Post Properties Inc. Q1 2009 Earnings Call Transcript

Post Properties Inc. (PPS)

Q1 2009 Earnings Call

May 5, 2009 10:00 am ET

Executives

David P. Stockert – President, Chief Executive Officer & Director

Thomas L. Wilkes – Executive Vice President & President Post Apartment Management

Christopher J. Papa – Chief Financial Officer & Executive Vice President

Analysts

Michael Salinsky – RBC Capital Markets

Todd Thomas for Karin Ford – Keybanc Capital Markets

Michael Lewis – JP Morgan

Scott Kirkpatrick – Teton Capital

Rob Stevenson – Fox-Pitt Kelton

David Toti – Citigroup

[Sloan Bullman] – Goldman Sachs

David Shapiro – BGB Securities

Presentation

Operator

Welcome to the Post Properties First Quarter 2009 Earnings conference call. Today's call is being recorded. (Operator Instructions) At this time, I'd like to turn the call over to the Post Properties' President and Chief Executive Officer, Mr. Dave Stockert, for opening remarks and introductions. Please go ahead, sir.

David P. Stockert

Thank you and good morning, this is Dave Stockert. Welcome to Post Properties first quarter conference call. With me today are Tom Wilkes, President of Post Apartment Management, and Chris Papa, our Chief Financial Officer.

Before we begin the business of this call, I'll reference the Safe Harbor statement. Statements contained in this conference call regarding expected operating results and other events are forward-looking statements that involve risks and uncertainties. Actual future events or results may differ materially from these statements. Such forward-looking statements are made pursuant to the Safe Harbor provisions, of the Private Securities Litigation Reform Act of 1995 and are made based on our expectations, assumptions and beliefs, as well as information available to us at this time.

A variety of factors could cause actual results to differ materially from those anticipated, including those discussed in the risk factors section of our annual report on Form 10-K, dated December 31, 2008. Post Properties undertakes no obligation to update any information discussed on this conference call. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to comparable gap financial measures can be found in our earnings release and our supplemental financial data.

I'll start this morning with the discussion of operating results. For the quarter, same store revenue and net operating income were consistent with expectations underlying the annual same store guidance we gave three months ago. Property revenues on a same store basis declined by 1.6% year-over-year; on a sequential basis, the decline in same store revenues was somewhat less at 1.3%.

These results compared to our annual guidance of a 2.5% to 4.3% decline in same store revenues for the full year. That full year guidance anticipates the cumulating affect of challenging economic and employment conditions through 2009, even as we enter what is our seasonally strongest leasing period in the second and third quarters.

As to specific markets, Houston, Austin, Dallas and the Washington, D.C., areas are our best relative performers. The Texas markets will face some offsetting supply challenges in the near term, but they also continue to have better relative health in their employment conditions. Our portfolio in Atlanta has held up as well as we would expect in light of substantial job losses and 9% unemployment. In town locations in Atlanta are performing best for us.

Tampa and Orlando entered the downturn first, which is reflected in our rent roles. Tampa, in particular, is showing some early signs of stabilizing. Finally, New York and Charlotte have been hit hard by heavy job losses. In the financial sector, we face the greatest near term revenue pressure in these two markets. We'll turn now to operating expenses.

On a same store basis, expenses were down by 3.8% year-over-year on successful efforts to enhance staffing efficiency and reduce costs at the property level. One example is in the area of prospect generation. We recently rolled out a redesigned website, including the new [Post Home Finder] that allows prospects to apply search criteria across an entire market of Post communities.

In the first month of deployment we recorded a substantial increase in Internet-generated prospect leads and have been able to continue phasing out print advertising. With centralization of procurement, and other processing functions, we've also been able to reduce staffing at several communities and still maintain our resident service standards. I want to thank, particularly, our associates for doing a great job in this area.

Sequentially, expenses were up 4.1% the first quarter due primarily to accrual adjustments in the fourth quarter of last year and the reset of new accruals in this year's first quarter. The sequential increase in expenses was expected and is consistent with our full-year guidance for property operating expenses to increase by 0.3% to 1.1% for all of 2009.

Turnover fell in the first quarter, which also contributed to lower costs. Year-over-year, gross turnover dropped from 46% to 41%. Net for moves within the Post system turnover fell from 41% to 35%. Move outs to home purchases also dropped from 23% last year at this time to 15% this year and, finally, net uncollected continued to run in under a half of a percent of total revenues, although it did tick up to 42 basis points in the first quarter of 2009 compared to 21 basis points in the year ago quarter. These operating metrics speak to the quality of the portfolio and of our resident base.

Beginning this month, we are now in lease up on all five of our active apartment developments and will substantially complete construction by yearend. We currently expect rents to be off of pro formas by about 10% on average, reducing initial stabilized yields by about 100 basis points. We also pushed out expected stabilization dates on some projects to reflect actual unit delivery dates and expected leasing conditions and increased the budget for two projects primarily to reflect higher anticipated tenant improvement allowances on the retail component of those mixed use communities.

In our condominium business, we recently adjusted prices and this is reflected in the loss from condominium activities for the quarter. We will continue to make appropriate adjustments to meet that market. Finally, through the end of the first quarter we've completed nearly $7 million of the work involved in our exterior remediation program and we continue to be comfortable with our total cost estimate of up to $45 million.

Turning to our balance sheet, we've raised, since the beginning of this year, nearly $340 million in proceeds from asset sales and secured agency debt. We used those proceeds to refinance all of our debt maturity for 2009, tender for 2011 public bonds and to pay down our $630 million lines of credit to a nominal balance of under $10 million.

A one-year extension on our primary line of credit has opened up at our optioned, and we are actively evaluating the approach to our credit facility that will give us the best flexibility going forward. While we will not rule out any particular form of capital raising that would maintain financial flexibility, liquidity and reduce leverage, our strategy to date favors agency mortgage debt and asset sales and we continue to pursue both.

In April, we closed the sale of Post Dunwoody at a cap rate on trailing 12 months NOI of 8%, net of a 3% management fee and $300 per unit reserve. This is our customer at a cap rate calculation as indicated on page 18 of our supplemental financial data. On a forward 12 months basis, which is how the asset was underwritten by the purchaser, the cap rate's similarly calculated as to management fees and reserves was approximately 7.6%. We have two other assets currently held for sale.

Finally, we are not updating specific components of our annual earnings guidance given last quarter, except to note that the expected first quarter loss on early extinguishments of debt was less than we had forecast and was offset by gains realized on our unsecured bond tender. That concludes our prepared remarks. We'll now open the phone lines to Q&A.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Your first question comes from Michael Salinsky – RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

As you mentioned, you talked a little bit about a development pipeline and you talked also about marking the existing condos down the market a little bit there. Can you talk about, specifically about the two condo projects? You know, how leasing is going on those and whether you're seeing people back out, you know, specifically what's going on with those two projects?

David P. Stockert

Sure, absolutely, well, the two you're referring to are the Ritz in Atlanta and the Four Seasons in Austin. The Four Seasons we've held steady at 61 contracts to date that we've got. We continue to have good traffic. People are hesitant in this market to commit. The building is now – the skin is going up on the exterior of the building and, in the fall, we'll have model units and things that people can look at. So, we continue to track, but, obviously it's a challenging the housing market.

In the Ritz, we just opened a few weeks ago the Sales Center. In the Ritz Carlton Hotel, we expect to have model units by the end of June. And so we're just now getting into the activity of talking with prospects and starting to evaluate contracts. So, again, we'll continue to evaluate the market and adjust our strategies accordingly.

Michael Salinsky – RBC Capital Markets

Okay. There hasn't been any change in pricings, correct, to this point?

David P. Stockert

That's correct.

Michael Salinsky – RBC Capital Markets

Secondly, one of your peers had mentioned that the change from January to currently in market runs had been significant meaning that they weren't seeing further declines in market rates. Is that consistent with what you're seeing or are you seeing something different?

David P. Stockert

The change in rent had not been consistent?

Michael Salinsky – RBC Capital Markets

They hadn't seen further deceleration essentially in market rents from the beginning of the year, meaning on net new leases. The gap between existing leases and net new leases hadn't widened significantly.

David P. Stockert

I would say it a little bit differently. I don't know that that would be our experience. I think things eroded in the first quarter. I would tell you that the gap between net new leases and renewals today as we enter the spring leasing season that gap is closing a little bit.

Thomas L. Wilkes

This is Tom Wilkes. Today we're renewing people at approximately what they're paying today. On the other hand with new leases, those are generally 8% to 10% off of current rents. So what we have seen in just the last few weeks is that that gap is narrowing a little bit for new leases, but it's not an appreciable gap that we're ready to call the bottom on.

Michael Salinsky – RBC Capital Markets

Finally, across a number of submarkets we started seeing a little bit of stabilization in housing in the past couple of months. In specific submarkets are you seeing any pick ups and move outs yet to homeownership, and how is that impacting pricing if you are?

David P. Stockert

With respect to move outs to the homeownership, our experience is that over the last quarter we had a reduction down to 15% from a high of two years ago around 26% to 28%. As it pertains to pricing on our apartments, we haven't seen a material effect. What we do see is that the more in town markets.

Take mid-town of Atlanta versus even Buckhead or Cobb or South Tampa versus the north side of Tampa that those inner core markets are marginally stronger. The same could be said for DC with respect to the district and Arlington and Alexandria. We are seeing marginally stronger leasing activity and higher occupancy in these inner markets vis-à-vis the markets that are slightly more suburban in context.

Operator

Your next question comes from Karin Ford – Keybanc Capital Markets.

Todd Thomas for Karin Ford – Keybanc Capital Markets

This is Todd Thomas. You mentioned you're evaluating your credit line. Can you talk about what you're seeing in terms of capacity and pricing?

David P. Stockert

I think it's safe to say capacity you're going to see is going to be reduced and pricing is going to be substantially increased. But I don't think, I mean, I don't want to get too far into it, but I wouldn't be surprised to see lines cut by anywhere from a quarter to a third. And I think what you're going to see is a substantial uptick in the spreads.

Todd Thomas for Karin Ford – Keybanc Capital Markets

Can you give us an occupancy update as of the end of April?

David P. Stockert

Yes, today the occupancy is 93.3%. That's actually effective May 2.

Todd Thomas for Karin Ford – Keybanc Capital Markets

And do you have that by market?

David P. Stockert

I do, and I would say that it's going to vary from a range of Tampa where it's 95.7, likewise Orlando 94.7, down to a low of Charlotte and New York, which are in 91% to 92%. The rest are going to be in the range of 93% to 94%.

Todd Thomas for Karin Ford – Keybanc Capital Markets

And then finally on leverage overall, what is your view of your leverage level today generally and then you mentioned right now that you're favoring agency debt, but can you provide some context around your decisions to source capital and what your thoughts about issuing equity are to bring down your leverage overall.

David P. Stockert

Well, I'll start and Chris can jump in too, but we have historically tried to maintain a fairly moderate level of leverage and in fact over the last seven or eight years we've reduced it modestly. That's been typically in the context of a debt in preferred to total undepreciated real estate value calculation that we track as one of our principal measures.

The question today is whether or not the ranges that we've operated under, which have been in the 45% range are low enough and that conversation is occurring, obviously, in the industry and it's a current year post. So we will continue to evaluate all that. We'll look at all the different opportunities to us for raising capital, maintaining liquidity, financial strength and leverage and we won't rule anything out.

Again, we have had relative success with the agency debt and we have substantial unencumbered assets. We've also had some success on the asset sales, although, you can see when you go to page 18 of the supplement you can see what the cap rate move has been. And I think what's depicted on page 18 for asset sales are pretty reflective of what's happened in the market. Stuff we sold a year ago was around a low six and now it's on a trailing basis.

That was on an expectation I think of less erosion in NOI than might be the case today when people underwrite. Today on a trailing basis it's more like mid seven to eight depending on the asset. So we'll look at all the costs of capital and the different opportunities and take advantage as we think is prudent.

Christopher J. Papa

And the thing I'd add as far as financing where we stand today, as you look at our supplement we provided some color as to the development and renovation, remediation, funding needs over the remaining projects and that's about $160 million if you take out our construction loan financing. As Dave said, we've paid down a lot of our debt maturities. We have no 2009 debt maturities at this point and about $100 million of maturities at the end of '10 related to our senior note.

So that totals about $260 million and as we sit here today we have less than $10 million of outstanding borrowing on our $630 million line. So we have plenty of capacity today excluding anything we would do as far as asset sales, condo sales or additional secured financing, so we're trying to maintain as much financing flexibility as we can.

Todd Thomas for Karin Ford – Keybanc Capital Markets

Okay. How much do you estimate your unencumbered asset pool is?

David P. Stockert

Depending on how you value that, I mean, on a book value basis if you pro forma out the recent deal we've done on the sale you're about $1.8 billion on a more current value basis, which is how our bank credit facility would work. It's going to be 1.6, 1.7 billion range.

Operator

Your next question comes from Michael Lewis – JP Morgan.

Michael Lewis – JP Morgan

I know you said you're not updating components or guidance, but can you just give me an idea if that 3.8% decrease in operating expenses, was that expected?

David P. Stockert

Yes.

Michael Lewis – JP Morgan

Okay. And then regarding Peachtree Hills and Post Heights, which I believe are the only two undergoing these remediation efforts right now. Can you give us an idea of the occupancy dip there and can you also just remind me how you treat these types of communities in terms of the same store pool?

David P. Stockert

Well both of those, and those are major renovations, those are not the remediation. Those are both detailed in the supplement and I'll find the page for you, it's on page 16. They are not included in the same store pool. We don't have any renovation projects in the same store pool. Renovation wouldn't come in until they've been stabilized for an entire year ahead of coming into the same store pool. And if you look on page 16, Mike, you'll see that the leasing percentage at March 31 was 65 %, 69%. So many of the units are getting close to being physically complete but there's still a fair amount of vacancy in those two projects.

Michael Lewis – JP Morgan

What about then in terms of the ones that are undergoing remediation?

David Stockert

Well those are in the same store pool and we don't take them off line. That's an exterior remediation and we're working on six or eight of the ones where we think that the issue is the greatest. We're focused on those. That covers, we've got them underway in Atlanta and Florida and Dallas and Houston.

And as I said we spent about through March 31st about $7 million and that pace of spending will accelerate in the second and third quarters as we ramped up the approach and the systems and things like that. We hope to be able to get substantially all of it done by the end of the year.

Michael Lewis – JP Morgan

Is there a meaningful impact on the occupancy in those markets?

Thomas Wilkes

As Dave said the work is being done, the exterior of the properties so we're not taking that many units offline for the period of time where we are working on the project to the extent that there's scaffolding and extension of the amount of construction work. Certainly it affects the marketability. But that's a temporary point in time that doesn't materially affect it over the course of the year.

Operator

Your next question comes from Scott Kirkpatrick – Teton Capital.

Scott Kirkpatrick – Teton Capital

Yes congratulations on a good quarter in a tough environment. This is [Scott Kirkpatrick] with Teton Capital and my question is I just want to make sure I got the bad debt numbers correctly. A lot of your peers had big increases in that and I wondered if you would be kind enough to share what the sequential entries from December was and kind of what your thought on that and delinquencies going forwards are?

Christopher Papa

We do not change our qualifying guidelines at all and in the fourth quarter our net bad debt was 0.29%. In the first quarter our bad debt was 0.42% so we have an aggressive in-house collections effort. And we have a very rigid screening process just before we accept our residents.

Scott Kirkpatrick – Teton Capital

So you expect the numbers to sort of stay in that range and is that sort of the historical range in the target zone that you have?

Christopher Papa

It is. If you were to go back into 2001 and 2002 when we went through the prior market downturn our numbers perhaps got up to 0.5% but generally they've stayed well below the 1.0% range.

Scott Kirkpatrick – Teton Capital

Okay. And then I missed the earlier part of the call. I don't know if you talked to it, did you have an annual occupancy target and did you talk to that and sort of pricing in general just how the newer leases coming on at the lower levels could impact pricing and will you keep reducing the newer rents in order to keep occupancy at a certain point?

Christopher Papa

First of all the occupancy target for the year is 93.7%, that's essentially what we operated at in the first quarter. Today our occupancy as we begin this month is in that range at 93.3%. With respect to leasing on the new lease ups what Dave mentioned in the script is that on our new lease ups our rents are generally 10% off the pro formas. And then if you look at leasing on an existing property you'll find that renewals in general are being accomplished at current rates whereas new leases are off current rates by 8% to 10%.

Scott Kirkpatrick – Teton Capital

So is the philosophy that you'll in order to keep the occupancy at that target if necessary keep reducing the new leases?

Christopher Papa

That's correct, the most efficient way to operate an apartment community having gone through this slump just a few years ago is in that 93% to 95% range. And I think what you'll find is that most institutional owners will attempt to do that. And they, like us, will use a revenue management system to do so in a judicious fashion so that's it's not an across the board concession but it's a unit by unit, day by day pricing so as to maximize the pricing. Or said another way mitigate the reductions.

Scott Kirkpatrick – Teton Capital

Great, thank you and just lastly I don't know if you care to share your thoughts on how the rest of this plays out. I know it's anyone's guess but do you think we're through the worst of this, or do you think it continues to be a very challenging environment or how do you all see the future?

David P. Stockert

I think it depends on day you ask us actually. It's so tied to the economy and so tied to some mitigation in the job losses. And you're starting to see some, maybe see if these aren't just numbers that end up getting revised, but maybe you're seeing some very, very early signs of that. You're seeing some very, very early signs that maybe the housing market is starting to firm up a little bit. But again this could also just be a head fake and we could be at a longer period of time. It's very tough to predict at the moment.

Operator

Your next question comes from Rob Stevenson – Fox-Pitt Kelton

Rob Stevenson – Fox-Pitt Kelton

Dave, can you talk a little bit about what you've been seeing in terms of the breadth and depth of the buyer pool for assets these days as you sell Dunwoody and market the other two assets?

David P. Stockert

As I think has been widely discussed it's tough. I mean the breadth is there's not as much breadth, there's not as much depth. It's an every deal pretty much is contingent on arranging financing. The agency financing so far and we don't see that it's changing, so far that's been fairly reliable. Pricing has obviously moved some over the course of this although it's been pretty attractive lately. But there's clearly not the number of buyers out there that there might have been certainly this time last year.

So it's a process of, for us, with respect to the agency financing and after sales since that's a big part of our leverage management program, we're in the market all the time. So we're just – we've got assets in the market, we're working with buyers and we're trying to nurse things along and get deals done at the same time we've got assets being underwritten by the agencies to keep that iron in the fire as well.

Rob Stevenson – Fox-Pitt Kelton

Okay, then a couple of questions for Tom. Tom, in terms of the Charlotte market how much more deterioration do you really see there, I mean have we gotten through a lot of the bank consolidation job losses etc. and that's sort of filtered it's way already through the system or is there another batch of this stuff yet to come?

Thomas L. Wilkes

As Dave said earlier we can't begin to predict what the banks are going to do with respect to continued layoffs. Today if you look at the trailing 12 months for Charlotte they've lost 53,000 jobs to 6.1%. Their unemployment is up at 8.1% so they're our most, one of our two most difficult markets that we're dealing with.

And with respect to the two downtown properties that we have about 30% of our residents' employment is associated with the banking industry. So we do have a great dependence on the health of those institutions. The good news is that we have adjusted to the marketplace. Occupancies are starting to firm up a bit. But we still have to discount both on the new leases as well as in some cases on the renewals in order to maintain that occupancy that we do have.

Rob Stevenson – Fox-Pitt Kelton

And then last question in terms of what you've seen in the first quarter and what you've been seeing and hearing on the ground over the last six weeks or so. What's your feel for property taxes for this year? Is the increase going to be as bad as most people expected or are some of the municipalities holding back given the economy?

Thomas L. Wilkes

It's fairly early in the process for us to make any firm predictions. Everything that we've experienced thus far for the most part has just been in the newspapers. So we have yet to receive a significant number of assessments. So our cycle for our markets is later in the year and we'll begin to receive those on into May and June and then begin to go through the protest process. We budgeted for a property tax increase of around 5% to 6% imbedded in our earnings guidance.

Operator

Your next question comes from David Toti – Citi.

David Toti – Citigroup

Michael is here with me as well. Can you talk a little bit – just sort of stepping back from the detail, now that you've taken out '09 and you've retired a good portion of 2010 and 11, do you think that you could become more opportunistic and what's your expectations toward the end of the year relative to potential opportunity in terms of type and location and market?

Thomas L. Wilkes

Well I think that number one, I think the opportunity set has not ripened at the moment from our perspective and I think it could continue to get better as there's more forced distress out there for the kind of product that we would be interested in, you're not seeing a lot of that other than fractured condominium projects or projects that were slighted as condos and where you have an opportunity maybe to convert them to rentals. But even in that case typically there's not quite a resolution of the value, so I think you've got some time.

But going back to the opportunistic and how our balance sheet is I think until we're real comfortable that we know how all of our financings happen for the next few years, we will continue to favor keeping our leverage down and keeping our financial flexibility very high.

David Toti – Citigroup

Have you considered any kind of lending, mezzanine lending and so forth?

Thomas L. Wilkes

We've talked about it and we've looked at it a little bit, but no, I don't see that any time soon.

David Toti – Citigroup

Okay and then just on the 11 condos that you sold, could you just tell us, maybe I missed this, about the investors and what types of buyers you're seeing for these?

Thomas L. Wilkes

Yes all of them in fact were speaking – I mentioned the Tampa market back in my comments about leasing and we're seeing some activity on the leasing side of Tampa and again some very early signs that market is stabilizing. There's a fair amount of growth in population and house information still in that market. We're starting to see the housing market there, the condominium market show a little bit a sign of life.

And in that market I think we've found the pricing in Tampa that moves the market and so these purchasers are not so much investors as they are people who find Harbor Island where this project is located very attractive and our pricing is very attractive. So we've looked at the other projects in Texas and we've made some adjustments there, too to generate more activity. That's what we have to do in this market.

David Toti – Citigroup

Just going back to the Ritz and the Four Seasons, can you just go through how those price points on average compared to the immediate catchment area or demographic market and what kind of concessions and inducements you might attach to some of those, or is it too early to...

Thomas L. Wilkes

Yes it's a little early and it's a little early to talk about the second part of that. In terms of the catchment areas, you know both of these are located in very desirable submarkets within Austin and Atlanta, Buckhead and Atlanta and downtown Austin which is kind of the desirable residential area. They're both attached to very leading brands and the quality of the products and the locations are excellent. But it's still early. You're still in a pre-sale kind of environment where people can't see what they're buying. They're buying it on spec in some ways.

We do have some mock ups and things in our sales centers but you don't have the ability to walk in a unit and see it. That'll happen over the next few months and we'll just stay on top of it and do what we need to do to meet the market conditions.

Operator

(Operator Instructions) We'll go next to [Sloan Bullman] – Goldman Sachs.

[Sloan Bullman] – Goldman Sachs

Just a question about tenant trends. You saw your year-over-year turnover in move outs decline, but would you expect that to reverse itself over the summer months, particularly given the commentary you've had on how new leases relative to renewals are 8% to 10% lower?

Thomas L. Wilkes

We're monitoring our renewal success and turnover very, very carefully as you might expect because we sent out our renewals 75 days in advance. Now do we expect turnover to increase sequentially? Absolutely because our residents traffic demands dramatically increase by as much as 50% to 60% from the first quarter to the second quarter. Consequently, our lease expirations are set to increase from 22% to 29% of our rent roll going from the first quarter to the second quarter.

So yes we expect turnover to increase sequentially and it historically has. If it begins to increase more in the second quarter than it has in past years' second quarters, then we'll begin to adjust our renewal strategy and try to reduce turnover. And as you, as we've said earlier, in the Charlotte and New York markets, that is precisely the reason that we began to adjust our renewal strategy in those markets.

[Sloan Bullman] – Goldman Sachs

And that's mostly going to be on rent. So in New York and Charlotte has it been more than the 8% or 10% below what renewals are or how should we think about that?

Thomas L. Wilkes

Well first of all with respect to New York, that is very much a concession driven market. The prospects there are more geared around upfront concessions. And so we will adjust to meet their demands in what the market dictates. With respect to Charlotte, we will use the LRO, the lease rent optimizer, to adjust rents as we need to and as the system dictates. We will also give that staff, working with the system, the ability to adjust renewals down. Now the renewals won't go down by 8% to 10%. We may adjust the renewals down buy 2% to 4%.

But it's just giving them some degree of flexibility. We fully expect Charlotte as well as New York to experience a full recovery. Both of them obviously are great long-term markets.

[Sloan Bullman] – Goldman Sachs

And is it just fair to say that what's baked in the guidance at this point is that the year-over-year renewal increases are basically the same as they have been in past years or how should we think about that?

Thomas L. Wilkes

Well in past years our renewal increases would be increases. Our guidance reflects a tougher environment this year.

[Sloan Bullman] – Goldman Sachs

And then just lastly kind of a modeling question, just what drove the spike and the sequential expenses in New York and Houston?

Thomas L. Wilkes

Sure. First of all, in New York that represented the resetting of tax accruals, taxes, because these two properties are on the 421 a program increase ratably each year. Likewise our utility expenses from a seasonal basis increased dramatically in the first quarter due to colder weather. And then in Houston we had a very favorable property tax adjustment in the fourth quarter of 2008, so as we reset the accruals for 2009 the difference was far more dramatic than in other markets.

Operator

And we'll take our next question from David Shapiro – BGB Securities.

David Shapiro – BGB Securities

Just a quick question regarding your operating expenses here, I was sort of surprised to see that large drop off of – you said it was sort of in line with your expectations. Can you talk about how you see that moving sort of sequentially over the next few quarters? I mean it would seem like it would have to start moving up pretty dramatically sort of to meet that increased forecast that you set out last quarter.

Thomas L. Wilkes

Sure, some will, some won't. Our insurance renews each May and we experience a significant decrease in our insurance expenses in May of 2008 so from May of 2008 through May of 2009 we have a very favorable comparison to prior year.

So that will be one category where we will not have that great prior year comparison. Now our property taxes, as I mentioned earlier in the call are expected to go up 5%. That's built in. Now there are a variety of categories where we do anticipate a continued positive comparison to prior year. For example in personnel where we reduced our headcount utilizing technology on a variety of the larger properties, we anticipate that that favorable comparison will remain in place for most of the rest of the year.

Likewise we've shifted away from print advertising into far more effective use of the Internet and that also will continue to save us. And then our property staffs and our procurement function they work very hard in reducing our cost from our service providers and our suppliers and they've been cooperative in that process.

So we likewise anticipate that those costs will remain lower so we're working very hard to be as efficient as possible. The largest expense that we have is property taxes which is about 32% of our operating expenses and so that at a 5.4% increase will alone help drive those expenses. We'll know more about where our property taxes will actually be in the next quarter.

David Shapiro – BGB Securities

But that seems in and of itself if you get the 5% to 6% property tax increase and then if all these other categories are going down so we're still having a hard time seeing how given the first quarter decline in operating expenses have –

David P. Stockert

We expect, as Tom said, we expect taxes to go up and insurance so those are the two big categories.

David Shapiro – BGB Securities

Okay, so those two combined should sort of cost higher than I guess all the other …

Tom L. Wilkes

Remember from the second quarter on insurance is going to be marginally up whereas for this quarter we experienced a significant decrease over prior year.

David P. Stockert

And the last piece of it which is just a seasonal piece which is our turnkey costs, turnover costs will go up in the second and third quarter just because our leasing activity and turnover increases seasonally.

David Shapiro – BGB Securities

Sure, so any sort of figure you can put on that seasonal increase?

Tom L. Wilkes

Well, our turnover is going to go up from probably 30% sequentially, 30% to 40% from first quarter to second quarter. But again, it should remain within range of prior years' historical averages.

Operator

And your final question comes from Karen Ford – Keybanc Capital Markets.

Todd Thomas for Karin Ford – Keybanc Capital Markets

One quick follow-up, back to bad debt for a moment, are there certain markets where it's noticeably higher or lower and is there like an urban or suburban trend or difference that you're seeing at all?

David P. Stockert

No, there's no dramatic variance from market to market and if you look at page 8 and look at our rental rates compared to some of our – the rest of the market you'll see our rates are significantly higher which denotes the location of our properties. They are closer in, more located around the core markets so I can't comment as much to the suburban versus urban because most of our properties are more located in the urban or job center markets.

Operator

And gentlemen we have no further questions at this time. I'll turn the call back over to you for any additional remarks.

David P. Stockert

Thank you all for joining us and we'll look forward to talking again next quarter.

Operator

Thank you. That concludes today's conference. Thank you for your participation.

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