Colonial Properties Trust's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.27.11 | About: Colonial Properties (CLP)

Colonial Properties Trust (NYSE:CLP)

Q3 2011 Earnings Call

October 27, 2011 2:00 PM ET

Executives

Jerry Brewer – EVP, Finance

Thomas Lowder – Chairman and CEO

Reynolds Thompson – President and CFO

Analysts

Eric Wolfe – Citi

Jana Galan – Bank of America Merrill Lynch

Stephen Swett – Morgan Keegan

Mike Salinsky – RBC Capital Markets

Richard Anderson – BMO Capital Markets

Jeffrey Donnelly – Wells Fargo

Haendel St. Juste – KBW

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Colonial Properties Trust Third Quarter 2011 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, October 27, 2011.

I would now like to turn the conference over to Jerry Brewer, Executive Vice President, Finance. Please go ahead, sir.

Jerry Brewer

Thank you, Susan. Welcome to everyone joining us today. We released our earnings this morning via Business Wire. A copy of this earnings release may be found on our website. We’re also webcasting this call for your convenience. Replay will be available for your convenience on our website after the call.

Tom Lowder, our Chairman and Chief Executive Officer and Reynolds Thompson, our President and Chief Financial Officer will lead today’s call. On the call, they will discuss our business developments, financial results for the third quarter and our guidance for 2011. 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 our 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’ll now turn the call over to Tom.

Thomas Lowder

Thank you, Jerry, and welcome to everyone joining us. Today we’ll discuss our third quarter results and review our outlook for the remainder of the year. Three CEO focused directives for the year are to grow the company, improve operations and achieve our balance sheet targets.

Our largest opportunity to grow the company is through growing our core revenues. Our third quarter results were some of the best numbers we have posted in our company’s history. We posted an 8.3% quarter-over-quarter same property net operating income increased driven by 5.5% increase in revenue. This growth is a direct reflection of strong new and renewal rental rate growth, stabilized occupancy and good expense controls.

We’re also adding to our growth with the start of another multifamily development during the quarter. This brings our multifamily development pipeline to a total of 1014 apartment units under development with projected spending of $120 million. We completed an asset recycling transaction that allowed us to dispose a six order multifamily communities and bring home three much younger assets.

This transaction helped improve the quality of our multifamily portfolio in terms of age, average rental rate, operating margins and lower CapEx requirements. Reynolds will discuss this transaction in more detail in just a few minutes. With our increase in revenues and control of expenses to operating margin for our same property portfolio improved 150 basis points for the quarter as compared to last year.

Contributing to this improvement, our reduced turn calls, which are a result of lower turnover and completing a significant portion of our turns with our in-house maintenance staff. All of this was accomplished while maintaining a high level of occupancy resulting in financial occupancy of 95.6% for the quarter.

Our third CEO directive is to achieve our balance sheet targets. We maintain our stated objective of regaining our investment grade rating. Since last quarter, all three rating agencies have given us a positive credit outlook, as a result of the improvements we’ve made on our balance sheet. The seven-year $250 million financing we completed earlier in the quarter along with the capital raise through the ATM programs has certainly helped in that regard.

Now Reynolds will provide more details on the operating performance and activity during the quarter and I’ll conclude with updating guidance. Reynolds?

Reynolds Thompson

Thank you, Tom. FFO for the third quarter was $0.28 per share, compared with $0.20 a year ago. The increase is primarily related to an improvement in the same property net operating income and a contribution from acquisitions. Operating results continued to be strong in all of our major markets as evidenced by same property NOI increase of 8.3%, compared to the third quarter of 2010.

NOI growth exceeded 10% in many of our major markets. This growth was driven by a revenue increase of 5.5% versus the prior year. Our rent per occupied unit increased 5.2%, while maintaining a high level of occupancy. Sequentially, revenue grew 1.5% with rent per unit up 1.9%. Our strongest revenue markets were Austin, Phoenix, Roley (ph) and Savannah.

For the quarter, new lease rates were up 5.9% and renewal rates were up 6.2%. We define a change in the new release rate as a percent change in rent compared to the prior rent for the same apartment upon moving. We define a change in renewal lease rate as a percentage change in rent from the expiring lease in the month at the renewed lease takes effect. This methodology allows us to have the changes in our rents and our financial statements

Renewal rates remained strong consistent with year-to-date trends and are presently at 7% for October. We expect the new lease rate to be up 4% to 5% in the fourth quarter. Our average rents per unit were $749 in the third quarter which represents a 4.1% increase from the second quarter. It’s still 3.3% below our key brands of $774 per unit.

Turnover improved 250 basis points over last year to 58.7% and remains at historically low levels. Move-outs to the home purchases were 13.2% for the quarter, which has been consistent this year and below our historical average. Our same property portfolio end of the quarter at 96.1%, physical occupancy, 95.6% financial occupancy. Regarding our acquisition, disposition and financing activity, we discussed last quarter that we acquired the mortgage notes secured by joint venture property Colonial Grand at Traditions and Gulf Shores, Alabama.

During the third quarter, we foreclosed on this property and are now a owner and manager of the asset. We also executed an asset recycling transaction that allowed us to enhance the multifamily portfolio by lowering the average age, improving operating margins, raising average rent per unit and reducing your ongoing capital expenditure (inaudible). We sold six apartment communities for the total of a $105.8 million that have an average age of almost 22 years then acquired three apartment communities for a total of $90.3 million that have an average age of less than four years.

On our last call, I mentioned that we anticipate that closing one third – one half of the total amount in the sales agreement. This transaction we closed in the quarter represents about one third of the $338 million of assets listed in the option agreement. Our guidance does not contemplate disposition in many other multifamily assets this year. As part of our continued simplification strategy, we currently have three commercial assets in the latter stages of due diligence that we expect to close in the fourth quarter, which put us at the high-end of our disposition guidance range.

Turning to new developments, we now have a total of three apartment communities under construction. During the quarter, we started our development of Colonial Grand at Lake Mary in Orlando. The total costs are expected to be $30.3 million and the development will be completed in the fourth quarter 2012. These new developments and acquisitions would not have been possible without the significant progress we’ve made on the balance sheet. In July, we successfully completed our latest $75 million ATM program at an average price of $20.67 per share.

We also closed on a $250 million seven-year unsecured term loan during the quarter approximately $105 million outstanding on our credit facility. As I mentioned earlier, all three rating agencies have a positive outlook on the company’s credit profile. Leverage at quarter end was 45.9% of net debt plus preferred gross assets compared with 50.3% a year ago. The fixed charge ratio was likewise improved to 2.1 times at quarter end. We have no remaining consolidated debt maturities for 2011. Finally 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.

Thomas Lowder

Thanks, Reynolds. We’ve tightened our full year of 2011 FFO and operating FOO to $1.14 to $1.16 per share, which is the higher end of the range we provided last quarter. Our estimates now include a full-year multi-family same property net operating income increase of 6.5% to 7% in the quarter was same property revenues expected to increase in the range of 3.25% to 4.5%. For same property expense range is flat to an increase of 0.75%. How guidance does not contemplate the issuance of any more equity this year.

Our development spending is anticipated to the between $50 million and $60 million, which includes the three multi-family developments currently underway. For acquisitions, we estimate between $200 million to $250 million of which we have completed $200 million today. Our dispositions are expected to be $125 million to the $225 million with $105 million completed today. As Reynolds mentioned, the closing of the two commercial assets sales were put us toward the higher end of this range. The timing of these commercial closings will affect our bottom line FFO number, closings slight during the quarter will push us toward the upper end of our FFO guidance and conversely quicker closings will remove revenue from our results.

We have made exceptional progress on our three CEO focus items with going the company improving operations and achieving your balance sheet targets this year. This will set us up to have continued growth during the next year. While we anticipate the seasonality that typically occurs in the fourth quarter, operating fundamentals remain strong and we continue to execute on the business plan that we laid out at the beginning of the year.

Operator, we’d like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question coming from the line of Eric Wolfe with Citi. Please proceed with your question.

Eric Wolfe – Citi

Hey, guys. At the end of your remarks, you mentioned this briefly, but your guidance implies a bit of a drop in the fourth quarter from the third quarter in terms of same-store revenue growth. And I’m assuming that since your overall guidance for the year stayed the same from last quarter that you anticipated this drop as of a couple of quarter ago, right, that’s a seasonality?

Reynolds Thompson

That’s correct. We did anticipate it and we do, it is seasonal.

Eric Wolfe – Citi

Okay. And I guess presumably, it’s your occupancy that’s taking you down. So if you can maybe just tell us where you expect to end the year in terms of your occupancy?

Jerry Brewer

Yeah, our occupancy has been very resilient and we’re not really facing this on a – occupancy backing up, I mean, if it’s come under a little bit of pressure from the basis points, that’s primarily the result of lower number of transactions, which leads to a lower number in our other income category.

Eric Wolfe – Citi

Okay. So it’s mainly just other income then?

Reynolds Thompson

Yes.

Eric Wolfe – Citi

Okay.

Reynolds Thompson

You look at our net rental income, which is kind of occupancy and rate and how that is trending, it is still trending positive. We feel very good about how that’s working now.

Thomas Lowder

Yeah, that particular number should increase over this quarter.

Reynolds Thompson

It’s increased every quarter this year and we would anticipate it increasing in the fourth quarter as well.

Eric Wolfe – Citi

Okay. That’s helpful. And then just thinking about one of your comments that you made, I think you said that new lease were up 5.9% in the third quarter. Would you expect that to trend down to 4% to 5% in the fourth quarter? Just curious why you would expect that to trend down? Is that also just seasonality? There is less people demand traffic, so you’re going to be cautious on when you’re seeing a rental rates or is it – is there something else there?

Thomas Lowder

No, typical seasonality as well. I also mentioned that our renewal trends remain extremely strong. Our lettuces are going out 7% plus and we think that number is going to remain very healthy.

Eric Wolfe – Citi

Okay. And just one last question. For the asset recycling program, you mentioned differences in terms of age and the rental rates. Could you also talk about some of the differences in terms of margin and CapEx costs?

Thomas Lowder

Sure. We expect the CapEx cost to be significantly different. The – if you look at it on an FFO basis, it is somewhat diluted, but on AFFO basis we think we’re – if there is some dilution, it’s minimal. The run rate on these 20-plus-year-old assets is higher than our company average. And we anticipate run rate of these young assets to be lower than our company average. So there is a big spread there in a notch pickup and the cash flow. As far as the rents are also higher, so on these properties and the properties with the higher rents, our margins definitely improve.

Eric Wolfe – Citi

All right. That’s helpful. Thank you.

Operator

Thank you. Our next question coming from the line of Jana Galan with Bank of America, Merrill Lynch. Please proceed with your question.

Jana Galan – Bank of America Merrill Lynch

Hi. Thank you. Good afternoon. I believe in the second quarter call, you said that you may start two developments and so I was just kind of wondering what your timeline look like now for that second one?

Thomas Lowder

We do have several additional sites on the balance sheet and we – the game plan that we were thinking about is we were heading into the second half of the year was – starting one development per quarter and that can still take place. We’ve got several that we’re working on and there is we may have an additional start here in the fourth quarter, if not, we’ll certainly have some additional starts as we enter the first half the year.

Jana Galan – Bank of America Merrill Lynch

So you’re not seeing any particular slowdown in any of the markets that get you to kind of pause on development?

Thomas Lowder

At this point no. We are – we really like the trends we’re seeing out there and particularly in the markets where we have sites that we’re working on. We feel very bullish about where those opportunities are today.

Jana Galan – Bank of America Merrill Lynch

Great. Thank you very much.

Operator

Thank you. Our next question coming from the line of Steve Swett with Morgan Keegan. Please proceed with your question.

Stephen Swett – Morgan Keegan

Thanks very much. Hey, Tom and Reynolds. Well, on the properties that you put out under the option you closed a third of them. The other ones are you now intending not to sell them or is it just the timing thing and they may still be under consideration for sale into 2012?

Thomas Lowder

Sure. The big picture is they’re still under consideration, and I’ll let Paul give you a little bit more color. But corporately we mentioned that we’ve got some commercial assets sales lined up.

There is our dollars that we would like to recycle in the multi-family. So we’ve got – as we mentioned, when we did the original – we announced the original transaction, we’d like to recycle into multi-family when the opportunities to reinvest these proceeds whether it’s from commercial or older multifamily assets sales, it is highly dependent on our ability to generate attractive acquisition opportunities to recycle this capital into. So the next thing on our last is to focus on the commercial assets sales that we hope to get now here in the fourth quarter. And this contract runs through the end of next year. So we’ll have some opportunities to continue looking with those as we look ahead. Paul, have you got any additional color?

Reynolds Thompson

No. It’s a wire that we’ve done business with for many, many years. And we executed further the strategy and as we find attracted multi-family acquisition opportunities then we’ll engage the wire and move to the second tranche, but there is some active contracts through the end of 2012. So it gives us a lot of flexibility as we manage through our acquisition pipeline.

Stephen Swett – Morgan Keegan

Okay. And then you mentioned overall the entire portfolio rents are – I think, you said 3% or so below the peak. Can you just break out a couple of the markets that may be significantly off the average either above peak or farther away from peak just amongst your major markets?

Thomas Lowder

Yes, this is Paul. Phoenix, Orlando, Atlanta and Richmond are – create the best opportunity for rent growth going forward whereas like in Austin or, Roley, or Birmingham either at peak or very, very close to peak rents. So it’s really Phoenix, Orlando, Atlanta and Richmond that create the best opportunity going forward.

Stephen Swett – Morgan Keegan

Okay. Last question. Could you just remind me, Reynolds, what the development yields you guys are underwriting to?

Reynolds Thompson

Reversing out these things, we were 6.5% to 7.5% yields. From the yield is that we’ve got underway today with were rents have trended there with more of 7% to 7.5% range.

Stephen Swett – Morgan Keegan

Okay. Thanks very much.

Operator

Thank you. Our next question coming from the line of Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Mike Salinsky – RBC Capital Markets

Hi. Good morning, guys, actually, good afternoon. First question just in the commercial assets sales. I believe your marketing one was a two part and one that was – just a one part. Did your selling – was it three assets or two assets, (inaudible) the same assets as before.

Thomas Lowder

There is the same assets as before. We’ve got two active contracts today and both of those are going through due diligence. We feel our work is progressing well at this point and hope to have both of them closed before the end of the quarter.

Mike Salinsky – RBC Capital Markets

Okay. And just as you look ahead in next year’s, is it still – I know you’re doing some leasing work on – still a plan to sell that as well next year?

Thomas Lowder

(Inaudible) it will depend on the opportunity that we are working on with one of our major tenants that or recash their lease. So if we can work something out that makes sense for the asset that will be an opportunity we take advantage on. But it’s a – we don’t have that issue resolved yet we’ll see where it goes.

Mike Salinsky – RBC Capital Markets

Okay. On operations you talked about the rent rate you guys had during the quarter was the expectations for the fourth quarter, where you guys had versus markets rents right now, maybe looking at on a vast lease basis.

Thomas Lowder

Were about 6.1% down.

Mike Salinsky – RBC Capital Markets

Okay. It’s helpful. Also since you’ve been in the market, can you talk a little bit about asset pricing which are seeing in terms of cap rates in the third quarter as well as the fourth quarter. Have you seen any move up there?

Thomas Lowder

Cap rates through the summer and end of the fall for acquisitions seems to be about 5.5% or say 5.75% for the assets we’ve been looking at.

Mike Salinsky – RBC Capital Markets

Okay, and finally in terms of the line it matures the mid part of the next year, you guys have already started discussions on that and kind of the expectations?

Thomas Lowder

We have started discussions the ninth market has been in great shape and that something we’ll get a little bit more active where that get towards the end of the quarter and looking into early 2012. But we anticipate having a very successful credit facility renewal process.

Mike Salinsky – RBC Capital Markets

Great. That’s all from me guys. Thanks.

Reynolds Thompson

Thank you.

Operator

Thank you. Our next question is coming from the line of. Please proceed with your question.

Unidentified Analyst

Good afternoon. I was wondering if you could talk about if there is any change in of tenants pushing back on renewal crisis. And I’m just trying to figure out why you wouldn’t push rents even harder given your turn over still remains low?

Thomas Lowder

Wells you’ve not seen any pushback so far from our resident base. Current rent staying as percent of our residents income is at 14.9% and we think we can grow that number to 20% easily before we hit any resistance at all from about our markets, in many of our markets we did go well about 20% of gross income. So absolutely no pushback at all, have to indicated by our turnover numbers and all of our peer turnover numbers.

I don’t think anybody is seeing any pushback our resistance from the rent increases. These are historic high rent increases for our industry. Yeah runs even further in the summer but everybody is pushing through the rent rolls historic high rent increases, couple of years ago several of years ago perfect storm that we are all talking about and it’s very negative. Now it’s a perfect way at the beach. We have 96% plus occupancy, we have strong demand and they have limited new supply and we just moved through the cycle and the cycle should run for some period of time.

Unidentified Analyst

And would you say are there any particular markets where maybe you’ve seen a trend where property managers have sort of overrode the LRO rent for tenants or have they all kind of stayed with the LRO system and what the suggestions have been?

Thomas Lowder

As a philosophy, we embrace LRO and on-site people work with the pricing manager and really LRO drives our decision and we don’t have any markets where we are working outside the recommended rent.

Unidentified Analyst

Got it. And then, just last one on, can you just kind of talk about maybe what the IRR spread has been between assets you sold and purchased on the recent recycling programs you’ve guys taken under? Thanks.

Thomas Lowder

I don’t have the current data on that. IRRs and things we sold, I can tell you (inaudible) kind of high single digit IRRs on acquisitions that we are looking as we recycle this capital.

Unidentified Analyst

Thank you.

Thomas Lowder

Thank you.

Operator

Thank you. Our next question coming from the line of (inaudible) with Sandler O’Neill. Please proceed with your questions.

Unidentified Analyst

Good afternoon. So I have one question regards to the guidance. I see that you lowered your expense increase for 2011, and I was wondering what kind of the drivers were behind that?

Reynolds Thompson

Our turnover is lower, so costs are running below our plan and are tax work has resulted in lower increase across the board in tax line. So those are the two biggest drivers in making the decisions to change our guidance.

Unidentified Analyst

Okay. That’s it from me. Thanks.

Thomas Lowder

Thanks.

Operator

Thank you. (Operator Instructions) Our next question coming from the line of Rich Anderson with BMO Capital Markets. Please proceed with your question.

Richard Anderson – BMO Capital Markets

Thanks. Good afternoon, everyone.

Thomas Lowder

Hi, Rich.

Richard Anderson – BMO Capital Markets

So just I kind of think of this disposition program as like a revolving disposition facility here something, because it’s kind of as they’re for you to take through 2012 and I’m wondering is this like sort of – if this is successful and you finish it and all that is this a model that you think you can replicate with this investor or others where you can kind of have an on-going agreement to sell assets and time them? Or is this kind of like a one-off thing that you don’t expect to materialize again in this fashion?

Reynolds Thompson

I would suggest that may be one-off. I mean this has been very stable – favorable for us, I hope it’s a win-win for the buying party, certainly cases a lot of flexibility will just have to wait and see when we finished this program. And if we can find another opportunity just like it, but we certainly like the flexibility. We are held in the contract.

Thomas Lowder

We do have a history with the buyer.

Reynolds Thompson

Very solid long history with the buyer.

Thomas Lowder

And he’s got demand.

Reynolds Thompson

Equal amount of demand. So very much a win-win for sure in this current contract.

Richard Anderson – BMO Capital Markets

Does this buyer have more appetite beyond the $300-change million.

Thomas Lowder

I don’t know.

Richard Anderson – BMO Capital Markets

Okay. In terms of the upgrade, the particular reinvestment grade, what do you think of the timing is there and where do you think – what are the points of improvement that still have to be made for you the kind of clear that hurdle?

Reynolds Thompson

Rich, we believe that the targets that agencies have laid out for us we’re very close to all their targets, just not in front of some of them. I think at this point it’s about being consistent and being able to put several quarters worth of credit metrics, own the books that are keeping our results in the ranges they’ve laid out for us. And I’d say factor after that is also the kind of the bigger economic picture.

Obviously, they want to feel good about the operating trends that the company is going to experience going forward, so they can feel good about the trend and the credit metrics. So as anxious as we are and as much work as you feel like we’ve done to get there, we think we’ve got a few more quarters of posting the right credit metrics and we’ll stay in front of agencies and push as hard as we can and keep delivering the types of numbers that we’ve been delivering.

Richard Anderson – BMO Capital Markets

Okay. Last question. Did you guys mention how dilutive the asset sales plus acquisition was to FFO?

Thomas Lowder

Yeah, we did speak to it specifically, but now that we’ve gotten a couple of deals, we don’t have all of the money reinvested look at it from big picture. The cap rates are actually pretty close, but what’s a little deceiving there is the CapEx that goes into one calculation versus the other that the essence that we sold from a market standpoint, the CapEx apply the 20-plus-year-old property just higher. Our numbers are actually calculated with $625 a unit.

The acquisition cap rates are calculated with a $250 a unit reserve. So optically it looks pretty close, but in reality the yield that we are able to generate is a little bit wider that we think it’s important to look at the CapEx real CapEx on 20-plus-year-old property is much higher than our company average of around $700 a unit or so. CapEx we’re going to have on these new properties is going to be significantly below our company average. And when you look at it on an AFFO basis, we think – is very close to being a wash.

Richard Anderson – BMO Capital Markets

Yeah, the CapEx on the new stuff will be bigger than 250 though, correct?

Thomas Lowder

Probably not, I mean, it could be a little higher than 250, this is going to be a lot less than our $700 kind of the average rate. So conversely the CapEx that we could spend on 20-plus-year-old property can be significantly higher than our $700 run-rate as well.

Richard Anderson – BMO Capital Markets

Just using those – that 650 and 250 assumption, what was – can you provide the cap rate on the sales and the cap rate on the acquisition now that we know the underlying assumption of CapEx?

Thomas Lowder

Yeah, I mean, that’s in our KDS on page 19 to 61. . .

Richard Anderson – BMO Capital Markets

Okay.

Thomas Lowder

Selling cap rates includes $625 CapEx results.

Richard Anderson – BMO Capital Markets

Okay. I didn’t see that much.

Thomas Lowder

And then the individual numbers, if you like, the last three acquisitions average – if you average those, it’s 5.7 cap rate, which includes $250 per unit reserves.

Richard Anderson – BMO Capital Markets

Got it. Thanks.

Thomas Lowder

You bet.

Operator

Thank you. Our next question coming from the line of Jeffrey Donnelly with Wells Fargo. Please proceed with your questions.

Jeffrey Donnelly – Wells Fargo

Good afternoon, guys.

Thomas Lowder

Hi, Jeff.

Jeffrey Donnelly – Wells Fargo

I was just curious how you think about the pricing on your recent dispositions and maybe some of your planned dispositions relative to where replacement cost is today?

Thomas Lowder

Dispositions that – we were around $60,000 a unit on the things we just sold so with significantly below replacement cost. The things we’re buying are a lot closer replacement cost, we think we are slightly under, but pretty close to replacement cost.

Jeffrey Donnelly – Wells Fargo

And do you expect to have many more, I guess, assets down the road that we can kind of see those, replacement cost on?

Thomas Lowder

Well, it’s really a function of the rents. So we certainly still have older properties that have the lower rents that are going to generate per unit prices that I think would be below replacement cost, yes.

Jeffrey Donnelly – Wells Fargo

Then just one last question, I’m just curious how – you’re speaking about this dynamic in your markets specifically the appeal for renting single family homes or even purchasing single family home. I know you mentioned you didn’t do much of a change in the move-outs and you certainly have a strong quarter. But have you sensed any resistance from residents flinching on price increases or maybe increased interest in single-family rental activity?

Thomas Lowder

We are saying somewhat of an increase that that’s a number we started tracking here in the last couple of years and internally for the federal home market, it’s around 4% of our turnover of residents leaving to rent homes. So it’s not a huge number, but it is a number we’re watching in certain markets.

Jeffrey Donnelly – Wells Fargo

Any change in that pace or has it been pretty steady?

Thomas Lowder

That’s moved up over the last several quarters from 2% to 4% likewise the number (inaudible) down if you kind of think about in terms of looking at those numbers together you’re probably still right on that historical average.

Jerry Brewer

That number is around 14% to 15% down from a half 38% guidance.

Jeffrey Donnelly – Wells Fargo

Okay. Thanks, guys.

Thomas Lowder

You bet.

Operator

Thank you. Our next question is a follow-up question coming from the line of Eric Wolfe with Citi. Please proceed with your question.

Eric Wolfe – Citi

Hey, just quick ones. I was pretty shocked to see that, I guess, you said that rent as a percentage of your tenant’s gross income is only 14%. I’m just curious what’s the highest that’s ever been, because it seems, I think, that’s probably the lowest within the entire space?

Thomas Lowder

Yes, 14.9% and if you look back, before the Cornerstone merger, we were in the low 20%, 21%, 22%, 24% after the Cornerstone merger that moved a little bit. But, 14.9% allows us a lot of room to grow rents than the current resident base can afford the rent increase and not aggravate turnover. So we have a lot of opportunity looking forward.

Eric Wolfe – Citi

Right. And I think you said expense were only 3% off peak, so if I bring those two together it sort of suggests that there is a lot more higher income tenants that you have now than you had just a couple of years ago.

Thomas Lowder

We do. We recycled about 60% of our Cornerstone assets that we brought into the company several years ago. So our resin profile has improved measurably.

Jerry Brewer

Also we thought traffic is well.

Thomas Lowder

Yes.

Eric Wolfe – Citi

Okay. Maybe just follow-up to Mike’s question. When will the renegotiation with the tenant – when it would be completed? I mean is that a process that’s going to be down within the next quarter? Is that going to drag on for a while?

Thomas Lowder

I think, we’ll know whether or not we’re going to be successful within the next quarter, I mean, it’s – the discussions are taking place as we speak and I think we’ll know where we’re headed with them if we can work something out or not probably by the time we have a call with you again.

Eric Wolfe – Citi

Okay. Great. Thank you.

Operator

Thank you. Our next question coming from the line of Haendel St. Juste with KBW. Please proceed with your question.

Haendel St. Juste – KBW

Yeah, good afternoon, guys.

Thomas Lowder

Hello.

Haendel St. Juste – KBW

So just a quick question or two here. I guess during the past quarter you introduced a new (inaudible) portfolio, the Colonial reserve. I’m just curious going forward the plan to use the commercial disposition proceeds. Could we assumed that you’re focused on acquiring more infield, more Colonial reserve type assets? Or are you also considering the, I guess Colonial grand, where can we see focus those potential proceeds? And what is the cap rate differential in your market, say, between, say, the reserve and the Colonial grand type of asset?

Thomas Lowder

We’d like to be balanced between the Colonial reserve product line and the Colonial grand product line. We do like rail systems, our Dallas acquisition, Colonial reserve medical district is a perfect example of what we like. It has a huge concentration of hospitals and medical employment within walking distance and you get the benefit of walking to the rail system, which gives you access to downtown Dallas and so that’s a perfect example of what we like to acquire. It is about 50 basis point spread between Colonial reserve and Colonial grand or urban versus suburban product line that you’ll see us acquire both asset classes going forward.

Haendel St. Juste – KBW

And how are you looking at underwriting in terms of IRR? What is your minimum hurdle today? And as you look at those operational risk what do they look like for you there?

Thomas Lowder

On the acquisition front, (inaudible) kind of high single digit IRRs, that’s the area that these acquisitions that we made this year is landing in and that’s kind of the area that we’re comfortable right now.

Haendel St. Juste – KBW

Unlevered, I presume?

Thomas Lowder

Unlevered, yes.

Haendel St. Juste – KBW

Great, guys. Thanks.

Thomas Lowder

Thank you.

Operator

Thank you. Mr. Brewer, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Jerry Brewer

Thank you, Susan, and thank you everyone for joining us today. We look forward to seeing you in Nairie. Have a great day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.

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