Mid-America Apartment Communities Inc (MAA) 2012 Q3 法說會逐字稿

Good morning ladies and gentlemen, and thank you for participating in the MAA third-quarter 2012 earnings conference call. The Company will first share 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 investor relations. Miss Wolfgang, you may begin.

Thank you, Howard, and good morning everyone. This is Leslie Wolfgang, director of investor relations for MAA. With me this morning are Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO.

Before we begin with our prepared comments, I do want to point out that, as part of the discussion, Company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the Safe Harbor language included in yesterday's press release and our third and fourth filings with the SEC, which describe risk factors that may impact future results. These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, will be available on our website.

I'll now turn the call over to Eric.

Thanks Leslie, and good morning, everyone. Thank you for joining us. Third-quarter performance exceeded the midpoint of our guidance with favorable leasing conditions that continue to support high occupancy and strong rent growth. Resident turnover remains low well, with third quarter move-outs increasing only 0.7% as compared to the third quarter of last year. Rent growth trends also remained steady, with same-store effective rent grow of 5.2% in the third quarter, which is consistent with the 5.2% performance captured in the second quarter. We're currently underway with property level budgeting and forecasting for next year and expect that favorable leasing conditions will continue in 2013.

From what we see at our properties, a continued recovery next year in the single family housing market is unlikely to have a meaningfully negative impact on leasing conditions across our portfolio. Turnover associated with move-outs to single-family home buying drove only 18% of our turnover in the third quarter, which is consistent with the performance in the preceding second quarter. Likewise, turnover associated with move-outs to rent a single-family home only contributed to 6% of our move-outs in the third quarter, which is, again, consistent with preceding second quarter. While it's reasonable to believe that a more robust recovery in the employment markets and economy could eventually drive more demand for single-family housing, these same factors will also support increasing demand for apartment housing as well.

New apartment supply projections across our portfolio continue to look manageable when compared to the outlook for job growth and growing demand. Within our large market segment of the portfolio, the latest projections suggest a ratio of just over eight jobs to each new unit expected to be delivered next year, which is stronger than the last up-stock we had over the 2004 to 2007 timeframe. Within our secondary market segment, the story is even better, with the job growth to new supply ratio projected to be just over 10 to 1 in 2013. In a large market, you really have to get into sub-market analysis to understand what threat, if any, emerging new supply is likely to have at specific locations. It's worth noting that, in a number of the larger markets, new supply is more likely to create pressure on locations and more of the urban or core CBD sub-markets, and less likely to material impact most of our locations. Within the secondary markets, in general, we just don't see much new permitting activity taking place. It would expect that this segment of our portfolio is more likely to capture improving performance as compared to our large market segment towards the second half of next year.

As noted in our earnings release, we had an active quarter for property transactions, selling five properties and acquiring four. Over the past three years, we've added a total of $1.1 billion in new properties with an average age of three years. As a result, we believe we have materially strengthened our long-term earnings outlook. Construction activities and lease-up continues on our four development properties, and we look forward to more meaningful earnings contribution from this pipeline in 2013 and '14.

You'll note in our earnings release that we recently closed on a land parcel near downtown Jacksonville and expect to be underway with development of 294 units at this site before year-end. We expect to continue with an active capital recycling program next year as we steadily redeploy capital into higher margin investments. Our strategy remains centered on value creation, primarily through the acquisition process, and we expect that our markets, the extensive relationships we have across the region, and our established transaction execution capabilities will continue to yield attractive new investment opportunities next year. So in summary, we expect to capture record FFO per share results in 2012, outpacing last year's record results, and expect 2013 will likewise be another record year performance for MAA.

That's all I've got. Al?

Thank you, Eric, and good morning, everyone. I'll provide a few comments on earnings performance for the third quarter and as well as a few highlights on investing and financing activities. FFO for the third quarter was $48.2 million, or $1.11 per share, which is $0.02 per share above the midpoint of our prior guidance. Better-than-expected performance from both our same-store portfolio and development and lease-up communities produced the majority of this favorable performance for the quarter.

Revenue performance was essentially in line with expectations, driven by the 5.2% growth in average effective rents over the prior year, reflecting a continued pricing momentum in virtually all of our markets. Operating expenses for the same-store portfolio were better than expectations, with lower than projected repair and maintenance, utilities, and real estate tax expenses, combining to produce about $0.01 per share of favorable results. The remaining $0.01 per share for the quarter was primarily produced by our development pipeline, as lease-up for the two communities with delivered units continuing to outperform expectations.

As Eric mentioned, we were very active in property transactions during the quarter. We invested $218 million in the four new communities acquired, which brings our year-to-date acquisition volume to $345 million. Initial cap rates for these acquisitions averaged around 5.6% on first year's projected cash flows after deducting a 4% management fee and a $350 per unit CapEx reserve, which is expected to grow to about 5.8% on completion of significant upgrade projects at several of these communities. As part of the annual recycling plan, we also sold five communities during the quarter for a total proceeds of $47.3 million, producing a $16.1 million gain on dispositions recorded during the quarter. These sales bring our year-to-date disposition volume to about $100 million, and we have one additional community under contract to sell during the fourth quarter. After completing this final sale, full year disposition volume is expected to be about $113 million for the nine communities averaging 25 years of age. The overall cap rate for these dispositions is expected to be about 6.8%, based on the final in-place cash flows after deducting a 4% management fee and a $350 per unit CapEx reserve.

Construction and lease-up continues to progress very well on the four communities under development. During the third quarter, we funded an additional $12 million towards completion of these projects, bringing the total investment to nearly $109 million, or about 75% of the expected total cost of these projects. At quarter end, Ridge at Chenal Valley in Little Rock was fully delivered, while Cool Springs in Nashville was 75% delivered. Nearly 0.66 of the delivered units were already leased by the end of the quarter. Cool Springs is expected to be completed during the fourth quarter, while 1225 South Church in Charlotte is expected be completed in the first quarter of 2013, followed by River's Walk in Charleston to be completed in the fourth quarter of 2013. As mentioned in the release, we plan to begin construction on one additional development community located in Jacksonville during the fourth quarter, which we expect to be completed mid 2014.

Our balance sheet entered the quarter in great position, and we continue to make progress towards our rating goal. As previously mentioned, during July, we received a first time investment grade rating from Moody's, a Baa2, which is the second level investment grad, which immediately reduced the cost of our outstanding borrowings under both our unsecured credit facility and term loan by 30 basis points to 40 basis points. During the quarter, we also expanded our unsecured credit facility to $325 million, and issued $175 million in senior unsecured notes to pay down additional secured borrowings and to fund acquisition and development activity. We also issued 813,000 common shares during the quarter at an average price just over $67 per share for total net proceeds of $53.7 million, which was also used to fund acquisition and development activity. During the quarter, we repaid an additional $43 million of secured debt, releasing the related mortgages, which along with the acquisition activity, increased our unencumbered asset pool to 51% of gross assets at the end of the third quarter, as compared to only 24% one year ago.

At the end of the third quarter, our total debt net of cash balances was 44.7% of gross assets and just below seven times EBITDA, while our fixed charge coverage ratio for the third quarter was 4.3 times, well above the rating agency thresholds. And also at the end of the quarter, 90% of our outstanding debt was fixed or hedged against rising interest rates, resulting in total effective rate of 3.7% for the quarter. We believe these metrics put us in a very good position to pursue an additional credit rating from S&P, with a goal of achieving a full investment requisition later this year or early next year.

Finally, given the third-quarter performance and updated expectations for the remainder of the year, we are increasing our FFO guidance for the full year by $0.04 per share at the midpoint, $0.02 of which relates to the third quarter performance, with the remaining $0.02 relating to the revised expectations for same-store and non-same-store portfolios over the remainder of the year. Our updated FFO guidance for the year is now a range of $4.46 to $4.56 per share, $4.51 at the midpoint, which is a 13% increase over the prior year.

The key assumptions included in our forecast are wholly-owned acquisition volume of $345 million to $400 million, a $50 million increase to the top end of our guidance range, disposition volume of about $113 million, only depending on one additional community under contract, and development funding of $80 million to $85 million for the year. We also expect our leverage, defined as net debt to gross assets, to end the year in the 44% to 46% range, with about 90% of our debt fixed or hedged with an average interest cost between 3.7% and 3.8% for the full year.

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

Thank you.

(Operator Instructions)

David Toti, Cantor Fitzgerald.

I have a couple of detailed questions for you today. The expense divergence between the larger and secondary markets was a little bit noticeable. Do you think there was a specific driver to that in the quarter?

A big driver to that, I'll let Tom tell you some of the details, but a big driver of that was real estate tax. We had some credits during the third quarter, and so they impacted one segment more than they did the other. That was the main driver. Typically, you get a lot of information in the third quarter, and that's pretty common that that can happen.

And then on the -- excuse me, David, on the operating level, we had a little bit higher turn level on the secondary markets in the late second quarter, and we were actually able to wring a little efficiency on the cost per turn in the third quarter on that. So we were able to spread our turn cost out a little bit and be more efficient there.

That actually leads me to my next question, which was the turn is lower in the large markets, which is counterintuitive. Is there any dynamic that you think is happening to drive it up?

Absolutely. The small markets we had, again, in sort of late second, early third quarter, we had some one-time exposure to military deployments, carrier deployments in Virginia and the third infantry brigade in Columbus, Georgia. And that's generated a little bit higher turn. That creates a one-time market lull, and then it snaps back out. It's not a market fundamental shift in the secondary, it's really just a one-time move out. And then it picks right back up.

October occupancy in the secondary markets was back ahead of last year. So it was just a one-time event.

Okay. That's helpful. Then my last question just has to do with -- you sort of boosted guidance a little bit, but the underlying assumptions didn't move that much. Are you still pretty comfortable with the 4.5% to 5.5% range on revenue growth for the full year?

We are comfortable with that. I think if you average out the first three quarters, you'll come somewhere to below the mid point of that range. I will say that given what we expect for occupancy to continue pricing performance and solid occupancy performance for the fourth quarter. We expect the revenue performance for the fourth quarter to be ahead of the average that we have so far in proving that a bit.

The secondary markets have been fighting a little bit of an occupancy comparison headwind that ends with the third quarter, and we are more optimistic. It ends -- that headwind ends in the third, and we are pretty optimistic about the fourth.

Okay. Great. Thanks for the detail today.

Rob Stevenson, Macquarie.

Al, given your comments there, where -- as you head into the fourth quarter here and into next year, where is your most significant expense pressures besides real estate taxes?

Taxes are certainly one. As we went into the year, I think the context is, we expected taxes to be 4% or 5%, and that so that was certainly the most significant pressure going into the year. I think in overall context it is still the same message. Taxes now are at 3.5%, sort of 3% or 4% for the year expectations because we have better information now. That is the primary pressure that we expect.

I think repair, maintenance and utilities during the third quarter gave us some positive performance, and we are feeling very good about that. But I think in the fourth quarter you will see some unfavorable comparisons on real estate taxes. For the full year, it still going to be 3.5%, Rob, but we had a lot of information come in, in the fourth quarter of last year, driving some credits last year. So that one line item, you're going to see though good for the year, better for the year now, it is going to be unfavorable for the fourth quarter. So I would expect that.

Okay. So nothing else that should be sticking out besides taxes?

Not really.

Not at this point. We don't expect anything else.

What is the rough magnitude of the breakdown on your expense side between real estate taxes as a percent, and then this other major group?

I think real estate taxes and personnel costs are by far the largest and well over half. And so those are the key drivers. And utilities are another big, big area. So keep in mind we do bill back the majority of the utilities back to our customers, but those three are really the drivers. The biggest dollars in that line item.

Okay. And then, I guess a question for you, Eric. What is your thought here? You sold some assets, you've issued some stock, but where you're thinking to fund future acquisitions and developments in terms of assets sales there especially given where the implied cap rate is on the stock today. Does selling more aggressively, especially some of the older assets to bring the average a down on the portfolio or continue to bring average age down on the portfolio make more sense in today's market?

We will definitely be selling more next year than we sold this year. We have a plan to really step up the recycling effort over the next two to three years. As long as conditions support it, we plan to see that pace pick up a little bit. I would put order of magnitude somewhere around $150 million, maybe $160 million or so next year.

But we really will see over the next couple of years more of a balanced funding plan where we will be recycling into higher margin investments, as well as on a net basis we'll probably still be, we believe, a net acquire, and that will require the need to go back to the market at some level, but we think that the disposition of the recycling effort will become a greater component of our funding plans and needs over the next couple of years.

Okay. And then, what has been the recent conversations with the Board on the dividends?

We will have that conversation with the Board, as we always do in early December. We, in early December every year sit down with our Board and update our three-year business strategy. And as part of that process, discuss dividend payout. And so we will do that in the first week of December.

Okay. And then, just lastly, you guys entered KC this quarter. What other markets out there -- are there other substantial markets that interest you at this point in where you are seeing decent deal flow where you could enter with buying a couple of assets?

No other real target markets and I can point to right now. We continue to like the footprint, we continue to be very committed to the idea of bifurcating capital between large and secondary markets roughly in the same weighting we have today. As a consequence of our stepped-up efforts of recycling capital out of some lower-margin, older investments and into higher margin, newer investments as a focus of that, it just so happens that a lot of our older properties are in some of our secondary or tertiary markets.

And so you will be seeing much more active recycling taking place in that particular component of the portfolio. And as so markets like Kansas City and San Antonio and Charleston and Savannah, those are some of the secondary markets that we would like to continue to fill out in.

Just to add to that, is there any inclination on your part to partner with some merchant developers in some of those areas, if you can't find enough product to buy in the secondary market as a whole to keep your weighing between the secondary and primary markets relatively consistent,? Or with that, would we likely to see some of the secondary markets NOI tailing down and the primary markets becoming an increasing portion of the NOI or the company?

Clearly, we do have a lot of conversations always going on with developers in some of these secondary markets. And that is why you see us deploying capital in development markets like Little Rock and Charleston and Jacksonville. You're not going to see us do development in Dallas and Atlanta; we let others do that. But yes, in an effort to keep our portfolio strategy intact, and continue to execute on this recycling effort, to the extent that we deploy capital with development, it will be a secondary market focus.

Okay, thanks guys.

Rich Anderson, BMO Capital Markets.

I just want to get back to the fourth quarter guidance, or the fourth quarter revenue number. It implies you going from 4.2% revenue growth to 6.7% revenue growth? Is that right?

No, that wouldn't be the math. I would -- what I would say is the first three quarters will get you somewhere around the lower end of the range. We expect the fourth quarter to be a strong quarter, so I would expect the full year to be below the midpoint of the range, maybe closer to the bottom of the range. But still be -- the performance of the fourth quarter is stronger than the third quarter. And probably with the first three quarters -- first two quarters.

Okay, so, if your revenue range or the year is 4.5% to 5.5% and you're running at below 4.5%, you're saying that you're getting --? Am I doing that right?

The first three average out to close to 4.5%,and if you finish strong in the fourth quarter, you'll end up somewhere around 4.75%, something like 4.6% to 4.8% range, Rich, that's sort of the thinking.

Okay. So you don't think you will -- maybe I'll take it off-line, because it seems like you need to do more than that. And you are also saying that the top end of the range, so are you saying that the NOI number is more of an expense-driven phenomenon?

Yes. That's what we talked about. And we really, we talked about that a little bit in the second quarter begin saying that our range in expenses, we didn't change our range in the second quarter, but we said we'll be toward the bottom end. We had a little more favorable performance in expenses in the third quarter, so we felt the need to move the range. And so, revenues will end up in the range below the midpoint for sure, but have strong performance in the fourth quarter. Stronger than the first three. That's the expectation.

Okay. So speaking on external growth, I know you're primarily an acquisition story, but it appears you are at least contemplating to doing more development in the future. And you say that at the same time, you're saying you will step-up recycling and using dispositions more as a funding element to your story. So, I don't know, it seems like two different directions you are going in terms of taking on risk.

And can you just talk a little bit about your development mindset? I probably ask this question every quarter, but your development mindset as it relates to where you think you are in this game, are we in the sixth inning, seventh inning? Just talk to me about that.

Well, we think that development will remain a limited part of our external growth story. Order of magnitude, we think that external growth on a steady-state basis via acquisitions will probably be somewhere between $300 million and $400 million a year. Our development pipeline, we're comfortable carrying up to about $150 million at any one point in time. We've got four projects currently, two are nearing lease-up, stabilized status. The other two will be delivered next year, one in January of next year.

So we think that we are at a point that we can reload that pipeline, and thus we did the deal in Jacksonville that we just alluded to. I do not believe that for a host of reasons that us being a big developer is the right thing to do. And our platform, our approach to development as we are doing again in Jacksonville is essentially to enter into a negotiated, fixed-price contract with the developer. We handle the lease-up, they build it for us and they are free to walk away. We own it.

Okay, that makes sense. Last question. Do you -- I'm asking everyone, do you know if Essex owns any of your stock?

(Laughter) We're unaware of that at this time.

More to the point though, what do you think about M &A? You guys obviously are a great organization, I'm not suggesting -- I'd hate to see you go, but I mean, do you think the end game for the sector will be some consolidation, public-to-public consolidation. Not maybe commenting on your situation specifically, but just as a general thought about M&A in this space?

Yes, I don't think that there's any sort of macro trends or macro needs afoot that would suggest we're going to see a flurry of M&A start to take place. I think when it takes place, what M&A that does occur, is typically a company specific issue that has arisen either -- for a host of reasons, somebody just decides that staying independent, or staying in the public market isn't making sense.

And so, I don't think that there is any -- I don't see any huge initiative underway to have -- or need, frankly, for the sector to shrink down to half of the number of companies that it is today. As an example, I think is just a case-by-case situation. And companies decide what they want to do.

And for you guys, you feel pretty good about just continuing to do your thing, but if you ever got the right price, you would have a conversation, because that's your fiduciary responsibility. Is that the right way to think about it?

Certainly, we understand what our fiduciary responsibilities are and we're always going to do the right thing for shareholders. Having said that, we're very comfortable doing what we are doing. We feel like we have demonstrated the ability to create great value for shareholders over a long period of time. We feel like we're fulfilling a particular niche in the sector that I think the market appreciates at various points in the cycle more times -- more so than others at various points in the cycle. But we're comfortable doing what we're doing.

Okay, sounds good. Thanks guys.

Michael Salinsky, RBC Capital Markets.

First question, probably for Tom, can you talk about new lease and renewal growth in October, as well as how that compares to the third quarter, and also, where you sit portfolio-wise from an occupancy standpoint at the end of October? Just trying to get comfortable with the revenue guidance you guys talked about there?

Yes, sure. And I'll just bang through on third quarter and October numbers here, starting with new lease, [2.8%] for third quarter, [2.4%] for October renewals, [6.1%] and [4.7%] for blended at [4.3%] and [3.4%]. And then occupancy is running ahead of October by about 20 basis points or so where it has been running about, on an average basis, about 40 basis points behind. And so we feel pretty darn strong.

We also have another forward-looking metric would be exposure at this time last year, we have exposure of [9.3%], which is our 60-day uncovered, and we are at [8.3%] this go round. Traffic for October was outstanding, turnover was down. So, we feel pretty good going forward.

Okay, that's actually very helpful. A couple of bigger picture questions. First one, can you define what you mean by favorable for 2013? I'm not asking for guidance, but I just want to get your thoughts on '13 at this point given where we are in the cycle?

Well, I think that we're going to continue to be in a position to see steady rent growth. I know that there is hand wringing over two issues, over this resurgence of recovery in the single-family market, and then, obviously the conversation about new supply. We continue to believe that the threat surrounding single-family is overblown.

As I've noted in my earlier comments in the third quarter, we did not see any increasing pressure associated with single-family either rental or for purchase and just continue to believe the dynamics surrounding single-family home buying are unlikely to create any pressure for us -- meaningful pressure this next year. On the supply side, clearly, supply is picking up. But again, when you look -- the way we have to try to get comfortable with supply is to compare it to forecasted demand, forecasted job growth. And supply in and of itself is not a problem. It's only a problem if there's not enough demand to absorb it.

When we look at the ratio of job, new job projections to supply, in our large markets, next year, it is better than it was in the last sub cycle, and then the secondary markets, it's outstanding. It's only 10 to 1 next year. 10 to 1, which is very strong. We continue to not see anything out there that would suggest any material weakening in 2013 performance, as compared to 2012.

The prior-year comparisons, year-over-year comparisons are a little more difficult just as a consequence of continuing to compare against these growth numbers that we are putting up every year, but when you look at the other metric that people look at in terms of ratio of rent to income, we are still right around 17%, which is well below the peak we were back several years ago at 20%. So there is just a lot of reasons for us to suggest that there doesn't appear to be any looming significant headwinds going into next year.

Okay. That's very helpful. Then final question, if you look at a couple of the recent Atlanta purchases as well as the Kansas City purchase, they tend to be more urban, mid-rise type product. And you also made a comment about moving to higher margins. Should we -- is at any change in strategy there on the investment side or is it more opportunistic than what you traditionally have done?

It's really more opportunistic, Mike, I think because -- we are committed to the idea of bifurcating capital between the large and secondary markets. Now within those markets, whether it is an urban, more downtown-oriented location or a suburban location, we are indifferent on that. Once we get into the market, we are looking for good sub-markets where people want to live where we can find properties that we feel like we can acquire on a very favorable basis.

A lot of these Southeastern markets, a lot of the favorable places for people to live. A lot of where the employment centers are, are out in the suburbs; likewise there's some great places near downtown and downtown. We think there's probably some good things about being diversified, both suburban and urban as opposed to concentrating on one particular.

Mike, the last couple purchases, just to remind on -- that core stuff or the urban stuff is getting some press. Lake Nona is suburban outside of Orlando in a great medical district and Blanco in San Antonio both. Good old bread-and-butter, mid-America, good suburban garden stuff. We're buying a little of both now, which is probably the difference, not an abandonment of our suburban roots.

Appreciate the color, guys. Thank you.

Dave Bragg, Zelman & Associates.

Could you just quickly take us from the 5.2% increase in average effective rents to the 4.2% revenue growth in the quarter?

Yes, I've got it. Dave, essentially it's two main drivers. First, our average effective occupancy or our average what you would call our physical occupancy was off 40 basis points from prior-year. That's driven by a 70-basis-point gap in the secondary markets, which I think I touched on a little bit earlier, but just in case folks missed it, but it was really driven by some turnover, related to military deployments in some of the secondary markets.

The second component of that is we had great savings in utility rates this go-round. We were excited about that. The downside of that is, though, that our utility recovery fees or our reimbursement revenues were down. That's another 40 basis points of it. We're very happy with that happening, because our recovery rate is probably is about 80%, and we would rather see it on the savings. Those are the two big drivers.

I'll just add to that, Dave. There's been some questions about the guidance in the fourth quarter. Just want to make it clear, what we're seeing is we're expecting continued strong pricing performance of average rents. So we saw 5.2% in the last two quarters, consistent continuation of that on top of the stable occupancy and middle impact utilities and those things Tom just talked about. So what we expect, is that the top pricing rent will drop to the bottom of the revenue line in the fourth quarter.

All right.

Occupancy should be more neutral than negative for us.

That's very helpful. That gets us there on the fourth quarter. Thank you. And then the other question, just as it relates to revenue growth and guidance, when you think back about your prior outlook or your initial outlook of 4.5% to 5.5%. That top half of the range, which is less likely now, what didn't play out? Was it performance and secondary versus large markets, or was it rent gains on either renewals or new move-ins, or the utility reimbursement or occupancy? Can you just talk about the drivers of where you're trending now versus the thought that you had earlier?

I think there was a little bit of each of those line items, Dave. I think it was a little bit of pricing, not quite a sharp as we thought. A lot more coming probably from occupancy. Average occupancy for the year has been a little lower than we had projected going in. And then some impact from the utilities and other things. Now remember that utilities and those things are reimbursements in revenue from the expenses that we get benefit from on the bottom line. So I would say it's really no single area; it's spread across small impacting several of those areas.

It's worth noting, the midpoint of that revenue range was 5%. We think we will probably come in for the year at 4.7% or something in that range probably. So we're not talking about some significant miss here. We're talking about at the margin, probably as Al just mentioned, probably a little bit lower effective occupancy. This is a consequence of pushing the rents and some of this military deployment -- our secondary market segment in the third quarter took a little bit of a hit because of this one-time event that Tom's referred to, but secondary markets were back in October running ahead of last year. So there's no trend here that's worrisome.

Got it. Then the third quarter new move-in and renewal numbers of, I think you said [2.8%] and [6.1%], could you split those out for us in the secondary versus the large market?

Yes, give me two seconds. I've got that for the quarter, but not for the month, if that's cool.

The quarter's fine.

We were -- it's skewed more on the new lease rates that was up [4.7%], and over one on the secondary market, and then renewals were [6.4%] and [5%].

And, Tom, can you actually tell us what the new move-in gains were over the prior lease? Which is more comparable to [Pierce]?

Yes, on a company-wide basis, new leases were [3.1%] and [6.3%] and [4.5%] for blended. So [3.1%] new, renewal [6.3%], blended [4.5%].

Thanks, that's helpful. And the last question, Eric, on your opening comments on single-family housing, when you talked about the potential benefit, could you talk about your expectations there? And are you seeing any early signs of improved job growth in your markets, and which markets -- if not, in which markets would you expect to see that? And how meaningful does that become on the revenue line?

We are seeing slow recovery in the employment markets are taking place, as the news reports outline. The Texas market's continue to do quite well. Atlanta has been lagging, but it is showing signs of getting better, as is Florida. It is interesting when you look at the impact of single-family move-out, or move-outs due to single-family buying, it is actually an example -- it's actually created more pressure for us in our larger markets than it has in our secondary markets. As I alluded to in my opening comments, the move-outs due to home buying was only about 18% on average.

It's actually about 20% on our bigger markets in the quarter, but in the secondary markets, it was 15%. I think that clearly as the economy hopefully begins to show more meaningful recovery, and then people begin to get more comfortable in their jobs, I do expect that we will probably see a little bit more activity surrounding turnover associated with buying homes. But I don't think we're headed back to anything close to what we were years ago.

My guess is we get back to maybe 25% or something like of our turnover. And I think that is probably a 2014 kind of phenomenon. But I think as we look into next year, it is hard to see the single-family recovery derailing fundamentally the rent growth and the revenue growth projections we think we'll have going into next year.

Right, but my question was actually on the other side. Are you getting more optimistic surrounding the potential for incremental job creation, related to new housing construction in your market and are you seeing any signs of that yet?

Not really. I think that your point is right. I think a recovering single-family market can have very good implications for job growth across the country. And so, we haven't seen it yet, but I think it very well could happen.

Thank you.

Paula Poskon, Robert W. Baird.

Could you run through some of the tenant credit metrics like where your rent to income ratio is this quarter versus last quarter and a year ago, average household income, reasons for move out, things like that?

Yes, sure. The rent to income ratio, as Eric called it, 17%, I like to refer to it as 16.9%. It is up about 40 basis points, but a long way away from the 20% that it was a couple of years ago. Household income is about $57,000, which has grown over time. Rents have just grown at a faster rate.

And then as far as move-outs for economic reasons, and I can get you an exact stat, but those things are well down. I don't want to over-answer the question, Paula, I'd rather circle back. I got those two things. What did you want about the move-ins and move-outs and that sort of stuff?

Really just any change in the trends and if there is significant -- if you're seeing a significant shift in the trends between primary and secondary markets.

No. And along those things that Eric mentioned with Dave earlier, I think it is a little different than conventional wisdom that we have fewer home buyers in our secondary markets and our primary markets, our rent-to-income ratio is better in our secondary markets than our primary. I think that's a little bit of a different issue as well, but they're great in both, to be perfectly honest.

So I realize that turnover is down, but those new tenants that are moving in, is their credit quality better or worse than the tenants that are vacating? Is there any change in that trend?

Our average -- we have a safe rent score that we track, and I don't have the exact data points for you, but it continues to trend up each quarter. It just is a steady improvement.

And this is more of an anecdotal or perspective question, but portfolio-wide and then, separating between large and secondary markets, what do you see -- how do you think the percentage shakes out in your tenant base between renters by choice and renters by force?

If you look at reasons for home buying, you would come to a conclusion that the secondary markets have more renters by choice, and they like being there and they're not exiting for home buying. But I think that's about the only data point that we really have into that psychology. I just wouldn't read too much into it.

I think everyone is reacting similarly on realizing that the American dream is not always buying a home and that there is some financial stress that comes with that. And I think that while we are not becoming 100% a renter nation, I think people are more comfortable with that today. And I think until jobs pick up, you won't see home buying pick up and you won't see a turnaround. I think it's 65% or so -- Eric?

I would tell you that, given the impact of us having a better credit quality resident and continued growth in average income of our resident profile, we are definitely getting folks that are, if you will, more capable of being able to buy a home. But I think the decision of what constitutes renter by choice or renter by necessity has undergone a fundamental shift. And the bottom line is there's a lot more people out there that are renters by choice. And I think they will stay in that mindset for quite some time.

Thanks, that's all I had.

Tayo Okusanya, Jefferies.

Just a couple of questions and going back to Kansas City, Missouri. Trying to understand what kind of demand supply fundamentals you are seeing in that market and whether that's demographics in that market that attracted you to it, and then the longer term plans in regards to how big you can get in that market to take advantage of economies of scale?

Kansas City fits into our definitions of a secondary market. The other REITs are not there. It's a market where we feel we can come in and use our balance sheet and our operating platform and our execution capabilities and create very attractive returns for our shareholder capital. It's a market that tends to have more stable characteristics. It doesn't tend to get a lot of excess of supply as you might get in some of the bigger markets.

And thus we like the stable nature of that particular market. It's very stable employment base there and very portable region of the country, and this particular opportunity was a newly built property with a broker involved and developer that we know, and we were able to come in and provide them a very definitive quick close and make an attractive acquisition.

What we would expect over the next several years is to see our presence there grow by another five or six properties. Obviously we'll take our time and be patient about it. But we like the market as part of our secondary market strategy.

Okay. That's helpful. And then speaking to the secondary market strategy, as well, when I take a look at some of your same-store statistics, and then there's a section in your supplemental where you talk about your individual markets that have less than $30 million in gross real assets?

I'm just curious with those assets, you basically have a handful of assets. What kind of economies of scale or what kind of margins are you getting in those markets when you only have one, two, three assets in those markets as compared to your larger markets. And is the long-term plan to also grow those markets? Or is there a long-term plan to exit some of the smaller markets where you do not have that type of economies of scale?

I think just as a consequence of rotating capital out of lower-margin investments into higher margin investments, what that often translates into is selling both older assets and assets where we don't have much in the way of the efficiency from scale in the given market. And so, the impact of that or the consequence of cycling, you're going to see, over the next several years, is that some of these properties that are listed in that section you were referring to will probably get sold.

And we just are able to, we think, recycle the capital in a more effective way into markets like Kansas City or some of the other secondary markets. So, we are mindful of really, first, the margins specifically on the investment. And then the overhead efficiency as well, and that will drive us to cycle out of some of these properties.

Okay. That's helpful. And then this question is for Al. Al, if you do end up getting the second credit upgrade sometime over the next one or two quarters, how do you see that impact in your overall cost of capital?

We think it will have a direct impact on being able to access the bond market, probably 25 basis points, 30 basis points below where we just accessed the bond market on a private placement. I think that will be the initial.

You have two phases of that, Tayo. You've got one where you get your credit rating and you have your first-time full rating will go into the market, and then I think we will have benefit of 25 basis points or so immediately, hopefully. But then after we've been in the market for a while, maybe a year or two, we will have actually another step-down as a well-known seasoned issue in the market. Maybe another 20 basis points or so.

Let's call it we had a spread of [$235 million] on the recent deal, we can expect something like [$200 million] our initial deal and even south of that once we become seasoned. That's what we are expecting and we're hoping for.

It doesn't have an impact on your line of credit, does it?

No, the line of credit impact, when we got our first two ratings, Fitch plus Moody's, we had the impact on the lines of credit that were written a little differently. And so when you go to the full bond market, though, you really need all three. Just to have your best pricing.

Sounds good. Thank you very much.

Carol Kemple, Hilliard Lyons.

Do you all have anything under contract now that you expect to close on by year end?

We're working on one other deal at the moment, Carol. It is in due diligence, not sure it will get closed, but we are working on it right now. That's probably the only other deal that gets done by the year end, if it gets done.

I think I missed this earlier. Overall, how much were new leasing prices up and renewals in the third quarter?

Sure, new leases were to [2.8%], renewal [6.1%] and blended, [4.3%].

Okay, thank you.

Thank you. I'm showing no additional audio questions at this time. I will turn the conference back over to you.

Okay, no further comments. I appreciate everyone joining us this morning and we'll see you at NARI, 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.