For most analysts listening in on the apartment REITs’ third-quarter conference calls, fundamentals were the key. They wanted to know where rents were moving, whether traffic slumped after August’s economic woes, and the will fare in the traditionally slower winter months. While those questions weren’t totally answered, a few other topics seemed to come up this past quarter.

Here are three unexpected things the REITs tackled on their recent earnings calls.

1. External Growth
With stock prices falling, companies could be less likely to issue equity. That increases the cost of capital for REITs. Since this was one of the main vehicles for funding acquisitions and dispositions, there were questions about whether the growth seen over the past year would continue.

For most companies, it appeared things were business as usual. Alexandra, Va.-based AvalonBay Communities, for instance, showed no signs of slowing development. It now has $1 billion on the way. “The [REITs'] development pipelines continue to grow, and they’re still being aggressive on the acquisitions front,” says Andrew J. McCulloch, an analyst for Newport Beach, Calif.-based Green Street Advisors. 

Others are growing as well. San Francisco-based BRE Properties and Atlanta-based Post Properties are among the REITs with deals in the pipeline. “Companies are adding [units] in a measured way,” says Haendel St. Juste, an analyst with Keefe, Bruyette & Woods (KBW), an investment banking and security brokerage firm based in New York. “They’re not letting development exposure go too far.”

Though Houston-based Camden Property Trust recently bought a $40 million site in the Buckhead section of Atlanta, CEO Ric Campo expressed some concern about wide swings in stock prices and unsecured bond spreads. Alexander Goldfarb, managing director of equity research of REITs for New York-based Sandler O'Neill + Partners, sensed caution in other places as well. “I think management teams have tempered their plans to spend given the overall macro environment,” he says. “Relative to earlier in the year, where people were pretty enthusiastic about opening the spicket, I think you could tell a change in tone.”

2. Expense Increases
One of the benefits of the recession that apartment operators enjoyed was that, while rental rates went down, expenses also shrank. Now that rental rates have grown, analysts haven’t necessarily seen expenses grow on a commiserate level. But REITs are seeing signs of them moving up.

“It seemed to me that the REITs are preparing investors for higher expense growth next year,” McCulloch says.  “If you look at property taxes alone, that should put quite a bit of pressure on operating expenses because you have had a very significant rebound in asset values. I would be shocked if operating expenses were not up next year."

McCulloch specifically sees this happening in property taxes and repair and maintenance fees, as companies push rents and apartment turnover increases. “Utilities are kind of a wild card and payroll will be up but not as much as property taxes,” he says.

AvalonBay reported that it received a number of property tax returns in the third quarter that it won’t enjoy in the fourth quarter. It’s also had success cutting utility costs doing things like lighting retrofits or cogeneration systems and going paperless. Meanwhile, Camden, which expects full-year expense growth in the 2.75 percent to 3.25 percent range, also saw property taxes trend better than expected, but salaries and benefits are up 6.1 percent and utilities are up 6.6 percent. Turnovers drove repair and maintenance expense up 4.9 percent in the third quarter.

“Favorable variance in property taxes and insurance are offsetting some non-recurring un-favorability in salaries and benefits and utility expense, resulted in our full-year guidance remaining unchanged,” said Dennis Steen, Camden’s CFO in the company’s earning calls, transcribed on

3. Unsecured Debt Gains Favor
Thomas J. Sargeant, AvalonBay’s CFO, noted during the REIT's conference call that one change is that the secured and unsecured markets have reversed themselves over the past year with secured debt actually cheaper by about 40 basis points. But REITs seem to be moving to unsecured debt.

Companies like Memphis-based MAA and Cleveland-based Associated Estates are working to establish investment grade rating to issue unsecured debt. “The broad trend is to get away from not just secured financing but the Fannie and Freddie relationships,” says Paula Poskon, a senior research analyst with Robert W. Baird & Co., a Milwaukee-based wealth management, capital markets, asset management, and private equity firm. “Even small companies like AEC are pursuing investment grade ratings.”

The appeal of unsecured is the flexibility. “When you consider which one of those you might execute if you were in the market, you'd have to consider the inflexibility of secured debt and the potential for prepayment penalties if you wanted to sell that asset early, and we're seeing that this year in our numbers,” Sargeant said on the transcript from “So we have a bias towards unsecured for lots of reasons, primarily financial flexibility, but also you really don't know what your total cost on a secured debt deal is until that asset is sold or somehow disposed of, so we like the unsecured markets and at 4.25 percent to 4.5 percent, it's still pretty good money.”

But getting unsecured debt takes time. “It’s not something that you do over night,” McCulloch says. “Changing the capital structure takes time. [The REITs] are doing it prudently.”