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Associated Estates Realty, Inc. (NYSE:AEC)

Q3 2010 Earnings Call

October 26, 2010, 2:00 pm ET

Executives

Jeremy Goldberg - Senior Director of Corporate Finance & IR

Jeff Friedman - Chairman, President and CEO

Lou Fatica - VP, CFO and Treasurer

John Shannon - SVP, Operations

Patrick Duffy - VP of Strategic Marketing

Analysts

David Toti - FBR Capital Markets

Bill Acheson - Benchmark

Eric Wolfe - Citigroup

Paula Poskon - Robert W. Baird

Andrew McCulloch - Green Street Advisors

Tayo Okusanya - Jefferies & Company

Andrew DiZio - Janney Capital Markets

Buck Horne - Raymond James and Associates

Operator

Good afternoon and welcome to the Associated Estates Third Quarter 2010 earnings conference call. My name is Tina and I will be the operator for your call today. At this time, all participants are in listen-only mode. Following prepared remarks by the company we will conduct a question-and-answer session, and instructions for asking questions will follow at that time.

Now, I would like to turn the call over to Jeremy Goldberg, Senior Director of Corporate Finance and Investor Relations, for opening remarks and introductions. Please go ahead.

Jeremy Goldberg

Thank you, Tina. Good afternoon everyone and thank you for joining the Associated Estates third quarter 2010 conference call.

I'd like to remind everyone that our call today is being webcast and will be archived on the Associated Estates website through November 8th.

Prepared remarks will be presented by Jeff Friedman, our President and Chief Executive Officer, Lou Fatica, our Chief Financial Officer, and John Shannon, our Senior Vice President of Operations. Additionally, Patrick Duffy, our Vice President of Strategic Marketing, Jason Friedman, Vice President of Construction and Development and I will also be available for the Q&A.

Before we begin our prepared comments, we would like to note that certain statements made during this call will be forward-looking statements that are based on the current expectations and beliefs of management. These forward-looking statements are subject to certain risks and trends that could cause actual results to differ materially from projection.

Further information about these risks and trends can be found in our filings with the SEC and we encourage everyone to review them. As a reminder, Associated Estates' third quarter earnings release and the supplemental financial booklet are available on the Investor Relations section of our website at www.associatedestates.com and they include reconciliations to non-GAAP financial measures, which maybe discussed on this call.

At this time, I will turn the call over to Jeff Friedman.

Jeff Friedman

Thank you, Jeremy. Thanks to everyone for your interest in Associated Estates. Today, in addition to providing the details relating to our third quarter, we'll share some perspective on market conditions our expectations for the balance of the year, and some long-term priorities.

I grew up in a small southern town on Saturdays and during the summers; I would ride downtown with my dad. Most mornings his dad, my grandfather would take me to breakfast across the street, and we'd sit at the counter at the back of the drugstore afterwards and before I took a bus to work we would walk back to my dad and grandfather store. On our way people would talk to my grandfather, they would always ask him how the business (Inaudible), and he would answer back, business is tough but we'll be okay.

One day I asked my grandfather, how tough things were? He paused for a second because he wasn't sure why I was asking, I told him, I heard him tell people the business was tough, and I wanted to know what he meant. He told me business was fine. But that the reason he said the business was tough was that no one wanted to hear that his business was good. I think of that story every day. And when people ask me how the business? I want to say business is really good.

But I think of my grandfather and I say business is tough but we are going to be okay. The fundamentals of the apartment business continue to be strong, demographics, trends relating to the size and make up of households and the financial flexibility that comes with renting versus owning, are all positive factors driving demand.

The remaining driver will be when we start to add jobs. And that's when we'll begin to see rents approaching the peak of the past. As most of you know, we have been back to the equity market with follow on offerings three times this year. We've used the proceeds to pay down debt, pay-off high coupon perpetual preferred and to buy properties in strong markets at prices below replacement costs.

As we talk to investors over the last few years, we repeatedly heard that as a small cap company, even if they liked our story, it was hard to invest in our name, hard to accumulate a position. As a result of our sector leading performance, clearly communicating our objectives and our recent stock offerings, our list of shareholders now includes most of the dedicated REIT investors, names focused on long-term and consistent performance and our average daily trading volume is three times what it was at the end of the fourth quarter of 2009.

These offerings and how we use the proceeds combined with our performance have gone a long way towards working our way back to investment grade readings and as a result of the increase market cap, we expect to be added to the MSCI REIT Index soon.

Our business is tough. But we remained focused and we positioned the company to take advantage of what we believe to be a disconnect between the current apartment pricing and the expectations for future apartment performance. We have a team of highly trained professionals that have successfully navigated through the most difficult times together and in spite of the market we had continued to put up the best numbers. Cap rates are low, but so are long-term bond. We all expect inflation to reappear but we don't know when.

In the meantime, the low beta associated with the income streams at well located core apartment properties provide attractive returns even with little pricing power. When inflation does return, we'll be able to raise rents even more.

Cap rates may go up, but so will the cost to build and in many of our locations close to job centers and large pools of highly educated workers there is limited land for new construction.

Demographic trends will be favorable for many years to come. Our business is tough, but we are going to be okay. We know what we can control and we understand the importance of our dividend. Our focus has been and will continue to be to demonstrate our ability to maintain our dividend and to maintain a comfort level between our FFO and our FAD that buffers the impact of any unexpected change in market conditions. And of course, we recognize the importance of paying our regular dividend in cash.

We are beginning a new strategic planning process and we expect to layout more of the details in the first half of 2011. Rest assured, while we continue to grow, we will not compromise our balance sheet, or our ability to maintain and cover our dividend. Our story will remain a simple one. Our business is tough, but we are going to be okay.

I will now turn the call over to Lou.

Lou Fatica

Thank you, Jeff. For the third quarter, FFO and FFO as adjusted were $0.24 per share and right in line with our internal expectations. Q3 same community NOI was approximately 400,000 or a penny per share higher than projected driven primarily by greater than expected revenue. Q3 same community NOI increase a 0.2%, represents the first time NOI has been positive, since Q4 2008, or six quarters.

The revenue growth is reflective of the improved apartment operating fundamentals in all of our markets. John will discuss each of our market as part of his prepared remarks. Year-to-date, same community revenue is up 0.4%, expenses are up 1.7%, resulting in NOI decline of 0.6% when comparing 2010 to 2009.

Based on year-to-date performance, the equity issuance on October 1st and our expectations for the balance of the year, we have updated the midpoint of 2010 FFO as adjusted guidance to $0.86 per share. We continue to expect that full year FAD will exceed the $0.68 per share annual dividend.

Significant assumptions relating to our revised full year guidance are as follows. Full year same community NOI of negative 0.5% at the midpoint, which is 0.75% points better than projected on our Q2 earnings call.

9.2 million of additional shares outstanding in Q4 related to October 1st offering with the weighted average impact of an additional 2.3 million shares for full year 2010. And acquisition guidance of 250 million to 300 million, 165 million of which we have already closed on.

The acquisitions are expected to result in 300,000 of additional acquisition costs which will be charged to expense during the fourth quarter. After the equity offering on October 1st, and the acquisition of the asset in Texas, our leverage is measured by debt plus preferred to un-depreciated book value which is just over 41%.This level of leverage will allow us to fund the balance of the projected 2010 acquisitions on our line of credit and keep our total leverage within our targeted range of 48% to 52%.

Our Q3 fixed charge coverage and interest coverage ratios were 2.12 times and reflect the reduced interest expense associated with the fist half of 2010 debt repayments and the preferred share redemption.

During the quarter, we placed permanent 10-year financing on Riverside Station, which is a property we've acquired in Northern Virginia in May. The interest rate is fixed at 5.14%, and total loan proceeds were $36 million. The loan was issued off of our $100 million credit facility with Freddie Mac leaving $64 million of availability under the terms of this facility.

Our near-term loan maturities are manageable with $21 million this year, $54 million next year, and $81 million in 2012. The 2011 and 2012 maturities include a $100 million of 7.7% CMBS debt well added maturity schedule has been and will continue to be of primary importance.

Year-to-date we have raised equity of nearly $289 million of which 46% or approximately $130 million has been used to repay or redeem debt and preferred securities that have an average coupon of 7.6%. With the anticipated repayment of the $54 million of CMBS debt in the first quarter of 2011, we will have used nearly 65% of the equity proceeds to repay high coupon debt and preferred securities. The balance has or will be used to fund acquisitions and leverage neutral way.

Before I turn the call over to John, let me take a minute to discuss some details relating to our line of credit. Last week, we announced that we entered in to a new $250 million line of credit that replaced the $150 million line that was set to expire in March 2011. The new facility has a three-year term with a one-year extension option and $50 million according option to expand the line to $300 million.

Current pricing is at 230 basis points over a LIBOR. Pricing is based upon a financial ratio and a range between 230 and 325 basis points over LIBOR. We are pleased with the pricing grid and the expanded capacity.

At this time, I will turn the call over to John.

John Shannon

Thank you, Lou. In my prepared remarks, I will provide an overview of our third quarter same community operating performance and specific market details. Our results are ahead of our internal expectations. On a quarter-over-quarter basis, our same community NOI was up 20 basis points versus a budget of a negative 2.1%. This improvement is result of an increase in physical occupancy and rent growth on both renewals and new leases.

As our customers increasingly make the decision to rent versus own, we expect to see a continued improvement in resident retention. This trend will drive higher rents as well as margin improvement from reduced turnover costs. For September, we increased rents 2.8% on new leases and 3.1% on renewals.

Over the past year, we have focused on several initiatives for reducing resident turnover and the most important one is our on line resident surveys, these surveys are available to our residents through the resident page on each property website and they provide instant feedback to the property and regional management teams. And why is this a focus? Because we are a service business and people will pay more for good service. It's what we do.

Same community sequential quarterly revenue was up 80 basis points and average physical occupancy remains strong at 96%. Sequentially, NOI was up slightly. We said last quarter that we anticipated second half same community performance to be better than the first half and that continues to be the case. As Lou mentioned given our year-to-date performance and our expected fourth quarter out-performance in rent as compared to our budget, we are increasing our revenue and NOI guidance. We now expect full year same community revenue to be up 60 basis points and NOI down 50 basis points at the midpoints.

We continue to see positive trends in our markets. Year-to-date annualized turnover has held at about 58%, a 3% improvement from the last year. Our resident satisfaction scores from both external and internal sources remain high. We continue to be highly occupied prospect traffic is up and other income and fees are increasing. And as a portfolio, both renewal and new lease increases have been positive for the past three months. We expect to see these positive trends continue.

During our Q1 earnings call, we said that we hit an inflection point in December 2009 as related to rent. We carefully monitored the differential between renewal leases and new leases. For us, this reached an unprecedented high of 950 basis points in December of 2009.

At the end of the first quarter, we were at a differential of 600 basis points. At the end of the second quarter, we were at a differential of 240 basis points. And in Q3, we were at a differential of 30 basis points with both renewal and new leases being positive.

For October, new leases are up 2.6% and renewals are up 2.8%. There are a number of reasons for our improved performance. Our properties are in great physical condition, our pricing is very competitive, our site level teams are providing great service and great value. Residents and prospects continue to be nervous about job security. There are uncertain as to where housing values are going and prefer the financial flexibility and physical mobility of renting. We expect these factors will contribute towards staying full, as we continue to push rents.

Now, let me take a minute to discuss our markets and the specific quarter-over-quarter and sequential performance. In the Midwest, we finished the quarter at 96.8% physical occupancy. Quarter-over-quarter, revenue was up 80 basis points, and NOI was down slightly on 2.4% expense growth.

Sequentially, in the Midwest, total revenue was up 1%. Over the past two years, the Midwest was our top performing region with average annual revenue growth of nearly 3%. Due to this tough comps and the fact that most of these markets did not peak to the first half of 2009, we anticipate rental growth to be up only modestly in the Midwest for the balance of the year with year-over-year rental growth flat in 2010.

In the Southeast, we closed the quarter at 93.8% physical occupancy. Quarter-over-quarter revenue was up 2.6% and NOI was up 1.7%. Sequentially, total revenue was positive 50 basis points, as a result of an increase in physical occupancy. However, due to concessions quarter-over-quarter net rents in the Southeast were down 1.5%, offsetting some of the gains in occupancy, as we expected.

In Florida, our four communities continue to perform in line with our internal expectations. In Orlando, we finished the quarter at 94.8% physical occupancy. Two months of free rent continues to be the norm. In South Florida, where we have three properties, we expect occupancies to hold at the current 93% level with concessions of 1 month to 2 months. While Florida's rents are currently showing no further decline, we expect rent to remain flat for the next two to three quarters.

In Atlanta, we finished the quarter at 94.6%, physical occupancy and we're still offering concessions in the range of 2 months to 3 months depending on availability and floor plan. For the balance of the year, we're forecasting that Atlanta will continue to be a concession driven market and occupancy levels will remain in the low to mid 90% range.

With that being said, we are seeing positive rent trends, for the quarter, renewals were up nearly 2% and new leases, they were up 5%.

In the Mid-Atlantic, where we operate in Baltimore, Washington and Virginia, we closed the quarter at 95.9% physical occupancy. Quarter-over-quarter revenue was down 30 basis points and NOI was up 70 basis points due to 2.1% decline in expenses.

Sequentially, in the Mid-Atlantic, total revenue was down slightly. Our three Baltimore Washington properties performed in line with our internal expectations finishing the quarter at 95.5% physical occupancy with revenue up 40 basis points.

We anticipate that we will maintain occupancy in the 94% to 95% range with net rent growth due to the stability of the region. For the quarter, new leases were up 3%, and renewals were up 4%.

In Virginia on a same community basis, because our recent Northern Virginia acquisitions are not yet included in our same community results, we operate in two markets, Norfolk and Richmond. We performed as expected with physical occupancy at 96.1% and revenue down 1%.

We continue to see pressure on rents, as new supply in our sub-markets is being absorbed. For the quarter, new leases were off by 4.5%. We are forecasting that most of the new units will be absorbed by year end, as all the new communities are nearing stabilization. Also, as a quick update on the additional 60 units at River Forest in Richmond, the project has been completed; we have reached stabilization with only two units available to rent.

In regard to our 2010 acquisitions, we have closed on four deals. In May, we closed on Riverside Station, 304 unit property in Woodridge Virginia and in September, we closed on the Asheboro, a 504 unit property in Ashburn Virginia. These communities compliment our existing Mid-Atlantic portfolio with their superb locations, unique design and close proximity to major employment centers.

Both properties are outperforming underwriting and are 95% occupied. Earlier this month, we closed on San Raphael, a 222 unit property, in the Galleria neighborhood of Dallas Texas.

We have had our eyes on the Dallas market for sometime with acquisition prices below replacement costs, and strong apartment fundamentals we plan to grow our presence in the Dallas market over the next 12 months to 18 months.

We also comments construction of Vista Germantown in downtown Nashville Tennessee where we will develop a 242 unit apartment community. Nashville is another market where we plan to grow. The diverse economic base anchored with universities, the state capital, the medical and music industries combined with solid demographic trends should bode well for the Nashville apartment market for years to come.

And with [merit] our in-house construction and development team, we will be able to provide important construction efficiencies for this urban infield development. We believe now is a very good time to buy in certain markets where demographic trends and limited new supplies support ongoing high occupancies with current rents below the peak. Most pricing is below replacement costs and cap rates are 30 to 75 basis points above the lows.

In closing, we are positioned to have another good quarter as we finish the year. To reconcile to the mid point of our revised guidance range for the fourth quarter we are projecting 1.75% revenue growth and expenses to increase by 4%, resulting in Q4 NOI up by 20 basis points compared to Q4 2009.

On a year-over-year basis, our revised guidance for the entire year at the midpoint reflects 275 basis point improvements from our original guidance.

I will now turn the call back over to Jeff.

Jeff Friedman

Thanks John and Lou. As you heard today, fundamentals at our properties are materially better than we expected at the beginning of the year, while we are not prepared to provide a specific forecast today, we expect continued improvement in all of our markets next year. Tina, we can now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

The first question comes from David Toti at FBR Capital Markets.

David Toti - FBR Capital Markets

Good afternoon everyone. Jeff, in your opening remarks you commented on obviously the three equity issuances this year so far and talked about goals about getting larger. Can you bracket for us, how you see your size going forward and where does it max out what is your optimal size in terms of total market cap? And then, maybe just marry your leverage goals with that bracket as well.

Jeff Friedman

Sure David. We have been very clear throughout this process that 48% to 52% that our gross un-depreciated asset value is the range that we are comfortable operating in from a leverage perspective. In terms of market cap as much as we want to grow and the fact that we are, probably a multiple of four the smallest equity market cap of the apartment companies. We really haven't set goals in terms of how big we want to be.

What will drive that will be the opportunities that we find and I think, if we look at our past performance since 2005, particularly, and the way we allocated capital from 2005 to 2007, that is also an indication of how we plan to use the various ebbs and flows of the market. So, I am not dodging your question. I just can't say we want to double in size or quadruple in size because it will all have to do with how we perform and when we look back at the properties we are buying and the thing we say about value and expectations for the future performance of our properties, we will be looking in the rearview mirror and we will have either made the right decision or we won't and that will impact our growth.

David Toti - FBR Capital Markets

Understood. I guess the question a different way is if market conditions sort of remain somewhat similar today for sometime, relative to your implied cost of equity and the increasing pipeline of deals that are out there, one could really assume that you are going to continue to issue equity relative to growth.

Jeff Friedman

Let me tell you what we heard and one of us refer to it in our prepared remarks. When we did our first deal in January and we used the proceeds of that offering to pay down debt the people that bought into that deal understood and were supportive. In May, when we did the second follow on offering and we used the proceeds as Lou referred to pay down the perpetual preferred, I believe that it had 8-7 coupon, and trust preferred 7.9%. And then, use a portion of it to buy a property in Virginia. What we heard was, we will pay for growth, show what you can do. And I think, there was a little bit of sort of show me but also uncertainty that we and our team would be able to actually compete.

Compete not only with regard to buying properties but there seemed to be a shortage of quality assets coming to market. What we heard between the time of the second offering and the time of the third offering was we will pay for growth. And so, we understand that we keep raising the bar on ourselves as to what may happen in the future again David, it will relate to how the properties we buy perform and our expectations for the future of our business. Right now they are both very strong.

David Toti - FBR Capital Markets

Great, thanks. And then my last question just has to do at a more operational level. This is something that came up a bit last quarter as well, if you're anticipating stronger rent growth and you are obviously seeing some pricing power at the margins and different markets, why is it that occupancy continues to ratchet up at a somewhat faster rate than your rent growth is in terms of trajectory, wouldn't you be inclined to push harder on the rents and let occupancy drop-off at this point in the cycle?

John Shannon

David, this is John. That is something that we really spend a lot of time on is that balance of physical occupancy and where we are pushing rents. We believe that the optimum of being right around that 95% physical occupancy in driving rents is where we want to be and the September better than 3% rent growth. We really been monitoring the sustainability of our ability to push rents on new deals as well as renewals and we think that through the third quarter and through October we have been able to sustain those rents and we will continue to push the rent and we may see physical occupancy dip down a little bit.

David Toti - FBR Capital Markets

Great. Thanks for the detail.

Operator

Our next question comes from Bill Acheson at Benchmark. Please go ahead.

Bill Acheson - Benchmark

Thank you, good afternoon, gentlemen. Continuing on pricing power here. One of the things I'm trying to look into here is that we got a lack of job growth and if you look at the top 40 metros, there is actually 75% of metros actually seen a contraction in jobs non-farm payrolls since the beginning of the year. My question is, are we getting to the point where pricing power just running on unbundling is going to run out of gas, or are there any markets where you seem to be close to hitting that sort of plateau?

Patrick Duffy

Bill, this is Patrick. We are seeing some benefit from household unbundling but we are also seeing demand from a shift in how people perceive homeownership and as people decide to rent rather than buy we think that's going to continue to push occupancy, which will give us an opportunity to continue pushing the rents. So, we think that reduction and homeownership rate will allow us to continue pushing rents.

Bill Acheson - Benchmark

Okay. So I guess, I hear you correctly, you are counting on household formations and higher propensity to rent.

Patrick Duffy - VP of Strategic Marketing

Correct.

Bill Acheson - Benchmark

I guess we will have the household formations numbers out may be this week, so far there haven't been anything to write home about. But looking at the Southeast Florida and Georgia, it looks like the tenant turnover ratio did tail up during the quarter, although, the region as a whole did fairly well, is that a signal where you might be running to a little bit of reluctance to subtitle rent rates there? I know you are already giving out two months, three months free rent there but.

John Shannon

Bill this is John, we think that it may be a little bit of that, but really we are not concerned with that up tick in the third quarter. Because when we look at it on annualized basis, we are really flat kind of rate at the 63%-64%. Turnover rate, year-to-date from January through September in the Southeast. So, we think, it's more of a blip and we are comfortable that we are going to trend to historical levels.

Bill Acheson - Benchmark

Okay. Last question on construction services income during the quarter. Pretty big jump, I was wondering, if you could give us a little bit more detail say how many projects are involved, the timing of the future fee streams here and is the profit margin in this business, I mean, do we just take it off the income statement it looks like it's 94% expense ratio, just give us a little bit more detail on that if you could.

Lou Fatica

Sure Bill, this is Lou. As we talked about on prior calls there is lumpiness in that business just in terms of when projects get started and kicked off and in our original expectations where that they would happen sooner in the year. But currently, we have about six projects that are in place, average gross profits on those projects are somewhere in the 8% to 14% range. And then, you have some other costs that get you back down to that 6% or so number that you see on our financial statement. And those all relate to third party projects any internal projects that our construction business is working on all get illuminated to consolidation.

Bill Acheson - Benchmark

This is sort of leveraging your in-house development expertise in addition to the development project you have in Memphis, you are going out and doing third party.

Lou Fatica

Correct. Yes.

Jeff Friedman

Okay. Nashville, Bill. This is Jeff. Let me just go back to a point you made in that Patrick touched on. Because I belief it is very important because it often gets swept under the rug so to speak. With regard to both household formation the relationship of new households to new starts as well as propensity to rent. We think that household formation is growing over a million households a year. Maybe it's slowed down to 900,000, census bureau projects 1.2 million annualized per year through 2015.

So, with an additional, let's just say for discussion purposes million households compare that to the 150,000 new starts. In addition, when we look at ownership, homeownership, every 1% fewer homes is another 1 million plus renters. So, when we look at propensity to rent this is in just some fries we are talking about because of what is going on with people be in upside down in single family homes. We are talking about literally as many more customers coming into the rental pool, as we are talking about in terms of total households. So, we believe these are very important to keep in mind and as I refer to in my prepared remarks what will really drive pricing versus demand is in those markets as the jobs come back first. So, we combine the propensity to rent versus own with the household formation and the job growth and that's really those are the markets that we are trying to identify that have the best characteristics for improvement.

Bill Acheson - Benchmark

Okay. Thank you, guys.

Operator

Our next question comes from Eric Wolfe at Citigroup. Please go ahead.

Eric Wolfe - Citigroup

Thanks. Could you give us some details on the economics of the development you are doing in Nashville, specifically how much you paid to acquire the property and the development rights what your stake in JV will be and what stabilized yield you are developing to?

Lou Fatica

Sure Eric, this is Lou. We paid just under 7 million to acquire the land and development rights including architectural drawings for the property and that's reflected in our invest in real estate as that joint venture is fully consolidated in our financial statement, as we have a 90% interest and controlling interest in the project. You will see on our balance sheet about 1 million dollars of minority interest that represents our JV partners 10% interest. In terms of return on cost, we are projecting a return on cost in excess of 7%, and un-levered IRRs in excess of 11%.

Eric Wolfe - Citigroup

Would that include, are you receiving fees from Bristol for managing and developing asset.

Lou Fatica

No.

Eric Wolfe - Citigroup

Okay. Do you think this development is more of a one-off opportunity or do you see other types of deals that you are interested in, just wondering whether development is going to become a bigger component of your business going forward?

Lou Fatica

Eric, as we have said in the past, I think, we would like to be developing a deal or two a year, so we see this as part of an on going process but we don't expect that it would be a significant portion of our growth.

Eric Wolfe - Citigroup

Just one follow up, to David's question, I understand that you think it's a good time to buy right now given the discount or replacement cost you can get and solid growth prospects going forward. But I would also think that you consider your stock to be under valued especially relative to peers, making the poor time to sell equity. I'm just wondering now that you think you overcome some of the market cap obstacles for large dedicated investors to invest in your stock, do you still think it make sense to issue stock at the current level to buy cap rates that are less than implied by your stock?

Lou Fatica

I think what we said is that our guidance for 2010 doesn't contemplate any additional equity issuance based on our below target leverage at 41% currently post offering. So, yes we would hope to have seen a multiple expansion. We currently trade at about 16 times our 2010 FFO, versus a pure average of 21 times. And hopefully, we'll be able to demonstrate with the continued performance and out performance and the acquisitions that we make to bridge the gap between our current multiple and pure multiple.

Eric Wolfe - Citigroup

I guess the question is if that doesn't necessarily happen if you stay about same relative multiple, same relative implied cap rate, do you still think it make sense to issue equity to continue to fund these acquisitions? I'm just wondering, you are looking at the next year if you find some good acquisition opportunities but your stock isn't trading where you want it to be whether you are going to use that as a vehicle to purchase these assets?

John Shannon

Let's see, what happens Eric.

Operator

The next question comes from Paula Poskon at Robert W. Baird. Please go ahead.

Paula Poskon - Robert W. Baird

Thank you, good afternoon everyone. Jeff could you talk a little bit about what other new markets are on your radar screen?

Jeff Friedman

Hi, Paula. Maybe Patrick, I mean, I could answer that but I think Patrick really and the acquisition development team, you all are probably better…

Patrick Duffy

Paula, as you know we recently increased our guidance by 100 million to 150 million, order to acquire 100 million, really have to look at a lot of opportunity. So, we are looking in a lot of market Mid-Atlantic, Southeast, Dallas and so we are looking at a lot of opportunities to assist us with acquisitions we hired John Hinkle who is now the Vice President of Acquisition, John has over 15 years of experience in acquiring multifamily properties in the markets where we are looking. So, to answer your question it's primarily Mid-Atlantic, Southeast and Dallas.

Paula Poskon - Robert W. Baird

Okay. Thanks. Lou just to follow-up on the conversation around leverage, you said that your targeted leverage as a percentage of gross un-depreciated assets is 48 to 52, do you have target range for debt service coverage or fixed charge coverage?

Lou Fatica

Well, the fist hurdle is to be at least two times as reflected in our Q3 results, and the impact of the debt repayments we were at 2.12 times. In terms of longer term we would like to see that as high as possible somewhere in the 2.5% range or 2.5 times range is probably reasonable.

Paula Poskon - Robert W. Baird

Okay. Just to be clear then, as you are embarking on further external growth, is it your intention now that you got the balance sheet where you want it to be that your deals will have to be leverage neutral?

Lou Fatica

Yes, we want to operate in the 48 to 52 obviously where we sit today at 41%. We are able to buy all debt deals using our line and still operate within that 48 to 52. If we just assume the high end of our guidance range, and which is the $300 million, which is an additional $135 million of acquisitions, adding $135 million of acquisitions all funded on either a line or with GSC's would take our leverage to 48%.

Paula Poskon - Robert W. Baird

Okay. And as you are looking at the new opportunities and the ones that you already closed on more recent in the last few months, what's the implication on the portfolio operating margin. Is there, I will just leave it at that?

John Shannon

Paula, this is John. We are looking at properties, we are running at the 56% to 57% margin, when we go back and look at the assets that we bought, just recently the 3 assets, that's closer to the 65% margin. So, with these buying younger properties, we really think we are going to continue to see margin improvement.

Paula Poskon - Robert W. Baird

Great, thanks, John. Just to stay with you John if I might, can you make any commentary on what you are seeing in October trends?

John Shannon

As I said with the October month to date, we are just about there, so I would assume its pretty close. New deals we were up 2.6, in renewal deals up 2.8%. We continue to stay fully occupied. We are very optimistic as I said we're looking for 1.75% revenue growth all in revenue growth for the fourth quarter so yes we are feeling pretty positive.

Paula Poskon - Robert W. Baird

Great. Thanks and just one final question, can anybody comment on the transition of Martin Fishman and what he is going to be doing in the four-year contract that you have with him moving into advisory role and then the role of the new person Bradley that you are bringing on is there implication for G&A?

Jeff Friedman

Sure Paula, Jeff. Before I answer the question about Marty and Brad and office of general council, let me just add one more thing to a question and the answer Lou gave relating to leverage. One of our strategic objectives is to get back to the point where we have investment grade ratings from Moody's and S&P. So that we have another arrow in our quiver so speak to be able to use unsecured debt markets. In order to do that, we have and will continue to focus on the largest number of properties and the greatest amount of NOI coming from our unencumbered pool. So, when we look at this debt to our gross asset value, we are not just looking as a percentage of the gross asset value we are also looking at encumbering the fewest number of properties in the least amount of NOI and you will see that activity.

So, we may finance one property and use those proceeds to pay-off loans on other properties as those loans mature. With regard to Brad Van Auken and Marty Fishman, Marty and I have worked together for almost 25 years maybe longer and Marty is if not the best one of the best real estate lawyers, I've ever worked with and ever known. We are lucky that in this transition over the next four years that Marty will continue to be an advisor to the company and to me and will have certain responsibilities all be them, somewhat lesser role than he had in the past.

Brad Van Auken comes to us with a tremendous amount of transactional experience and it is because of the increased transactional volume the additional velocity and all areas capital markets, acquisitions, other aspects of our business that this is really beefing up our team. And so, we see this as a net positive Marty will continue to play an important role and will continue to handle certain aspects of the business such as the insurance process and real estate taxes and other transactional areas where Marty has done a great job for many years.

From G&A perspective, one of our objectives continues to be to reduce G&A, and this will not have an impact any kind of impact on G&A.

Paula Poskon - Robert W. Baird

That's very helpful color, I appreciate that. If I could just follow up Jeff with one more question, I'm sorry. So again, coming back to the equity issuance, can you just talk about how you are thinking about the use of the ATM program versus overnight deals, understanding that you have already said you don't expect equity issuance for the rest of the year?

Jeff Friedman

Sure. As you know we've put up a $25 million ATM and it should be if it's not obvious by not mentioning anything about taking anything down off the ATM that we haven't gone to the ATM for any issuances since we put it up. Because one of the other things that we heard when we spoke to investors both ours and others, now our new investors over the last few years, particularly of late was that come talk to us, come see us, and that using the ATM, as others have was that necessarily what they wanted to see from us.

Now, we've put it up and we put it up because it's another arrow in our quiver and I would expect us to use it but we don't plan to use it in a material way obviously with $25 million put up it wouldn't take us very far. But it is a way from a timing perspective without the dilution to assist in our on going whether it be debt maturity we see coming down the road or acquisition or development funding, it is a way to supplement our additional capital needs.

Paula Poskon - Robert W. Baird

Appreciate the additional color. Thank you very much, that's all I have.

Operator

Our next question comes from Andrew McCulloch at Green Street Advisors. Please go ahead.

Andrew McCulloch - Green Street Advisors

Good afternoon guys. Just to maybe ask Paula's question on acquisition a different way. Can you spend on, how you concluded Dallas and Nashville were markets you wanted to target? And then, going forward, do you expect to build scale in these two markets first or target additional new markets with one-off acquisitions and developments as opportunities become available?

Patrick Duffy

Andrew, this is Patrick. We do plan on acquiring additional properties in both Nashville and Dallas, we have been looking for acquisition opportunities in both Nashville and Dallas for the last 18 months because both of these markets have very strong apartment fundamentals. Nashville, it's state capital, it has significance presence in healthcare, higher education, entertainment, government, where we are building this is a Germantown, downtown market has not had any new supply with the exception of one property for several years. We believe some paint up demand in downtown Nashville.

In Dallas, the population household and job growth forecast are very strong for Dallas. Where we are focused, we are focused on the closer end sub market, so we don't anticipate that we are going to have a lot of new supply. We do plan to expand in both of those markets.

Andrew McCulloch - Green Street Advisors

And then on Atlanta, can you breakout what you are seeing on Duluth and Buckhead, it is a strong performance there part as bounce back from Duluth?

John Shannon

We seen really a bounce back in both kind of the Buckhead and the Duluth markets. The Buckhead market did not go down as far as the Duluth market. So, I would say, we are going to see a little bit less growth on a comparable basis than the Duluth market. But on a going forward basis, we think that the softness of Atlanta for our portfolio will be centered around the Duluth and then the Buckhead is gaining some strength.

Andrew McCulloch - Green Street Advisors

Thanks for that. Quick follow up on development, what's the total cost on that new project including the land and then on the expected yields that you quoted is that on trended or current rent?

Lou Fatica

Andy its Lou, our total cost is right around $35 million, and the 7.1% return on cost is on in place rents.

Andrew McCulloch - Green Street Advisors

Thanks. And there is one last question, as I wondering if you guys can comment on status of rolling out revenue management software?

John Shannon

Sure. Andy it's John again. We have said for sometime that we believe our system of setting rents new lease and renewal rent doing it on a daily basis on a unit-by-unit basis has really been better than any revenue management system that is currently available.

I think our numbers have proved out that it has worked for us, but with that being said we are continually evaluating systems that will allow us to push rents and that includes third party revenue management program. So, if we identify and opportunity with any system that will allow us to increase revenue we absolutely would adopt that system.

So, I guess that's the long answer short answer, we are continuing, continually evaluating ways to push rents.

Andrew McCulloch - Green Street Advisors

Great, thanks guys.

Operator

Our next question comes from Tayo Okusanya from Jefferies & Company. Please go ahead.

Tayo Okusanya - Jefferies & Company

Good afternoon. I actually missed that. Couple of questions guys. Good quarter. When I think about upcoming debt maturities, possibly over the next one to two years, the current rate you have on that debt, could you talk a little bit about certain of your plan of attack with regards to refinancing that debt?

Lou Fatica

This is Lou. I think with the near-term 2011 maturities, which were about $54 million of CMBS debt, the current plan would be to use our line of credit which is in essence result of the equity issuance that we just did and having the availability on the line to do that. So, that average coupon is about 7.6% on that maturing debt it represents seven smaller deals. We also have three deals that mature in 2011, of 7.9% CMBS debt.

That again our intention would be to as Jeff mentioned to unsecure as many assets as possible. So, we look to place financing on another asset to repay that $45 million or use our line of credit to do so.

Tayo Okusanya - Jefferies & Company

Okay. That's helpful. Jeff you made a couple of comments about when you did the first equity raise this year you got a couple of comments back from investors generally in support. But into the second raise got bunch of comments back from investors generally in support but you didn't talk anything about in the third raise what kind of feedback you got, and what your plan of action is based on that feedback?

Jeff Friedman

You know, I guess, you are right but getting the deal done at the mid-point of the range was one indication of the support the second has to do with large number of our existing shareholders continuing to support us and invest in the follow on offerings as well. And here, we are by our comments and our guidance increasing our guidance. So, if you take all of that in its totality I think it's fair to sum up that we got overall very supportive comments and we understand, as I said we keep raising the bar on ourselves and we understand we are in the show me environment where its now okay, let's see how you do with these assets that we say are great values at below replacement costs.

Tayo Okusanya - Jefferies & Company

Okay. That's helpful. But I get in regards to the acquisition, kind of acquisition going forward, and the ability to kind of finance those on a leverage neutral basis, can you just talk a little bit more in regards to detail of how you hope to accomplish that?

Jeff Friedman

Well, we really, I think Lou's answers Tayo have addressed that, with regard to the 2010 guidance, we do that on our line of credit. If we knew today really what to expect for 2011, and so the heat so to speak that we would get and that run rate going forward that would impact a lot in terms of underwriting expectations in other words, we will be more aggressive from an acquisitions perspective to the extent that we continue to be comfortable that the dynamics in the markets where we are buying are positive.

Now, how we finance that on a leverage neutral basis clearly will have to do that with a combination of both selling properties and using proceeds from the sale of properties as well as returning to the equity markets. At some point clearly, if we are not going to get paid in terms of the capturing that discount to the current multiples we'll sit back and maybe let the earnings catch up with everything else.

But right now, we think there is a lot of room and a lot of fruit on the tree. We won't know until we look back whether it's low hanging or not to be able to go out there and pick.

Tayo Okusanya - Jefferies & Company

One last question. I think a part of the story also is you guys increasing your presence in what typically considered faster growth market, the recent deals you have done are Nashville and the Dallas, have this general kind of Midwest, Southeast feel to them. Just trying to make sure that there is still a lot of focus in regards to growing what is considered the faster growth markets on going forward basis?

Jeff Friedman

Hi, let me say this to add on to what Patrick said and I think it was Andy who asked the question. Our team spends an in ordinate amount of time with what we refer to as our market analysis. In that analysis, we look at every major market in the United States. And that analysis is updated quite frequently. And we have created certain criteria that we believe are important and we monitor and update that analysis on a regular basis.

And so the markets that we have identified really aren't identified as coastal or interior or tertiary or secondary or anything else they pop up because of the dynamics that drive apartment demand and that's the reason that we are in Nashville. The fact that some of the other companies aren't there that is a good thing for us because it gives us an opportunity on the deal we are building to go in and coming 20%, 30% below what people are paying for property in that market and build something new.

It gives us an opportunity to go in Dallas where others may haven't owning nothing those markets today and may not be competing with us in those markets and establish a position while at the same time what we said and I can't emphasize this enough that we want to reduce the exposure we have to the Midwest but not necessarily by selling our Midwest assets. We are working towards getting to 35% in the Midwest and the way we will do that is by growing in these other markets. These are markets we want to be in.

Tayo Okusanya - Jefferies & Company

That's helpful. Just asset sales the two times if I conversations that you kind of brought this up as a potential strategy in regards to managing balance sheet liquidity, if you could talk a little bit about under what circumstances you would consider selling assets in which particular markets you would consider doing it what kind of coverage you are looking for as a magic number that would make you kind of hit the green light and regard to that and how large the amount could potentially be over the next 12 months.

Jeff Friedman

If we can, I know there are quite a few other questions, let me give you the short answer you need to we can talk offline. We rank every property on a return on equity basis and we determine which properties to sell based on those that we expect to have the lowest return on equity from. We do that constantly. We will do that and as I said before, selling properties is and has been a way to fund future growth. So, for the long answer why don't we talk offline you can get Lou or John or me a call and we would be happy to go to the details.

Tayo Okusanya - Jefferies & Company

Appreciate that, thank you.

Operator

Our next question comes from Andrew DiZio from Janney Capital Markets. Please go ahead.

Andrew DiZio - Janney Capital Markets

Thanks, good afternoon guys. Can you talk about the spread that you guys feel you need with our resurrected development platform over acquisition returns to break ground and if you think there is any markets in which you are currently located where that spread makes sense right now?

Jeff Friedman

I can tell you that something with a 10 handle or better, I think 11 or better unlevered, IRR, on a development is significantly better than what we are able to do on an unlevered basis. If we look at return on cost standpoint and just for a moment refer that to cap rate, we are talking anywhere from solid 100 to 200 basis points better than the cap rates we are seeing in the markets where we want to buy. So, two things, one is the increased spread. Risk at the level of that we are talking about our prosperities, a project or two a year, is not that much risk.

Development, construction is in our DNA, we have been in that business for 40 years. It's always been a par of who we are. So, it doesn't scare us. We don't see the risk. The risk is in terms of how much development as a percentage of the rest of the business that we do and development will never be that much as a percentage of what we do.

Operator

Andrew, did you have any follow-up questions?

Jeff Friedman

We may have lost Andrew.

Operator

Our next question comes from Buck Horne at Raymond James and Associates. Please go ahead.

Buck Horne - Raymond James and Associates

Thanks gentlemen I will be quick. Maybe I missed it did you give the cap rates on in place rent for the Ashburn and for the Dallas acquisition?

Jeff Friedman

Sure. For Asheboro the going in cap rate was 5.8. And for San Raphael, which is the Dallas property the going in cap rate was 5.7.

Buck Horne - Raymond James and Associates

Great. And just in terms of your acquisition costs, the expense you expect to I guess incur in the fourth quarter. What is in that is that a number that we should try to model going forward as kind of recurring type of expense you are still looking for shopping mode for new acquisitions out there?

Lou Fatica

Buck, this is Lou. It really all depends on what costs that are not capitalizable, but typically what you see or any third party costs, if we are not going to place debt on a property, those typically get expensed you have title policies, any surveys that we would be responsible for and other types of costs. So, it really depends on asset by asset basis. But typically there in the 75 to 150,000 per deal is what we are seeing.

Buck Horne - Raymond James and Associates

Okay. All right. That's great, thank you.

Operator

Our last question is a follow-up question from Bill Acheson at Benchmark. Please go ahead.

Bill Acheson - Benchmark

Thank you for your time guys I know we are running over here, for the 100 or so million that you would need to making acquisitions to get clear guidance, lower end of guidance, what are you seeing in terms in pricing, are we still on downward slope here or is supply sort of mitigating that. I think I heard you say that supply is increasing?

Jeff Friedman

Bill, from where I sit, Patrick and the guys may have a little bit more color but from where I sit, in spite of the fact that people say there is a lot of money out there, I'm really not sure how many buyers are showing up since we haven't been to the market recently how many buyers are showing up.

Clearly there is competition. I happen to be looking at one of the potential acquisitions and when I was on site there were two other perspective buyers at that time, this was a day when there weren't given tours we were just on site there were two other perspective buyers, clearly there are other buyers. From our perspective is more of a shortage of quality well maintained what we call core properties that are coming to market because I think in many cases owners of those properties are still under water.

We are buying properties many times often below what the sellers paid for the property we are looking at buying deals below what the current owners paid for those properties and I think there are many seller whose just hasn't come to realize if they want to sell they are going to have to sell at a loss.

Bill Acheson - Benchmark

Okay. I guess I was just turning in terms of normal cap rates. We are not going to see you guys venturing down 5.5%?

Jeff Friedman

I think that if we found the market that we felt comfortable enough that the future growth would be there, we are not going to get scared away by what somebody calls a cap rate because…

Bill Acheson - Benchmark

Okay. That's a good qualification. Thank you, Jeff.

Operator

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Jeff Friedman, for any closing remarks.

Jeff Friedman

Thanks everybody for your time today. Tina for your help, we appreciate it. Give us a call.

Operator

The conference is now concluded. Thank you for attending today's presentation you may now disconnect.

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