Colonial Properties Trust Q2 2010 Earnings Call Transcript

Colonial Properties Trust (CLP)

Q2 2010 Earnings Call Transcript

July 22, 2010 2:00 pm ET

Executives

Jerry Brewer – EVP, Finance

Tom Lowder – Chairman and CEO

Reynolds Thompson – President and CFO

Paul Earle – COO

Analysts

Dustin Pizzo – UBS

Alexander Goldfarb – Sandler O’Neill

Swaroop Yalla – Morgan Stanley

Eric Wolfe – Citi

Michael Bilerman – Citigroup

Michael Salinsky – RBC Capital Markets

David Toti – FBR Capital Markets

Michelle Ko – Bank of America

Steve Swett – Morgan Keegan

Rich Anderson – BMO Capital Markets

Jeffrey Donnelly – Wells Fargo

Andrew McCulloch – Green Street Advisors

Haendel St. Juste – KBW

Shane Buckner – Wells Capital Management

Operator

Good afternoon. My name is Ginger, and I will be your conference operator today. At this time, I would like to welcome everyone to the Colonial Properties Trust second quarter 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. Jerry Brewer, you may begin your conference.

Jerry Brewer

Thank you, Ginger, and welcome to everyone joining us today. We released our earnings this morning via Business Wire. A copy of the earnings may be found on our website at colonialprop.com. We’re also webcasting this call for your convenience. A replay will be available for your convenience at our website after the call.

I'd like to point out, on Monday of this week we updated our corporate website with a new look and improved functionality for our current perspective residents and investors. We would like to thank everyone involved in a redesign process and we'd encourage you to visit our site at colonialprop.com.

Tom Lowder, our Chairman and Chief Executive Officer; and Reynolds Thompson, President and Chief Financial Officer will lead today’s call. On the call, they will discuss our business developments, financial results for the second quarter and our guidance for 2010. After their comments, we’ll open up the call to take your questions. Paul Earle, our Chief Operating Officer, is also here to field 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 measures and filings that can be found on our website.

I will now turn the call over to Tom.

Tom Lowder

Thanks, Jerry. And welcome to everyone joining us. On the call today we'll discuss second quarter results, provide an update on the initiatives we’re pursuing this year and review our revised 2010 guidance.

Our initiatives that we announced at the first of the year to improve our company were to simplify the business, improve operating margins, strengthen the balance sheet and grow the company.

We've executed well on our initiatives in the second quarter, we released the strong occupancies, we've had sequential growth in revenues and in NOI, we've exited a couple of joint ventures, we've secured attractive 10 years financing and raised an additional $17 million of equity through our ATM program.

A number of factors such as the unbundling of households and lower home ownership coupled with limited multifamily supply in our markets has led the fundamentals improving earlier than we all had expected. I'll discuss at the end of our call our revised guidance.

I’ll now turn the call over to Reynolds, who will report on the details of our operating performance and our financing activities. Reynolds?

Reynolds Thompson

Thanks Tom. FFO for the second quarter was $0.27 per share, compared with $0.56 of the prior year period. Operating FFO, which we define as FFO before transaction income was $0.27 per share, compared with $0.28 per share for the prior year.

Our second quarter same property fiscal occupancy remains strong at 96.4%, down 30 basis points sequentially and up 220 basis points compared to last year.

Revenue was down 1.3%, versus the prior year, but increased sequentially for the first time in eight quarters by 1.3%. Our sequential revenue growth was broad based. All of the two of our markets posted increases.

Rates on new leases decreased approximately 3.4%, for the quarter, based on 5100 new leases. On a monthly basis, new lease rates in June declined only 1.5%. We anticipate a continuation of this trend with new lease rates turning positive during the third quarter. Additionally, our monthly rental rate for occupied unit turned positive sequentially in June, the first time in 25 months.

For the quarter, our renewal rates were up 2.1%, based on 4200 renewals. On the expense side we experienced a 0.2% increase sequentially and a 4.7% increase over last year. The increase over prior years primarily in repairs and maintenance as we prepared more apartments for move-ins and also for a heightened emphasis on landscaping which included mulch pine straw and irrigation repairs.

Overall, same store NOI declined 5.3%, versus the second quarter of 2009. Sequentially, NOI increased 2.2%, as a result of increased average physical occupancy. Qualified traffic for the quarter was up slightly compared to last year. Turnover improved 150 basis points over last year and 90 basis points sequentially to 62.7%.

Move-outs due to home purchases were approximately 16% and financial and job related turnover was 25.6%, a 190 basis point decline sequentially.

LRO has been a useful tool in identifying turning points in our markets. During the first quarter, we were able to improve occupancy and begin working on rents. Beginning in May, we pushed asking rents and LRO by an average of 10% on 12,000 units, then let the system go back to work. The test was successful as we now have asking rents 6.5% higher than where we started in May.

With the early success in our first wave of rate increases we pushed rates 8% on another 16,000 units at the beginning of June. We consider this test a success as well, as asking rents have settled in at a net increase of 5%. During the process, we maintained a strong occupancy level, good traffic and reasonable closing ratios.

Capital expenditures are presently at $400 per unit year-to-date and we expect that number to be approximately $825 to $875 per unit for the full year. We are accelerating some CapEx projects that will push us above our original guidance range of $675 to $725 per unit.

Turning to transaction activity, we successfully exited two single family joint ventures. We transferred our 20% interest in Colonial Village at Cary in Raleigh, North Carolina to our joint venture partner along with a net cash payment of $2.7 million for their 80% interest in Colonial Grand at Riverchase Trails, in Birmingham Alabama, with 100% ownership of Riverchase Trails, we paid off a $19.3 million loans secured by the property. We were released from the mortgage on Cary, but retained by the partner to manage the property.

During the quarter, we closed five condominium units, a total sales proceeds of $1.1 million; bringing the total book value for our two remaining condominium projects to $17 million at quarter end. As of today, we have contracts on all of the remaining units at our SouthGate project leaving only our metropolitan mixed use project with units to be sold.

We were also active on the capital markets front this quarter. We issued 1.1 million new shares through our ATM program, generating net proceeds of $16.6 million, which completes our authorization under the $50 million program announced during the first quarter.

Total of 13.6 million shares were issued since March 2010, at an average price of $13.88. Yesterday our Board of Trustees authorized a new ATM program, providing for the issuance from time-to-time of up to an additional $100 million in common shares.

During the quarter, our Parkway Place joint venture refinanced the loan that was maturated in June 2010 on the retail shopping center. Joint venture of which we have a 50% interest secured a new 10-year loan for $42 million at an interest rate of 6.5%.

Finally, in June we closed $73.2 million of secured financings with Fannie Mae that are secured by multifamily properties for the 10-year term at an interest rate of 5.02%. We use the proceeds to pay down borrowings under our unsecured line of credit.

After factoring of these transactions with the exit and exiting of the joint ventures, we now have only $20 million of consolidated debt maturing in 2010, $57 million maturing in 2011 and our unsecured line of credit in June 2012.

Our ratio of net debt plus preferred to gross assets stands at 53% as of the end of June. Consistent with last quarter, our board declared a quarterly cash dividend of $0.15 per share.

I’ll turn the call back over to Tom.

Tom Lowder

Okay. Thanks, Reynolds. I think everyone agreed that's pretty good report for the second quarter. So based on our performance in the second quarter and improving fundamentals in the business, we revised our guidance upward for our annual numbers. FFO and operating FFO are now in a range of $0.98 to $1.03 per share, compared with $0.92 to $1, which was our guidance quarter ago.

For a second time this year, we've also adjusted our full year of same property net operating income as a result of the improving performance. The improving fundamentals we talked about earlier and their ability to drive rent growth are the primary reasons for our change in guidance.

We now expect a full year NOI decline of 3.5% to 5%. Our revenues are expected to be down 1% to 1.5%, with expenses unchanged at an increase of 2.5% to 3.5%. We've increased corporate G&A range to $18 to $20 million from $19; excuse me, $17 to $19 million; primarily as a result of an increase in anticipated legal cost and compensation expenses.

Developments spending for 2010 is unchanged, but we expect to start two postpone multifamily projects, if it looks like the improving fundamentals are sustainable in the markets where we currently have development sites.

As we discussed last quarter starting these developments would enable us to deliver in 2011 or 2012 first quarter.

We were able to acquire the remaining interest in Colonial Grand Riverchase Trails in Birmingham an asset this quarter and an attractive cap rate of 6.9% and bring unencumbered asset into the portfolio. However, we still have approximately $25 million remaining in our guidance for additional acquisitions.

Finally, our revised guidance incorporates the issuance for the majority of $100 million of new equity, which is now been authorized by our Board through the balance of the year under a new ATM program. We continue to see broad base improvement in the fundamentals of our portfolio and remain cautious until stronger job growth materializes in our market.

Operator, we’ll now open the call up for questions. Operator?

Question-and-Answer Session:

Operator

(Operator Instructions) And your first question comes from the line of Dustin Pizzo from UBS.

Dustin Pizzo – UBS

Thank you. Good afternoon, guys.

Reynolds Thompson

Good afternoon.

Tom Lowder

Good afternoon, Dust.

Dustin Pizzo – UBS

Reynolds just following up on comments regarding new and renewal rates, given the forward-looking nature about our road. Can you talk about where those metrics are trending on leases that are coming due over the next 60 to 90 days?

Reynolds Thompson

As we have experienced this year, those trend lines continue to come closer together and that's why we expect those new lease rates to actually cross our expiring lease rates in the third quarter.

So we continue to see those I think I mentioned in June for the quarter they rolled down 3.4%, in June that number was down to 1.5% and we continue to see it trend down in July as well. So they are getting very close to crossing.

Dustin Pizzo – UBS

Okay. And I’d imagine haven't seen much impact on closing ratios or occupancy?

Reynolds Thompson

Yeah. We feel like, we saw little bit of pressure on occupancy but it was still a very strong 96% plus number in traffic and closing ratios are holding up very well.

Dustin Pizzo – UBS

Okay. So then when you combine the continued improvement there you are seeing in fundamentals and what you seen on the ground, with the suggested run rate in FFO from the second quarter and you have been accounting for the higher G&A and the slight debt gain, at least on our numbers the full year guidance doesn't really add up as it implies a pretty significant slowdown in the second half?

And I understand that the new ATM does have somewhat of an impact, but I mean, outside of that is it just simply added conservatism on your part given the some of the recent macro data points we've seen or is there anything else going on?

Reynolds Thompson

Yes. There are really three factors there. That does and they kind of play into this for us. And I will say that we are – while we are excited about the fundamentals, we are cautious about the way things look going forward because ultimately we do believe we are going to have to see some job growth for these trends to continue.

But in the more immediate future as we look into the third and fourth quarters, the ATM program that I mentioned is going to add some shares to the mix in the third and fourth quarters and that's probably a couple of penny’s of pressure to the existing run rate when you look at the balance of the year.

We’ve also replaced some of with our financing that was on the land at a very attractive interest rate, little over 1%, with our new 10-year financing that’s right at five. So it’s had a little bit of interest expense to the equation.

And we’ve been running a very healthy financial occupancy particularly through the second quarter. It’s something that we would like to duplicate, but we’re not sure that it’s prudent to budget with that half of financial occupancy going forward. So we backed off to something around 95% or so. That is still a very healthy number and that’s how we put the forecast together for the balance of the year.

Dustin Pizzo – UBS

So all those pennies add up to a nickel, six pennies that would probably…

Tom Lowder

Compared to what you’ve seen in the second quarter.

Dustin Pizzo – UBS

Yes.

Jerry Brewer

Hello? Are we still connected?

Operator

Yes. And your next question comes from the line of Alexander Goldfarb from Sandler O’Neill.

Alexander Goldfarb – Sandler O’Neill

Just want to get a sense for some of the trends that you’re seeing as you are looking at the, your portfolio today versus earlier in the year. As far as traffic, the quality of that traffic, home buying and then also tenant confidence and actually really focusing on the latter to the extent that you may have seen any change in tenant behavior now versus earlier in the year?

Paul Earle

This is Paul. Our traffic continues to run ahead of last year. Even in July or for the month of July we were up 2.3% as Reynolds mentioned. For the second quarter, we were up year-over-year. And so we’re seeing a continued slight increase in qualified traffic.

What we are seeing on at street level on the grounds, confidence in our rental base. We’re seeing employees that are working more, I mean customers and residents, they’re working more hours or they are giving out promotion and upgrading the unit within which they live. We’re seeing job transfers into cities like Charlotte. So at the street level, we still feel that the slow economic recovery is underway.

Alexander Goldfarb – Sandler O’Neill

Okay. And then earlier you had spoken about, land maybe some home builders or folks like that sniffing around at some of your land holdings. Just want to get a sense of what you are seeing if that activity is still continuing and then also what you may be seeing from some of the merchant builders or other developers out there?

Tom Lowder

We’re not seeing any of merchant developers to come active in the multifamily sector. There’s few discussions going on across all the markets, but nothing in our markets where we see a start in immediate horizon.

The single family national builders and single family regional builders are out there looking at opportunities and we have seen several foot sites under contracts that may speak to some supply coming into the markets in a single-family arena in the spring of next year. But on the multifamily side it's still a very difficult environment from a financing standpoint. And it's somewhat challenging to make the pro forma work in most markets.

Alexander Goldfarb – Sandler O’Neill

And I'm sorry, did you comment on the land on home builders looking at your land?

Tom Lowder

No. We are seeing a few national and regional home builders out looking for opportunities that are available in markets like Tampa, Orlando, from the single-family perspective.

Reynolds Thompson

And Alex, this is Reynolds. We've got, we've really got exposure in Central Florida and on the panhandle. Our Central Florida activity is still there. The oil spill on the panhandle has slowed down some of that interest. I think some of those people who are kind of wait and see how that situation plays out.

Alexander Goldfarb – Sandler O’Neill

Okay. And the final one is just sort of a small one but sort of logically I didn't quite get it. It looked like your investment in unconsolidated JV's went up on the balance sheet this quarter and giving that you are unwinding joint ventures, I just was curious why that – why it seemed to go up?

Paul Earle

Alex, we have changed the way we’re presenting those. The balance did not go up, but we’re presenting it gross as opposed to net. As you may be aware there has been a lot of focus on – from the SEC on different things and after looking at some of the comments they’ve made and discussing it with our auditors, we felt like it was a appropriate to present this on a gross basis.

The bottom line gets you to the same place when you look in the asset section you’ll see the bigger number that you’re referencing. If you come down into the liabilities you’ll see another heading called investment in unconsolidated subsidiaries there, which is 22,110,000. You net those two and it will bring you back to the investment in JV sheet in the back of our KPIs.

Alexander Goldfarb – Sandler O’Neill

Okay. Okay. Then that's helpful. Thanks a lot.

Operator

And your next question comes from the line of Swaroop Yalla from Morgan Stanley.

Swaroop Yalla – Morgan Stanley

Hi. Good afternoon, guys.

Reynolds Thompson

Good afternoon.

Swaroop Yalla – Morgan Stanley

You alluded to the unbundling which has happening in your market. I was just wondering if you could shed some light on some of the statistics you are seeing in terms of the move-ins. Is it, which points to this unbundling theory, is it demand and which is higher for one bedrooms or any other kind of statistics which you might have been tracking.

Tom Lowder

There is – our increase in the business is just – it’s very broad based. We see some traffic coming in from new jobs being created or employees being transferred into our cities from other locations.

We are seeing some unbundling. It's a hard number to track but we are seeing some prospects coming that wherein living with mom and dad are now out looking for an apartment.

We are seeing a slight amount of activity where we have a two bedroom rented to roommates and now we’re renting to two one-bedroom customers. It’s very broad based though we are seeing a little bit traffic coming in from the home foreclosures that are out there occurring in the marketplace. We get a little bit of activity from home foreclosures.

A new item that is starting to surface and we’re tracking customers that were renting condominiums are no longer as happy in that environment as they were in a professionally managed apartment property, they’ve learned that working with an HOA President or working with customer complaints is much more complicated than in the professionally run apartment community.

So in places like Tampa and Orlando where there are a will the of condominium conversions that were put back in to the rental pool, fractured properties are put back in the rental pool that are run by HOA's those customers are now starting to feet back into our business. So the customer base is very broad based that's coming back into our units.

Swaroop Yalla – Morgan Stanley

Okay. Fair enough. And just a quick question on Phoenix market. I mean, we have seen pretty good sequential numbers for the past two quarters. Just wondering if you sense that that market has finally turned on or are they more particular to your assets?

Tom Lowder

Phoenix if you look on our supplemental page, 12, you’ll see that Phoenix seek sequentially was actually positive on revenue 3.2%, which is the first time we’ve seen a bottoming in that market in quite some time. And so we have firmed up on occupancy. We see some sequential job growth in Phoenix. Not year-over-year job growth but if you look at the sequential job growth stats that are available you’ll find that the numbers have turned positive.

And so Phoenix does appear to be firming and our second quarter sequential numbers are up from our first quarter numbers. So I think the worst is behind us in Phoenix and we can claw our way back out west.

Swaroop Yalla – Morgan Stanley

Yeah. Thank you so much.

Operator

And your next question is from the line of Eric Wolfe from Citi.

Eric Wolfe – Citi

Thanks. Michael is on the line with me as well. Just on the ATM program, I guess why not just come out and do an equity raise for 100 million, if you know that's the amount that you want to raise and rather than trying to dribble out 100 million, which is 10% of your total shares outstanding and that can apply pressure on the stock.

Tom Lowder

So we got two – if we had an immediate use for the funds today, overnight maybe an appropriate option but as we are out looking for acquisitions and thinking about the developments. Our experience with ATM has been much more beneficial to our shareholders in that we have been able to get that out the door at a lower, better net cost so CLP than we’ve experienced when we’ve done the larger overnight deals.

And they – it might make sense if we find an opportunity that we need to raise the capital immediately. But we like what we have been able to do through the ATM program through the first part of this year and even the ATM program we had in place last year. And with our goal, still being to get the balance sheet back in investment grade shape, we believe this is a good way for us to approach it given what our opportunities are in front of us today.

Eric Wolfe – Citi

Fine. And how far along would you say you are right now in the deleveraging process. I am just trying to think about once you do this $100 million or looking out at next year, I mean do you think we’re going to see another ATM after that or do you think this steps you up to be exactly where you want to be six months from now?

Reynolds Thompson

This gets us very close. I mean to ultimately answer that question we’ve got to factor in asset sales. What kind of acquisition or development opportunities may eventually unfold? And most importantly, how our operations come around and what kind of impact that has on our coverage ratios. I can't answer completely but it does put us in a much better position with regard to where we think the balance sheet needs to be and ultimately, it’s going to be a combination of all those factors that tells us exactly what the answer to that question is but we are getting close.

Eric Wolfe – Citi

Okay. And just thinking about that $100 million – just one last question on it, I mean what do you have – I know you have the 400 million going in guidance for the rest of the year, but what do you have to proceeds going to? I mean is it just – is the mix of the $25 million to $50 million acquisitions some pay down of secured debt, just trying to understand how that money is being spent?

Reynolds Thompson

Yes. The acquisitions and development are certainly on our radar screen. We also have some preferred stock that's outstanding that is callable, so all of those things maybe opportunities for us.

Eric Wolfe – Citi

Okay. And just last question on the expense side. And I'm sorry, if I missed this earlier, but it looks like you're expecting expenses to come down to about 1% in the second half and 5% in the first half, the comps don't appear that much easier. So I'm just wondering is it just the lower repairs in maintenance that's making that number come down?

Reynolds Thompson

Yes. That is a part of it. We’re going to – you are going to see that number slow. From a sequential basis, it will remain somewhat – probably same general level in third quarter then you’ll see a fall off pretty dramatically in the fourth quarter which is pretty typical as we move out of the high season for pools and landscaping and that sort of stuff in to the fourth quarter. And then the comps do get better for us in the third and fourth quarters and that's really where the change is coming from.

Michael Bilerman – Citigroup

It's Michael Bilerman. I said – two quick follow-ups, just in terms of the equity, I know you are saying it – there is that net cost benefit to shareholders just given the cost of doing an ATM versus underwritten overnight transaction. But there is, I guess, a cost of just being an active seller of 10% of your float without telling the story about why you are raising the equity but also keeping a lid on your potential out performance as you’re a seller in the market of stock. I think that when you are looking at the ATM you can’t just look at it and saying it cost me a 0.5 or two points versus four points, you got to think about the performance impact to your shareholders as well?

Tom Lowder

Well, Mike, my quick comment would be that we performed very well over the first and second quarters while we were out in the market. I think that the banks that have helped us, employed us have done a great job of helping us manage the impact on the stock price that we performed very well while executing this program.

And secondly, from a use of proceeds standpoint, we’ve been very clear that we are going to delever this company and get our balance sheet back to – with a goal of earning our investment grade rating back. And ultimately what we are doing is continue to execute that plan. So I don't feel like we are – we haven't been out front with exactly what we are going to use the money for. It's going to be to improve the balance sheet and hopefully, fund some attractive investments for the company and we're just going to manage through if I – the idea of not – of doing this in one fell swoop is attractive. But what our experience to date has been – and this has been a very manageable process and one that ultimately, if we are going to go through it, we are trying to look for the best cost benefit analysis.

Reynolds Thompson

And I will add, the velocity and volume will be affected by our – what our NOI growth is and by our other non-core assets sales are. So we're trying to manage both of those to minimize the dilution to our current shareholders.

Michael Bilerman – Citigroup

And then, just go over the notes receivable balance went up about $27 million sequentially. I don't know if that has to do with you exiting the joint ventures and providing seller financing or what exactly occurred. Can you just go over the increase in that balance and what the terms of those notes are?

Tom Lowder

The increase in that balance relates to a third party joint venture loan which we repurchased from the bank. So we're essentially now the lender for the joint venture. We had a short-term construction loan on our Colonial Promenade Smyrna property. It's our plan. That property has actually been listed for sale and we are, with our joint venture partner going to have that property in the market. And so we are holding the note for the joint venture while we go through the marketing process.

Michael Bilerman – Citigroup

And what's that paying right now? You bought it at par or you bought it at discount?

Tom Lowder

We bought it at par.

Michael Bilerman – Citigroup

With what yield?

Tom Lowder

The note?

Reynolds Thompson

It's LIBOR plus 120.

Michael Bilerman – Citigroup

And has a term of?

Tom Lowder

About six months and then it's got an option to extend it for another year.

Michael Bilerman – Citigroup

And how much joint venture do you own?

Tom Lowder

50%.

Michael Bilerman – Citigroup

Okay. Thank you.

Tom Lowder

Yes.

Operator

And your next question is from the line of Michael Salinsky from RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

Good afternoon, guys. First just to explain the sequential numbers you guys put in the supplement there. I'm struggling to get to the 1.3. I mean you had 0.3% decline in occupancy, 1.1% decline in rate, yet the 1.3% growth there. I mean, what was driving that? Was it all the occupancy gains in the last quarter carrying through?

Tom Lowder

It was – yeah. Our financial occupancy throughout the quarter was 130 basis points higher than it was in the first quarter. So we were – we had less vacant units during the quarter than we had compared to the first quarter. That's what drove the revenue.

Michael Salinsky – RBC Capital Markets

That was the carry through then, okay. It wasn't anything else there. I mean (inaudible) or anything like that. Okay. That's helpful.

Tom Lowder

It's just – we had more – we had less vacancy or less days vacant for the portfolios. That's what drove the big difference.

Michael Salinsky – RBC Capital Markets

Okay. That's fair. Second question, you talked a little bit about development starts potential in the second half of the year here. I mean, what markets do you feel comfortable enough to start at this point? And where, obviously, conditions improved since the first half of the year here, where would a yield have to be right new before you start to break ground?

Tom Lowder

Well, the first part of your question, the two markets that we’ve looked at the two sites you can go to our supplemental on page 20. Page 20 lists our sites that we have on the balance sheet and the two we are looking at are Austin Texas and Tampa Florida. Austin site is on south Austin and the site in Tampa is new Tampa which would be northeast Tampa. And both of those sub markets are performing well for us now coming back.

And as far as a return, obviously we would love to be able to buy product in either one of these markets. But there is not any product available and so we are trying to build towards a better than a 6% return but obviously getting some of this dirt either off the balance sheet or productive is also an added benefit to us. And another reason why we would like to start these as well as be early in the recovery rather than late.

Michael Salinsky – RBC Capital Markets

In terms of yield, is it still around a six is that what you are still looking for or would those be actually on the higher side?

Reynolds Thompson

Yeah, six.

Michael Salinsky – RBC Capital Markets

Okay. Also just curious as to what the conversations are with the rating agency as of late. I mean how receptive are they to the actions you guys have taken and where they kind of tell you is, if you need to get back to that investment grade rating status?

Tom Lowder

The feedback has been good. They obviously appreciate what we have done in terms of improving the balance sheet and simplifying the business with regard to exiting joint ventures like one of the key components for getting an opportunity to revisit that story has been on the operating side. Thus we can work on the balance sheet but we also need positive operations and with that turning around faster than we had anticipated, that's going to help.

Obviously, we want to be able to present a story that shows coverage metrics improving over time then that was difficult to do while our revenues were declining. And it appears that, that is bottoming out and we are going to be able to do some projections that actually show revenues improving sooner than we had anticipated. We have not been back in form of the rating agency since the spring but we plan to visit again in the fall and talk about where we are and where we believe our markets are going and what it means for our coverage metrics. But they appreciate where we are going and understand where we want to be in a couple of years.

Michael Salinsky – RBC Capital Markets

That's helpful. And then final question there, I mean, you’ve cleaned up a lot of the joint ventures at this point, looks like your marketing colonial Smyrna? What’s left to clean up in the joint ventures at this point?

Reynolds Thompson

We still have a number of one-off JV's that we continue to have discussions about and then we’ve got a couple of larger ones. And as we’ve discussed in the past, we have been patient in that when there is a desire on both from your partners perspective and from ours, we’ve been able to come up with a deal that was reasonable for everybody.

And there are other opportunities that will present themselves because of financing or strategies from a partner that it may make sense for us to visit. And we anticipate being able to do some more of this work in the second half of this year.

Tom Lowder

There is a list on page 33 of the supplemental that you could view.

Michael Salinsky – RBC Capital Markets

Yeah. I gone through that. I just noticed that you taken care of all the ones that you had near-term maturities there. And we talked about getting rid of the retail – cleaning out the retail ones first. I just wondered which ones made the most sense to move at this point about.

Tom Lowder

There are ongoing discussions with a number of those that as Reynolds indicated we hope we make some progress and we believe we will make some progress in the second half of the year.

Michael Salinsky – RBC Capital Markets

Thanks, guys.

Tom Lowder

Thank you.

Operator

And your next question from the line of David Toti from FBR Capital Markets.

David Toti – FBR Capital Markets

Hey guys, a quick question. Forgive me if you mentioned this earlier, the LRO system. I'm a little bit confused as to why you would push occupancy so high in this face of what you're predicting to be a rent crossover towards more positive pricing power towards the end of the year? Wouldn't it be intuitive towards that fall a little in advance of that period?

Reynolds Thompson

That's a good question. Paul, you want to answer our philosophy and where we are going?

Paul Earle

We are really not – we’re not occupancy driven LRO setup under several business rules, but it really doesn't trigger on specifically occupancy. It looks at unit availability, in traffic and our lease renewal schedule that's coming, historical information, same period a year ago. And so there are many business rules that will help us determine what’s the optimum rent and there is a delicate balance between occupancy and rental rate. And we feel like we have taken the – we think LRO was doing a very good job helping us manage our rates. And we did push through pretty sizable rent increase on May 3rd of 12,000 apartments and then the second group of 16,000 apartments on June 1.

And the combined net gain of on both portfolios is 5.6%. So we kind of turbo charged the LRO system and let the LRO system start working the rents up or down if we were too aggressive. It helped us adjust the rents back down and if we were not aggressive enough, it moved rents even if – even higher. Like in the case of Richmond, we moved the rates 10%, LRO moved them another 4.7%, so up in Richmond 14.7%.

So it's not a perfect black box. It requires a lot of interaction with on the ground intelligence and I will say that our men and women in the field were fearless. They embraced this large rent increase beta test with enthusiasm and they were out marketing the price of their apartments followed above our competition in anticipation that the competition would come up and join us and that's what happened. So it’s not really driven for occupancy. We are just driven for the maximum rents based on a unit type and…

Reynolds Thompson

Well, Paul don't you think it's fair to say to David though, we have an outsized number of our apartments turning in the third quarter. And so we set ourselves up in the second quarter, in first and second part of – the first part of the year to drive our occupancy higher. Now, we're going to be challenged a little bit more in the third quarter just because we do have traditionally a higher turnover in the third quarter. People locating to be in certain school districts changing jobs, student affect in some of our markets and so we have a higher number of…

Paul Earle

We have 31% of our leases expire in the third quarter. That gives us an opportunity to release those apartments at a higher rate or renew at a higher rate.

Reynolds Thompson

Whereas in the second quarter we had 24% of our leases turning. So we were going in to the third quarter so we built some cushion in there. Now, we got the ability to try to push the rents and I think it's safe to say in our conservatism, in our guidance, we have built some slippage in the overall occupancy numbers down from where we are today.

David Toti – FBR Capital Markets

That's very helpful. Thank you.

Reynolds Thompson

Thank you.

Operator

And your next question is from the line of Michelle Ko from Bank of America.

Michelle Ko – Bank of America

Hi. Thank you. I was just wondering if you could give us some data points in terms of rents in July versus June. I was just wondering, given some of the recent concerns of the double dip in the economy, have you seen indications in the field of a slowdown and have you may be pushed rents a little less aggressively in July versus June?

Reynolds Thompson

No. We actually see the continuation of the positive pattern. We're down approximately 1% on new lease rates so far in the month of July, which is better than June sequentially. And the renewals are trending up about 2.3%. So we still have momentum and our traffic remains strong for July so far. We're up 2.3% in traffic and so we are still cautiously optimistic as an overused term.

Tom Lowder

Optimistic, we are nervous. We stayed nervous, okay? I think that's fair.

Reynolds Thompson

We stay nervous 24/7 around here. But we are still seeing some positive results at the site level.

Michelle Ko – Bank of America

Okay. Well, that's great news. When do you think that you'll see year-over-year same store revenue growth?

Reynolds Thompson

Towards the end of the year, the trend that we are on towards the end of the year, we should see some positive results.

Tom Lowder

Yeah.

Reynolds Thompson

Late this year, early next year, depending on the velocity of the trend that's last crossed.

Michelle Ko – Bank of America

Okay. Thanks. And then just – you talked about some development starts that could come online possibly in 2011 and '12. I was just wondering in your markets, have you seen some others start to build and when do you think supply could start to become an issue going forward?

Tom Lowder

We've seen no new supplier come online. There are a lot of builders who are out there trying to have discussions with public companies such as ours to fund potential construction. But we are not interested in going that around.

Michelle Ko – Bank of America

So is it, are the banks giving construction loans or it’s still very difficult to get a construction loan?

Tom Lowder

It’s very difficult. Most builders are praying that they renew the loans they have. Forget about new loans, they’re trying to renew the ones they have.

Reynolds Thompson

And if they can’t get a construction loan there is a tremendous amount of equity required. And that you know that’s a lot more difficult to pull together that percentage of equity compared to what they had to raise a few years ago to get a project like that started. So that’s – raising the equity is also a hurdle.

Michelle Ko – Bank of America

That’s helpful. And then just lastly, in terms of your markets, what kind of cap rates have you been seeing recently. Have cap rates compressed in your mind or have they increased over the last three months?

Reynolds Thompson

Well, I think we shared with a number of you at the May REIT meetings that we have underwritten some 85 opportunities in our markets and that number has now gone up since – since I spoke to you at the May REIT meeting a 124 opportunities. And we can tell you the 85 opportunities that we saw in the first four or five months of the year that we have followed-up on and been able to really identify only 11 of those 85, really got to the closing table and were sold. So that’s somewhere around 13% of what we were looking at. The cap rates were sub six and in some markets, they were as low as 5%.

Michelle Ko – Bank of America

Do you think that’s changed at all recently, over the last month or two?

Reynolds Thompson

Well, we since we talked and we looked at 85 and now we’ve underwritten another 30, 35 deals. We are seeing more activity coming from the banks. And in lot of cases, they are hand-in-hand with the borrower, the merchant builder and they are trying to come to some resolution over some of these loans that are maturing. So we are getting the feeling on it. But I can’t statistically tell you if any of these are getting to the closing table because there is still a gap between the asker and the bid. But there seems to be more of an interest from the banks to move some of these deals on through pipeline.

Michelle Ko – Bank of America

Do you think the banks could put pressure on the cap rates in your personal opinion?

Reynolds Thompson

Well, I mean, the cap rates will all be extremely low if these things come to – to the closing table. They are all in stages of lease up. And if the numbers work well, most of these borrowers would already be at Freddie or Fannie Mae putting financing all them but there is a big gap there. So in the current income, they are all – that’s why they are all sub six.

Michelle Ko – Bank of America

Thanks so much. That’s very helpful.

Operator

And your next question is from the line of Steve Swett from Morgan Keegan.

Steve Swett – Morgan Keegan

Reynolds, just one clarification I want to make sure I got, you said that the expenses were up in part due to higher turn costs and yet, I think, you said the turnover was down, occupancy has been pretty steady. So can you just clarify that am I – did I hear you right and if so, what’s behind the higher turn cost, the prepping units for the third quarter releasing?

Reynolds Thompson

That combined with just a higher overall occupancy level. I mean, occupancy was up 220 basis points compared to second quarter a year ago. So we just physically had a lot more units being prepared and occupied.

Steve Swett – Morgan Keegan

Okay. You’re not spending anymore per unit?

Reynolds Thompson

No. I mean, turn cost, first time we just got more, we have – between the first and the second quarters, we had a lot more units that are occupied this year than we did a year ago, so we’ve had to spend more repair and maintenance dollars to get those ready.

Steve Swett – Morgan Keegan

Okay. I just wanted to make sure that wasn’t behind some of the rent increases that you were spending more and putting a little more in. And then one final modeling question, couple of revenue line items, the tenant recoveries and the other property income, trended in the first half above, where they had been, are those line items sustainable in to the second half of this year do you think?

Reynolds Thompson

Yeah. We think some in the primary driver of that are bringing on the two commercial assets that we had late last year, the Three Ravinia asset and the Colonial Promenade Alabaster, so we think there is a sustainable going forward.

Steve Swett – Morgan Keegan

Okay. Yeah, I just wanted to make sure there was some.

Reynolds Thompson

Yeah. There are probably a few dollars in there that are true up recoveries from 2009 as those kind of trickled in. But the big dollars are coming from Ravinia, which is a triple net leased building. So the recoveries could come in on a monthly basis there from the tenants.

Steve Swett – Morgan Keegan

Okay. That’s very helpful. Thanks very much.

Operator

And our next question is from the line of Rich Anderson from BMO Capital Markets.