Mid-America Apartment Communities Inc (MAA) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the Mid-America Apartment Communities first quarter earnings release conference call. The Company will first share its prepared comments, followed by a question and answer session. At this time, we would like to turn the call over to Ms. Leslie Wolfgang, Director of External Reporting for Mid-America. Ms. Wolfgang, you may begin.

Thanks, Matt. Good morning. This is Leslie Wolfgang, Director of External Reporting for Mid-America Apartment Communities. With me are Eric Bolton, our CEO, Simon Wadsworth, our CFO, Al Campbell, Treasurer, and Tom Grimes, Director of Property Management. Before turning the call over to Eric, I want to remind you that as part of the discussion this morning, Company management will make forward-looking statements. Please refer to the Safe Harbor language included in yesterday's press release and our 34F filings with the SEC which describe risk factors that may impact future results. We will post a copy of our prepared comments, as well as an audio copy of this morning's call, on our website. Further details of surrounding Mid-America's first quarter results may be obtained from the 8-K that was filed with the SEC yesterday. You may also obtain a copy of our press release on our website. I will now turn the call over to Eric.

Thanks, Leslie, good morning. Thanks for participating in our call this morning. Mid-America had a terrific start to 2005. As reported yesterday, our first quarter results were at the top end of our revised guidance and 5% ahead of original First Call expectation. Usually, first quarter revenues tend to be lower than the preceding fourth quarter, as leasing traffic and move ins are generally at a low point for the year. However, this year, our first quarter same-store revenues were actually up almost two percent as compared to the fourth quarter.

Encouragingly, this was driven by a broad based improvement in revenue performance. Average occupancy performance was stronger than we expected, rents increased, concessions were down, collections improved, and residents turnover was down. It was, indeed, a good start to the year. We believe this supports what we've been saying for some time, mainly, that Mid-America's portfolio is poised to recapture stronger operating performance as leasing conditions continue to recover. We expect steady improvement in same-store results for several reasons. First, because we've maintained the earnings potential of our properties during the weak leasing environment, we expect to fully recapture the higher level of NOI we had prior to market conditions softening.

While the largest recovery opportunity exists with our large tier market segment of the portfolio, we have revenue performance to recapture in our mid-sized and small tier market segments as well. As we have noted in past calls, we believe we have roughly $0.18 of FFO per share to recover from our same-store group of properties and leasing concessions alone. Secondly, our systems and operating platform have been significantly strengthened over the past 18 months. We are very optimistic about the opportunities associated with enhancements we have made to date and others that are still being rolled out.

Our on-site operations will continue to capture new cost efficiencies, and our pricing management practices have been improved. In other words, we have the ability to operate the same properties at a higher level of performance. Thirdly, our portfolio is better and more broadly diversified across all three market tiers of the southeast. You'll note that we are steadily approaching the balanced allocation that we outlined two years ago. This portfolio is now much better diversified across large, mid-size and smaller tier markets, with our large tier allocation approaching one third of the portfolio. As a result of the changes completed to date, we expect Mid-America's portfolio to perform in a more robust manner during the improving market cycle.

On the external earnings growth front, finding new acquisitions that meet our strict investment disciplines remains a challenge. However, the deal flow and pipeline remains very full, and I continue to believe that we will achieve our external growth target for the year on our.terms; namely, on a basis that is clearly going to reward our shareholders. It is worth noting, at our size, a forecast of only $150 million worth of new acquisition still means something, and will have a meaningful impact on new NOI growth performance next year and thereafter. As you have come to expect with Mid-America's operation, operating expenses remain under tight control. Same-store expenses were up only .9% year-over-year in Q1. As we've commented in the past, in a highly competitive industry and operating region such as our ours, a relentless focus on driving productivity and efficiency into the expense structure is very important.

We feel Mid-America's performance in this area is another of our strengths, and differentiates us as an organization. This first quarter result is the second straight quarter that Mid-America set an FFO per share record. As we head into the recovery phase of the apartment cycle, we think the best is yet to come. With that, I'm going to turn over to Tom to talk about property management. Tom?

Thanks, Eric. And good morning, everyone. We had a strong first quarter. Before adjustment of straightlining concessions, same-store revenues for the quarter were up 130 basis points versus the prior year, and expenses remained in check, generating same-store NOI growth of 1.53%. Revenues were boosted by improved occupancy and delinquency performance. Same store physical occupancy for the end of the first quarter was up 10 basis points from a year ago, and we ended the quarter at 93.6%. This is the best first quarter occupancy start we've had since 2002.

We have seen significant improvement in occupancy in Houston and Tampa. Dallas continues to be challenging, but we were encouraged with the improvement versus the prior sequential quarter. In the middle markets group, Jacksonville and Nashville showed the biggest improvement, which combined represents 13% of our same-store units. Our small markets group ended the quarter at 93.5%. The positive occupancy trend for the same-store group is carried beyond the first quarter. At the end of April, our occupancy was 93.7%, up 118 basis points from April a year ago. The improvement in occupancy was the result of higher levels -- higher traffic levels and a lower turnover than the prior year.

Our marketing processes continue to drive improvement. Both traffic and applications to lease were up versus the prior year. Our traffic levels increased by 5%, and our applications by 3.9%. Closing ratio was a solid 35.5. Our inventory management and resident retention programs continued to aid in revenue and expense. Resident turnover improved by 4.9%, as we improved -- as we turned 251 fewer units in the first quarter of 2005 than the prior year. Home buying as a reason for leaving decreased by 5.7%. The implementation of our web-based property management system 6 months ago has improved our pricing information.

On a real time basis, we now know at multiple levels daily what pricing decisions are made and how they affect our pricing goals. We have new tools in place that aid in pricing each unit in an optimum manner, and we can identify quickly when decisions are made that do not maximize opportunity. In order to manage this information in a focused and timely manner, we have added pricing support to our regional marketing director roles. Each of our six operating regions now has a pricing and marketing specialist who assist our operating teams in interpreting information and implementing plans that are a result of the new capabilities of our system. As occupancy builds, market stabilizes, and concessions burn off, we feel the additional information and personnel will allow us to achieve performance beyond historic levels. Early results of this focus are encouraging.

Portfolio rents -- portfolio-wide rents have improved by 90 basis points versus the prior year, and 40 basis points versus the prior quarter. Concessions, while up from the prior year, were down from the prior quarter by 20%. On a per move-in basis, concessions decreased by 18.7% from 582 per move-in to 473 per move-in. Our process is geared towards preserving resident quality, and credit standards are showing very good results. Our net delinquency for the quarter was our best performance in recent history. On a dollar basis, it improved by 25%. Net delinquency as a percent of net rent potential improved by 28 bais points from the prior year and 57 basis point from the prior quarter. This is the result of rigorous resident screening -- we still reject over 26% of our applicants -- and aggressive on-site collection process -- practices.

This focus preserves the long-term value of our communities, and is now also producing positive revenue growth. Expense control remains a strong point, up just 90 basis points from last year and down 30 basis point from the prior sequential quarter. Savings in insurance and marketing costs offset pressure in utilities and personnel. Our property and casualty insurance renewed at a lower rate in July of 2004. Our marketing efficiency program is encouraging better advertising decisions. As a result, our advertising costs per lease dropped from 173 to 146 per lease.

Utility costs are pressured by current oil pricing; and while we pass most of this on to the end user, reimbursement revenues were up 6%. The increase is felt in house accounts. Personnel costs are up versus the prior year because of increased on-site commissions and bonuses, as well as being fully staffed in positions that were open last year. One closing point, and I'll turn my comments -- one closing point in my comments and I'll turn it over to Al. Two years ago, we began an initiative to hire and recruit more qualified property managers and have them stay with us longer. We took several steps to improve the quality of those hired and increase retention of our performing managers. For the last 16 months, our turnover rate has been reduced by almost half, well below -- and is now well below the industry average.

We feel this stability gives us a significant advantage in our ability to focus on new initiatives and processes that can drive additional growth in our existing communities. These folks are the foundation of our business. Al?

Good morning, everyone. Our balance sheet continues to grow stronger and more flexible. Both our fix charge and debt service coverage ratios were more than two and a half times for the quarter, and our leverage level remains well within our acceptable range, currently at 51% of total market capitalization. We also had over $60 million in current borrowing capacity at the end of the quarter, with room for another $130 million in cost effect expansion in our current credit agreements.

We continue to feel that our balance sheet strategy is a good fit for conservative business model, which is growth through acquisition rather than through development, and diversification across three market tiers. As you know, our financing strategy is focused primarily on using agency credit facilities because of the attractive pricing and flexibility they offer, while adding interest rate swaps to fixed rates and line maturities. Our goal is to maintain around 80% of our debt fixed or hedged, and about 10% of our debt maturing each year. We ended the current quarter right on target, with about 80% of our debt fixed, swapped, or swapped our cap, and with our rate maturities well laddered through 2012. This number does include a $50 million four swap mentioned last quarter that goes into effect on May 1 of a total rate of 5.2% maturing in 2012. Over the remainder of the year, we have $75 million in fixed rate debt maturing at an average rate of 5.6%.

This consists primarily of interest rate swaps maturing in the third and fourth quarters, which we plan to replace with new swaps maturing in 2013. But based on the current yield curve, we expect to achieve an average interest rate of about 5.5%. Our overall average interest rate during the quarter was 4.99%, down 14 basis points from the same period a year ago, as we continue to see benefits from our recent refinancing. We do expect our average rate to rise slightly over the course of the year, ending the year at about 5.5%, but averaging between 5.3 and 5.4 for the full year. As Simon will discuss fully later, we acquired two properties during the quarter for a total cost of $47 million. The debt portion of these acquisitions was funded by the assumption of a $19.5 million agency loan and by $15.8 million in additional borrowings under our Freddie Mac credit facility.

The assumed loan has a fixed rate of 6.62% and matures in 2014. We did record a fair market value adjustment of $1.6 million to mark this loan to a market rate of 5.3% over its remaining life. We also entered a $15 million swap contract maturing in 2011 to fix the rate on the Freddie Mac borrowings. The balance of funding for these acquisitions is provided by common equity achieved through our direct stock purchase program, which is currently providing about to or $4 million of funding each month. We've added the refinancing of $8.5 million in tax free bonds to our plans for the remainder of the year. The current bonds, which are at 6.1%, will be reissued under our Fannie Mae tax free facility at an expected rate of about 4.25% based on the current yield curve. We will write off nearly two points per share during the fourth quarter related to this transaction, but we expect cumulative interest rate savings over the life of the bonds to be more than $2 million. Simon?

Thanks, Al. FFO for the quarter was $0.79 per share, and operating unit, again, a record $0.02 above the prior record we set last quarter and $0.05 about the mid point of the range we discussed three months ago. Our AFFO for the quarter was $0.67 per share, equalling last quarter's record. As you know, our quarterly dividend is fifty-eight and a half cents. We beat our own forecast for two primary reasons. Most of the difference was in property revenues. The very strong quarter over quarter revenue performance indicated an earlier market recovery than we anticipated.

The balance was mainly in interest expense, as the timing of certain financings was more favorable than we'd planned. Our property management expense in G&A ran higher than planned, due to higher property bonuses driven by the improved property performance, our final bill from KPMG for Foxworth after the year end and the timing of certain other expenses. In March, we recorded a $94,000 impairment charge related to the sale of Eastview, one of our original IPO properties located in Memphis, that we sold on April 1 for $9.2 million. Straightlining our incremental concessions reduced our FFO for the quarter by a quarter percent per share. On a same-store basis, the impact was to reduce our year-over-year same-store revenue growth from 1.3% to .9%.

Although this is a noncash charge, for the sake of simplicity, we do not add the concession adjustment factor in FFO, which we continue to define in accordance with [INAUDIBLE] -- FFO less recurring capital expenditures. During the quarter, we signed a contract to sell the two remaining properties in our first joint venter with Crow Holdings. Once these sales are completed, that will leave one property, Verandas at Timberglen in Dallas, in the second joint venture with Crow. As reminder, we have a one third interest in both joint ventures. The sale of both Preston Hills in Atlanta and Seasons at Green Oaks in Dallas, are expected to close in late May or early June, and nonrefundable deposits have been paid into escrow by the purchasers. Our blended cap rate on the two sales is 5.9%, representing a total price of $59.5 million, or almost $78,000 per apartment. We expect to receive a total of $9.5 million as our share of the equity in mezzanine financing, which will be applied to reduce our credit facilities.

Under the terms of the agreement, once the two remaining properties in the first joint venture have been sold, we expect to receive a promote fee over and above our share of the equity. Based on current expectations, this will be paid in June, although a delay into the third quarter is possible. The exact amount of the promote fee is forecast to be $0.18 to $0.19 per share of FFO; so we've adjusted our forecast to add $0.18 of FFO to the second quarter of 2005. The average cap rate that we anticipate realizing from the sale of the three properties in the first Crow joint venture is 5.69%. Extending this cap rate across our portfolio would value the Company in excess of $50 a share. During the quarter, we announced the acquisition of two adjacent properties totaling 657 apartments for a total of $47 million in metro Atlanta on Lake Lanier. The average purchase price was $71,500 per unit, and it represents a 6.5% [INAUDIBLE] cap rate.

We have taken a detailed look at our forecast for the balance of '05. As mentioned, the recovery in our market seems to have occurred quicker than we'd projected, and our projections are built around steady progress in same-store performance. We are still projecting our full year same-store NOI growth to be in 2 to 2.5% range. This translates to 3 to 3.5% growth without the concession adjustment which we'd initiated last year. In our prior forecast, we had anticipated a weaker first quarter and a sharper recovery in the latter half of the year. Also, although we completed two acquisitions in the first quarter, the acquisition environment, as Eric mentioned, continues to be challenging. And so in our forecast, we've moved additional acquisitions to later in the year.

Offsetting almost all of this reduction is the favorable shift in the interest rate yield curve that occurred in the last couple of months. At present, we do not plan additional dispositions this year other than the sale of Eastview completed on April 1st and the anticipated sales of the two joint venture properties. As a result of the sale of the two properties, other than the promote fee, we now anticipate $0.03 per share less FFO from the joint venture. As Al mentioned, our fourth quarter refinancing will result in almost a two point per share charge. Together with adjustments, including additional provisions for bonuses driven by the improved performance, we have adjusted our forecast range of FFO for the year to a range of 316 to 326 per share. We're forecasting our combined G&A and property management expenses to be approximately $21 million for the full year.

One of the bigger variables is the amount of bonus expense we have to accrue, and a key factor driving this is property performance, as these bonuses are accrued at the corporate level. Included in our forecast for the balance of '05 is the accounting adjustment to straightline the incremental concessions, which we project will reduce revenues by about $150,000, or almost 3/4 of a cent. Our capital expenditures should again be close to our expected norms. We forecast total recurring capital expenditures of $15.6 million, or $0.64, per share, for approximately $400 a unit. For the first quarter, as is usual during the winter, our recurring capital expenditures were below the quarterly average, only $2.8 million or $0.12 per share.

At end of the quarter, our debt plus preferred ratio to growth assets was at the same level of last year. This level hasn't changed materially for five years. We are presently projecting 100 basis point reduction in the overall leverage ratio as we continue to build balance sheet flexibility, funding our limited equity through our Direct Stock Purchase Plan as we seek external growth opportunities. Eric?

Thanks Simon. As you can tell from this first quarter report, we expect Mid-America to deliver another good year of FFO performance. We expect same-store NOI to continue to improve. Furthermore, because of the changes we've implemented to date in strengthening our operating platform, as well as the changes we've made to date in repositioning the portfolio for a more robust leasing environment, we expect NOI performance to exceed Mid-America's historical performance levels. While we certainly expect our goal of steady new growth to be challenging in the current buying frenzy environment, we continue to believe that we will be successful in reaching our acquisition target for the year. Clearly, coverage of Mid-America's dividend has materially improved, and it's better than the sector average. We look forward to further improvement on this important investment variable for our shareholder.

We continue to believe that the market has not yet fully priced MAA. I'd like you to consider three points in thinking about MAA's current pricing. First, we don't believe the market has fully considered the FFO growth potential of this Company. Over the long haul, we think the southeast will continue to drive steady and more robust job growth and household formations in other regions of the country. Mid-America's unique three-tier portfolio strategy across this region and our proven ability to operate, the enhancements we've made to date to our operating platform, the higher allocation of capital to more robust growth markets, the new growth upside we have relative to our current size within the sector, all support our belief that Mid-America is very well positioned for solid FFO growth performance over the next couple of years. Second, take a look at how the apartment REIT sector is priced and where MAA currently trades.

Mid-America's FFO multiple trades at almost a 15% percent discount to the apartment REIT sector average, and that's ignoring the higher FFO average range we just announced. In years past, concern over the dividend coverage pressured the Mid-America multiple. We believe we've addressed those concerns at this point. We believe our balance sheet is stronger and more flexible than it has ever been. With a demonstrated ability to weather market downturns with an operating strategy that avoids the risk and earnings pressure associated with new construction operation and with a stable and lower risk portfolio strategy, we are comfortable with our current leverage level. With over 80% of our debt cost fixed or locked, and with our maturities well laddered, we are in a position for a rising rate environment. And as noted, we are very optimistic about prospects for continued steady FFO growth, both same-store as well as from new growth.

In summary, we just don't see the justification for our multiple in MAA that is below the sector average. A move to adjust the average multiple for the sector would add $6 or 15% to the current share price. And thirdly, consider the market's valuation of Mid-America's real estate and what both public and private capital are paying for apartment real estate these days. At $38 a share -- I'm sorry, $39 a share -- the implied value for MAA's real estate is around $58,000 per unit. We think that's a 12 to 18% discount to the current market valuation of the portfolio. Recall that we've added $335 million of high quality real estate to the portfolio over last three years, at $74,000 per unit -- a price, by the way, we believe that discounts replacement value.

We added $280 million of newly developed properties prior to that at $67,000 per unit. Take a look at the pricing on any number of private and public real estate transactions over the past year, and we believe one can only conclude that there is upside in MAA's current pricing relative to the underlying real estate value. Our agenda remains as it has been: First, we're on course to fully recover performance of our existing portfolio. Second, we will continue to pursue new growth in a manner that will generate additional FFO growth, while enhancing long term value for our existing owners. That's all we have in the way of prepared comments, so Matt, I'm going to turn the call back to you for questions.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you have a question at this time, please press the 1 key on your touch-tone telephone. Our first question comes from David Rodgers of Key McDonald. Your question, sir.

Hey, good morning, guys. Eric, a question for you. In your opening comments, you said you were getting close to your allocation that you'd laid out several years ago. Do you think it's time to revisit some of that with respect to the third tier markets, and maybe set a new target for an intermediate term?

Well, not really. I mean, we're going to -- you know, we're not there yet. We see the large tier allocation glowing to 35, maybe close are to 40%. You know, once we get there, we'll certainly take a look at things and see where we stand and, you know, look at dividend coverage and all those factors. We'll be -- we go through a fairly extensive strategy review with our board every year in the fall of the year, and we'll certainly take a look at it at that time. But, you know, we -- we -- we're -- we're looking at sort of this thing on a long-term basis, Dave, and you know, we -- we're going to remain committed to some allocation to these small tier markets.

They've just proven themselves to be too valuable to us during the downturn, and you know, as you know, this business is cyclical in nature. So, you know, with the idea towards creating a steady earnings platform, you know, that's going to allow us to move the dividend up in a steady state fashion through all phases of the cycle, we think it's important to have some allocation to these steadier markets, and, you know, we will continue to do that. It's certainly going to be smaller than it is today; how much smaller it will get, we'll take a look at that probably later this year.

And Tom, maybe -- you had mentioned in your comments that, I think, reimbursements for utilities were up 6%. I didn't know that if that meant dollars were up 6% or that your reimbursement percentage was up 6% percent of the total portfolio. Could you clarify that, and then give us the progress and timing of the rollout of higher reimbursements across the portfolio?

Sure, I'd be glad to. And that was 6% on a dollar basis. An update on the utility program, as you probably know from earlier calls, test and trash are rolled out to 100% of the portfolio. We've got water and sewer everywhere it's legal, and gas and boiler on 11 properties that have the boilers. We've got two programs underway to improve and move our recovery higher. We're moving all collections of utility bills on-site. If we collect our utilities at the same level as rents, we'll gain about $0.5 a share, which we would expect to cash in 2006. And testing is complete on our core property test group. Our central region is rolling out this program as we speak, and the balance of the portfolio will be operational by August of '05. And the current collection rate on utilities is about 85%. So if we -- if -- there is the opportunities that are swinging out in our delinquency rate, basically. And then the other thing we've got going on is we're testing a process at 43 properties that will improve the process of transferring vacant utilities from a house account over to the resident's name. There's not a huge opportunity here, but we believe we can squeeze a penny a share out of it for next year as well.

And the delinquency billing -- or it seems like you closed down on the delinquencies. Is that something you did internally or was that going after bad debts better or was it just existing properties?

It's a combination of things really. I mean, we've been pretty obsessive on keeping the resident hurdles high, and I have been lamenting that on the occupancy side a little bit. But it's just a -- it's a general improvement across the board of dragging people in and making them pay rent a little bit better. There wasn't a secret formula on this one other than sweat.

And last question for Eric or Simon. Can you talk a little bit more about what your thoughts are about the dividend and a potential increase, as you seem to have stabilized here and good results coming out of the first quarter?

Well, as with the former question, we'll take a look at that later this year with our board. You know, obviously, we are interested in getting to a position as soon as we feel we can to start to raise the dividend. We think that, you know, for sure that once we start this program, it's something that we want to be able to continue doing every year. And I don't want to pull the trigger on it until we really feel that we're in a position to ensure that it's going to happen every year from then on out. And so, you know, more and more to come on this later. We haven't really had any kind of conversation with the board about it yet , but obviously we're getting closer.

All right, guys, thanks.

Once again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. Our next question comes from Nap Overton of Morgan, Keegan. Your question?

Yes, good morning.

Hi, Nap.

Eric, could you tell us how much of that -- I believe you estimated $0.18 on upside from leasing and proving leasing concessions alone back to where they were historically. How much of that is in the large versus the other markets?

I'm going to, you know -- I can get back to you with more details on this, but I'm going to estimate, Nap, that probably 60% of it or so is in the large tier markets. That clearly is where we've seen the higher level of competition , so that's where a lion's share of it -- in Dallas, you know, Atlanta, Houston. We -- we -- we have -- you know, done -- and I've continued to talk about it. We -- we -- when people talk about, you know, the fact that things have been so pressured for the last couple of years -- and we've done better than most have over the last couple of years because of our small market tier allocation -- it's not that they haven't suffered as well. So there is a -- there is a healthy percent -- I'm going to guess 40% -- of pricing upside that we've had to concede over the last couple of years in some of these smaller markets -- in some of the small and some of the mid-size markets. But clearly, the lion's share of it's in the large tier.

And we'll -- let us do a little work on that, and we'll get back to you on that, Nap.

All right, well, that kind of directional response is what I was really looking for. And then, Al, you said it and I missed it, the capacity you have remaining to -- on your lands to make acquisitions?

We have a -- I think quite a lot is capacity of expansion room under our current credit facilities -- about $130 million. And if you take a $150 million acquisition target on an annual basis, you know, roughly $100 million in debt is what we'll need to expand the year. So we have plenty of room under that expansion capacity on a cost effective basis, and we'll probably at the end of this year begin to negotiate a further expansion to carry into the next year.

Okay. And the straightline rent adjustment for the first quarter I think you also said, and I missed.

About a quarter of a cent, Nap.

Right, just a minimal adjustment.

Nothing to speak of.

Right.

Okay. And then how many joint venture properties do you have remaining, and are there -- is there the potential there to promote fee on any ones that you still have an interest?

Nap, this is Eric. We have one property remaining in our joint venture with Crow Holding, and another separate joint venture entity that we have set up. It's a property in Dallas -- Verandas at Timberglen is the name of it. It's a $45 million investment, 544 apartment property -- unit property. We don't have plans at the moment to take that to market, and we -- as far as, you know, we're concerned, and I think Crow is concerned as well, we're going to continue to just own and operate this property for the foreseeable future. But in answer to your question, yes, we do have a promote opportunity set up similarly to the last deal on this property as well.

Okay. And one last thing and I will be quiet. Could you just address capitalization rates and internal return -- internal rate of return prospects on investments that you're looking at in large versus mid or small tier markets? How could they differ?

Well, honestly, we are not looking a whole lot at some of the small tier markets right now. The ones that we do look at occasionally are some of these markets like Charleston or Savannah, some of the coastal areas. And candidly, there is not a whole lot of cap rate differential being made between some of these more attractive smaller markets and some of the bigger markets right now. You know, cap rates continue to hover, you know, anywhere in the low 6 range based on the weak operating fundamentals. It's still just as competitive as it ever has been. We don't really see any change taking place as of yet.

You know, we're not -- we're not losing deals to other REITs for the most part. Every now and then, we run into another REIT; but it's really the private capital buyers, the high leverage buyers, are continuing to just, you know, dominate the pricing. And of course, the condo guys have just basically, you know, cut off water from everybody.

Okay. Thanks.

Thank you, Nap.

Our next question comes from Rob Stevenson of Morgan Stanley. Your question, sir?

Morning, guys. Most of my questions have been answered; but Simon, can you talk about the insurance? What are you seeing as you go to renew that this year?

Well -- well, we -- you know, that's a good question. We will be talking with our primary property insurer as well as our casualty insurer in the next month; and, of course, our renewal is July 1. And we have built into our forecast I would call an inflationary growth. But preliminary signs -- I don't want to jinx any of our conversations -- but preliminary signs are that we may do a little better than that. And, you know, we've had a good loss year; and barring anything happening between now and then, you know, we're hopeful we will, you know, maybe be able to get maybe a flat renewal or perhaps maybe a slight reduction.

And that's the direction, as you have seen out there in the market right new for insurance, sort of flat to slightly down?

I believe that's correct, yes.

Okay. All right. Thanks, guys.

Thanks, Rob.

Thanks, Rob.

Our next question is from Bill Crow of Raymond James. Your question, sir?

Good morning, guys, nice quarter.

Thanks, Bill.

Couple of questions. Simon, how much of corporate G&A is really property level G&A?

We'll, we -- well, it's pretty much as we break it out in the -- in the -- in the P&L. You know, we do segment out property management expenses, and the G&A -- and the G&A is pretty much corporate. A breakout is, frankly, just a little bit of adjustment, but -- but -- but the -- but I think that we made the best attempt we can to kind of split it between property operations and corporate.

Okay. And Eric, could you talk -- you know, a few years ago you went and kind of switched from acquisitions to development, and now you're back in the acquisition stage. Does it -- you know, does it make sense right now to be an aggressive acquirer, or to even set a target of what you want to do this year, given the cap rates? And you know, along with your argument that the market isn't recognizing the value that you've created or that is inherent in your portfolio. So is this the time to be developing instead or is it the time to be, you know, looking at selling more assets aggressively to recognize that value? I mean, can you just talk about that in a philosophical debate?

Well, let me take the several pieces of it, and hopefully address all your points. On the point of getting back into new development, the answer is we don't plan to do that. You know, we think that one thing that we can always count on in the southeast is there's always going to be plenty of new construction available for sale somewhere. And, you know, candidly, we think we can capture more value and create more value through the process of looking for and acquiring a struggling lease out situation some where or by working a relationship with some of the smaller developers that we know that really are not in the long-term management or whole business. And we, you know, continue to look at a number of those kind of opportunities, and have done a few and expect to to some more.

So, you know, we think we can bring brand new product into the portfolio through an acquisition process as opposed to developing it ourselves on a much lower risk and really create more value right away for our owners. As far as, you know, selling properties and doing anything different on that front, you know, we are on a program to continue to look for opportunities where we need to call the portfolio for some -- of some the older properties that we've had for some time, or those that, you know, we feel like have sort of really peaked out in terms of performance, or we've got concerns about the changing demographics in the neighborhood or things of that nature. But really, you know, our focus has been and continues to be to grow the earnings platform, both currently and long-term, to, you know, position the Company to fund a steady and growing dividend, and through that process also continue to create value through the, you know, careful acquisition process that we go through. You know, we have this target of $150 million this year. It has virtually no impact on our earnings forecast for this year, 2005. Of course, it begins to have an impact on '06 and '07.

But as far as our underwriting, we don't think that the $150 million will do a lot for us in terms of earnings this year. Having said that, what that means, frankly, is I'm not going to be uncomfortable sitting here in February of next year explaining how we only spent $100 million or how we only spent $50 million we didn't hit our earnings target -- or hit our new growth target. We're just not going to feel pressure to do earnings -- or to do acquisitions to meet current year earnings, and we don't -- we don't forecast that way, and -- because we know it's going to be tough. And one thing that I know would kill this company is if we go out and start spending a lot of money to buy stuff at values that don't make sense. You know, you cannot overcome overpaying for investment. -- you just can't overcome that. And we are not going to do that.

So we're very -- we're going to stick to our guns and, you know, we're going to continue to improve the performance of the assets that we do have, look very carefully for some opportunities to add new assets to the portfolio through our acquisition process. We may or may not do it on that -- hit that particular target in a given year; but we -- you know, we feel comfortable that just the internal earnings growth itself is going to allow us to continue to put up some pretty good performance for a while, and I think the acquisition environment will continue to change a little bit.

All right. Paul is here, and he's a question as well.

Yes, hey, Eric.

Hey, Paul.

Along those lines, could you just -- what are the assumptions that are in your -- you know, your IRR model at this point? The growth rates and residual, how do you get to the residual value, et cetera?

Well, you know, of course, the operating assumptions vary somewhat by market; but most cases, particularly some of these larger markets that we're looking at, you know, we think things are going to continue to be tough for another 12, maybe 18 months, and then things will begin to improve. So there generally is some fairly conservative operating assumptions, high concessions, no rent growth, that kind of thing, in the first year and maybe two; and then it begins to pick up, particularly like in Dallas, it will pick up, you know, pretty significantly in years three and four in the forecast and then kind of flatten out from there on out. As far as exit cap rates are concerned, we think -- we think cap rates are going to go back up. And so our exit caps are anywhere from, you know, close to -- you know, probably most of them are averaging around 8 at this point when we do our pro forma.

So -- and that's looking out 7 or 8 years, and we think that that kind of exit cap is more likely what we are going to see at that time. And as far as our internal rate to return and the way we look at things, you know, we spend time looking and thinking about what our cost of capital is, and what sort of return our shareholders are looking for. And we have that number identified, and we add 300 basis points to that number to give -- that 300 basis points being a cushion, if you will -- to give us a cushion in case we miss something on the pro forma, in case things turn out differently than we think they would, we can still hit the earnings expectations that we think the market has for this stock and this Company long-term as we define the cost of capital.

Well, and what's the IR target currently?

It's going to be around 13.

13?

Percent.

Yes, and then you're using debt costs in the five, I take it?

Well, what we do -- what we do, Paul, frankly, is we run it onto the 7 year time horizon and take the full yield [INAUDIBLE] plus our borrowing spread at the time that we -- at the time that we do the analysis. Plus we, you know -- plus we add, you know -- we do the analysis based on our target capital structure.

We also blend in the cost of our preferred.

So Simon, if we assume you buy -- you've been buying at five and a half, in that area, and you're assuming an 8 exit and maybe flat results the first year or two, what's that imply for same-store expectations in years, you know, 3 through 7?

The -- you know, really it does depend dramatically on the individual market analysis. It really does.

It also depends on, you know, whether it's a new property in a lease up [INAUDIBLE] stabilized. You know, there's a deal we've been looking at, as an example, in the Raleigh area -- North Carolina -- where the recovery years, if you will, kind of years three and four, we're looking at sort of 4% type recovery. And it depends on sort of what kind of pricing and operating tactics have been employed at the property prior to our taking over, whether they're spreading concessions over the life of the lease or whether they had cut rents, whether we've got to go in and change the profile of the property.

But in terms of -- if you're looking for, you know, sort of top end same-store underwriting assumption, you know, probably the most aggressive we've ever looked at is something approaching 6%, 6.5%, in a big market where, you know, they've been -- the property is sitting at 85% and had been giving, you know, tons of concessions away, and you've got this huge opportunity to recover. But you have to get down to the individual revenue variables to understand. We really -- you know, we underwrite the individual variables -- occupancy, collections, concessions, rent growth and things like that -- and you know, and it -- the -- the overall revenue performance and NOI performance is, of course, a result of those individual assumptions, and if we get a metric in NOI or a revenue growth assumption in aggregate that's well outside of anything we've ever seen before, then you know, we go back and take a harder look at it.

But in this weak, beat up environment that we've seen for some time, and you're looking at a pretty steep recovery opportunity at a particular property, it's not unusual to perhaps see something approaching 6 to 6.5% of same -- or NOI or revenue growth in a given year.

For the first -- in the first year or two.

Well, after -- you know, after you get things kind of turned around.

Yes.

The one thing we do do is we do track our -- the performance of the acquisitions we've made against our daily pro forma. and you know, certainly last year we were ahead of that.

Yes, I mean we've -- we've -- we have that and, you know, track it for every deal we've done since 2002 in an aggregate. You know, we're definitely ahead of our assumptions.

Okay, thanks, guys.

Thanks.

Mr. Bolton, at this time, I show no further questions. Would you like to proceed with any closing comments?

No, Matt, I think that was -- that's all. So we appreciate everyone being on the call, and thanks. If you've got any other questions, just call us. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.