Mid-America Apartment Communities Inc (MAA) 2008 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 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 this morning 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 to point out that as part of the discussions this morning, Company management will make forward-looking statements. Please refer to the Safe Harbor language included in yesterday's press release and our 34-F 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 morning's call can be found on our website. I will now turn the all over to Eric.

Thanks, Leslie, and thanks for calling in to our first quarter earnings call. As outlined in yesterday's release, Mid-America is off to a terrific start in 2008. Strong first quarter results support our belief that the Company is poised to deliver another year of solid performance. Within our markets and portfolio, steady employment conditions, minimal new construction starts, and a lack of pressure from vacant single family and condo product drives our expectation for steady NOI and FFO growth this year and into 2009.

Employment trends in those markets where we have higher concentrations such as Houston, Dallas, Atlanta, Jacksonville and Memphis continue to show positive job growth trends and overall steady employment conditions. While the research we all read supports that job growth is indeed slowing from last year's growth rate, we continue to believe that the employment levels in our markets are likely to hold up pretty well and at this point we don't see any evidence developing for significant job loss. From what we are seeing in our leasing offices, and some markets, indications are the leasing market environment will remain stable as we head into the busy summer leasing season. Of course, to some degree, demand levels are also being supported by the pull back in single family home buying. It's hard to tell how much of the slowdown in job growth is being offset by the pullback in home buying, but there's clearly some offset and I expect that it will vary significantly by market across the country.

Further supporting what we expect to be continued net positive absorption trends is a pullback by developers in starting new projects. Most of the developers we talked to are clearly having a difficult time securing financing and also having a real challenge in making their numbers work when they can secure financing. I continue to believe that the necessary components are not in place to support any sort of significant ramp up in new development activity across our markets and expect that it will remain so for some time.

Now, if one wants to forecast a more severe slowdown, in the economy, in a meaningful deterioration of employment levels as the year unfolds, we continue to believe that the overall -- that overall the apartment business will avoid the severe collapse that occurred back in the 2002/2003 time frame. The lack of new construction pressure and a return to a more disciplined mortgage financing market will provide some continued relief unlike the 2002/2003 downturn. As you may recall, Mid-America's regional focus and diversification held up as one of the stronger performers during this very weak -- period of very weak fundamentals for the apartment business. So while some moderation in job growth is occurring, there are other cross currents at work to keep us comfortable, that leasing fundamentals within our portfolio are in pretty good shape as we head into the busy leasing quarters of Q2 and Q3.

Looking more specifically at some of the performance trends in Q1, total walk-in leasing traffic was up 3% over last year's strong performance. We continue to see an explosion in the growth rate of folks initiating contact with us through the Internet and via email. Traffic in these two areas more than doubled from Q1 last year, and now represents close to 40% of our total traffic. We expect this trend to grow with long-term positive implications to our leasing and marketing cost efficiencies.

With the volume of leasing traffic running higher than last year, and closing ratios strong, the average days to lease vacant units across the portfolio declined to 15 days in Q1, down from 19 days in the first quarter of last year. That's a pretty meaningful metric and has positive implications for improving year-over-year effective occupancy and lowering vacancy loss. In addition to these positive front door trends for the third consecutive quarter we saw move outs due to home buying closely decline as compared to the prior year. Turnover attributed to buying a home declined by 16% in Q1 versus last year. Additionally, move outs to rent a home only increased by 3%, or an insignificant 4% of all move outs as compared to last year. We remain comfortable that Mid-America's portfolio is not materially exposed to the shadow market of vacant single family homes and condos that are pressuring apartment fundamentals in a number of markets across the country. With traffic and demand levels running higher than last year, same store physical occupancy at the end of the first quarter was a very healthy 95.6%. 70 basis points higher than the same point 2007 and up 80 basis points from year end. We expect to see this trend continue. In fact, we closed April with same-store occupancy ahead of last year by 65 basis points at a strong 95.3%.

In addition to the solid occupancy results, in Q1 leasing concessions declined by a significant 46% and helped to drive effective pricing on a same-store basis up 2.6% over the prior year. Our property management operation continues to become increasingly knowledgeable in using our new yield management program and we have been very pleased with the ability to more actively manage pricing and revenue management decisions on site.

Another area of performance that we have been closely monitoring for any signs of weakness is collections. Again not only did we see -- we saw no indication of performance deterioration in this area, and in fact, overall performance on net collection loss improved in the first quarter as compared to last year. Current month uncollected rents held steady in Q1 as compared to last year at 1.1% of total net potential rent, however, as a result of additional system enhancements and procedural changes recently introduced the recovery of prior month collections and collection agency recoveries improved a significant 28% over last year, and as a result, our total net collection loss in Q1 improved to just 0.4 of 1% in the first quarter, which is down from 0.5 of 1% last year, this result marks another quarterly performance record achieved in Q1. In fact, it's the strongest net collections performance we have captured in our 14-year history and is another example of an area where retooled systems and practices have made a significant positive impact to our performance.

So with occupancy running ahead of last year's strong performance, pricing power intact and no signs of deterioration or collections we continue to feel pretty good about our expectations for another solid year of performance. Simon will provide additional insights on our updated earnings guidance for the year. But in addition to the overall stable leasing environment, we continue to capture positive momentum from several new enhancements with our operating systems, including the recent rollout of a new purchase order system and expanded capabilities for on-site operations to more actively manage their expenses. Also our kitchen and bath upgrade initiative is continuing to capture terrific results and is making great progress in steadily penetrating a higher percentage of the portfolio.

In the first quarter our renovation team completed just over 800 units capturing an average price increase of 12% on the renovated units. Our guidance this year was based on completing a total of 3,000 units so we are clearly off to a great start against this goal.

On the transactions front, there's some changes starting to take place. From what we are seeing, sellers are slowly starting to recalibrate their expectations. More distressed situations such as a lease up property or high leveraged deals facing refinance and close without financing contingencies. The competition for value add reinvestment opportunities where the buyer can get a little more creative or aggressive with their underwriting remains very competitive and pricing is holding up pretty well. Assuming the operating fundamentals continue to be good we don't expect to see any sort of significant shift in overall pricing but the number of distressed situations brought on by financing issues is growing and we believe that buying opportunities are increasing.

Our goal for the year of adding $150 million of high quality properties on 100% owned basis to our balance sheet is off to a good start with $23 million completed a day. We currently have a new leaseup in the Raleigh market that is undergoing due diligence and we expect to close on this acquisition later this month. We are also very active in underwriting acquisitions for our joint venture, Mid-America fund I with a focus on repositioning investment opportunities. In the first quarter we closed on two investments for $60 million for the fund and are on track to also capture our goal of $150 million of JV investments this year as well. With that, I will now turn the call over to Simon.

Thanks, Eric. First quarter FFO per share of $0.96 was $0.04 ahead of the midpoint of our guidance and a 10% increase over the first quarter of 2007. Excluding the $0.04 per share promote fee from the Pro joint venture that we reported in the same quarter last year, the growth in FFO per share was 16%. The strong growth was driven by excellent operating results and a 40 basis point reduction in our average interest rate. First quarter year-over-year same-store revenue growth was 3.8%, slightly ahead of our internal forecast. NOI growth was 5% which compares favorably to the 4.3% growth we reported a year ago and other than the first quarter of 2006 is the best first quarter we reported in the last 12 years. Fee revenues and reimbursements continue to climb more rapidly than rent at 6.9% and 7.2% respectively as we continue to grow fees and fine tune our reimbursement collection procedures. All of these contributed towards excellent revenue performance.

Same store expenses increased 2.1% over the first quarter of 2007. This was a little higher than we forecast, partly due to the timing of some personnel costs that we expect to moderate during the year. Increasing utility costs were partially recovered through our rebilling programs and repair and maintenance and marketing expenses had some modest reductions which helped to offset some of the cost increases.

Same-store results including 5% -- included 5% revenue growth and 7.9% NOI growth in our high growth markets with strong revenue performance in Dallas, Houston and Nashville, and strong overall performance in most of our other markets. Florida is the only significant area which has shown any weakness but even their revenues increased 0.8% over the same quarter a year ago. Our portfolio is well positioned for the Florida market conditions as we have very limited to supplies with condos and single family houses. We only have one property in south Florida, one in Orlando and four in Tampa, of which two are in protected sub markets. Our biggest Florida concentration is in Jacksonville which has performed well and where we have just one property, Lighthouse Court that is experiencing tough competition from single family housing. Excluding this property, Jacksonville property revenues were up 2.1%. Overall, we expect positive revenue growth from Florida for all of 2008.

In Columbus, Georgia, revenues at our two properties dropped 3%, but we expect to recover as the year progresses. NOI in our three Texas markets is up by 11% and by 12% in our northern Tennessee and Kentucky markets. The strength of the markets and the implementation of yield management software enabled us to reduce concessions in the first quarter on a cash basis by more than 50%, from $370 per move in-a year ago to $179 this year, down from 2.6% of net potential rent to 1.2% which is likely now approaching the stabilized levels. We were pleased the turnover decrease of 1.6% compared to the same period a year ago, from 54.1% on annualized basis to 52.5%. Turnover is generally lower in the first quarter of the year so on a trailing 12 month basis they did 63.6%. As Eric mentioned, the number of people leaving us to buy a house continued to decline, dropping 16% to 25.5% of move out from 29.3% in the first quarter of 2007.

Turning to the balance sheet, our leverage, defined as debt plus preferred to gross assets, dropped by 40 basis points from March of last year to 58.5%. As a percentage of total market capitalization, our debt plus preferred stands at the sector median 48.5% and our fixed charge coverage continued to improve rising to 2.4 from 2.22 in the first quarter of 2007. We have $280 million of unused precommitted credit under our agency and bank facilities of which $160 million is available under in place mortgages and an additional $120 million are committed to our existing credit spreads.

We benefited as treasury and swap rates have dropped and as agency debt securities are trading very favorably, compared to LIBOR. We have $180 million of debt refinancing and swap maturities to address in 2008 of which we completed $27 million in the first quarter. Since quarter end, we have now put in place, a further $100 million of forward swaps, locking in attractive interest rates that will be effective between May and December. We will be working on the refinancing the remaining $50 million of maturities using our Fannie Mae and Freddie Mac credit facilities. As a result we expect to pick up interest savings beginning in the third quarter which is in both our original and our current guidance. We continue to benefit from the fact that 20% of our debt is floating rate, including the 4% that is capped. Mostly tied to very attractive Fannie Mae DMBS rates.

We sold 300,000 shares, raising $15.5 million net of new common equity in the first quarter through our continuous equity program. In April, we sold an additional 350,000 shares raising $18.4 million net. So we netted about $52.14 a share. We will either use this equity together with some debt to repurchase some of the preferred, which will lower our blended cost of capital or if the acquisition environment continues to improve, as we think it may, we will use the equity to fund additional new investment. In either case we anticipate leaving some of the preferred in place with effectively a free call option to use if we choose at some future date. As a reminder, if we take out some of the preferred H we have to write off the original essence cost at noncash cost. This works out to be just over $0.01 per share for each $10 million that we redeem.

Because of our strong first quarter, we've added $0.03 to our full year FFO forecast, taking the range from $3.68 to $3.88 per share. Our guidance for the remaining three quarters which we have outlined in the press release remains very close to the original forecast. We continue to expect property operations to perform in line with our initial 2008 forecast with same-store NOI growth in the range of 4 to 5%, revenues growing 3.5 to 4.5%, and expense growth for the full year in the range of 2.5 to 3%. Remember in the second half of the year, we will have some tough comparisons because of the favorable insurance renewal in July the 1st of last year. And the favorable real estate tax adjustments in the second half of last year.

We do have a few pieces of the forecast that are moving around. We have increased our forecast for same store real estate tax expense to just over 4.5%. This is almost offset by our expectation of moderation from our July insurance renewal that's coming up. Taxes are always one of our biggest areas of uncertainty, at least until we get greater clarity towards the end of the third quarter. Our 1% change in taxes impacts our results just over $0.01 per share. We are now hopeful of a flat renewal of our insurance program on July the 1st and we will be pretty focused on this over the next couple of months.

Compared to our original forecast, lower short-term interest rates continue to help us, although longer term interest rates have moved up. For the full year, we expect interest rates to average 5% to 5.1%. We also will have slight FFO dilution from raising the additional equity that I mentioned. Our new guidance assumes we will sell an additional 300,000 shares during the balance of this year. The net of all of this adds $0.02 to 2008 FFO. We now expect about $0.03 of FFO dilution this year from the likely acquisition of the Raleigh property that Eric mentions because it's in lease up. Combining these items with the $0.04 that we beat our Q1 forecast gives us a $0.03 addition to the midpoint of our full year guidance.

We preliminarily identified our disposition candidates and subject to approval by our Board, we anticipate starting the marketing process in the next 90 days. We think our prior guidance for acquisitions both for fund one and for our wholly owned count and for dispositions seems approximately correct. Eric?

Thanks, Simon. We continue to believe that our disciplined value-oriented approach to deploying capital, diversified in high growth markets across the Sunbelt region supported by a culture that's passionate and our focus on property operations will continue to deliver performance that competes favorably with those strategies focused on high varied markets and large new development operations. Over the last few years, we have made a lot of changes to our portfolio profile, operating platform and balance sheet. All of which continue to deliver record levels of performance for Mid-America.

We believe that at times like these when strategies and platforms are challenged with a more difficult part of the credit cycle, and concerns about moderating market fundamentals, those companies with a history of disciplined investment practices and a strong operating platform are at their most competitive. This is also a time when a value buyer and a disciplined investor are presented with more opportunities. We built a platform that we believe will create a lot of long-term value for shareholders and we are working hard to leverage the platform with additional assets. We've got several new growth initiatives teed up and a platform that is well prepared to execute. We look forward to another year of good results and are enthused about the foundation we continue to build for long-term value growth to our shareholders. That's all of our prepared comments, so operator, we will turn it back to you for any questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first is from David Cohen of Morgan Stanley. Your line is open, sir.

Good morning.

Good morning.

Hey, you guys talked about the turnover declining and you have fewer move-outs due to home purchases and you have more people coming, in I guess, due to foreclosures and stuff. But your turnover actually declined -- I guess not that much, and I guess my question is, are there other reasons, that are increasing in terms of -- this turnover is not down that much, but you are talking about the turnover going down for other reasons. Are there other reasons, other than homes that are increasing to keep this turnover ratio relatively steady? Does that make sense? Not sure it does.

Sure, David. And look, just for the quarter, looking at the only quarter year-to-date, we had 148 fewer move-ins, 225 of them were buy homes. And really the point that had the largest increase was represent increase is 97, offsetting that. And frankly, that's -- that's a metric we're willing to stomach a little bit. We will gladly trade fewer move-outs to home buying for half as many move-outs for rent increases as we pushed out.

So they are just moving to other apartments that are cheaper?

We don't have an answer for you on where they are going from here, when we raise the rents.

Okay. And then you talked about a lot fewer new developments and other developers not being able to get financing. Does that leave opportunity for you to do more development or are you similarly as cautious about new development?

Well, we've always been pretty cautious, frankly, about new development. We are seeing more interest particularly from developers that either have product -- projects teed up or they are in the middle of leaseup and they are worried about their takeout financing, and we are being approached a lot more actively on that front. I don't think you will see Mid-America -- well, you won't. I can tell you, you won't see us jump into new development in a big way, but we are starting to see a lot more opportunities for some very attractive properties in great markets that we'd like to be in where people are coming to us saying, look, we are worried about our financing, or we can't get the financing and let's talk. So -- like the deal in Raleigh we just mentioned and the deal in Houston we bought at the very start of the year. We are seeing a lot more in that area.

So would you likely jump in as kind of an equity partner or would you do a mez with loan-to-own type of--?

We would do it straight up as the owners, the equity. It would be a situation where we come in and just provide the takeout or provide the -- we just wouldn't buy it in the middle of leaseup, like the deal in Raleigh. We are not really interested in going in as a mez lender and that kind of stuff.

We have done, David, a couple of deals and probably do some more where we have gone in on a fixed price contract with a developer on a ground up development, and Phase II was one of those. We have got one of those going on with Copper Ridge right now which is a Phase II also. So we'll probably continue to look for those opportunities and you are right, there may be some more of those opportunities, particularly on a value added basis to take advantage of the situation.

And just a final question, can you just review the $0.01 difference in the $0.03 guidance. You kind of reviewed some dilution from the equity issuance and then lower short-term rates. Can you review some of those pieces again.

Yes, this is Al. I can go over those for you and bridge that for you quickly. I think Simon mentioned the first portion of that is just the $0.04 in the first quarter and I think he mentioned the quart that -- the color on that really is strong operations for the year, mainly interest expense and some G&A being a little less than we expected. Then on top of that the yield curve has changed since our previous forecast and we have a 20 basis points reduction in our average borrowing cost projected for 2008. If you do the math on that, that's another $0.06 per year and then you have offsetting, and obviously the equity that Simon was talking about, the equity we are featuring this year and also the $0.03 on the leaseup property in Raleigh that Simon talked about. If you add all of that down, you get to a midpoint that's about $0.03 higher than the guidance from the previous quarter.

Thank you.

Thank you. Our next question is from Steve Radanovic of BB&T Capital Markets. Your line is opened.

Good morning, Steve.

You touched on dispositions. I guess there were no sales in the quarter. Can you give us a little more detail on what the timing is on the roughly $60 million that you do have targeted?

We will be talking with our Board about our plans on that in another couple of weeks in our meeting and I would expect that we will start the marketing of those properties in Q3, early Q3, late Q2, and get them -- get them done by year end, we expect.

Okay. So more late third quarter or fourth quarter event?

Yes.

And then in general, can you comment on the cap rate environment in your markets, one of your Coastal peers commented they have been seeing cap rates back up, anywhere from 25 to 75 basis points. What are you seeing here in your primary markets?

Well, it's -- it's hard to give you a real fix on cap rates, though, with any real certainty for sure. Transaction volume really follow off there for a while, and it's just now starting to show any sort of movement. So it's hard to give you a real sense on that. I will tell you that operating results and NOIs are holding up pretty well. So we continue to believe that if you see any sort of moderation, really start to take hold in cap rates, that to some degree the improving operating -- or continued growth in NOIs will offset it to some degree. Clearly the high leverage and the highly leveraged buyer in the condo converter out in the market at this p point. That capital is out of the environment, but there continues to be a lot of equity out there looking to deploy in the multi family space, and so at least what we are seeing, there's -- prices are holding pretty firmly.

Probably the only real thing that I can point to is that we are seeing that some of those sellers that are really being impacted by the financing environment, the developers or those that have put together pretty high leveraged deals over the last several years, they are now facing some refinancing pressure. I think that's where you are going to start to see some of the biggest opportunities. But having said that, particularly on the value add deals, that's where we are seeing a lot of capital still actively chasing opportunities, where capital can go in and put a repositioning story on their underwriting. You can get pretty aggressive still with the underwriting assumptions and so the bid/ask spread in those areas is still pretty tight.

But, I would tell you that in an effort to kind of give you some sense of it, I would tell you that cap rates maybe moved 10 basis points on really sort of the value add stop and we think that on some of the more opportunistic plays, where sellers are facing some financing risk, that somewhere upwards close to 50 basis point spread may be taking place. But -- or spread in cap rates taking place. But not -- not a whole lot of movement to be honest with you.

Okay. And then lastly, just back on Jacksonville, I know you had taken out the one lighthouse property to revenues up 2.1%. What is rent growth looking like? If you took that property out. I mean, is it still pretty good? Is it still around 2% or is there some weakness in that market in Jacksonville?

It's -- it's primarily that. Rent growth was, I think with it was 0.7. And that property is holding us back a little bit on rent growth and I have that stat--.

Excuse me.

I was just going to say, to give us some sense of what Florida, in general means, overall our effective pricing performance was 2.6% up. You take the Florida properties out of the equation, total effective pricing growth was 3.3.

So Florida is sort of the anchor on overall growth.

Okay. Thank you.

Thank you. Our next question come s from Michael Salinsky of RBC Capital Markets. Your line is open, sir.

Good morning, guys and congratulations on a good quarter.

Thank you, Mike. With regard to Fannie and Freddie, can you talk to us what you are hearing from them in terms of their willingness to lend, spreads, just what you're hearing from them? Yes, Mike be glad to give you some thoughts on that. As you know, we've had a relationship with really both agencies for a long time. That's been our primary borrowing platform for some years. We talked to both, been at their offices over the last few months. We really expect that they will continue to be committed to both the multi family industry and in us, in Mid-America because of our relationship. And really, I think the key as you think about it, lending to multi family meets their charter. Right now it means they're going through a tough time, not only a profitable part of their business but it's also a very low risk part of their business. We expect them to be continued to be committed and we are hearing that they have got the capacity they need and they will be committed to the industry and especially the people who have relationships with them and we have worked hard to create that. I think we are being rewarded for that now.

Of course, Mike, as everybody said, spreads are widening, but absolute -- because the absolute drop in treasury and swap rates on a year-over-year basis has helped a lot, but still the spread is widening. Probably the overall borrowing cost on a 7 or 10 year is probably up 20 or 30 basis points, something like that.

Yes, just a little color. I think both agencies have meetings each week to adjust and look at their credit spreads. For a while their spreads were going up 5 and 10 basis points every week. I think they are obviously at a much higher level than they were, but they are up and down, they're at a much higher level than they were but they're starting to stop and hopefully maintain or come back in the future. We will see how that plays out.

For the moderate level borrowers like us we feel we are in pretty good shape.

Also, if you think about it, as Simon mentioned, we have about $280 million from the capacities -- or 250 from the agencies remaining that we have historic credit spreads locked in on, Mike, from our credit facilities that mature between 2011 and 2018. So we feel pretty good about that too.

Just a quick bookkeeping question then. Will the asset you jointed to the joint venture fund in late March, what was the cap rate on that?

Well, it's -- it's not a particularly -- I don't know what it is. The guys are looking for it right now, but I can tell you, of course, this is a repositioning deal. So we don't really get that focused on the ingoing cap rate.

It was the ingoing cap rate was 5.75%.

In terms of -- in terms of your redevelopments you guys had a pretty good activity there in the first quarter. Is there a possibility for upside to that later in the year?

Michael, it's Drew Taylor, typically we expect to do 20% or so in the first quarter. We did a little bit -- 20% of our total units that we planned for the year in the first quarter. We planned 3,000 units this year. We did 800 so we are a little ahead of pace there. The production is good. The acceptance is good. We are seeing the 12% rent increases that we sort of expect in the programs and the appetite for the apartments continues to be good. So we'll -- we will do 20% -- we did slightly more than 20% in the first quarter. We will do -- we will ramp that up as turnover increases in the second and third quarter, certainly we'll do more units and we expect to do 3,000 when the year is completed.

More specific, I don't think you are going to see that program ramp up at a run rate much higher than what we planned this year. We continue to think it's pretty important to manage this thing very, very aggressively and watch it carefully and, of course, we are also pretty sensitive to how much dilution, if you will, we are willing to take as we take more units offline for longer periods of time and run up the vacancy lots. So we are pretty comfortable with the 3,000 a year run rate from the execution and earnings management perspective and think that we will probably carry that same run rate into next year but we will look at it more later in the year as we prepare for 2009.

And finally you mentioned the April occupancy rates were up about 60 basis points. How is rent growth performing?

We have still got some scrubbing, since that was really just yesterday and with the recent growth, the way we measure it, just sort of balancing concessions and ARU growth to get to effective, we don't have that number just yet. It's not a clean number, not one we are comfortable in sharing but continuing in a positive year over year.

Yes, I would expect it to be pretty consistent but we will see as we get more color on the numbers.

Great. Thanks, guys.

Thank you, sir. Our next question is from Rich Anderson of BMO Capital Markets. Your line is opened.

Thank you. Good morning. I apologize at the outset. I'm getting in a little late at least mentally to the conference call. Did you -- did you have any comment about a change to your acquisition volume targets? I know it was $150 million, but did you comment on that?

Nothing other than to say that we still feel pretty good about our assumptions. We closed on one deal earlier this year for our 100% owned balance sheet.

How much was that, by the way.

$23.5 million the first one in January.

$23.5 million and we have got another one under control right now in Raleigh.

Right.

So we will see how it plays out. We still feel pretty good about the guidance.

Raleigh is $34 million.

Yes, about that.

Now in terms of the out performance and the good results for the first quarter, were you able to break out how much of that $0.04 was interest expense, how much was operations, how much was G&A? Was it like sort of 30/30/30?

Rich, I think we just gave a little bit of color on that. We will try to detail that a bit more. I think really in terms of performance compared to what we expected the operating performance was strong, it was about what we expected for the quarter. We had projected a good quarter, so the majority of that $0.04 really, more than half was really interest expense and then G&A primarily a little less than we had expected in prior year with the other portion of that G&A.

Okay. Now, Simon, you mentioned the likelihood, at least in terms of how you feel right now about keeping the preferred outstanding and using it as a -- potential redeployment source, if other things don't materialize, is that sort of the mindset right now if you were to do it -- if you were to think it through today, the preferred would sort of not get redeemed?

I think that's a fair way of putting it, Rich. I think we feel, as Eric had mentioned, I think we feel pretty good that we are reaching an attractive environment for investing in some of these opportunities and, of course, the preferred is -- about an 8.3% yield which is about what its replacement cost would be and we will have the free call option. So I think that we probably will leave most of it out if -- if things play out as we think it will play out.

Okay. Same question from the -- acquisition volume I asked earlier. What about on disposition. I think the number was 68. Are you still targeting that?

Yes, we are.

Last question is, the big swing factor for second quarter, $0.10, what is causing that? Is it just the timing of the acquisition.

Well, I think we try to keep a fairly wide range, as you know we always do, and some of that has come from sort of our conversations we had with our audit committee, but I think the big uncertain thing is interest rates and how -- frankly how some of the Fannie Mae DMBS trades are, because that can fluctuate. I think the timing of this Raleigh acquisition who make a difference too, because that would be -- would -- that's dilutive. It's only 40% leased.

That's right.

But those I would say would be the two biggest factors. Now the third one which I mentioned in the call, which we will get further clarity on as the quarter develops, of course, is and, most of you know by now, I'm paranoid about real estate taxes and we start to get more information as time goes on about real estate taxes and that's a big wild card. As I mentioned for every 1% that we -- that I'm wrong, that's with $0.01 a share. And you have to catch up if you are either over or under for the full-year accruals, but those I suppose would be the three items, Rich, that would cause us to kind of be wanting to change from the midpoint of the guidance.

Okay. Great. Thanks, very much.

Thanks.

Thank you. Our next question is from Sheila McGrath of KBW. Your line is opened.

Good morning. I was wondering if you could give us an update on the development project, how the leaseup is going versus your expectations and pro forma rents, et cetera.

Sheila, hi, it's Tom Grimes. How are you doing.

Good.

Good. Things are honestly just rolling along on all of them. We are pleased with where the pricing is, and we are pleased with the way the leasing has gone. Brier Creek's Phase II, 71% occupied, 76 leased and on target from a pricing area. And there's been really no cannibalization of Phase I which is 97 occupied right now. And then St. Augustine and Copper Ridge are yet to -- we haven't started leasing those two yet. So that's as far as the pure wholly owned development that we are doing. Those are the -- those are the three biggies.

Okay. And how is the leaseup going on the Phoenix property?

The Phoenix property is coming along. We are excited. It broke the 90% barrier. They are 91 occupied now, 94 leased. So we have been a little behind the curve. I think we mentioned on start-up, we started a little behind the curve when we bought it, but given the sort of head winds in the Phoenix market, we are very pleased with how it's leased up and stabilized.

Okay. Great. Thanks.

Sure. Thank you, Sheila.

Thank you. Our next question is from Andy McCullough of Green Street Advisors.

Good morning. You touched on this a little bit but can you give us a little bit more color on Florida and where you think we are in the cycle, there both in Jacksonville and the other markets.

Sure, Andy, I will take a quick stab at that. I think we are -- we are most concerned about on the shadow supply type issues under south Florida and in Tampa and Orlando, mercifully, we have light exposure in south Florida and our product has been somewhat protected there because of a -- its suburban location and a very, very good school district along with a very good operating team. In Tampa, we've had sort of the benefit of derestricted neighborhoods on the northern two and then the other two that are in more of a wide open market, we've just had a little bit better performance in terms of managing the gap between physical and effective occupancy and closing that. And frankly, we've had the benefit of 16 units come back online that were on down status from a fire. The other places, Jacksonville, we've hit on before with the turnover primarily focused at Lighthouse Court, our southernmost asset. What we are seeing about that, that's a little encouraging, the whole -- the reason the property is running behind us because move-outs of home buying and house renting. That was particularly evident in the fourth quarter.

We are sort of pleased to see that moderating at that property specifically in the first quarter and while performance was not great there, they were 160,000 behind last year. We saw some recovery take place as those trends moderated occupancy grew so we are hoping it's on the rebound a little bit. And then the -- we are also seeing some weaknesses in places like Melbourne and Ocala, but with one asset there, in each of those, where -- we're coming along. So Florida -- Florida to me feels a little better. We are certainly learning to -- we can complete much better today than we could a year ago. We've leaned our organization up, and we -- we're feeling better about the way we compete. It's hard for me to call the bottom of Florida yet. I just don't have that kind of insight, Andy, and I apologize for not giving you a firmer answer on that.

That's helpful, thank you. And one more housekeeping item, what was the NOI for the quarter from Brier?

From Brier Creek? Phase II or Phase I, Andy?

Development.

Okay. NOI for the quarter on Phase II on development was -- it was about 7% ahead of where we thought it would be. It was $232,000.

Okay. That's it for me. Thanks, guys.

Thanks, Andy.

Thank you, sir. We have a follow-up from David Cohen of Morgan Stanley. Your line is opened, sir.

Just a couple of follow-ups. Can you talk about just the St. Augustine project? It looks like you pushed back the completion and the stabilization date. Is that just due to market conditions or did I miss something?

No, David, it's Drew Taylor. Essentially we had some construction delays at St. Augustine where we had some soil condition issues to start the project that delayed it slightly and then frankly, there's been some rain down in Florida, which has delayed construction there, but it's nothing to do certainly with our expectation of how we think the project is going to do. It's just sort of off to a bit of a slower start than -- than we expected.

Did that impact your IRR expectations for the project?

It doesn't. I think it increased our capitalized interest costs just a little bit but we have contingencies that are going to cover sort of that. So that the IRRs intact. We expect it to be 7.5% still.

Okay.

NOI stabilized yield at 7.5 rather.

This is maybe an i.e. question, but when you do redevelopment, what are the rules in terms of capitalizing the units that you are redeveloping? Is sounds like you keep them in service, but what are the rules in terms of the capitalization?

Dave, we have eight properties we pull out of the same store and really we pull them out of the same store if there's a significant rehab.

Yes.

If we are going to renovate 50% more of our terms, and we are going to spend more than $6,500 a unit, we pull it out of same store.

And if it's a lighter rehab, given those criteria, we keep it in same store.

In terms of same store, but does it still impact your income statement?

No, it doesn't. Let me put it like this taking units out of service, yes it does impact our income statement because the units are going to be down during the redevelopment period. So we don't capitalize any costs associated with the down period, that gets expensed through the P&L statement. And now, the only possible impact on the P&L statement is that, -- is that as part of the redevelopment process, inevitably some normal rehab -- some normal turn costs may get capitalized, but generally, that's pretty small. And so -- but we do not, if you like capitalize any costs associated with units that are taken out of service. That's expensed through the P&L.

And just last question, Greenville seemed particularly weak. Can you touch a little bit more on that?

Yes, sure. That's really driven by our larger property there, our largest property there. And Eric touched on this a little bit earlier where we have -- we have a significant rehab going on at that property. And we just got a little bit of dilution caused by that. I mean, we are happy with what Greenville is doing, but we are incurring a little more vacancy loss there than we normally would because of the renovation project.

Great. Thanks a lot.

Thank you. Our last question is from Steve Radanovic of BB&T Capital Markets. Go ahead, sir.

Yes, hi. Real quick on the developments, can you just remind me what the yields are on those three developments, if they moved at all.

This is Drew, Steve. They have not moved. They are intact and what we expected them to be when we -- before we started. Brier Creek, which we finished but is still leasing up is 77. The other two are mid 7s NOI, stabilized yields both for St. Augustine and for Copper Ridge.

Having been in the development business, Steve, one thing we learned is to have a bit of a cushion in there to protect us against Murphy's law. We are still, well within the cushion, thank goodness.

Okay. Great. Thanks a lot.

Thank you.

Thank you, sir. There are no further questions at this time. Please proceed with any further remarks.

No further remarks. We appreciate everyone being on the call. Call if you have any questions. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect, and everyone have a wonderful day.