al, you mentioned that you need another investment grade rating to re-price the line of credit. What other steps do you have to undergo, to get the second rating? Secondly, when you look at your expected interest rate costs under this new strategy, how much more expensive do you think it's going to be than your existing financing?

Okay, good question, Sheila. I think, what we need to do to get our second rating is continue to increase our unencumbered asset pool. And that's why we talked about beginning to focus on it, in the call. It's about 25% of our gross assets now. And so, we'll begin discussions with the other rating agencies. And we're getting pretty close, we feel like we can begin some real activity with those guys. And, so, once we feel like we're there, we'll make the transition in the grid. Pricing grid will come down probably 40 to 60 basis points. So, we feel good about that.

In terms of what -- your question there is once we achieve unsecured and market financing on investment grade, what does that compare to secure pricing? Is that what you're asking?

Yes. Just, when we look into 2012, if this is the strategy you are going to take, should we be rolling out our interest expense rate costs a bit?

I would say, that the market is still pretty good for unsecured. I mean, certainly these credit lines -- if you've seen the last -- month or 2, or quarter. There certainly is going to be a lot of the REITS putting new deals in place. The reason is, is because they're very competitive and very attractive right now. And so, I would say that it's not a significant increase in terms of credit facilities.

Now, when you look at fixed rate financing, Fanny Mae, Freddy Mac, like companies, they are very aggressive still. And you could probably get 7 to 10 year financing in the 4% to 4.5% range. My guess, is if I went to do -- call it another private placement right now, with our current balance sheet, I might get 50 basis point north of that, But, when I get my full investment rate I would expect to be a little tighter than that. And so, I would say that, there's different times in the market where different types of financing are a little better than others.

But over the long-term -- we are very confident that the best strategy is to have allocation and have both unsecured and secured assets. And have numerous partners involved. It's the best strategy to keep our costs lower, over the long-term. As well as, in the short-term we don't expect a significant increase. I would say, instead of pricing in fixed rate financing 4.5% maybe 4.75% for us that we do, of the next year just to give us some room there for the unsecured that we may do.

Okay. Eric, last year you bumped the dividend in December by about 2%. Could you give us some insight on your -- thoughts there on the dividend outlook?

Certainly, we will take up the topic as we already do with our Board at our December meeting this year. And we will see what they choose to do. I mean, obviously, we feel good about the coverage ratio that we have. We feel good about the earnings outlook. There are some pretty positive earnings momentum we think, over the next couple of years. I'm sure the Board well take all that into consideration. We'll have more to say about it in early December.

Okay, thank you.

Mr. Michael Salinsky from RBC Capital Markets, your line is open.

Good morning guys.

Good morning.

First question, can you give us a sense of where new lease rate trended for the quarter, through August, September, and October? Also, as well as the loss-to-lease in the portfolio, currently. And just I guess -- you guys look at it on a year-over-year basis sometimes? But on the new lease rates, do you had the data by lease-over-expiring lease?

Sure we've got that. New lease data over new lease for the quarter -- and again, we caveat or pitch for year-over-year, we prefer that, but I'm going to rattle these off real quick. But -- 58, 57, and 39 in September.

The reason we don't focus all lot of the new lease pricing on lease-over-lease is that -- obviously, the new lease replacing existing lease, the existing lease may have been for a 6 month lease. It may have been for a much shorter term lease versus a new lease being written for a longer term. So, you get a lot of apples and oranges. We differentiate our pricing pretty extensively, given the length of the lease.

And then, you also get into different seasonal factors, as well. And so, for us, that is the reason we always think about lease-over-lease on a year-over-year -- or new lease pricing on a year-over-year basis because you take out some of the noise.

It really magnifies seasonality Mike.

Okay, did you have October trends in there by chance? As well as the loss-to-lease.

October, was -- let's see --

I can tell you loss-to-lease real quick while he's looking for that if you want. If you look at our in-place leases right now, Mike, and you look at where our new prices are right now. So, a little over 3%, 3.1%, 3.2% for loss-of-lease that we still have to capture.

Yes. And new lease pricing, on a year-over-year basis, was just under 5%, in October. And around 3% on a lease-over-lease basis.

Reflective of the seasonality.

That's helpful. Second of all, I think one of your peers mentioned they were seen little but more value-add opportunities in the market. Is that what you are seen as well? Can you touch a little bit, just in terms of asset pricing? You know, what returns are being underwritten in the market as well as growth expectations?

Well, I think there is a fair amount of, value-add products that is in the market. But it also tends to be very competitive. Frankly, because the product is pretty easy to finance and there is a lot of capital out there, a lot funds -- private money and other money looking for these deals.

So frankly, we have had a hard time finding a lot of those opportunities that made sense, based on the pricing and underwriting that we were coming to. In terms of -- pricing, we are seeing a lot -- as Al mention the deals -- the 3 deals that we've done since the end of the last quarter, capturing around 6% average -- in place cap rates. And, I'm sorry -- what was the other part of your question, Mike?

Just in terms of growth expectations being underwritten, have you seen that change in the last 3 months.

Well, obviously, I don't know what others are underwriting. I mean, from our perspective we've always looked at it on the basis of -- it varies, obviously, by deal quite a bit. And, just back to the point I was making a few moments ago, talking about 2012 and 2013, against this backdrop of all this weak economic news that we just continue to get. I might be slightly more conservative today than I was say, 6month ago. Thinking about 2012 and 2013 -- I may pull back 50 basis points on my revenue growth or something of that nature.

Nothing significant but somewhere in the range of be my guess. As we look at an individual deal to buy, I mean every situation is unique, and has got its own turn-around opportunity. It may be significantly under managed, where we could come in and do some pretty strong things in the first 12 to 18 months that might justify a 5% rent bump, or 6%, or 8%, or something really meaningful. But, over a long haul the way we think about forecasting rent growth and generally revenue growth, is we tend to moderate around 3.5% or so. Just as a way to -- protect ourselves against supply pressure that tends to come into the market from time-to-time.

Okay. Third question, Al, in term of on the expense side. I know that real estate taxes were up 8% related to tough comps from accrual re-adjustment from last year. Can you go through a couple of the other expense categories, personnel, insurance. Give us a sense of what you're seeing on those fronts?

I would be glad to, Mike. I'll tell you, the 2 main -- there were really 2 items in the third quarter that put pressure and you talked about the biggest one, real estate taxes this year. The second one was utilities, and I'll tell you, those 2 combined for half of the entire growth for the quarter. Taxes was a comp [width] issue, we talked about that related to last year in the credit. The utilities grew about 5.3%, but as you know, that impact is mainly water costs there. The impact does hit the expense line -- the pressure.

But we do pass on, ultimately about 85% of that to our residents, it hits the revenue line. As far as the other areas, they are pretty much normal, under control growth ranges. And those 2 items really produce the issue.

Okay. And then finally, it looks like you've got about $40 million tee'd up this year in dispositions. As we move forward into '12 and '13, should we think -- look for increased recycling activity.

I would tell you that probably so, a little bit. We are looking at it -- right now for 2012. I do believe that we've -- got a couple of other assets that are part of our fund-to, that we are going to be bringing to market. We'll know in the first quarter. And, I would expect that given the acquisition pace that we are seeing, and just where pricing is, that we -- and with the strong earnings performance that we expect to get out of our existing portfolio, that will be in a position to probably have a little bit more active recycling efforts over the next couple of years.

Eric, did you say fund-to?

Yes.

So, that assets that you had acquired in fund-to, over the last 24 months, you are taking to market?

Well, we've got frankly, a couple of opportunities to get a very, very attractive return on something that we bought on a very, very attractive basis. And we've had some conversations with our partner, and -- we think they just offer a very unique opportunity to make a lot of money in a short amount of time. And we are going to do it.

Interesting. Thank you, much.

You bet.

Thanks, Mike.

Miss Paula Poskon from Robert W Baird.

Thanks. Good morning everyone.

Hello, Paula.

Just a follow up on Mike's question about dispositions. Just looking out long-term over the next, say, 5 years. What percent of your existing portfolio do you think would fall into the culling possibility?

Well, I think the percent, I hope -- of course, it's going to be affected by what I hope is a growing portfolio also. But, I would tell you that something between $50 million to $75 million of deals, maybe as much as $100 million would be a steady state, in an environment where we feel our values are good. We feel like we can do -- make sense of the recycling effort, and find attractive ways to redeploy that capital, at yields that will be superior to what we could get out of those existing assets.

I mean, we think it's important to keep the portfolio broadly as young as we reasonably can, particularly in this region of the country. And, we think that the younger portfolio with a lower CapEx requirements and just the more appealing nature of the younger product in this region, is important. And so, I think given the ability that we've got now -- we think with a platform in the balance sheet and other things, that the opportunity to put capital out with new investments is pretty robust. That affords us the opportunity, I think, to get a little but more active on the recycling efforts. So, I do think you will see it move up a little bit over the next several years.

Thanks Eric. And then, just a follow up on the supply conversation earlier. I mean yes, the percentage increase numbers are big, but aren't those off really low levels in 2010 and this year? Or going back to 2009 to 2010?

Yes, very good point Paula, and they absolutely are. If you compare those 2011 numbers to the peak years, they are still down, anywhere from 55% to 65%. It varies based on which segment you are talking about. But yes, very good point. They are still way, way down relative to the heyday back in 2006. And so, that largely is why we continue to feel that while it is clearly ramping up, new supply is clearly ramping up -- it is still very manageable relative to what we see as the demand side of the equation.

So, just to make sure I understand your perspective, then, Eric. So, new supply, even though the percentage of increase numbers on the permitting would suggest it's a problem, because that percentage increases is on such a low base on an absolute level, will still be below historical norms through -- what 2013?

Yes. I think at least between '13 -- and yes. The answer to your question is yes. You've got it right. We are still running well below the delivery levels we were looking at in 2006 and 2007. Delivery levels -- that I think we'll happen in 2012 and 2013, based on today's permitting activity, the deliveries coming in 2012 and '13 will still be running anywhere from 55% to 60% below the peak levels we were seeing in 2006 and 2007.

Then, just to follow that same line of reasoning, because of the differential and the pace of permitting between primary and secondary markets, you would expect the new supply to be a problem sooner in the primary markets than in your secondary markets?

Yes. And -- yes, the answer to your question is yes. We see the permitting activity picking up, as you would expect in these bigger markets. I mean, typically it happens in 3 phases. First, when the permitting activity really picks up, is -- it picks up in the much-loved, top institutional markets -- the bi-costal markets. And that, was the point I was trying to make earlier. And, usually only the best capitalized developers, the strong balance sheet developers -- the REITs are able to do that. So, that's where we saw permitting and activity really starting to pick up. Last year 2010 in a lot of these top 25 markets. Then after those markets start to really get going then you see capital and development looking for other ways to get deployed. Then they moved to the larger markets in the lower barrier areas, Dallas, Atlanta, Houston, things like that. That's the second wave. And that's where we are seeing things pick up a little, but again, still very manageable in numbers.

Once -- if things get really frothy and the capital markets are really cooperative and the lending environment is really cooperative, then finally the small merchant builders are able to get those hands of the bunch of money. Then, they really start to build. They typically are the ones that go into a lot of the secondary markets. Those are the ones -- that my point is, is they still are not seeing access to capital along any meaningful line. So, we continue to see permitting activity being very, very modest in these secondary markets. Suggesting that supply is going to be -- continue to be very muted for the next couple of years in these secondary markets.

Thanks for clarifying that, that's all I have.

Thank you.

Thanks Paula.

Mr. Dave Bragg from Zellman.

Hello. Good morning. What was the move-out by home rate on the quarter?

The move-out by home rate on the quarter, was about the same that it's usually been, Dave, but -- and it's our second largest [reason] for move-out for the quarter it was 16.2%.

Okay. Do you track move-out to rent single family homes?

We do Dave. And it was down, actually. Let me get you the exact stat. It was down 8%.

Down 8%, on what basis? Sequentially or year-over-year?

Oh, sorry -- year-over-year. And am I answering your question, it was -- we had 400 move-outs last year to that reason, it's 367 this time.

And so, on a percentage of basis as compared to that 16% moved out to buy homes.

Yes. Sorry no, less than 6%. It's not a very big move-out reason for you. That was year-over-year change, not percent change. My bad.

Okay. So, the percentage of departing residents that left the rent single family homes, was less than 6% -- and that's down -- that's a lesser percentage than a year ago? Or how does that compare to a year ago.

Roughly it is down a year ago, because turnover was up slightly over all. So, I don't have the percent difference, between the years if that make sense, Dave. But it is a smaller number on a slightly larger number. So it's percentage is lower.

Okay. What could you tell us that the level of competition qualitatively. A peer of yours suggested that this activity has risen in recent quarters. And has really worked to offset the decline in move-out to buy homes, as compared to historical levels. Therefore, the percentage of people moving out to single family homes is about the same. What would you say about that thought? And what are your general thoughts on that level of competition?

Just to make it clear, they are suggesting that move-outs to renting home is equal to that of move-outs to buying home, as a percent of our move-outs.

No. My understanding is that they suggested that move-outs to rent single family homes has increased, working to offset the decline in move-out to buy homes.

No. We are not seeing that. That trend -- and I'll be honest with you, Dave. I have seen presentations [Smart Guy, URI] a couple of years ago -- or a year ago. And tend to agree with it that, the people are making a decision based on lifestyle. And they either want to come in and they want to live in a multi-dwelling unit where we take care of everything. There's not cars up on blocks in the front yard. Or they want live in a single-family home and have the lifestyle that comes with that. They are willing to clean up the gutters and they're willing to do -- or I just don't see those as interchangeable.

I think, you could get some difference. Honestly in those performance metrics between given portfolios based on, frankly, the profile. Perhaps of the properties and the portfolio and -- they tenant profile and the portfolios. As Tom says, what we are seeing is the propensity, for our renter to leave us to go rent a home, still remains very minor. We don't see any meaningful change taking place. As Tom says, it's really more of a lifestyle decision. We've got much newer properties broadly throughout our portfolio and people want the lifestyle. They want to access the fitness center, and the swimming pool, and all the other amenities that we offer. We just don't see the single-family product -- rental product as much of a threat to our business.

I completely agree on the lifestyle decision, but just looking back -- and I know that this is a completely different era. But when you had above 25% of departing residents leaving to buy single family homes, in the middle of the last decade. That certainly suggests interest in that lifestyle. So, given the more difficult environment home purchases today, I was trying understand whether or not that interest is still being fulfilled, but on the rental side. It's as though you're not seeing greater move-out to rents.

I would tell you that a lot of the pressure that we saw years ago of people leaving us to go buy a home, was not motivated by a decision on lifestyle, it was motivated by a false assumption that it was a good investment to make. And -- I think that, that myth has been blown up.

And, I think people now are looking at housing, as not an investment product, its a housing product. And I think they are deciding what is the best way to spend my money to meet my housing need. I think that whole paradigm has been re-thought, and it continues to be re-thought. So, I think when we saw move-out to buy a home at those high levels, it was motivated for a multitude of reasons, including a belief that it was a good investment to make. That it should -- I have to change my employment, I have to move, it was an easy thing to do to take your house to market and sell it -- I can get out of it quickly. Of course, we find that's not the case anymore, and unlikely to be the case for some time.

Okay, understood. Last question on this topic. You have a mix of markets of varying levels of single family supply. So, are there any markets that stand out on the -- above the 6% level that would be notable?

There's really not. Obviously, some of the Florida markets come to mind as an inventory of single housing issue, if you will, and those are non material higher than anywhere else. It's pretty small everywhere.

Thank you.

Thanks, Dave.

Mitch Germain, from JMP securities. Your line is open.

Good morning.

Hi Mitch.

Eric, you spoke that the investment markets were pretty lively. I'm curious about activity levels in your secondary markets.

It's a good question. We don't see the volume of activity in these secondary markets that we do in some of the bigger markets. And now, it has definitely picked up in the last year to 18 months. We are seeing a fair amount of activity. We have done the growth, in the transactions that we've done this year. I mean, we've done things in Little Rock, and Richmond, and Greenville, South Carolina, Savannah, Georgia. So, we do see these. But broadly, to give you some perspective, for every deal that we look at the secondary market, there is anywhere from 2 to 3 deals that we can look at in a large market.

We've continued to be, frankly, pretty selective about the opportunities that we would invest in, at this point, in these large markets. Just because the deal volume is so much greater. Then, as you know, I've made a big point of reemphasizing, we are very committed to the idea that we need to be properly allocated between both the large and the secondary markets. After a lot of analysis and performance over long period of time, we really concluded that balance of where we are today, 60% large, 40% secondary markets, is the idea of portfolio strategy for us. In terms of how we want to perform for capital over long period of time. So, having said all that, we're at where we want to be from a portfolio allocation perspective. So, we don't see as many opportunities in the secondary markets. I will tell you this, when they go into the secondary markets, of course, we're not running into nearly the level of competition. Certainly, most of the competition we occasionally run into is not able to execute on bases that we can execute. Consequently, we tend to see a lot of -- whatever deals do come to market in these secondary markets, we tend to get a shot at them. I think that -- hopefully that answers your question.

Yes, absolutely.

And so -- okay.

Just a quick question for Al. What is a road map to unencumber -- to increase your unencumbered asset pool.

Good question, Mitch, pretty simple for us. Over the next year or 2 years, let's call it. Everything we buy, and everything we refinance, we are going to look to do that with some sort of unsecured paper. The combination of -- could be any combination of products in the market, we will use to -- tactically move to use the best one. You saw us do private placement. There's also convertible bonds and there's also common equity. There's also preferred equity. So, what we will do is look to make the secured mortgages that we have, on the secured debt, replace those with unsecured debt or other --

As they mature.

As they mature, release those mortgages and increase our unencumbered asset pool. When you look at our balance sheet, it compares very well to our peers from the best investment rate peers in the market. It's just we need to unencumber more assets. So, those bond holder, when they -- give us the money on unsecured basis, they have assets that protect them, they are comfortable. So, we're looking to get to 40% to 50%. Right now are at 25%, unencumbered assets to total gross assets. Okay that's helpful. Just last question, what's available on the APM, currently?

We have about 2.8 million shares left on the APM. The program was 6 million, we've used just over 3 million.

Great thanks a lot guys.

Thanks Mitch.

Mr. [Tayo] Okusanya from Jefferies and Company. Your line is open. Mr. Okusanya, you may need to un-mute your phone. I am going to return Mr. Okusanya back to the main conference.

Okay.

I am showing no additional audio questions at this time. I'll turn the conference over to you, sir.

All right. Well we appreciate you being on our call this morning and if, obviously, you had any follow-up questions just give us a call. Thanks.

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