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Colonial Properties Trust (NYSE:CLP)

Q3 2009 Earnings Call

October 29, 2009; 2:00 pm ET

Executives

Jerry Brewer - Executive Vice President Finance

Bo Jackson - Executive Vice President of Commercial Properties

Thomas Lowder - Chairman of the Board of Trustee & Chief Executive Officer

Reynolds Thompson, III - President, Chief Financial Officer & Trustee

Paul Earle - Chief Operating Officer

Analysts

Michelle Ko - Banc of America/Merrill Lynch

David Toti - Citigroup

Michael Salinsky - RBC Capital Markets

Jeffrey Donnelly - Wells Fargo

Michael Brennan - Citigroup

Richard Anderson - BMO Capital Markets

Andrew McCulloch - Green Street Advisors

Operator

Good afternoon. My name is Bobby-Joe and I will be your conference operator today. At this time I would like to welcome everyone to the Q3 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Thank you Mr. Brewer, you may begin your conference.

Jerry Brewer

Thank you Bobby-Joe and welcome to everyone joining us today. We released our earnings this morning via Business Wire. A copy of this earnings release maybe found on our website at www.colonialprop.com. We’re also webcasting this call for your convenience. A replay will be available on our website for one week after the call.

Today’s call will be led by Tom Lowder, Chairman and Chief Executive Officer; and Reynolds Thompson, President and Chief Financial Officer. On the call they will present an overview of our business developments, discuss our financial results for the third quarter and our full year 2009 guidance. After their comments we’ll open up the call to take your questions. Paul Earle, our Chief Operating Officer; and Bo Jackson, our Executive Vice President of Commercial Properties are also here to fill the questions.

Let me remind you that much of the information we discuss on this call, including answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall under the Safe Harbor provisions of the securities law. These estimates are also based on a number of assumptions, any of which unrealized could adversely affect their accuracy.

Please see our latest SEC filings for the detail and explanation of risk. Any non-GAAP financial measures we discuss are reconciled to the closest GAAP financial measures and filings that can be found on our website.

I will now turn the call over to Tom.

Thomas Lowder

Thanks Jerry, and good afternoon to everyone, good morning to our friends on the West Coast. On the call today we will discuss the initiatives we’ve been pursuing this year, our third quarter results and guidance for the year-end.

As I’ve outlined on previous calls, our initiatives for 2009 were to strengthen the balance sheet, improve liquidity, address near term maturities, reduce overhead and postpone our phase developments. We’ve made significant progress on all of these initiatives, particularly in the third quarter.

On September 30, we launched an equity offering that was completed early in the fourth quarter, raising net proceeds of $109 million. Coupled with the success of our after market equity program, we’ve injected over $150 million of new common equity into the company.

In August, we executed a tender all for our longer dated unsecured notes, which eliminated $148 million of maturities. Year-to-date we repurchased $579 million of unsecured notes, recognizing $54.7 million of net gains. We’ve also generated over $80 million of commercial and non-core asset sales in the midst of a difficult sales environment. All of these actions have enabled us to continue to delever the company.

Our overhead reduction initiatives that we implemented earlier this year in the continued simplification of our business model, has reduced our 2009 G&A expenditures to a range of $16 million to $18 million, on an improvement of approximately $7 million from 2008. With additional loan lending of joint venture Reynolds will discuss in a moment there could be further savings.

Lastly, we’ve reduced our development pipelines significantly. The pipeline is now comprised of two active retail properties which includes the public grocery store, second phase of craft farms we announced last quarter, that was a function of our unwinding of a joint venture.

I am pleased with how well we’ve executed on our initiatives so far this year. Our leverage, liquidity, near-term debt maturities have improved markably from the first of the year. Focusing on most family operations and reducing our non-core assets have made us more cost efficient. We will continue to look for opportunities to further improve the balance sheet and simplify the business, while aggressively managing operating expenses and development spending.

Now Reynolds will provide some details about the third quarter operating performance and financing activities. After that I’ll update guidance for year-end. Reynolds.

Reynolds Thompson

Thank you, Tom. FFO for the third quarter was $0.49 per share, compared with the same amount for the prior year, and results for the third quarter included $0.24 per share of gains from unsecured notes repurchase, offset by $0.06 per share of charges for an expected partial loan repayment guarantee and impairment related to an apartment joint venture. Operating FFO, which we define as FFO before transaction income, was $0.23 per share, compared with $0.41 a share for the prior year.

Our third quarter same property revenues were down 4.1% compared with the prior year. We continue to experience significant revenue pressure in Phoenix, Atlanta, Orlando and Charlotte as a result of the continued job losses. These same four markets have experienced the largest job losses in our portfolio, with Phoenix, Orlando and Charlotte currently having unemployment rates in double figures. Further we’re feeling occupancy pressure in Dallas, Forth Worth and Austin, due to new supply recently coming online.

Compared to 2008, NOI declined 6.2% for the quarter and 5.6% year-to-date. Third quarter average rental rates were down 4.4% compared with 2008, and now 1.7% versus the second quarter. Rental income has continued to decline and we expect to see this trend continue into next year. Same property occupancy ended the quarter at 94.4%, a decline of 160 basis points from a year ago.

Qualified traffic for the quarter declined 150 basis points as compared to the prior year. Rates on new leases decreased approximately 9% for the quarter, based on 6,600 new leases. Renewal rates for the quarter were flat based on 4,100 renewals. Overall, resident turnover is up 79 basis points compared to last year.

Looking more closely at turnover, financial and job related turnover continues to be at elevated levels, up roughly 320 basis points over 2008, to 27.3%. However it appears to have leveled off with the number being in the 27% to 28% range over the last three quarters. Prior to the current recession, this number was consistently below 20%.

The improving housing affordability has allowed many of our major markets to work through elevated single-family home inventories, which is down approximately 25% from a year ago. The impact of the improved affordability is starting to show up in our homebuyer turnover, which trended up to 16% in our latest monthly results. All these factors will continue to put pressure on revenue in the fourth quarter.

Regarding our disposition activity, we sold 264 condominium units or total sales proceeds of $24.7 million, which included the remaining 93 condo conversion units at Murano and 118 units at Portofino. Subsequent to quarter end, we completed the previously announced sale of the remaining 14 units that at the Grander for $3.3 million. Our remaining condominium investment is in two projects located in Charlotte, with a total book value of approximately $24.5 million.

We are also active in unwinding several of our joint ventures. During the quarter we completed the sale of our ownership interest in four multifamily joint ventures, comprising 1,200 apartment homes with our partner CMS for $2 million in the release from our portion of the associated debt which was $15.3 million.

In a separate joint venture with CMS at our Canyon Creek property in Austin, Texas, we made a preferred equity contribution of $11.5 million, which was used to refinance the outstanding construction loan on the property. Our preferred equity has a cumulative preferred return of 8%. The new financing on the property included a $15.6 million ten year secured loan at a rate of 5.64%. As a result of the preferred equity contribution, we are now consolidating this property in our financial statements.

We also sold our 20% joint venture interest in the Cunningham, 280 unit apartment community located in Austin for $3.6 million, of which $2.8 million was used to repay our pro rata portion of the outstanding debt. In October we sold our 10% joint venture interest in Colony Woods, a 414 unit apartment community located in Birmingham for $2.5 million, of which $1.6 million was used to repay our pro rata portion of the outstanding debt that was scheduled to mature this year.

We disclosed last quarter that we’ve entered into an agreement with our retailer joint venture partner, OZRE Retail LLC to unwind our existing joint venture with them that is comprised of 11 retail properties with approximately 3 million square feet. We received a number of the required approvals and are working diligently on the remaining items required to close the transaction. We continue to expect a fourth quarter close.

As a reminder, we are exchanging our interests in the joint venture for one of the retail assets. We’ll pay approximately $45 million for debt repayment in unit holder note payments, and will be released from our pro rata share of the $292 million joint venture debt, of which our share is approximately $50 million.

Regarding our development activity, we had two multi family developments, totaling 742 apartment homes, and one joint venture retail center totaling 116.000 square feet that were replaced in the service during the quarter. We now have two active retail projects totaling 400,000 square feet under construction, with $10.4 million remaining to be spent.

As Tom mentioned earlier, we’ve made tremendous amount of progress on increasing liquidity and managing our near term debt maturities. The equity offering we completed in early October raised net proceeds of $109 million. Our after market offering program that was initiated in May raised net proceeds of $37.8 million during the quarter at a weighted average price of $9.20 per share.

Through the ATM program year-to-date, we raised net proceeds of $42.6 million at a weighed average price of $9.07 per share. Collectively we’ve raised over $150 million in new equity this year. We repurchased a total of $167 million in unsecured senior notes during the third quarter, with discounts totaling $14.3million or $0.24 per share, bringing us to $579 million repurchased year-to-date, with net gains of $54.7 million.

We have only 22 million remaining for 2009 that represents our pro rata portion of the secured debt in our joint ventures. $15 million of the $22 million has extension options which we plan to exercise. In 2010 we have $44 million in consolidated unsecured bond maturities.

We are also working closely with our joint venture partners on the $166 million of secured financing that is maturing in 2010, and we will corporate with our partners in connection with their efforts to refinance and/or replace other outstanding joint venture debt, which may include additional capital contributions. However, no assurance can be given, and our joint venture partners will be able to refinance or replace the maturing debt.

At the end of the quarter, our ratio of net debt plus preferred to gross assets was 56.3%, After taking into account of proceeds from the equity offering which closed after the quarter end, our net debt plus preferred to gross asset ratio is 53.7%.

I’ll now turn the call back to Tom.

Thomas Lowder

Okay. Thanks Reynolds. With only one quarter remaining this year, we are reaffirming our FFO guidance range for the year, updating our operating FFO guidance range and narrowing our same property operating assumptions.

Our revised 2009 full year guidance is as follows: net income of $0.11 per share to $0.28 per share. Total FFO is expected to be a $1.98 to $2.10 per share, with operating FFO in the range of $1.03 to $1.13 per share. We condensed our same store net operating income guidance range, which is now expected to show a decline of 6.5% to 7.25%.

We expect revenue to be down 3% to 3.25%, and expenses to be higher by about two and three quarters to three and a quarter percent. Development spending will be roughly $40 million to $45 million. Dispositions will be $80 million to $100 million of which the low end of $80 million has already occurred.

Transaction gains from developments and out parcels are expected to be in the range of $0.007 to $0.008 per share. Gains from the repurchase of our corporate securities are expected to be $0.88 to $0.89 per share, and corporate G&A remains at $16 to $18 million.

The guidance reflects an increased number of shares from our follow on offering and our aftermarket equity issuance program. Also our guidance range reflects the potential charges associated with joint venture assets in which the loans have either matured or currently in default. While we do not believe these charges are probable at this point in time, it is possible that these charges could be incurred and if the existing lenders pursue foreclosure proceedings on these property that would be the case.

Consistent with last quarter the board declared a quarterly cash dividend of $0.15 per share, which is conserving approximately $80 million on an annualized basis compared to 2008. With our initiatives that I covered on the front of the call, we have taken measured steps in a difficult environment to strengthen the company. I’m sure that we can be competitive in our Sunbelt markets.

The continued weakness in the job market has temporarily reduced our same property revenues, but we believe in the long term growth characteristics of our diversified markets, and the demographics driving future demand for most family, mainly the large and growing eco-Burma population, coupled with the trajected job growth that we expect in the Sunbelt will be a strong catalyst for our growth in the future.

Operator we will open the call up for questions.

Question-And-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Michelle Ko with Banc of America/Merrill Lynch

Michelle Ko - Banc of America/Merrill Lynch

Hi, I was wondering in terms of your ‘09 Same Star revenue guidance, I noticed that you revised it slightly down, and I was just wondering if there were any particular markets that drove that change.

Thomas Lowder

Well, it’s not one market in particular; it’s more of across the board. We saw the trends in the third quarter, and based on where we originally had expected things to may be flatten out a little bit in the fourth quarter, but we are not seeing that and the new guidance reflects the trends we’re now seeing.

Michelle Ko - Banc of America/Merrill Lynch

Are there some markets in particular that deteriorated more?

Thomas Lowder

Well, we’ve highlighted the ones where we are experiencing the greatest amount of pressure; that being Phoenix, Atlanta, Charlotte and Orlando and the pressure we are seeing there has been there has been pretty consistent this year.

Michelle Ko - Banc of America/Merrill Lynch

Okay. Also I was just wondering, you talked about renewals being essentially flat for this quarter, I was just wondering where the new lease runs were?

Thomas Lowder

New leases are down about 9%.

Michelle Ko - Banc of America/Merrill Lynch

And over how long do you expect maybe for the process to be where the renewals rolled down to the new lease fronts; do you think that will be the next six to nine months or how long do you think that could take?

Thomas Lowder

That’s a question about our view on job recovery. We expect the next two or three quarters to continue to be difficult and we look for improvements in the latter part of the summer, that’s our review on the markets.

Michelle Ko - Banc of America/Merrill Lynch

Okay great. Thank you.

Operator

And your next question comes from the line of David Toti with Citi.

David Toti - Citigroup

Bill Herman is here with me as well. A couple of questions relative to your portfolio strategy; it seems like your company took a little bit more of hit on the occupancy side than some of your peers. Do you think that’s more market specific given yourselves these concentrations or is it a more deliberate strategy of holding price potentially at the expense of occupancy?

Thomas Lowder

Well our physical occupancy pretty much stayed in line where we’ve been. We are down year-over-year, a slight percentage and a half. Paul do you want to give some color on that?

Paul Earle

It’s really a matter, if you go back to the third quarter of 2008, you will notice we were at 96.1%. So we were unusually highly occupied in the period of ’08. So if you look at our performance now we are pretty consistent with where everybody is operating.

David Toti - Citigroup

Okay, but in terms of the strategy on price, and pricing-to-occupancy, is there any focus there that’s shifted at all in terms of pricing?

Paul Earle

We typically focus on 94% to 94.5% occupancy.

David Toti - Citigroup

Okay. So you are still holding the line to occupancy essentially at the expense of potentially the red line?

Thomas Lowder

Yes.

David Toti - Citigroup

Okay great. Then in terms of some other metrics, again a number of your peers have mentioned they are seeing some improvements, some of the metrics in their portfolio, and I didn’t hear you guys comment at all on any signs yet. Are there any indications that there may be some signs of stabilization or improvement in the portfolio?

Thomas Lowder

I would say we still remain cautious about the economy and about our markets at this point in time.

David Toti - Citigroup

Okay, and then just moving over to expenses, can you just talk a little bit about some of the expense line items that you think you will be able to continue to manage effectively into 2010, in terms of controlling expenses overall.

Paul Earle

Look, the volatility will really come from the tax line items. As we move through 2009, we’ve had some good success on our appeals. Now we have to go forward into 2010, and there is a lot of pressure at the local level and we’ll be anxious to work through the 2010 tax appeals.

Regarding R&M and advertising and payroll, those numbers are very consistent year-over-year. There is a little bit of lumpiness maybe quarter-to-quarter, but we don’t see a huge amount of movement on an annual basis, and then we will look forward to renewing our insurance policy coming up in the first quarter which shouldn’t move dramatically, but we have not yet started the actual renewal policy, but if there was one line item I would say we are anxious to get the tax number for 2010 pin down, which will be mid summer next year.

Thomas Lowder

And I would also just add to that; because we’ve talked about the overhead savings that we’ve had during the year, and all of those savings have come at corporate and really in layers, and we have not reduced our staff onsite, so…

Paul Earle

Now if anything, at the site level when you are in great economic times you, could actually run properties with a few open positions, and it does not hurt your performance but when you are going through a down turn like we’ve all experienced over the last 18 months, you really want to run with a fully staffed enterprise at the site level, and so if anything in 2009 we were really working with a more fully staffed enterprise at the site level, but the drop in dramatic cuts are at the corporate level.

David Toti - Citigroup

Okay, and then my last question, and maybe I missed this in your presentation. Are there any plans to reinstate the market equity program? Is there anything else preventing you from doing that?

Paul Earle

No.

David Toti - Citigroup

Well there are no plans or there is no….

Thomas Lowder

No plans.

David Toti - Citigroup

Okay thanks guys.

Thomas Lowder

Thank you.

Operator

And our next question comes from the line of Michael Salinsky with RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

Hi, good morning. Sticking with operations there for just a second, can you talk about the impacts on the ball cable rollout and where you stand on that at this point?

Paul Earle

Yes, we are basically 90% rolled out on bulk cable, so we will get some slight increase in the fourth quarter, and then we will see pro rata increase next year, but we are basically rolled out on the cable program.

Michael Salinsky - RBC Capital Markets

Thanks that’s helpful. Switching gears to over to the transaction side, can you talk a little bit about the DRAs here at joint venture for the next year. Kind of give us an update, maybe a little bit more detail as to where you stand with the refinancing right now with that, just given it is such a big maturity next year.

Thomas Lowder

Yes, first of all, of the $166 million in JV debt that’s showing up as maturing in 2010, about 75% of that is related to the DRA CRT joint venture, roughly $125 million, $126 million. There are a number of individual loans, so it’s not all one loan that we’re working on; some are groups of property, some are individual properties securing an individual loan. So there is a lot of different conversations going on with the various lenders within that portfolio, about what makes sense to do.

Tom mentioned, and we have gone to great lengths to point out, that some of those loans have already matured and their discussion is going on with lenders as we speak about renegotiating those existing loans. Where those discussions end up, we don’t have a clear view on at this point, and part of the reason for leaving the guidance range as wide as it was is that, if one of those discussions turned the wrong way on us, we want to mention that we had enough room in there to deal with whatever charge we may have to deal with, if we made a decision to pursue foreclosure on a particular property.

So at this point, from our capital plan, we have looked at the loans, we have looked at what the debt yields are with regard of each of the individual loans, and we’re prepared to bring our pro rata share of the equity required, and refinance those to the table. There are some situations where we may look at those new dollars going in and we’ve got to make a decision as to whether or not those are smaller new dollars to invest in that property, and that process is ongoing, and it’s going to be evaluated on a building-by-building basis.

David Toti - Citigroup

Okay, are you actively leading those discussions or is DRA?

Paul Earle

DRA leads the effort, but we are very active in those discussions as well.

Michael Salinsky - RBC Capital Markets

Okay, and finally just on a disposition; I mean disposition plans may be a longer term here. Are you comfortable with where the portfolio is at right now from a positioning stand point, or are you looking at maybe some additional elevated disposition activity in the months ahead here?

Thomas Lowder

I wouldn’t say it’s elevated, but we are going to continue to pursue the plan that we’ve been executing, which is to focus on non core assets, continue to get more of the portfolio allocated toward the multi-family side of the business, and a lot of that has been focused to-date on unwinding some these join venture interest, and selling land and condominium units, and those efforts will very much continue.

On a loner term basis we’ve always been very active, that recycling our capital and that’s something that we will look at on the multifamily side, once we’ve worked though some of these non core asset sales, to continue to keep the portfolio allocations and our diversification by city and property type and all that sort of stuff and check over time.

Michael Salinsky - RBC Capital Markets

Then finally you were able to trim your expenses for the full year; can you talk a little bit about what the drivers behind that were?

Thomas Lowder

Paul you want to?

Paul Earle

It was really the success we’ve had on the tax line item and on the insurance line times; those are the two dominant forces behind lowering our expense guidance.

Operator

And your next question comes from the line of Jeffrey Donnelly of Wells Fargo

Jeffrey Donnelly - Wells Fargo

Good afternoon guys. A few questions, what are your competitors sounding a bit more encouraged about the prospects for Orlando I guess, that we have heard in the recent quarters. It seems to be little bit out of your view. Can you talk a little bit about what you’re seeing down there, and how you are thinking about that market over the next 12 months?

Paul Earle

Orlando, for us we’re in North Orlando, with the bulk of our assets and we have one apartment property down in the Hunters Creek, Southern sub market. We’ve seen occupancies firm this summer we’re about 95%, so we think that maybe renewal rents will firm up some, but there’s still a lot of unknown factors in Orlando.

We’ve experienced six quarters of challenges down there, and it has all started with the count of reversions, and then it’s picked up steam with the job losses, and then we have the single-family homes go through there, shake out and the affordability factor was really in favor of someone buying a home, which is the last cycle that we are now dealing with.

Our long-term prospects we’re feeling good about Orlando because the supply is just about shut off. So I think, by the time we cycle into 2010, we can feel very good about where Orlando will be positioned assuming job growth returns, but we’re not bullish about Orlando, but we are glad we are invested there, but there’s some short term challenges.

Thomas Lowder

And I would add to that, just to give another view, that in our office management operations, the joint venture that we you have with DRA. We want to be the largest suburban office holder in the City of Orlando, and we are seeing very few deals and we have Class A product again on the North part of the town.

So, we are all in the front line seeing where businesses are expanding and not expanding, and we’re not seeing it on the office side, and that probably makes us little more pessimistic when we give our view on the multi family side.

Jeffrey Donnelly - Wells Fargo

Understand, and I am curious and also several of I guess, like all your smaller markets like Huntsville, Birmingham and Savanna, delivered some of your strongest sequential and year-over-year NOI growth, thus far predominantly driven by top line revenues.

I’m curious; I honestly didn’t get a chance to check before the call, but what are you seeing in those markets that might be driving that trend. Are you thinking about migration or is it just they faired better in the employment picture than other markets, providing the relative degree of resilience?

Thomas Lowder

Yes, those smaller markets, they are slower growth, but when things turn around, they are more stable than the high growth markets. Also in particular markets; Savanna, you have had true concentration there, military concentration that has held occupancies well as long as there’s not a large deployment, and that has been the case this year. In Huntsville you have large a amount of government contracts in that markets. So, that’s been a strong market relative to what’s happening in other areas.

Jeffrey Donnelly - Wells Fargo

Just one last question, if I could switch gears; can you talk a bit about what you are seeing in demand for retail space in the South East and I guess where you think we at or headed I should say for cash rents in that market?

Bo Jackson

Well I’m probably the only retail guy left around the table here, so I would take your question. I would say, our lease and personnel are really three months ago Zombies, almost walking around the living dead, but they are actually having some conversations, and we have been surprised at the few bankruptcies that we’ve seen in the retail section.

The merchants have certainly managed their inventories well, and have hung in there in a very tough environment and we are seeing more activity there, but that’s not a business that we’re growing. We are finishing up some developments that we have on the drawing boards, and we’re maintaining occupancies in those joint ventures, but I would say that’s probably a better question for maybe Simon or someone else at DDR.

Jeffrey Donnelly - Wells Fargo

Okay, thanks guys.

Operator

You have a follow up question from the line of David Toti of Citi.

Michael Brennan - Citigroup

Hello, it’s Michael Brennan speaking. Just going back to the joint ventures and the most DRA, you look like you talked a little bit about the secured debt, those joint ventures are running in the low sixes from an NOI perspective, eleven times debt-to-EBITDA, and I think you made a comment about you’d have to reevaluate whether you would want to put money in. I guess given your strategic focus on multifamily, why would you put any money in and just run in default?

Thomas Lowder

Well, the realized answer to that question is, we’re not totally in charge of that. Ultimately DRA owns 85% of those joint ventures, and we are going to evaluate those in our way, but so far we are looking at those in a similar fashion, and we are not interested in losing money, we are interested in making smart business decisions.

While our focus is in another direction, we’re going to have a long term relationship with DRA and we’re going to be good partners and we’re going to make smart decisions together, and so far we’re looking at these things in a very similar way.

Michael Brennan - Citigroup

Do you have any seller financing or any other notes out to the partnership?

Thomas Lowder

We do not have any seller financing or any notes, we do have a guarantee on a mezzanine loan on one of the office buildings.

Michael Brennan - Citigroup

And what’s the total of that?

Thomas Lowder

$17 million.

Michael Brennan - Citigroup

Well I guess from the perspective of it, if the assets are only yielding a pretty low even on debt, why put any cap? I mean you want to be good partner, but at some point you have to make the decisions from a financial standpoint and from a strategic standpoint to walk away.

Paul Earle

Our general partner DRA are very good businessmen, and we’re both taken a very critical view in making the appropriate decision by asset. I think we are together in how we view those assets. So if you’re asking us, will we take a tough economic view on the matter, the answer is yes, but we’re not separate from DRA in that thing.

Michael Brennan - Citigroup

What are you running in terms of sort of net management fees, in terms of profit on an annualized basis right now from what you have left in the joint ventures?

Reynolds Thompson

I think probably the best view is to look at our KPIs on the income statement, and look at our…

Thomas Lowder

While you’re looking, I can give you a 30,000 foot view about the way we’ve been approaching it. Particularly when we unwind ventures, is when we make the appropriate downsizing in overhead, both upfront and back running people, so that we minimize any of the impact of the loss of that business, and to-date I think we have done very good at keeping that to a few pennies. You want to take a run at it?

Reynolds Thompson

For the quarter, our margins are about 16% on that business.

Michael Brennan - Citigroup

And that includes any sort of corporate overhead that you would allocate?

Paul Earle

Yes, that’s 100%.

Michael Brennan - Citigroup

Then outside of the commercial DRA ventures, any of other joint ventures in sort of difficult times where you have to come to a decision?

Paul Earle

No.

Michael Brennan - Citigroup

Okay. Thank you.

Operator

You have question from the line of Ernest Smith with BMO Capital Markets.

Richard Anderson - BMO Capital Markets

Hey, it’s Rich Anderson here with Ernest. So I apologize, a lot of calls today and I might have missed this, but did you guys go through the math and if you did, I’ll just listen to it. The math about fore sale and your exposure there and how it’s declined this quarter?

Thomas Lowder

Well I think we did, but our fore sale we have on the condo lines, is that what you are asking Rich?

Richard Anderson - BMO Capital Markets

Condo and land?

Paul Earle

Okay. Basically that’s 52 unclosed units left in charge, with two properties there, actually one is on the contract, so its 51 unsold, but 18 of our project called South Gate and 33 at our next development at metropolitans.

Richard Anderson - BMO Capital Markets

Each quarter you kind of go through the balance sheet value of your fore sale exposure, be it condos or land lords, and you know unwinding that, that’s what a big number, that we’ve been watching trend down over the past several quarters?

Thomas Lowder

Our condo exposure is down to about $24 million.

Richard Anderson - BMO Capital Markets

$24 million, that’s condo only?

Thomas Lowder

That’s condo only.

Richard Anderson - BMO Capital Markets

And what about the residential land?

Paul Earle

On page 19 of our supplemental Rich, we’ve got all of that broken out for you. The residential land that we’ve got tells our investments that there is not anything going on there. We have roughly $61 million, and then lots that we have available for sale currently is about $40 million, so total of a 100 there.

Richard Anderson - BMO Capital Markets

Okay, and then in terms the balance sheet, I think Reynolds you said 53.7% debt to gross asset after the equity, is that right?

Thomas Lowder

That’s correct.

Richard Anderson - BMO Capital Markets

Okay, so my recollection is you want to get in with a fore handle is that right? That’s longer term objectives.

Thomas Lowder

That’s a little longer term, I mean what we’ve been trying to move is back down towards where the peer group is, which is in the low 50s. So we’ve made some big strides toward that, but longer terms we believe that number needs to slide below 50 into the 40s.

Richard Anderson - BMO Capital Markets

So what’s the next set of steps to delever?

Thomas Lowder

Yes, that’s focusing on what we would call our non income producing assets. We’ve got a lot of capital tied up in that; it’s a way we can delever without having to dilute ourselves. We’ve gotten some equity into the company, it’s given us some breathing room and now we need to work on this non-income producing investment that we have and either turn that into income producing and get it sold, and we are going to work through that. We don’t want to keep diluting ourselves, when we’ve got such a big opportunity to delever by working on those numbers.

Richard Anderson - BMO Capital Markets

Okay, all right thank you.

Operator

Your next question comes from the line of Andrew McCulloch of Green Street Advisors.

Andrew McCulloch - Green Street Advisors

Hi good afternoon guys, a few quick questions and I apologize if I missed them, I got on the call a little bit late. Can you update us on your expected stabilized yields on those two family developments you just completed?

Thomas Lowder

Yes, one’s in Las Vegas, one’s in Austin, Texas and we are probably going to stabilize somewhere in the high fives or low sixes, which is probably about 100 to 150 basis points lower than where we thought we would be when we started those projects.

Andrew McCulloch - Green Street Advisors

And then on the unsecured side, have you been able to take advantage of unsecured buy backs in a fairly material way; you see that window as pretty much closed now.

Thomas Lowder

Yes, the bond market has strengthened so much and we are just not seeing what would be an attractive yield to maturity out there for us today.

Andrew McCulloch - Green Street Advisors

Okay, and then just one final question on your financial covenants, on your consolidated income available for debt service, I think as Ted says 1.5, that’s trended down over the last year, but it popped up a little in 3Q, where do you see that bottoming out?

Thomas Lowder

We’re probably at the bottom today.

Andrew McCulloch - Green Street Advisors

Even if NOI keeps falling?

Thomas Lowder

Yes, I mean we have got some other things that are going on. We feel like next year is going to be challenging from an operating standpoint, but new equity and the sales that we’ve been able to complete this year are going to give us plenty of cushions to work through what we expect 2010 to be in terms, difficult on the operating side.

Andrew McCulloch - Green Street Advisors

Great thanks a lot.

Operator

And I show there are no further questions at this time.

Thomas Lowder

Thank you all for joining us on the call today. We look forward to seeing you in Phoenix. Have a good day.

Operator

This does conclude today’s conference call. You may now disconnect.

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