Mid-America Apartment Communities Inc (MAA) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in 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, I'd like to turn the call over to Leslie Wolfgang, Director of External Reporting. Ms. Wolfgang, you may begin.

Thanks. And good morning, everyone. 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; Tom Grimes, Director of Property Management; and Drew Taylor, Director of Asset Management. Before we begin, I want like to point out 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 34X filings with the SEC which describe risk factors that may impact future results. These reports along with a copy of today's prepared comments and an audio copy of this mornings call can be found on our website. I'll now turn the call over to Eric.

Thanks, Leslie, and good morning. Thanks for joining our call this morning. Before we open the phone line for your questions, Simon and I are going to provide a few comments on the quarter's results as well as our outlook for the remainder of the year.

We're encouraged with first quarter results and the solid operating performance, especially when compared against a very strong benchmark of the prior year. First quarter results were near the top end out of our guidance. With the strong start to the year, we remain comfortable with our prior guidance for 2007. The first quarter's performance is the highest quarterly FFO per share result in the history of our company that sets the stage for what we believe will be another year of record high performance for Mid-America. With a larger portfolio waiting and high growth markets, a significantly enhanced operating platform, a number of new growth initiatives underway, a significant redevelopment upside opportunity within the portfolio and a much stronger balance sheet to support new growth opportunities, we're excited about Mid-America's prospects.

First quarter same store results were highlighted by strong revenue performance that exceeded our expectations. Occupancy at quarter end was almost 95% and the portfolio captured solid improvement in pricing. Concessions declined a significant 26% and rents grew by 3.6% driving growth in overall pricing of almost 5%. While it's clear that revenue performance is moderating in most of the Florida markets as we migrate from super charge to really good performance levels and occupancy returns to the 95% range, we continue to feel optimistic about the recovery still underway in most of our other markets and remain upbeat about the performance prospects for the overall Mid-America portfolio.

This optimism is driven by not only the strong absorption and demand side fundamentals in our SunBelt markets, but also the evolving and yet untapped fuel of the tightening single family housing mortgage, the impact of our new yield management program and the accelerating redevelopment program upside within the portfolio. Same store operating expenses in the first quarter were higher than normal, largely as a result of cost incurred on unit turn activities. Specifically, during the quarter we had a more intense effort underway in getting a greater number of units ready as well as getting them ready faster as we work to lower the gap between physical and effective occupancy.

Simon will give you more specifics on this in his comments, but we believe the focus not only drove higher levels of effective occupancy, but enabled us to care more market ready inventory into the second quarter. The effort was successful as supported by the 70 basis point increase in sequential occupancy from Q4 to Q1. We expect to see these turn related expenses moderate to more routine levels over the balance of the year. You'll notice in our supplemental schedules to the earnings release that we've made a change in how we define the market tiers or segmentation of the portfolio. Our previous approach of defining the portfolio diversification by market size was increasingly not properly recognizing the strong performance trends and high valuations generated by a number of our mid-sized and small tier markets such as Austin and Raleigh, Nashville, and Charleston. Under our new approach, we use a combination of forecast of net absorption, market size, and housing affordability to categorize the markets with the absorption projections and the size of the market as being the most heavily weighted variables of the index.

Based on this market ti9er definition and gross asset -- and based on gross asset values, 53% of the portfolio is in high growth markets, 29% is in growth and income markets and 18% is in stable income markets. We believe this approach reflects a more accurate representation of the performance profile of the portfolio. While the overall Sun Belt region certainly has strong job growth and demand site performance characteristics. The level of volatility and performance over four market cycles will differ between the three segments. And while it's clear that Mid-America now has a more robust market and performance profile, we remain committed to our diversified portfolio approach with a portion of capital allocated to growth in income and to stable income markets. We continue to believe that as a result of this diversification, the portfolio will generate a lower degree of earnings volatility and more stable cash flow. Or stated another way, the portfolio caps a strong performance in good market environments while remaining less exposed to broad economic downturns and retain recession resistance tendencies.

On the acquisitions front, the news is consistent with what we've been reporting over the last few quarters. Mid-America's deal pipeline is very active, but the pricing environment remains competitive. We're currently under contract for two properties that we expect to close over the next 30 days or so and are actively underwriting several other deals. Competition for acquiring well located new properties as well as for solid repositioning investment plays remains high. Despite the challenging acquisition environment, given our regional focus and long record of successfully executing on deals on a contract, we continue to capture a lot of opportunity flow and remain optimistic about achieving our growth targets for the year. We also remain upbeat about the prospects for strong operating fundamentals over the next couple of years and in particular about the prospects for Mid-America's performance. Let me highlight the variables that we believe position Mid-America for solid internal growth.

First, we continue to see support or solid positive absorption across our markets with demand exceeding new supply projections by a healthy margin. With the economy continuing to generate steady new job growth and recognizing that the Southeast and Southwest markets will capture the bulk of this job growth and with new supply continuing to remain in check, we believe absorption will remain positive across our markets for some time to come. Sequential quarterly gains and pricing power within our portfolio remains positive. And we don't see signs of this reversing.

Second, we believe the reversion of the mortgage market to more disciplined lending practices will aid our performance by both closing the back door somewhat as the velocity of our residents leaving to buy homes will slow as well as increasing leasing traffic coming in our front door. As more renters will be forced to stay in the apartment market. Simon will provide more details in his comments, but this conclusion is based on an analysis of the resident turnover incurred last year factoring in that turnover that is attributable to home buying and further identifying those that are likely to have been considered subprime borrowers that will now have a harder time securing mortgage financing. And of course, it's important to recognize that lower turnover also benefits us with lower turn related operating expenses.

While difficult to pin down the full benefits to be realized from the tightening of the subprime mortgage market, we believe this -- there will clearly be a positive impact to Mid-America's portfolio. And expect to see these benefits starting late this year and into 2008. We're also bullish about internal growth prospects as a result of the rollout of our new yield management system that is currently being implemented. We expect to have installation complete by the start of the third quarter and would expect to see meaningful impact over the last half of the year. The implementation is going very well and our properties are quickly adopting to the new pricing methodology. And finally, our optimism for continued strong internal growth is influenced by the strong results we're capturing from our redevelopment initiative. With 420 units repositioned in the first quarter and rent bumps averaging 14%, we are ahead of our projections for the year.

In total, we've identified roughly 10,000 units throughout the portfolio that we believe are good candidates for this repositioning initiative and expect the program to continue expanding and to be a strong contributor to our internal growth earnings performance for some time to come. While putting capital out on a basis that meets our investment disciplines and capturing new growth is certainly a challenge in this environment. We also remain optimistic about the new growth aspects of our business plan that we laid out in our earlier guidance. The new development that we currently have in process is proceeding in line with our plans. The construction and lease-up of Brier Creek Phase II in Raleigh is ahead of schedule. We expect to break ground on our new expansion developments in Jacksonville and Dallas this quarter. Our lease-up of Talus Ranch in Phoenix is going very well with the lease-up running ahead of our budget. As mentioned in our fourth quarter call, we're about to launch a new JV, that we believe will capture more opportunities and higher returns on our capital. All of this combines to create a meaningful amount of new FFO growth for Mid-America over the next couple of years. And importantly, with our balance sheet much improved and the strongest position it has been in for quite a few years, we think we have a great platform to sustain these growth initiatives and longer term value investment opportunities. That's all I've got, I'm going to turn the call over to Simon.

Thanks, Eric. We are pleased we were able to report first quarter FFO of $0.87 per share, that was $0.02 ahead of the midpoint of our prior guidance. The major reason for the excellent quarter was our strong revenues with same store revenues up 4.9% over the very robust quarter we reported a year ago. 100 basis points above our internal forecast and NOI growth of 4.3%, up 120 basis points from the midpoint of our internal forecast. AFFO was $0.76 a share, up 6% from last year.

Same store revenue performance for the quarter was excellent. Although physical occupancy continued to trend about 40 basis points below the exceptionally high levels of the first quarter of last year, at that time, several of our markets had the benefit of residents moving from areas affected by hurricane Katrina and when the Florida markets were exceptionally strong. With physical occupancy ending the quarter at 94.8%, this is still at the high end of the range of our expectations. Most importantly, we're seeing continued opportunity for improved effective pricing with reduced concessions and higher rents.

Property level operating expenses excluding taxes and insurance grew by 4.7% when compared to the same period a year ago. With a larger than normal increase in our turn costs. As Eric mentioned during the quarter we worked to reduce our average days to complete a turn from 14 to 8. We made ready 428 more units in the quarter than the first quarter of 2006. In effect bringing forward some expense from future quarters. The estimate that the additional cost was approximately $330,000. And increased our same store property level operating expense by 160 basis points. In other words, without this initiative, our same store property level expenses would have increased only 3.1% in line with our expected inflation.

Because we brought forward turn costs from future quarters, we expect repair and maintenance costs to moderate going forward and as Eric mentioned, the effort helped us to improve our occupancy. The large increase in premium costs we experienced at the end of June drove our insurance expense up 42%, although this was partially mitigated by real estate taxes, which were flat compared to last year. The favorable tax result was due to tax law changes in Texas and to some successful tax appeals. Based on the law changes, Texas real estate taxes have been reduced 12 to 14% and partially replaced by a new business tax equivalent to franchise and excise taxes, which we report in our property management expense line item.

Last year, we commented on this change. We should reduce our 2007 real estate taxes by just over $1 million. The offset is approximately $850,000, in additional business and franchise taxes from law changes in both Texas and Tennessee. Overall property expenses including taxes and insurance were up 5.8%, which would have been 4.7% without the one time repair and maintenance program discussed about potentially taking our same store NOI growth from 4.3% to 5%.

The sale of our last joint venture property Verandas at Timberland closed January 12. And we reported a $1 million promote fee on the gain on sale of $5.4 million. The sale was at a 4.6% cap rate defined as we usually do based on the next 12 months NOI, less a 4% management team and our allowance for CapEx of $350 a unit. We earned a 30% IRR during the whole period of the asset and the promote fee added $0.04 to our first quarter FFO as we discussed in our last conference call.

Our combined property management expense and G&A increased by $1.5 million. The bulk of the increase was in bonuses expense associated with property operations, a credit to our medical insurance accrual that we took last year and an increase to our F&E tax expense, which I just discussed. We continue to project the full-year total combined expense to be in the range of 28 to $30 million. As a percent of FFO or AFFO, our dividend coverage is well above the sector median, and our balance sheet is strengthened. We're able to continue to move forward with the sale of the few older high cap rate assets that we still retain. We completed the sale of two of our older Memphis properties Hickory Farms and Gleneagles yesterday for $12 million at a 6.95% cap rate for these average 25 year old assets we owned at our IPO. We also have listed for sale two smaller properties in Jackson, Mississippi, which have an average age of 23 years and we expect to sell them for 13 to $ 15 million later this year. We anticipate dilution in the range of $0.015 per share as a result of the dispositions this year and about $0.035 next year.

Results for the quarter continue to demonstrate exceptionally strong revenue growth by our Texas markets. We're not seeing any major impact in our markets from the reversion of condominiums to the rental market. The market with the most exposure to this is the Miami Fort Lauderdale area where we only have one property, in Carl Springs, and revenue at this property for the first quarter increased by 11% over the same period a year ago. We only have 5 properties in Tampa and Orlando, which also has some condo exposure and revenues were flat in these markets as occupancies moderated to the 95% range with strong rent growth. We're seeing some real estate tax pressures in Florida, but expect solid results.

As Eric mentioned, we've done some analysis on the possible impact on occupancy of the change in the subprime mortgage environment and declining home prices. A review of the credit scores of our residents who leave us to buy homes indicates perhaps 5% have subprime credit. Assuming that subprime lending shrinks 50%, we have the potential to pick up 40 basis points of occupancy from this back door impact of reduced loan availability. Although it's still early, we also reviewed our resident turnover data for a hint to any possible impact. The number of our residents leaving us to purchase homes declined slightly by 70 basis points to 29%. On an annualized basis, this represents 15 to 20 basis points of occupancy. So it's reasonable to speculate that we have the potential to see some favorable impact on our back door. That is a reduced number of our residents leaving to purchase a home.

It's harder to measure the impact on our front door of increased rental traffic from potential new renters who are seeking to rent as opposed to owning a home. Our balance sheet has continued to strengthen as our debt to gross real estate assets dropped to 53% from 58% a year ago and from 54% at the end last year. We have over $200 million of unused debt capacity and our fixed charge coverage was 2.22 up from 2.12 a year ago, above the sector median.

Our 2007 investment program assumes that we'll locate approximately $150 million of acquisitions for the anticipated new joint venture. Mid-America multi-family fund 1. Which given our joint venture one-third ownership and 65% leverage translates into a $20 million equity requirement for this year. We also plan a further $150 million of acquisitions for our 100% owned account. For forecasting purposes, we assume that fund 1 will make 500 million of investments over a 3-year period representing a total investment by Mid-America of $60 million. We have two properties under contract and are looking at several others that may fit the acquisition criteria of fund one.

As a reminder, properties 7 years old or older will be offered first to fund 1, newer properties will be targeted for 100% owned portfolio. In projecting 2007, we gave a fair amount of detail in last quarter's press release on the components of our guidance, which we've not changed. Our forecast is based on continued market strength. The same store NOI growth in the 5 to 6% range. At the midpoint of our range FFO per share growth is forecast to be 5%. Despite better than anticipated first quarter results due to stronger same store results, we are maintaining our guidance in the $3.40 to $3.60 range with a midpoint of $3.50. We've increased our bonus accruals because of strong property performance. And as I mentioned before, we've increased our real estate tax accruals.

Based on the midpoint of our FFO guidance, our AFFO growth should be in the 10% range faster than FFO as in 2006 we had an unusual number of large capital items that fell within recurring CapEx. You'll notice that in our guidance, we're forecasting a range of FFO for the second quarter of $0.77 to $0.87 with a midpoint of $0.82, which is $0.05 below our results for the first quarter. In the first quarter, we received a promote fee of $0.04 that won't be repeated in the second quarter. In addition, we'll have some dilution from the two dispositions and from the completion of several buildings at Briar Creek Phase 2, as well as the continued drag on earnings of the lease off of Talus Ranch in Phoenix. For the third quarter, we're forecasting FFO in a range of $0.83 to $0.93 and in the fourth quarter a range of $0.88 to $0.98. By the second half year, Talus Ranch will begin to be less of a drag on FFO. And we should begin to see the benefit of the implementation of yield management as well as some fee and other income from fund 1.

In our test of yield management software LRO, revenue growth for 7 test properties has been almost 3% greater than the 7 control properties over the 9 months test period. For forecasting purposes, we've assumed that we capture about half of this or about 1.5% during the third and fourth quarters. As a reminder, as a result of of LRO, we expect that we will increasingly migrate to net pricing, that is, eliminating concessions over the next couple of years. Since we straight lined concessions across the life of the lease, this transition could reduce reported FFO by $0.02 to $0.04 this year and a like amount next year. Of course, this is a non-cash item. We also expect LRO to cause some of our normal operating metrics to adjust as we move toward optimizing revenues and reduce our focus on physical occupancy and average rent per unit. And finally, as a reminder, we anticipate calling our 9.25 Series F in October which will result in a non-cash charge of $580,000 to write off the original issuance costs. Eric?

Thanks, Simon. We're encouraged by our first quarter performance and continue to feel the year will deliver results in line with our original forecast. We're off to a solid start as performance exceeded our operating forecast in the midpoint of our FFO guidance. As a home-buying market recalibrates to the new mortgage lending environment, we expect that tougher conditions in that component of the housing market will translate into improving fundamentals for our portfolio of apartment properties. Our expectation for stable occupancy and improving pricing power in our existing portfolio along with steady new growth remains intact. That's all we have. So if you'll open lines for questions, we're ready.

(OPERATOR INSTRUCTIONS) And our first question comes from Dave Rodgers from RB Capital.

Hey, guys. Dave Rodgers, RBC. I didn't hear, Simon, if you made a comment during your commentary about the contribution from some of the utility collections that you were really aggressive on last year year-over-year. Is that continuing to add to earnings? And will that kind of dissipate throughout the course of the year?

That's a good question. I didn't actually comment on it Dave. Utility collections have -- it was a initiative we put in place last year to improve the utility collections. Where we went from having a third party collection to starting to collect it ourselves. I believe collection rate improved substantially. I think, Tom, and Drew, went up to about 90% if I remember right.

And we saw most of that gain in prior quarters. So now we're just sort of a stabilized level on that with a few new initiatives that'll give us--.

We're going to be taking the fee up a little bit on trash removal this year, which will add a little margin to our program. But that -- for us at least on a year-over-year basis, those programs have pretty much matured.

We did have one new initiative that, Drew, you're sort of pinpointing, which is we were not getting some all the fees that were owed us on early moveout. People terming their leases early. And that's been a pretty good window.

Yes, I can -- this is Drew, our fee income's up substantially this year from that. And back to the original question. Our net utility expenses are down about 10% through the first quarter. That's net after reimbursement.

Yes.

Okay. Okay. During April, you made a lot of comments about kind of period end occupancy in March it was relatively strong. Did you see that continue in April? Anything that gives you pause? I think one of your competitors made a comment that April was weak. And we see that in the Southeast a little bit.

No, it was relatively encouraging. We're still behind last year. But the GAAP of April last year to the GAAP of this year is 20 basis points. So some actual improvement over the quarter ending in March.

Any impact or any early indications on the impact of LRO on your results this period? And how that'll contribute to the rest of the year?

It's really just rolling out this quarter. And so as Simon mentioned his comments, we certainly on the test properties that have been up and running on it for 9 months versus the properties that we're using as a comparison, the results continue to meet our expectations, but the overall portfolio impact really won't start until the third quarter.

Final question. In terms of the repositioning of some of the properties you've undertaken, you're seeing 14% rent growth. Have you kind of thought about the implications of rent to income kind of thought about the implications of rent to income ratios for some of your tenants as you continue to push that number up aggressively? Is that something you're contemplating in the positive outlook you have for the subprime market?

Well, certainly what we do is -- when we initiate this initiative, this project on any given property, we take a look at the demographics and the neighborhood and the profile of the residents that we have there and think through the implications of what you just said. And the 10,000 units that we feel like that we've got an opportunity to do this on at our, in our portfolio, we think can sustain the rent bumps that we would need to get without pricing us out of the market that we're trying to serve, if you will.

I'd add that of the 1600 or so units that we renovated so far, we've leased 1500 of them. 97% of our units thus far have been leased.

Okay. Okay. Well, thank you, guys.

Thank you, Dave.

Our next question comes from Nap Overton from Morgan Keegan.

Good morning. I missed your explanation, Simon, I think you talked about kind of a one time repair and maintenance programs. Could you just tell me again what that was?

Sure, I'll let Drew handle that.

Yes, Nap, during the first quarter and for sometime now we've really focused on a couple of things. Number one is the time it takes to turn a unit. And secondly, we focused recently on increasing level of our inventories as we headed into the busier part of the leasing season in the second quarter. So we saw -- we made ready 428 more units I think as Simon mentioned. We saw good benefit from that in the first quarter. We saw our sequential occupancy improve 70 basis points, which is really double our sequential improvement average when you look back to 95 -- all the way back to 95 to 96 to that period of time. Also expect some benefit in the second quarter where as we as I mentioned head into our busier leasing season or where we rule out LRO which is going to focus our leasing teams on generating traffic and we want to have certainly an ample supply of inventory as we head into that period of time and into that initiative.

And so in effect, Nap, I think we reckon the costs of about $330,000 of getting ready 428 more units than we would have normally done. And so we would expect since we've made that one-time lift that that's kind of moved forward some expense we would experience in Q2, Q3. We've kind of moved that into Q1.

Okay. And then the two properties you talked about having under contract. Are those -- do you care to share with us whether those are new properties or old properties and whether they are properties in need of substantial lease-up?

They are both stabilized properties that have repositioning upside opportunity.

We'll present both of them to our joint venture partner and would expect one or both of them to likely go that way.

They do fall into the criteria where fund 1 would be eligible to.

We don't -- I guess quick answer is we don't expect any drag as a result of lease-up or anything like that for sure.

Okay. And then the last thing, this is probably a Simon question is the property manage -- what shows up in the property management expense line increase substantially. The combination of that and what you show is G&A expenses is still pretty much in line with which one would -- what one would expect. Was that just a shift in accounting internally?

It was not due to a shift in accounting, Nap. The property management increase was driven a lot by bonus expense and by F&E tax, which sort of address F&E tax. F&E tax was about and by F & E tax, which sort of $0.250 million. Bonuses, it was just that we had more -- we have more operating -- more bonuses for the operating people because of the stronger performance than we anticipated at the properties. And that was -- that was really the reason. We also had a credit last year from medical insurance expense of $300,000, which we had in the first quarter of last year that we didn't have this year. Combination of all of that kind of scrambled it a little bit.

Okay. Thanks.

Our next question comes from Rob Stephenson from Morgan Stanley.

Good morning, guys.

Hey, Rob.

On the units, on the 400 and some units that you guys made ready, did you guys do any repositioning there, as well? Or was that strictly just unit turnover stuff?

It was really just unit turnover stuff. And recognize that there were two things that happened in the quarter that caused the blip up in expenses. One is we got 428 units ready. 428 more units ready in Q1 this year versus last year. We also got them ready a lot faster than we typically do. Again, the idea was to move forward some of the get ready effort from Q2 into Q1 just so we go into Q2 with a little stronger position. And we frankly also just had some ramp-up costs as we work to change our model a little bit how we go about handling the turn process. But we're pretty confident we're going to see this moderate back down in Q2 and forward over the course of the year with the net goal of working to keep our expense levels in line with what we historically have done, but yet also work to get more inventory ready quicker so that we're able to close that gap between effective and physical occupancy and thereby drive down vacancy loss.

Are you guys doing anything? Did you do anything here that's would wind up seeing turnover costs as you move forward either go down in cost or down in terms of time?

That's the goal. Not only to capture lower vacancy loss, but also to drive more efficiencies in the term process. And what it really gets back to is how we manage the delivery of unready units to our get ready team and really start to leverage that fixed cost we have on site in staffing and effectively get out of contracting out labor or contracting out costs to turn apartments. And so this whole inventory management cycle is something we're spending a whole lot of time thinking about and refining. As a result of MRI and a lot of the new tools we have in place at this point, we're able to really refine our process. And it really starts with how we manage lease expirations, how we staff the properties, and just how we managed -- we're tracking on every property now, literally how many days it takes when someone walks out, a resident moves out the door, until our maintenance team is back in there and working on the units and we're tracking it pretty aggressively now. There's some real opportunity we think here and in Q1, we accelerated the process a little bit and ran into some one-time things that we don't think we'll repeat later this year.

Okay. And then I think you guys mentioned that your moveouts to home purchases was 29%, and that was down 70 basis points?

That's correct.

Were there any markets where the fall was especially noticeable more so than others?

I don't think frankly we analyze that by market.

We can take a look at that and get back to you on that, Rob.

Okay. And then, lastly, is now a good time in your mind to be buying assets in Phoenix and South Florida? It looks like right now there's a lot of concern about the condo markets and units coming back as rentals and such. Is that presenting an opportunity at this point?

Well, certainly in Florida we're seeing more opportunity in terms of deal flow. But frankly, we haven't seen pricing really adjust to any sort of paradigm that assumes that the markets are going to be weaker in some way over the next 2 to 3 years. We think that there's definitely going to be some moderation over the next 2 or 3 years from what we've seen over the past 2 to 3 years. So for the last 2 or 3 years, every time an opportunity came to market in either Phoenix or Florida, the condo converter snapped it up and it just wasn't even available to us. At least that is out of the equation at this point. We're seeing a lot more opportunities. But at this point, at least the pricing remains every bit as aggressive as we've seen over the last 2 or 3 years. And so I think it's going to take a little time still before the opportunities really improve.

Okay. Thanks, guys.

Thanks, Rob.

Our next question comes from Tony Howard from Hilliard Lyons.

Good morning, Eric and Simon.

Morning.

I first need a clarification. Simon, on the new formatting of the 3-tier system, was past data changed or will there be an update on that?

Tony, this is Al, the data didn't change. What we did was we really created a weighted index to better segment our markets by the growth characteristics. In the past we've used market size exclusively, small, medium, and large. Really we found that that didn't capture some of the small to mid-sized markets that really operate or grew like large markets. What we did was we put together an index that's base on absorption which is in demand over projected supply over the long-term 5 to 10 years, brought in affordability based on the housing and affordability index. Then we do have still a pretty strong leg to market size because we think that's important, the overall risk of the market in terms of the objectives being met and capital being attracted to the market. We blended that together and our high growth markets of those markets that we expect to outperform over the next 5 to 10 years.

I understand that, but past data, has that been changed to the new format?

You're seeing year-over-year comp performance.

What about say 2006 for the full year?

Did we put that -- I don't believe we put it before?

I think the supplemental schedule information you look at -- you're looking at in our earnings release is apples-to-apples. What we can do is go back and recalibrate 2006 in total if that would be helpful for you, we can certainly do that.

Just the full year would be fine.

Yes, we'll do that.

Okay. Also another question. Simon you mentioned as far as the benefits of the integration of the yield system. Clarify to me, though how much of actual should you not only just from the benefits but actual as far as the reduction in the amount of expenses on a quarterly basis. How much has that been?

Well, the LRO system -- we've actually installed two systems. One is kind of a front office system, which is MRI, which we really did 3 years ago, or 2 to 3 years ago. And we've kind of continued to see the full benefit of that really roll out over 2, 3 years. And I don't know that we saw kind of -- it's hard to kind of pinpoint exactly an expense reduction associated with that. LRO will be strictly revenue driven. And as we've said, we've included in the back half of the year about a 1.5% lift in revenue from that. No impact on expenses, except that we're going to incur about $0.5 million or so annually of additional G&A and depreciation expense associated with the installation of the system. And our test results would indicate that we had almost 3% lift in the 7 test properties compared to the 7 control properties. So those are kind of the parameters we're working with, Tony, if that's helpful.

Okay. Yes. Third question on the balance sheet, there was an increase in assets held for sale a quarter since the end of 2006. And you mentioned, though, that there were some properties that were sold like yesterday?

Yes, that's correct.

So that will reduce assets held for sale?

That's correct. That's correct. So we will have in the assets remaining at the end of the second quarter, we should have just two assets in the held for sale in the held for sale bucket.

And how many were at the end of the first quarter?

It would be four.

Okay. As far as the two sales then, was there a gain?

Yes, there will be a gain on sale associated with those two assets. And I don't have that in front of me, but I'll get that to you.

Okay. Final question, on your equity program that you have, how much longer will that continue? And do you expect the increase in the number of shares outstanding for the year from that program?

Well, the answer to that is, we have it turned off right now because we sure don't like the stock price. And the -- of course the use of the program depends on available opportunity that we have some just knockout investment opportunities, which we think we substantially improve our returns on equity, really do from this joint venture that we're in the process of putting in place. Then that may give us some returns that we think that it's worth using the continuous equity plan. But the present time we've got it turned off. And we've got adequate capacity on the balance sheet to fund this year's -- this year's business plan and plan to do that unless stock price recovers substantially or we see a dramatic turn around in returns we can expect from other investments.

Okay. Thank you, much.

Our next question comes from [Paula Plaskon] from Robert W. Baird.

Good afternoon. I'm pinch hitting for Thayne Needles this afternoon. Just to follow-up on Tony's last question, should you reactivate the plan will those future orders be filled from new shares or market purchases?

They will be from new shares.

Okay. Secondly, the release detailed the balance sheet information that's evidenced by the better coverage ratio and the 500 basis point decline and debt to gross real estate assets. What's the ultimate goal of where you're trying to take that on these or other balance sheet measures?

That's a really good question. We're very happy. We think we have the balance sheet where it needs to be right now. We think we could, which is well within or better than the sector median, and we were recently told by a banker that we would probably be rated somewhere around Baa2 if we were to replace some of our mortgage debt with some unsecured debt. We don't have any plans to secure rating at the present time. But we feel very comfortable with our balance sheet where it is. We do think we could obviously we've run the Company very successful with higher leverage in the past. But our goal is to -- is to keep it more or less where it is right now. Certainly if the stock price continues where it is, we can I'd say add about 200 basis points of leverage and fill our business plan. Basically we are where we want to be.

Okay. Great. Thanks. Couple questions for Eric. With the JV structure and your focus on value creation plays, does that bring you an opportunity to enter new markets that up until now have just been too competitively priced for acquisitions? Or do you envision the JV remaining focused more on your existing markets?

In general, we think the JV will stay focused on the Sun Belt region markets. We continue to like our regional focus and don't really have a plan to change that. You're correct in that the JV platform certainly brings us some advantages in the acquisition environment that we have not had in terms of slightly higher leverage and the opportunities to create more return on every incremental dollar capital we put out as a result of the fees. So we do think we'll be more competitive. But in general, we don't think that we're going to take that competitiveness and really change our geographic footprint in any material way. We're going to continue to look a little more Southwest. But for the most part stay Southeast, Southwest in our market focus.

Okay. Thank you. And lastly, how would you compare the Trammel Crowe JV asset that just sold at the sub 5 cap rate to the remainder of the Dallas and Austin portfolios?

I would say that on average that particular asset in Dallas that we sold was in a superior location, right at the toll way in north Dallas. It was about a 10-year-old property. Average age of our portfolio is 14 years of age. So it may be -- it may be slightly newer, but we've got in Dallas and Austin it's going to -- a range of product is going to be similar to the rest of our portfolio. So it's going to be in that 14 to 13-year age bracket. I would say that the property we sold in Dallas may be a slight notch above the average, but not appreciably different.

Okay. Thank you very much, gentlemen.

Thank you.

Our next question comes from Richard Anderson from BMO Capital.

Hi, thanks, and good morning, everyone.

Hey, Rich.

I just wanted to talk a little bit about LRO. I got on the call late, so my apologies if I'm sort of asking the same question. But what sort of -- I know you test marketed -- you're test marketing 7 and assets but what sort of conservatism do you have baked into these second half expectations as it relates to the impact of LRO? How are you sure that 7 assets will be representative of your entire portfolio?

Really two answers to that, Rich. It's a good question. One is that as you know obviously LRO was developed by Artisan Smith. And when they came in, I think they told us to expect a 2 to 4% one-time lift. So that was really -- that's the most important important factor.

But they're selling it to you.

They're selling it to us, that's right. But that was their experience. But we've generally found them that, to our experience has been that they pretty much is what they've told us basically has happened. In our seven test tier properties it actually confirmed that. So there is -- so that's what we're basing our forecast on, which takes half of that amount into consideration for the second half year.

And the other thing I would tell you, Rich is that in our tests, we were very careful to include representation of product and market size of our portfolio such that we're testing it at small properties, big properties, small cities, big cities, and so we were real careful to try to get a fair representation of the portfolio. So a combination of a valid sample or a valid test case in extrapolating that against the portfolio we think has some validity to it. We're 9 months now into running the system on these test properties and the results continue to be very much in line with what Simon just described.

Let me make sure I've got this right. You've got your experience thus far and you've cut that in half in terms of what your outlook is for the second part of the year?

That's correct.

Now, let me ask you something about your tenants. How -- do you find that your tenants are getting smarter about the business in terms of rents and all that sort of stuff?

Well, first of all, we call them residents not tenants.

Okay.

No, I'm just kidding. I would just tell you that, I don't know if they're getting smarter per se, they're certainly getting more Internet savvy and they're certainly demanding that we do more of our business over the Internet, which we're glad in planning to accommodate that.

But are they smarter in terms of when you're trying to push rents -- don't you sort of want stupid tenants?

Well, I think that to some degree we can only be as smart as our dumbest competitor, I guess to some degree because this is somewhat of a highly competitive business, obviously. What we find is residents are still going to come in and they're going to shop us and they're going to compare us to some degree to our peers in the local submarkets where we're serving or where we're operating. And I think that at the end of the day quite honestly, it's not so much a success of rolling out, capturing the lease and capturing the applicant is not so much a function of smart or not as much as how effective we are in terms of how we sell -- sell the property and the enthusiasm and the exuberance that our leasing folks have and the training that they receive is really what wins the day. And I think that that -- at the end of the day, it's not so much the success of rolling out, capturing the lease and capturing the applicant is not so much a function of smart or not as much to how effective we are in terms of how we sell the property and the enthusiasm and the exuberance that our leasing folks have and the training that they receive is really what wins the day. I think that those variables are applicable regardless of sort of the profile of the person we're talking to.

Okay. Just a quick -- a separate topic. Your guidance range and I'm new, pretty new covering you guys, but a $0.10 range for the second quarter, just wondering what the thought process is to have like a range for quarterly guidance that you can run a truck through?

That's a really good question. Rich, I get that question from several people. And the answer really comes down to the fact that a couple years ago we had a couple quarters where we blew through the top of our guidance range and our audit committee instructed us to widen the range of our guidance. We said we would and we went on. And that's really what it comes down to. That's why we keep a pretty wide range.

Okay. Thank you very much.

Thanks, Rich.

(OPERATOR INSTRUCTIONS) I'm showing no further questions at this time, sir.

Okay. Thank you. And if you have any other questions, feel free to call us. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today, you may all disconnect and have a wonderful day.