Post Properties Inc. Q3 2009 Earnings Call Transcript

Post Properties Inc. (PPS)

Q3 2009 Earnings Call

November 3, 2009 10:00 am ET

Executives

David P. Stockert – President and Chief Executive Officer

Thomas L. Wilkes – President Post Apartment Management

Christopher J. Papa – Chief Financial Officer

Analysts

Dustin Pizzo – UBS

Rob Stevenson – Fox-Pitt Kelton

Michelle Ko – Bank of America Merrill Lynch

Karin Ford – Keybanc Capital Markets

David Toti – Citigroup

Andrew McCulloch – Green Street Advisors

Michael Salinsky – RBC Capital Markets

Sloan Bohlen – Goldman Sachs

[Scott Kirk] – TCAP

Presentation

Operator

Good day, everyone and welcome to the Post Properties' third quarter 2009 Earnings conference call. This call is being recorded. (Operator Instructions). At this time, I will turn the call over to Post Properties' president and chief executive officer, Mr. Dave Stockert for opening remarks and introduction. Please go ahead.

David P. Stockert

Good morning, everyone. This is Dave Stockert. Welcome to the Post Properties third quarter conference call. With me are Tom Wilkes, President of Post Apartment Management and Chris Papa, our Chief Financial Officer.

Before we begin 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 risks or 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 current 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 factor 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 GAAP financial measures can be found in our Earnings Release in our supplemental financial data. I'll now begin business of this call.

Funds from operations of $0.31 per share for the third quarter were consistent with our expectations. Full year funds from operations, both before and after the impact of charges, are also expected to come in within previously issued guidance.

On last quarter's conference call, we said that we expected same store net operating income to decline fairly substantially in the second half of 2009 and results were in line with that forecast. Same store revenue for the quarter fell 6% measured against the same period last year, which was 2008's peak revenue quarter, so we knew we had a tough comparison.

For the nine months year-to-date, same store revenue has declined 3.7% and we expect same store revenue to decline by roughly 4% for the full-year 2009 tracking prior guidance. As to specific market conditions, Washington D.C. continues to be healthiest, reflecting it's relatively low unemployment rate and moderate pace of new apartment deliveries.

Tampa and Orlando showed some signs of marking a bottom after entering the downturn earlier in 2008, although both cities are still experiencing higher than national average unemployment. The markets with the greatest job losses, namely Charlotte, Atlanta and New York, continue to present challenges, although concession activity in New York may be improving marginally.

Finally, in Dallas, Austin and to a lesser extent, Houston, we are seeing the impact of a near-term peak in new product deliveries, particularly in uptown Dallas and in town Austin. In all of our markets however, the supply of multifamily rentals will subside over the next 12 to 18 months as inventory is being absorbed and new starts are running at historically low levels.

Deliveries of new apartments across all of our markets in 2010 are expected to be less than half of the 2009 pace. While 2010 will still be challenging, the stage is set for a recovery down track. Turnover for the first nine months of 2009 is tracking about 1% higher than in the prior year, but we've seen velocity has been up as well.

We pushed occupancy some on a sequential basis to better position the portfolio for the slower winter season. Move outs to buy homes continue to run less than 15%, although change or loss of employment as a reason cited for moving out has now moved up to nearly one in five.

Throughout this cycle, we have maintained our resident qualifying standards and net uncollected accounts decline modestly in the quarter to about a quarter of a percentage point of revenue. As to property operating expenses, we continue to expect to achieve roughly 2% in overall savings for the year.

Property operating expenses tend to run higher in the second and third quarter during the hotter summer months in the peak leasing season. Exterior painting is also back end loaded in the second half of this year and accounts for some of the large quarterly variances by market. Other quarterly variances typically relate to the timing of adjustments to utility or property tax accruals year-to-year.

Although the expense numbers by individual market are choppy, we continue to be on pace with our overall cost reduction goals and we'll have restructured on a longer-term basis the way we run our properties, particularly in the areas of personnel, procurement, marketing, rent collection and administration.

Turning to the investment front, we are in the process of completing our existing apartment pipeline and have now turned most of the units out of construction. We are tracking to achieve lease up of each project in 2010.

This is analogous to what we see in most of markets, that is active projects have or are currently being completed and we'll be leasing up through 2009 or 2010. Much of the existing new apartment products should be absorbed by the end of next year and beyond that point is a potential gap in supply due to the dearth of new starts.

In our condo business, we've now signed contracts for 100% of the units are sold out entirely, two of our smaller projects in Dallas and Tampa. One was through a bulk sale and one in the ordinary course. Contract activity, overall, has been reasonable given the environment we're in, including at our high end Austin project.

We are currently working through a revised pricing with the construction lender on our Buckhead project, moving just at [shell] completion and preparing to write contracts under our marketing strategy for that asset.

We are seeing capital moving back into multifamily due to the expected favorable impact of demographic and supply demand dynamics in a gradually improving economy as well as the continuing availability of financing.

Cap rates appear to have compressed recently for high quality properties based on transactions currently in the market. Some of this move down in cap rates is offsetting lower in place NOI but absolute unit prices appear to be holding up.

During the quarter, we completed a relatively small equity offering to compliment the asset sales and debt refinancing we completed earlier this year. Proceeds from the recent offering are earmarked to reduce debt and enhance our credit metrics and most of the proceeds have been already been deployed in that way.

Maintaining the strength of the balance sheet and preserving access to the broadest range of capital remains a priority. That concludes our prepared remarks, operator, please open the phone lines for the question and answer session.

Question-and-Answer Session

Operator

(Operator Instructions). Your first comes from Dustin Pizzo – UBS

Dustin Pizzo – UBS

Dave, you talked about the third quarter of last year being the peak in revenues and based on the same store guidance, it looks like you're forecasting about a 5.8% decline in the fourth quarter, which would imply that the third quarter potentially represented the bottom. Is that a fair statement?

David P. Stockert

Well I don't know Dustin that – I don't know that I'd go so far as to say that. Certainly, again for 2008, the high revenue watermark for the third quarter of 2008, so the comparison gets a little better in the fourth quarter of 2009. 2010 is going to play out. It'll still be somewhat challenging because obviously the rent roll will be – will reflect the fact that rents have declined through 2009.

So I think as the supply starts to burn off over the course of 2010 and things get better, I think we will start to see things turn up over time.

Dustin Pizzo – UBS

Okay and then I guess just looking at 2010, what in your view is the probability that you might still lower effective rents further across your markets in the next six to nine months?

David P. Stockert

Well we haven't seen on new leases, we haven't seen a lot of change in effective rents over the course of this year. So the dynamic has simply been on renewals. We continue to renew people fairly flat. We'll turn over roughly half the portfolio this year, and so roughly half the portfolio turns over little to no decrease, the other half of the portfolios renewing down 10%, 12%.

But you will have some renewals that we did this year that may not renew next year and that's really I think the thing that we are keeping our eye on, not really the change in effective rents on new leases.

Dustin Pizzo – UBS

Okay and then just looking at the condo sales, can you talk about the details surrounding the bulk sale down at Mercer Square and specifically who the buyer was and if we should expect any FFO impact in the fourth quarter since it looks the pricing was 30%-ish lower on a per unit basis than the sales you closed in the third quarter, which it looked like were already at a slight loss.

David P. Stockert

Well if you'll notice on the page where we list condo activity, on page 15 of the supplement, the basis at the end of September is somewhat less than the bulk sale price, so the answer to the second part of the question, no, we don't expect a negative impact on FFO in the fourth quarter.

As to the decision thought process, we've got three projects that are active in sales in the sense that there's complete product and closings can be done fairly quickly, the one in Florida, which is now 100% contracted for in that sales have been clipping along at a pretty steady pace all year long.

In Houston at our Rice project it's been the same and in Uptown Dallas, that was the project that was the slowest. We had been changing our marketing approaches on that and discounting some pricing to move units.

And we had an opportunity that came up to do the bulk sale and we looked at it and the buyer I think is going to just rent the units, the few units, and sit on them for a while, but we saw that as an opportunity to close that project out at a price somewhat above, modestly above our basis and we did it.

Dustin Pizzo – UBS

And can you tell us who the buyer was or what type of buyer?

David P. Stockert

It's a private group. It's a local private group.

Operator

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

Rob Stevenson – Fox-Pitt Kelton

Tom, can you talk a little bit about, on your controllable expenses, what you see as likely to be under the most upward pressure over the next call it six months or so? I mean you guys have done a good job at sort of whittling away the expenses, but outside of real estate taxes and insurance and stuff that's out of your control, I mean what's the stuff that you expect to feel the most upward pressure on?

Thomas L. Wilkes

We made some fundamental changes in the way we operate our properties. Our headcount reduction that we executed about this time last year is not going to be altered. Likewise, we have redirected our marketing efforts to do that almost exclusively through the Web.

And although we may move those dollars around, we don't anticipate any change in that. We continue to be able to deploy new software platforms through our Website through internally creating those improvements, so I really believe that we have no significant upward pressure on the controllable expenses.

Rob Stevenson – Fox-Pitt Kelton

And can you tell us just a little bit about what the operating trend was in the portfolio during the quarter and through October? Was it pretty much sort of flattish, equal, sort of weakness throughout or did you see greater weakness at the beginning or at the end of the quarter or in October?

Thomas L. Wilkes

I don't think we're seeing any significant departures from the trends that we were experiencing throughout the quarter.

The two items that Dave referenced in the call comments to lead off this call referenced that New York we are starting to perhaps see some improvement with respect to concessions and that in Houston where there is a significant amount of job losses that have just come on in the last few months, we're starting to see some softness and you see that on page eight, where it shows Houston's physical occupancy being in the 92% range.

Rob Stevenson – Fox-Pitt Kelton

And where did you end October occupancy-wise?

Thomas L. Wilkes

We finished October at 94%. And as you – at the end of each month, the occupancy – at the beginning of each month, the occupancy is lower and then improves over the course of the month, so we anticipate the average should be in the 94.5% range over the course of the month.

Rob Stevenson – Fox-Pitt Kelton

Then one last question for Chris, do you expect any impairments on either the other condo projects, other than the Mercer Square or on any of the land parcels at the end of the year?

Christopher J. Papa

Well, I mean as we've said in the prior quarter, we do an assessment each quarter, look at our assets, held-for-investment, held-for-sale and will continue to do so in the fourth quarter. We've talked about the impairments previously on the condos, where we took a charge on 3630 last quarter. We did indicate that we had a reduction in value on Four Seasons.

Even though we didn't have an impairment there, we did have a reduction in value if we had applied the same methodology. And if you recall what will happen in the course of developing and completing those projects is, as we go to held-for-sale, we will have to reevaluate both those projects, both 3630 and Four Seasons on a held-for-sale basis as we start delivering units which should occur around the first quarter of 2010.

So I don't want to underestimate the potential impact there, but as we move forward we continue to evaluate those right now on a held-for-investment purposes and did not deem any additional impairment was required this quarter.

Operator

Your next question comes from Michelle Ko – Bank of America Merrill Lynch

Michelle Ko – Bank of America Merrill Lynch

I was wondering if you could talk a little bit about the asset sales that you had in the quarter and if you could give us a sense of the cap rates for each of those assets.

David P. Stockert

Well, we've given you the blended cap rate. This is Dave. On page 16 of the supplement, you can see there, it's a blended 7.6% overall. The high water mark on the cap rates was post-Dunwoody and that was closer to an 8% cap and the lower cap rate was post-Forest which was closer to a 7.2% cap.

Michelle Ko – Bank of America Merrill Lynch

I was wondering if you could just tell me, you spoke a little bit about some of your markets that are still struggling, I know Charlotte and Atlanta and what your view was for next year about when some of those markets might start to recover or start to stabilize a little bit more?

David P. Stockert

Well the short answer to that is when the start to make jobs again, and the good dynamic, particularly in Atlanta, is how little supply there will be and so it's not going to be a supply issue. It's just simply going to be how fast the market structure recovers from the job perspective and we'd say that about all of our markets. It's kind of the same dynamic. Supply is going to continue to ramp down and then it's just a matter of time on the job front.

Operator

Your next question comes from Karin Ford – Keybanc Capital Markets

Karin Ford – Keybanc Capital Markets

Just a little bit of clarification on the guidance. It looks like from last quarter to this quarter the normalized guidance went up about $0.025 at the midpoint, but your NOI guidance is towards the lower end of the previous range. Was it the condo sales gains or was it a gain in the October 9 debt repurchase that's driving the $0.025 or something else?

David P. Stockert

Well, as we went through the third quarter into the fourth quarter we revisited, obviously, reported actual results for the third so we were able to tighten that up and revisited our fourth quarter as well.

I mean if you look overall, Karin, I mean what we've done essentially, if you take out the unusual charges, we've looked at the guidance from a range of 121 to 133 up to 127 to 132. And essentially there's various impacts on the low end of the range partly due to tightening of our overall range on NOI on the properties.

There's some impact of little bit better overhead and G&A costs and then also the impact of asset sales and the stock offering flowing through as well. I'd say on the stock offering embedded in our guidance is probably around $0.02 of dilution related to the additional shares net the projected use of proceeds to date.

Karin Ford – Keybanc Capital Markets

Did you incur any gain or loss on the debt repurchases in October?

Thomas L. Wilkes

Well we disclosed a loss as we disclosed on the Fallsgrove repayment, the prepayment penalty of $400 million. It was not a lot of impact related to the $6 million repurchase. If anything it would probably be a very small gain; we bought it at a slight discount.

Karin Ford – Keybanc Capital Markets

Just last question, you mentioned cap rates tightening up a little bit, are you guys reconsidering – you said you have no assets currently for sale. Are you guys reconsidering potentially putting additional assets out for sale?

David P. Stockert

At the moment, we're not and as I said, I mean, I do think cap rates have tightened. Some of that again is offsetting the lower in place NOI so it's really serving as a buttress to absolute unit prices.

But to date, the challenge is, as is implied in the prepayment penalty that we incurred to take out of the 2011 debt, we don't have a lot of near term use of proceeds. And asset dispositions are diluted in the short run, and also they are tough on our credit metrics and we are keeping a close eye on our credit metrics through the rest of this cycle.

Operator

Your next question comes from David Toti – Citi.

David Toti – Citi

[Michael] is here with me as well. Just to expand on Karin's question relative to the asset sales, why not think of it more in terms of capital recycling in terms of pushing some of the stabilized assets out to market given that people generally expect there to be some opportunities on the condo side, condo conversion or distressed development side. So why not bank some of that mature cash and redeploy at higher yields?

David P. Stockert

Well, I think right now we've got almost $60 million of cash; so we've got some cash to be able to do that. There have been spotty opportunities out there, but I think the dynamic that we've seen lately is that asset prices have actually been bid up. And not just in some of the East Coast-West Coast markets, but in places like here in Atlanta where cap rates have declined a little bit. And so I think putting that money back out is something that is not obvious at the moment.

I do think hopefully that as we progress through 2010 and some of what's in the development pipelines, particularly the private companies, some of that may start to come into the market you may see some better opportunities over time. But I think we've got the balance sheet where we want it at the moment and again that's the priority unless we saw something that was really, really compelling.

David Toti – Citi

And then can you just touch a little bit in terms of the detail on the ground in Tampa and Orlando specifically in terms of how that may be stabilizing? And what are some of the factors contributing to that stabilization?

Thomas L. Wilkes

This is Tom. The unemployment there is still above [16%] so it's a difficult position with respect to the creation of new demand. On the other hand, from a supply perspective, both of those markets are going from deliveries of 2% to 3% to 4% and declining. So like the rest of the markets, the horizon for having competitive new product in the market is brighter.

David P. Stockert

And the other thing that's going on both those markets is the single-family housing supply is also starting to moderate and that's been helpful as well. And we've seen that with the activity at Harbour Island, little condo conversion we've had, where we've had fairly steady pace of activity and closings.

Operator

(Operator Instructions). Your next question comes from Andrew McCulloch – Green Street Advisors.

Andrew McCulloch – Green Street Advisors

On the Ritz development, the sales office has been open for awhile, now when do you expect to start putting units under contract?

David P. Stockert

Well, we're working through that right now with a construction lender in terms of pricing strategy, etc. But we've got prospects, and we're ready otherwise.

Andrew McCulloch – Green Street Advisors

Tom, has there been any change in expected pricing for either the Ritz or the Four Seasons development that's different from last quarter?

David P. Stockert

The Ritz, when we took the impairment, we took a reduction in pricing and then applied a big present value discount factor to that. I would say we are positioned today to offer founder's pricing at the Ritz which is going to be lower than that. On the Four Seasons we're not seeing really any change in pricing.

Andrew McCulloch – Green Street Advisors

Any change in the sell-out assumptions, the time period?

David P. Stockert

No. We use five years for both and no, we don't see any change to that.

Andrew McCulloch – Green Street Advisors

Just one last question, you said caps rates have come down a little bit for A quality product and we're hearing that from several sources. Are you seeing the same thing for lower quality assets in your markets?

David P. Stockert

We aren't tracking those as closely, so I don't know if we're good folks to ask about that. We tend to track deals that are comparable to ours and talk a lot with brokers and other players in the market so I'm not the best person to answer that question.

Operator

Your next question comes from Michael Salinsky – RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

On the development side, switching over gears there, can you talk about how leasing is progressing relative to underwriting, how far yields are off? And also just as you look out to the 2012/2000 timeframe, would you expect to begin starting new projects in say the next 6 to 12 months just to deliver into that or do you still need yields to pick up significantly to make that make sense?

David P. Stockert

Well, I think in most markets, you're still off of the rent level because you got to see some turn. I think there aren't a lot of markets where you want to be too early. Obviously, it is going to pick up ultimately over time and supply is going to be demanded in these markets. It's just a matter of time as the economy recovers. As to yields on our product, we are still targeting around 5% yields. And Tom Wilkes, why don't you talk about the pace of the projects.

Thomas L. Wilkes

East Side is nearing completion today; they are 77%. We still anticipate that they will meet or beat the expected stabilization projection at the second quarter. There pace of absorption did slow because they are fighting keeping people there as normal turnover occurs because that project has been in lease-up for a year and a half. Sierra has been operating at a pace of about 22 per month. They're now 50% leased. We're excited about the progress that they've made.

Post Park has been doing 16 per month over the last quarter; we're now 30% leased there. And then Post West Austin is been doing 13 per month, they've slowed a bit as a lot of new supply has been coming into the in-town Austin market. So they're now at 30%. And all these were about 10% off pro forma.

Michael Salinsky – RBC Capital Markets

Average concession on those are running at how many weeks?

Thomas L. Wilkes

We're running one-month upfront concession.

Michael Salinsky – RBC Capital Markets

And that hasn't changed significantly relative to last quarter?

Thomas L. Wilkes

That is correct, it has not changed.

Michael Salinsky – RBC Capital Markets

Secondly, last quarter you completed the two redevelopments. I'm just interested to get your thoughts on redevelopment at this point. We see several of your peers start to talk about doing a little bit more development as they focus on the recovery potential out there in '12 and '13.

David P. Stockert

Well we've got different models that we've used, and one of the things in terms of the major redevelopment that we did, which was a very high-end redevelopment pretty high ticket per unit. I think it will be awhile before we do another one of those because, candidly, in a market that is soft you just don't get paid as much for that difference as you need to.

Now we have something as well that we started called the Resident Design Center which allows people to customize their units. And we offer a menu of upgrades that they can choose from that have a price tag associated with them that we add permanently to the pricing of that unit, and that's where I could see us reintroducing that Resident Design Center as things start to get better.

And then finally we've got a few properties, not many, but we've got some that are 18 years old or so that just need some cosmetic upgrades, but I think those would be fairly modest. We've spent a fair amount of time and effort and money in the last few years to upgrade the leasing offices, the amenities spaces, the model apartments and things like that at our properties.

And then of course, we're undertaking this exterior remediation process that's been ongoing throughout the year. That will result as well in nearly half the portfolio being freshly tuned up from an exterior point of view. And so the portfolio sits here today – will sit here at the end of 2009 in pretty good shape.

Michael Salinsky – RBC Capital Markets

Then finally, I'm not asking for guidance, but as you look ahead to 2010, are there any plans to rollout certain programs or anything that you'd expect significant cost savings or provide a benefit. Several of your peers have rolled out bulk cable plans like that, or resident portals, anything like that? Is that something in the plan for 2010 that we should be looking for?

Thomas L. Wilkes

Sure, with respect to the portal, about one in every two of our rental payments are made by our residents, and we anticipated that number increasing. And that there may be a potential down track for continued consolidation of our onsite labor force. If you think about the fact that we really made a lot of these reductions as these technology platforms were deployed last fall.

We will deploy our online lease some time in 2010 and go to a virtual lease paperwork sometime thereafter, so we'll be moving towards examining exactly how our leasing offices work and how we may continue to obtain more efficiencies with there.

Michael Salinsky – RBC Capital Markets

On the service programs initiatives, anything on that side or no?

Thomas L. Wilkes

Today, about 20% of our service requests are submitted by our residents through the portal. We've always had a 24-hour maintenance guarantee, and we track very closely how we do with respect to meeting that. Likewise, we track resident satisfaction as we always have, and continue to outscore the indexes against which we are compared.

David P. Stockert

Your question is about bulk cable, though?

Michael Salinsky – RBC Capital Markets

Bulk cable or anything that could provide an added lift to revenue.

David P. Stockert

Yes, we've looked at both of those.

Thomas L. Wilkes

With respect to bulk cable, our residents, our target is to provide them as much optionality as possible. So to that end, it's our goal to provide them two different cable options for their cable service. In terms of where our price point is, in studying our resident who is average age of 30 making $75,000 a year, in looking and examining what we do through our resident surveys, they want as much opportunity to make their own selection as possible.

So we're going to obtain our revenue share from our providers, but we want to give them that choice to make. And the same is true for high-speed data, that we be able to provide them different options for that. So yes, we've looked at it. We continue to be satisfied with the current offering that we have, and we'll move in the direction of providing them as much option as possible while also obtaining the revenue share through the provider.

Michael Salinsky – RBC Capital Markets

And then finally, just a question for Chris. There's nothing that could potentially limit to your ability to draw on the remaining construction loan for the Ritz-Carlton asset, correct?

Christopher Papa

Well, you know, that load itself is tied to the entire master partnership. So we're in there with a total of four partners in the deal. There are two of us on the residential side, two on the office side.

Obviously, there's, as we move through the project and move toward shell completion, there are various things that we have to work through and we'll continue to have discussions with our lender, particularly like on things like Dave mentioned before on asset pricing and things of that nature. And I'm assuming the office guys are having similar conversations given the environment with the lender as well. So as of right now, we're continuing that process and continuing those discussions with the lender.

Operator

Your next question comes from Sloan Bohlen – Goldman Sachs.

Sloan Bohlen – Goldman Sachs

Just a quick question on the assets that are being rehabbed, it looks like, maybe I missed it, but it looks like the sheet came out of the supplemental. Could you give us a sense of where those assets are at a leased rate today?

David P. Stockert

Sure, the Heights is the only one that's still in a lease-up mode. Peachtree Hills, which was the other rehab under way in 2009 is leased up, and like the lease-ups, they're off their pro forma rates by about 10%. Today the Heights is 80% leased and in the supplement from last quarter, we projected that it would stabilize in the first quarter of 2010, and we feel comfortable that that project will complete its lease up and meet that target.

Sloan Bohlen – Goldman Sachs

And then with regard to, I guess, the $45 million is still the expected capital spend. It looks like $3 million or $4 million were spent in the quarter. Is that still a good run rate going forward, or will there be some pick up as we move further along, just thinking about timing?

Christopher J. Papa

Yes, well from a timing standpoint, I think we're shooting for late first quarter '10, beginning of second quarter '10 to finish up and it's going to be dependent upon whether, given the factor that we're dealing with water remediation, we're somewhat tied to the weather to get that done.

Sloan Bohlen – Goldman Sachs

And then just maybe a broader question about affordability. Were there any markets in particular – I guess you said, about 15% of move outs were due to home purchases – was there any one market where you saw affordability of homes particularly pick up and that was the reason for move out?

David P. Stockert

No, we track that on a market-by-market basis, and it's fairly consistent across our markets.

Operator

Your next question comes from [Scott Kirk] – TCAP.

[Scott Kirk] – TCAP

Hi, thanks for taking my question. I have three short questions. The first is, I think I understood occupancy was at 94.5% for the month of October, is that right?

Christopher J. Papa

That's correct.

[Scott Kirk] – TCAP

And have you talked about that on a forward-looking basis, how you see that through December or maybe even into 2010?

Thomas L. Wilkes

Well, certainly, we haven't given guidance for 2010, and we'll do that later, but in terms of November and December, it's our target to operate the portfolio in the 94% to 95% range. So we use the revenue management system to help us attain that occupancy. The point that we made with respect to the fourth quarter is given the fact that seasonally our demand drops, we wanted to solidify that occupancy in the 94% range knowing that going into November and December, that our traffic would be dropping off as it historically does.

[Scott Kirk] – TCAP

So I guess there's a little bit of promotional activity on the price in front to do that?

David P. Stockert

Correct.

[Scott Kirk] – TCAP

And then on the bad-debt front, where did that come in for the quarter, and how do you see that trending going forward?

Thomas L. Wilkes

Well, our bad debt was 0.26% as a percent of gross potential rent, and that's better than where it was a year ago, and on a year-to-date basis, it's also trending more positive. So we are adamant about maintaining our resident qualifying guidelines.

The other piece that helps that is that we require renter's insurance, so to the extent one of our residents causes damages, as opposed to having that sit out there as a delinquency, we can make that claim against the renter's insurance policy. So that's aided our efforts in reducing our delinquency.

[Scott Kirk] – TCAP

So is it the major insurance companies that provide insurance? Do you work through one conduit or do you just let the renter get that where they want?

Thomas L. Wilkes

The renter has their choice, but we refer them to a preferred provider through which we're able to obtain a commission.

[Scott Kirk] – TCAP

And do you disclose which provider you chose?

Thomas L. Wilkes

Today we are using a company called Leasing Desk.

[Scott Kirk – TCAP]

And are they – I'm not familiar with them. Are they based in your area?

Thomas L. Wilkes

No, they're not.

[Scott Kirk] – TCAP

Do you have a sense of where they are based?

Thomas L. Wilkes

Yes, they're based in Carrollton, Texas, and they're part of the Real Page organization.

[Scott Kirk] – TCAP

And just lastly, you mentioned the dilution on the share count. What share count should we be using? I guess if you can share 2010, that would be helpful, but if not for this year.

Christopher J. Papa

Well, for the fourth quarter, I think if you take, since the equity offering occurred right at the end of the quarter, if you take the third quarter as a guide and then increase that share count by about 4.25 million shares. That was the number of shares issued in the offer which closed on September 29th.

[Scott Kirk] – TCAP

And I'm sorry, what was the share count for the third quarter? The closing amount?

Christopher J. Papa

The share count for the third quarter on a diluted basis for FFO is 44,684,000.

[Scott Kirk] – TCAP

So you're talking about something like 49 million, approximately going forward.

Christopher J. Papa

Yes, it would just be a tad less than 49 million.

Operator

This concludes our Q&A session. I'll turn the call back to David Stockert for any closing remarks.

David P. Stockert

Thank you everybody for joining us today and we'll talk to many of you at NAREIT.

Operator

This concludes our presentation.

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