Mid-America Apartment Communities Inc (MAA) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And thank you for participating in the Mid-America Apartment Communities fourth 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, Tyrone, 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 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 34 (inaudible) 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'll now turn the call over to Eric.

Thanks, Leslie and good morning everyone. As reported in yesterday's earnings release, Mid-America ended 2008 on a positive note, despite a challenging market environment. Funds from operation for the fourth quarter were $0.01 per share ahead of the mid-point of our guidance. For calendar year 2008 FFO per share grew by 5% and importantly, was only $0.02 per share below the midpoint of our original guidance. This is worth noting, given that our original 2008 guidance issued last February did not contemplate the significant deterioration in leasing fundamentals that occurred over the last few months of the year. Nor, did our original guidance assume we would raise $104 million of new equity during the year. Achieving 5% growth in FFO per share and performing largely in line with our original expectations despite these challenges, reflects a number of positive aspects about Mid-America's strength and stability in portfolio strategy, operating platform, financing strategy and our approach to deploying capital. These same strengths are what now enable Mid-America to be well positioned for what will obviously be a more challenging operating environment in 2009. As we consider the forecasts for 2009 we believe that, consistent with the last downturn for apartment fundamentals, Mid-America will weather the weaker leasing cycle better than most. There are several aspects to our earnings platform that enable Mid-America to deliver strong financial results during up-cycles and to better weather down cycles without putting the balance sheet at risk, without writing off significant asset value and without raising real concern about the dividend. We were able to demonstrate some of these strengths in the challenging fourth quarter just ended and believe they will continue to support our performance in 2009.

The first key attribute to our earnings platform is of course our portfolio strategy. While it's clear that this recession is touching most every employment sector, Mid-America's diversified market profile also provides the solid diversification across various employment sectors and avoids significant exposure from job loss from any one particular industry. And somewhat unique to Mid-America's strategy among the other multi-family REITs is of course our heavier allocation to secondary markets. As demonstrated during the last downturn and as demonstrated in the fourth quarter, Mid-America's secondary market segment held up comparatively well. Our portfolio, having avoided significant concentration in some of the worst single family housing markets, is, we believe, going to continue to be a net beneficiary of the long-term correction under way in the single family housing market. We continue to see an overall decline in resident turnover in the fourth quarter with our largest drop in turnover once again occuring in those move-outs due to home buying. We expect our portfolio strategy focus on the Sunbelt region's higher employment growth and diversified across both primary and more stable secondary markets will demonstrate more resistance to the pressure of the recession, and also provide quicker recovery.

With the access to new development capital very, very limited and expected to be so for some time, the supply side of the equation is not going to be a pressure point in most of our markets for at least the next couple of years. Taking a look at our markets and expectations for 2009, we expect that we will see our biggest challenges in Atlanta and Jacksonville. While Phoenix will also be a challenge, we of course only have two properties presently in that market. Markets that we believe will continue to hold up comparatively well are Dallas, Houston, Raleigh and a number of our secondary markets such as Jackson, Little Rock, Tallahassee and Lexington. On a positive note we were encouraged with occupancy results in January as same store physical occupancy increased 70 basis points from year end and we ended the month at 94.2%. In addition to the strength of our portfolio strategy, we're very encouraged by the continued progress and capabilities of our operating platform. We believe the tools and capabilities we have in place, particularly in our secondary markets, provide a real competitive advantage.

During 2009, we have a number of additional new initiatives we plan to roll out including a revised platform for billing rent and utilities, a new bulk cable initiative, enhanced web based leasing and prospect follow-up tools and improved inventory get ready protocols. We made several changes in our collections platform during 2008 and continue to see strong results. Despite the deterioration in the economy in Q4, net collection loss in the fourth quarter was only 0.4 of 1%, a record performance for the Company. This speaks to both the strength of our screening and collections operation, and also the quality of our assets. Our unit interior and property redevelopment initiative made great progress during 2008, and captured very attractive returns on the capital invested. Given the weaker leasing fundamentals expected in 2009, we are planning to moderate the program this year, and are targeting to renovate only about half as many units as we did in 2008. In addition, we will be focusing on executing our lighter or scaled down version of the renovations.

The last point I'll make about our positioning for this part of the cycle concerns a balance sheet. We believe that Mid-America has one of the strongest balance sheets in this sector. Our leverage is at the lowest point it has been in our 15 year history as a public company. Our fixed charge coverage ratio has never been stronger. We've already addressed what little refinancing requirements we have over the next couple of years. We have significant balance sheet capacity. And, Mid-America has one of the lowest dividend payout ratios in the apartment REIT sector. When you combine these strong metrics with the fact that our balance sheet is not burdened with supporting a new development operation and is supported by a P&L with a high degree of recurring earnings, we believe Mid-America's balance sheet is well positioned for this part of the cycle. We remain confident that there are going to be some terrific buying opportunities over the next couple of years and are busy underwriting a number of deals. Overall, the bid spreads remain fairly wide at this point but as the weaker leasing environment continues to play out, we're optimistic that we'll see our underwriting generating pricing, that sellers or their lenders, are more willing to accept. We have a long track record of discipline, underwriting, capital allocation. It has kept us out of a lot of trouble over the years and it is certainly another aspect of our strategy that puts us in a solid position for this part of the cycle today.

Our 2009 forecast contemplates further weakening in the employment markets and we've taken a number of steps to pull back on expenses. In addition to aggressively managing expenses at the property level, we are projecting a reduction in our general and administrative expenses of close to 8.5%, as compared to 2008. Actions include suspending funding of the employee stock ownership program in 2009 and suspending the company match on our 401(k) program. In addition, our executive officer staff will forego salary increases this year. And of course, we expect that bonus compensation, associated with 2009 performance, will be materially below 2008's results.

I'm proud and appreciative of the positive response from our Mid-America associates to these actions. As we all work to keep the Company strong through this weak part of the economic cycle and ensure that we are well-positioned for the very strong outlook developing for late next year and into 2011. We're optimistic about the prospects for our business with the continued trend towards a normalized mix of single family and multi-family housing, and a dramatic curtailment in the expected delivery of new apartment properties for the foreseeable future. Once the economy stops shedding jobs, we expect the recovery in leasing fundamentals to be quick and strong. The pullback in the capital markets is now clearly pricing a number of REITs at some very compelling values, including Mid-America. Currently trading at an implied Cap rate of 8.25, which implies a value significantly below anyones definition of replacement costs. While also currently yielding around 8% against one of the stronger dividend payout ratios in the sector supported by a balance sheet that's in great shape, facing no refinancing requirements and positioned to capture new value growth, we believe Mid-America offers an attractive opportunity. That's all I've got. Simon?

Eric, thanks. Good morning, everybody. Our fourth quarter FFO per share of $0.92 was $0.01 ahead of the midpoint of our guidance. Performance was driven by three key elements. Despite weakening employment, our operating results were close to our forecast. Our property management and G&A expense was $900,000 below the same quarter a year ago. And our interest expense was also below our forecast as rates began to trend down, reflecting an average interest rate of 4.8% compared to 5.2% for the same quarter a year ago. In the fourth quarter, the markets were tougher than anyone expected but we still performed quite well, although a good operating performance was masked by some one time items and some unusual comparisons. Year-over-year same store revenue growth was 0.2%, despite the worse than expected job losses and the tough comparison of the very strong fourth quarter in 2007. Two markets, Atlanta and to a lesser extent, Jacksonville were weak and dragged down our same store revenue performance. Absent these two markets our same store revenues increased 1.0%. Same store expenses prior to taxes and insurance increased 1.5% and this included $310,000 of expenses attributable to hurricane Ike. Excluding these hurricane Ike expenses, the increase was only 0.1%. Including taxes and insurance, total same store expenses increased 3.6%, but again, this was comparing to an unusual fourth quarter of 2007, when same store expenses dropped 1.2% because of favorable real estate taxes. As a result of last year's fourth quarter tax adjustments, our same store real estate taxes increased 7.8% this past quarter. If you normalize the real estate tax increase and eliminate the hit from hurricane Ike, our NOI for the quarter goes from a negative 2.1% to a negative 0.7%. So, our reported NOI was not necessarily indicative of our performance in these changing market conditions.

For the full year, our FFO per share was $3.73, almost at the mid-point of our initial guidance for 2008 and 5% above 2007. Although the markets were tougher than we forecast we made up for almost all the shortfall in NOI through reduced G&A and interest rates. We also ended the year with less debt than planned since we raised over $100 million of new equity at almost $53 a share net of costs. We continued our investment in projects that deliver long-term value but carry short-term FFO dilution such as our modest development program in properties and lease-up. Together we estimate that our lease-up properties cost us over $0.16 of FFO dilution in 2008. This should drop to approximately $0.07 in 2009.

For the full year, AFFO was $2.99 per share, comfortably ahead of our $2.46 dividend and one of the best dividend coverages of the sector as Eric mentioned. Excluding the redevelopment program, total property capital expenditures existing properties were $31 million, $753 a unit or $1.05 per share. Revenues in our secondary markets outperformed our primary markets, helping to reinforce our view that the secondary markets tend to be pretty stable during a downturn in the economy. Of our primary markets, our three Texas markets plus Raleigh Durham, showed good growth while as I mentioned above, Atlanta was weak as to a lesser extent was Jacksonville. NOI growth in several markets and notably Houston, Dallas, Tampa, Jacksonville and Savannah was impacted by favorable adjustments to the real estate tax accrual in the fourth quarter of last year -- of 2007.

Turnover decreased 3.7% for the quarter compared to the same period a year ago, mainly because of a 20% decline in people leaving us to buy a house. Which dropped to 21.6% of move-outs from 25.8% in the fourth quarter of 2007. On a trailing 12 month basis, turnover dropped to 61.3% from 63.5%. Our delinquency for the quarter was still encouragingly low at 0.4% down from 0.5% a year ago, although we expect that this will be under pressure in 2009.

We have one of the strongest financial positions of the apartment REITs. We've taken care of the next two years' debt maturities. We put in place new loans in the fourth quarter of last year, designated to replace our only maturity in 2009, a $39 million bank facility. Our only 2010 maturity, our $50 million bank credit facility, is more than covered by capacity under existing credit arrangements, although we do expect to refinance this in the normal course of business. At December 31, our debt to gross assets was 50%, down 300 basis points from a year ago. This compares with 55% for the apartment sector as a whole. Our fixed charge coverage in the fourth quarter was 2.51, well ahead of 2.36 a year ago, and also well ahead of the sector median of 2.30.

As we detail in the press release, at year end we had $183 million of debt capacity available under our Fannie Mae and bank credit facilities of which $39 million is designated to fund the loan maturity in April. We have a further $30 million of our existing credit facilities available to be collateralized once we need the capacity which takes our potential availability to $213 million. In 2009 we have repricing opportunities on a $25 million swap that matures April 1 and $65 million of debt that resets to variable rate on December 1. These are not mortgage maturities but just a repricing opportunity of in place credit facilities. They are at an average rate of 6.9% and we anticipate that the new swap rate will be an average of approximately 4.2%. Potentially $0.08 of savings on an annualized basis. The savings in 2009 will only be about $0.01, for the full year impact not being realized until 2010.

About 20% of our debt is floating rate. Which we find as a natural hedge against changes in the economy. Our Fannie Mae variable rate debt that repriced in January was at 1.26%, down from 4.6% in November which will obviously help us substantially as the first quarter of 2009 progresses. To give you an idea of recent Fannie and Freddie pricing, the loans that we put in place in November and December were single asset seven year loans at 65% loan to value. The first loan was fixed at 6.2%. The second was a capped loan floating at 323 basis points over the Freddie reference bill rate, currently costing us 3.4%. While rates have come down since our November financing, it's quite likely that agency spreads are going to stay wider than they have in the past. Two weeks ago we heard talks from the heads of the multi-family lending for both Fannie Mae and Freddie Mac and they indicated that the agencies and their new regulator are very supportive of their multi-family programs.

Our 2009 forecast detailed in the release, takes into account the recession with further job losses taking average unemployment for the year to a range of 8% to 8.5%. The impact of this is partially mitigated by the continuation of the shift in households back to the rental market and reduction of resident turnover as well as a relatively more robust employment picture in our Southeastern high growth markets compared to the national picture. We've given some color in our 2009 forecast in the press release. We're projecting around a 1% drop in same store revenues, at approximately a 4% drop in same store NOI. We have several property revenue and expense saving initiatives that are helping to offset weakness that we'd otherwise expect. Based on the expected revenue shortfalls in local government, we project a 5% increase in real estate tax expense. Because of G&A and interest rate savings we believe our FFO will be in a range of $3.40 to $3.60 per share. As we point out in the release, we also have to absorb the impact in 2009 of the implementation of FAS 141R, which requires us to expense transaction costs than what were previously capitalized. Based on our current set of assumptions this non-cash accounting change will cost $0.04 per share of FFO in 2009.

We completed the sale of one property in Greensboro, North Carolina, Wood Stream, in January. This 25-year-old property was sold for $11.5 million at around a 7.7% cap rate. We have two other properties under contract for sale, Riverhills and Grenada, Mississippi and River Trace in Memphis with total proceeds estimated in the $19 million range, around a 6.25% cap rate. All three properties were listed as held for sale and year end. We have not forecast additional dispositions in 2009. In 2009 we expect property capital expenditures to moderate 7% to $30 million or just under $1 a share. With recurring CapEx in the region of $21.5 million or $0.70. In addition, we project development funding of $6 million, down from $25 million in 2008, and $10 million of redevelopment expenditures, about half of 2008's level. We anticipate that we'll invest approximately $75 million in new acquisitions and contribute about $9 million in equity for our share of fund two, our proposed new joint venture. We assume that this second joint venture will be structured similarly to fund one. We'll invest a third of the equity in an entity that's 65% leveraged.

Our forecast also assumes that we make $75 million of acquisitions in the second half year into fund two. Although our FFO guidance is not dependent on this, as we don't expect significant earnings accretion in this first year. We plan to finance our investment program with the $30 million of asset sales and our existing credit facilities, which we mentioned have plenty of capacity. We forecast leverage increase only by 90 basis points at the end of the year, with debt rising from 50.4%, to 51.3% of gross assets. As reported, our AFFO in 2008 was $2.99 per share, and we're forecasting a range of $2.70 to $2.90 per share for 2009. Our dividend payout ratio in 2008 was 82% of AFFO, one of the lowest in the sector and compares to 90% for the sector median.

In 2009, we're projecting our payout to rise to 88%, at the midpoint of our forecast, still a strong position compared to most of the others. As a point of emphasis, we believe that REITs are structured around the provision of a steady and secured cash dividend and absent a major deterioration in the apartment or financing markets, we don't plan any changes to the cash distributions for 2009. Eric?

Thanks, Simon. Last week marked the 15 year anniversary of Mid-America's IPO. It's worth noting that despite the significant falloff in our stock price over the past year, the annual compounded return delivered to shareholders over that 15-year period is almost 11%. That performance over the same period of time beats the S&P 500 by roughly 500 basis points. It beats the overall REIT index by over 300 basis points and it beats the overall apartment REIT index by over 200 basis points. Our record of performance and strategy for creating value continues to be centered on disciplined capital allocation practices, maintaining a high quality portfolio of assets, focused on building high quality and recurring earnings and supporting future growth and a cash dividend through maintaining a strong balance sheet. We believe it's just as important to be able to weather downturns effectively as it is to prosper during robust parts of the real estate and capital markets cycle. We're confident in our ability to perform during this down part of the cycle. And we're excited about the opportunities in front of us. Thats all we have in the way of prepared comments, so operator I'm going to turn it back to you for any questions. Operator are you there?

Thank you, sir. (Operator Instructions) Our first question is from Michael Salinsky of RBC Capital Markets. Your line is open.

Good morning, guys and Simon, thank you for the additional color on the GSEs there. In your guidance for 2009, can you break out the impact you expect from the bulk cable and utility reimbursement programs, just so we can get an apples to apples comparison on a year-over-year basis?

Yes, Michael, this is Drew. We've got really three things in 2009 that are adding value. One of those is bulk cable program as you mentioned, which our one connect bulk cable program which adds about $500,000 in 2009 and that's a number net of expenses. We've got an increase in our trash and pest fees that we executed in January. We moved our trash fees from $5 to $8 our pest fees from $3 to $5. And that's for all our new leases and renewals. That adds about $800,000 in 2009. And then the third primary thing we have going on is a reduction of our screening costs which are also netted in revenue, through the addition of our second screening -- resident screening company which is about a $300,000 effect.

Okay. That's helpful. Eric, several of your peers have mentioned that they think 2010 may be an equally challenging or even a more challenging year. What are your initial thoughts just given the downturn right now and when we come out of that.

Well -- I -- you know, Mike, obviously it depends on what happens with the economy and the employment numbers and, you know, I don't know. I think that -- I think that last time we went through a downturn it did last for a couple of years and the sector produced two years of negative NOI performance. I think that it's likely that 2010 will indeed be another challenging year. I like to believe that by the last half or maybe by Q4, we really are starting to see things turn around but I do think that 2010 will likely be a challenging year. The severity of it is -- is -- I couldn't begin to really guess at it right now. Obviously, we have to see what the government does and how the economy responds to a lot of the plans and programs being discussed. But I certainly think that this current downturn is going to be with us for a while.

Mike, I think one of the -- Eric and I were at the National Multi-housing Council Conference a couple of weeks ago and recently the -- I say recently. And the, sort of third party economists and market trackers that we saw and listened to, were kind of indicating a second half of 2010 recovery and that's probably the best information at this point that's open to us.

Okay. And then third and final. In your guidance for 2010 -- I mean 2009 rather, you include $75 million of acquisitions and a new fund. How far along are you on that fund and in talking to private equity and various other sponsors, what is the appetite right now for multi-family?

Well, we're really not under way in any meaningful way on that initiative yet and as mentioned, our guidance for 2009 really doesn't depend on getting that fund done. I very much believe that there are going to be some terrific buying opportunities over the next couple of years in this distressed environment. If this is the kind of stuff that we do. I mean, we find these kind of situations and we buy opportunistically and then we operate them back to full value. I think that there is going to be capital out there, institutional capital that understands that, can appreciate that logic and I'm confident and optimistic that we will get something done. But in terms of actually engaging in direct conversations, we've not done that yet. We started to do it late last year and frankly just backed off and we thought we would just let the markets kind of settle out for a while. But I'm hopeful that here within the next 90 days or so that we're engaged in our process to really get a better feel for just how viable this initiative is. I'm convinced it's there. I know the opportunity is there. And I think that there is capital out there that understands that and more importantly, understands what 2011 and beyond looks like for the multi-family industry. It looks incredibly strong. And I think that those who are in a position to both weather the downturn for the next couple years and take advantage of the opportunities presented have a real opportunity in front of them.

Thanks, guys.

Thank you, sir. Our next question is from Rob Stevenson of Fox-Pitt Kelton. Your line is open.

Good morning, guys.

Hello, Rob.

Eric, can you talk a little bit -- I mean given your comments about dividend coverage, what your thoughts are about the dividend going forward and whether or not you know, we're going to see some token increase, whether or not you hold it flat to preserve capital in this type of environment, I mean, what's the thought at this point from the board?

Well, we had a fair amount of conversation about it back in December and obviously felt appropriate at that time to hold it. You know, in general, we've looked at a number of different scenarios. We've put a lot of stress modeling on our payout ratio and so forth and just took a look at how bad things could get before we start to have to make those kind of evaluations about the dividend and we believe things could get appreciably worse before we really have to start looking at any sort of action on the dividend. You know, we think that the REIT model and a lot of our owners are in the stock, believing that we're going to pay a dividend and we think that that's one of our responsibilities and have tried to build an earnings platform on our balance sheet around that responsibility. So, I would tell you that obviously, you know, if the economy continues to go through some sort of real downturn and we got into just a catastrophic scenario, we would take a look at everything, including the dividend. But at this point, we feel pretty good about it and feel like that at this level, we can sustain it just fine. I would doubt that in this environment there will be much of an appetite for raising the dividend but we feel pretty comfortable with what we're doing right now.

What about paying part of it in stock? Is that -- I mean, do things have to get worse before you would consider that or just as a course of business since some of the other guys are starting to do that, would you do something like that in the near term, to continue to preserve additional cash?

No -- you know, we've not had that kind of conversation about paying it in dividend and frankly don't think that that really makes any sense for us at this point. We've got capacity on the balance sheet. We think we've got plenty of opportunity to pursue opportunities without having to take action with the dividend to preserve additional capital. I think that broadly speaking, you know, there could be situations with certain companies and certain balance sheets where they run into NOI or net income number where they've got to make a dividend payment in order to keep the REIT status and using stock as a currency may make sense in some cases but we're not anywhere close to anything like that and don't foresee that. But I think as a general rule holding on or if you will using your stock as currency at these prices in particular as a means of Marshalling or hoarding cash in order to look for future growth opportunities, I don't really endorse that model at all.

Okay. And then on the occupancy side, I mean, it's great that you guys were able to fight your way back up 70 basis points in January. Was that pretty much spread across all markets or were there one or two markets where you really saw a big increase?

Rob, we saw generally -- this is Tom, by the way. But we saw the occupancy jump -- from December to January was across the board. It wasn't really any major recovery in one area or the other.

And that was, you know, just better traffic or a combination of better traffic and concessions?

No, primarily it was better traffic, Rob. We had a nice uptick, up about 9.6%. So, primarily traffic. We were encouraged by that.

Okay. And then lastly, Eric and Simon, I mean, you guys were talking about -- in your guidance assumptions about the home ownership rate continuing to come down and that benefiting apartments. When you think about your markets right now, if the government winds up passing something substantial here in terms of a tax incentive to buy housing plus does something with an interest rate buy-down, whether or not it's 2.99% or 3.99% or something along those lines, which of your markets do you think have a stable enough employment and people who might be thinking about moving out and buying a home in this type of environment? And would be mostly impact -- most impacted by that?

You know, Rob, I -- you know, I would guess that you may see some of that pressure, if it all plays out as you described, in some of the bigger markets like in Atlanta or Dallas or Houston. Where you tend to have these bigger sort of starter home tracks that are out there. My guess, is that's where, if the government did come in and, if you will, once again artificially create an inducement of some sort and starts allowing and putting people into houses that really can't afford them, then I think that that may be where the pressure builds, much like we've seen over the last several years in some of the bigger markets like Phoenix and Vegas and Dallas and Houston, I think thats where -- and some of the -- you know obviously down in Florida, Tampa and Orlando, some of those. But, you know, I think that for us, it's always been an issue of over the last several years, the fact that our renters did not have a down payment and frankly did not have the financial wherewithal to be able to afford a mortgage, were being put into houses because they didn't have to come up with a down payment and they offered all these teaser rates, where essentially the mortgage payment was artificially low. I don't think that some of the programs that are being discussed right now are going to actually kind of create that kind of scenario again. So, we're obviously monitoring what some of these programs that the government's talking about doing and I think that the correction back to a more normalized single family home ownership rate may in fact be somewhat moderated or needed by some of these actions the government is taking but I think long-term, you know, we're still comfortable that the government understands and appreciates a balanced housing policy, balanced between single family and multi-family is a good thing for this country and I'm optimistic that we'll continue to work in that direction. I don't think we can fix it overnight.

Thanks, guys.

Thanks, Rob.

Thank you. Our next question is from Nap Overton of Morgan & Keegan. Your line is open.

Yes. Good morning. Couple of things. One, in terms of the fund two, in this environment with significant opportunities expected to develop over the next 12 to 18 months, have you contemplated just retaining the upside of that benefit for yourself as opposed to trying to pursue a joint venture with a partner?

Well, our plan for our JV initiative is really geared towards targeting investment opportunities that we, frankly, would prefer to co-invest in. Namely, what we're targeting will be turnaround or value-added plays that we define as assets being seven years of age or older. We think as a public platform, that we do better for long-term public price in the company by keeping the -- our focus for 100% investments on newer assets and -- but yet over the years, as a company, one of our core competencies, frankly, is locating these opportunities, underwriting the upside that's there and then realizing it through the operations and the CapEx and the other things that we've been executing on for 15 years and -- but we don't want to -- we don't think it would be appropriate to go out and start buying a bunch of older assets that we would own 100% of and putting them on the public balance sheet. And then of course as you know the JV model offers some alternatives in terms of how you can approach the use of leverage and fee incomes and things of that nature which is also -- creates some pretty attractive returns to our shareholder capital. So, we see that initiative as really being a good complement to what we're doing for our own balance sheet and don't believe there's any conflict issues but -- and believe that the JV model is the right way to prosecute those other kind of opportunities I described.

I think one further point would be, Nap, is that we like the leverage that we've got on the balance sheet right now and not really anxious to increase it and regard private equity as a good source of equity, particularly considering where our stock price is trading. So, that adds, if you like, another arrow in our quiver in terms of the growth of the business.

Okay. And then one other question and that is if substantial opportunities were to develop that you wanted to take advantage of, what are those balance sheet and capital structure considerations that would be the larger parameters for your capital structure beyond the immediate capacity that you have available under existing credit facilities?

Well, the challenge of course is that we do think it's a time to maintain modest leverage and your question is a good one, because these opportunities may present itself suddenly. We'd be -- the opportunities would have to be hugely compelling for us to be willing to let go of any equity at the current pricing. And so we're -- it's -- certainly I think that if this downturn in the economy continues for a considerable time and there are compelling opportunities and our stock price continues to be really depressed then I think that our -- frankly, the way we'll go about it would be to look at further partnering with other capital in order to reduce the returns sufficiently to give us what we need.

Yes, and, Nap, I mean, there's definitely going to be some of those, if you will, portfolio opportunities. I mean, we've already seen some and have looked at a number of them, frankly, over the last year and have continued to -- the kind of numbers that would be required for us to be willing to take that kind of risk on right now, I don't think that the market's there yet. But I think it may be headed there. But putting the balance sheet at significant risk right now in order to get a deal done is not really what we do. I mean, that's just not our culture. It's not the way we operate. And so I think that we would be compelled to look at a big opportunity. I mean, we would certainly pursue it if it were the right fit and the right opportunity and very compelling. But we would, as part of that event, I think do what we need to do in order to keep the balance sheet from being put at significant risk. We just don't think that's the right way to go about it.

Okay. Thanks very much.

Thank you. Our next question is from Carol Kemple of Hilliard Lyons. Your line is open.

Okay, thank you. Good morning, guys.

Good morning.

I just had a couple of questions. You talked about the uptick in occupancy in January. Where were those new renters coming from? Were they leaving other apartments or why were they getting a lease?

Honestly, off the top of my head, we don't have the source data for January that quickly, this quickly at the end of the month. So I mean, we've got traffic information, we'll be reviewing back where the sources of traffic came from but we don't -- this early in February, we don't have the analytical data to tell you these people moved out of a house and these folks came with new jobs.

Okay.

If that makes sense to you.

Yes. And then, just my other question, on your G&A and property management expense decline for 2009, do you expect that to be split pretty evenly between the four quarters or more heavily weighted in others?

I think it will be split fairly evenly. This is Al. It will be a little heavier by the end of the year just because some items will increase from inflation but fairly even (inaudible) slightly.

Okay. Great. Thank you.

Thank you. Our next question is from Paula Poskon of Robert Baird. Your line is open.

Thank you and good morning everyone.

Hi, Paula.

Good morning, Paula.

So, in your guidance you've said that you're building -- your forecast on the assumption that the national unemployment rate will be somewhere between 8, 8.5. What do you think the sensitivity is around your guidance if unemployment goes to 10 or above this year?

Well, I think -- we took a look at that obviously and we think 8, 8.5, if you look at the numbers that were released today, I think its reached 7.6%. I think to reach 8.5 even, would be another 1 million, 1.5 million jobs lost throughout the entire economy. And so I think if you took it to 10, that's another 1 million, 1.5 million as well. So we -- it's important to also note the 8.5 that we talk about in '09 is really an average for the year so it would entail maybe getting above 8.5 by the end and averaging out so we feel pretty good about that right now.

Obviously, you know, trying to take these broad sort of economic metrics, unemployment metrics and then applying them to our markets and then applying them to our sub markets and our neighborhoods and our properties, a lot of different variables go on but I can tell you that obviously if the economy were to fall off that much weaker, you know, NOI would be -- you know, frankly fall off that much more and -- I can tell you, as Al mentioned, I mean, we've modeled a lot more worse case scenarios in an effort to think about the balance sheet and think about the dividend and we think that we're in a position where we can weather materially worse decline from where we are right now and still trudge along. But NOI just goes that much more negative, frankly and how much more negative becomes a bit subjective, trying to evaluate against our markets. But, as you know, I mean, we continue to believe that some of these secondary markets will hold up a little better than some of the bigger cities.

Thanks, that's helpful. When we met at (inaudible) REIT we talked a little bit about the LRO program and what information is kicks out to you and your ability to override that system. How is that -- its results or its recommendations, how has that changed and are you changing your approach in terms of overriding what it's telling you?

Hi, Paula, it's Drew. LRO I think in a weaker environment like we're in now with higher exposures and lower demand, certainly there's going to be some pressure on upfront pricing and, you know, our strategy has been and what LRO does is to work to favor and protect occupancy over rents. And that's what we're seeing and that's sort of what we would expect the system to do.

I'll just add quickly, Paula, just as a side note, because this comes up a lot. You know will LRO or these yield management systems be as effective in a downturn as they are in an up part of the cycle? And I continue to believe that the system will because we put in LRO, believing that it will enable us to manage our revenue results better than we otherwise would be able to. Simply because we are able to gather more information, more market data, more insight on our own exposure regarding lease expiration, we're able to gather all those facts quicker, we're able to make a more informed decision and importantly we're able to make take decision faster. And I think the net result is that we generate better revenue results because we're making more informed and better decisions -- quicker decisions on the ground and that works whether it's a downturn or whether it's an upturn.

Okay, do just to follow up up on that, are you taking -- are you overriding what it's telling you less than you had been?

No, we're not, I don't think we're overriding more or less. I think we don't tend to override a lot anyway, but the volume of overriding, if you will, has not really gone up a lot.

Paula, that's usually isolated. I mean, we've often said with LRO, it's not an excuse to turn off your brain. An LRO is going to try to fix things with price. And if we know that the problem is -- every now and then we make a mistake on site. If we have made one, it doesn't make sense to fix that problem with price. It makes sense to fix the quality of the market right here, or something like that. So, that's where overrides generally come in is where we know something sort of, LRO doesn't and we don't want it to fix the problem with price.

Thank you. That's helpful. And then could you give us just a little bit more color around your decision to make the accounting change around the transaction expenses and also the resegmentation of your markets from the three tiers to the primary and secondary?

Al, why don't you address the accounting question.

Okay, well the accounting question is just a FAS 141R. We just, you know, we're required at the beginning of the year to go ahead and record transaction costs in our earnings.

We didn't have a choice.

We didn't have a choice.

Oh, that -- okay. I'm sorry. I -- actually -- for some reason I thought it was a voluntary change.

No, not to my knowledge.

Okay.

In fact January 1 for us and so that should be as we mentioned about $0.04 per share. It will happen probably toward the back half of the year obviously with the transactions that we're talking about right now. And then I think on the segmentation, I think we just clarified or refined our segmentation in a way that we felt better -- better looks at the characteristics of our portfolio. And so what you have, is in the primary markets, really you have markets that have populations that are 1 million and above and that have investments of public REIT portfolios of greater than 1% and we felt that was a good indicator of the gross margin.

I mean, quite frankly the attempts we've had in the past, sort of three tier definition, is adding a level of detail and complexity that really is unnecessary. I mean, what we find is that -- is generally the secondary markets, regardless of how small they may or may not be, generally tend to perform somewhat aligned with each other and the large tier markets tend to -- so we just really felt that the added complexity was not really adding any value and the segmentation between primary and secondary just generally makes more sense but then of course in our supplemental we detail out a lot of detail about the markets where we have the larger concentrations.

That's very helpful. Thanks, guys.

Thanks, Paula.

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

Good morning. I just was wondering if you could touch on Houston. Are you seeing that market negatively impacted by lower energy pricing?

Not yet, Paula. I mean, Houston on the revenue side, we're still seeing positive job growth. What we're monitoring a little bit there is just deliveries. You know, Houston absorbed almost 12,000 units in 2008. We expect that number to drop to half so we're encouraged by that. But overall, it's been a positive story, excluding obviously on the NOI side the hurricane Ike charges.

And Al, are there other markets that you're concerned about from the supply side, like how is Austin looking?

Austin, I mean -- you've sort of answers, you stole my answer Sheila. Yes, Austin -- 4,500 units delivered this year, which is sort of a tight spot. Next year it's 9,500. So, we've got good job growth and we've got good job growth in Austin to offset it. We feel like we're well positioned there. But we're going to be monitoring the supply in Austin.

I mean, Austin is clearly one of those markets thats going to get -- is a little bit of an outlier in terms of supply. But fortunately is a market that tends to have a stronger demand side story, I think, associated with it and so we think that that market will -- l -- certainly it will be weaker in '09 versus '08 we don't see it as being a collapse scenario there.

Okay. Great. And ast question. Based on -- you did mention the GSEs but I was just wondering if you could give us a little bit more specifics on your conversations with them and looking towards their kind of mandate to lower their balance sheet in 2010. What are you or other industry people thinking about their appetite going forward?

Well, I'll sort of throw one comment in. I think that the way that I believe that they are planning to address this, Sheila, is by offering current and new programs that are off their balance sheet. That is, where they guarantee or securitize (inaudible) securities. And I think Freddie's got a number of initiatives in that regard. Fannie's already has them. So, I think that's how they're planning to deal with it. Certainly we'll be heard from the heads of both of their multi-family programs where that their aware of the capacity issues that will present themselves. And they're very committed to multi-family and do plan to address them in this manner. We will be meeting with Freddie and Fannie in the next 30 days which we do once a year and we discuss our business strategy with them and their strategy. But from what we heard, things were -- things are well in hand and pretty positive.

Okay. Great. Thank you.

Thank you. (Operator Instructions) And we have a question from Philip Martin of Cantor Fitzgerald. Your line is open.

Good morning.

Hello.

Good morning.

I jumped on 25 minutes late so if you've answered this I'm happy to deal with it offline. But, kind of a general question, but at least from my analysis, you know, your typical property seems to offer a nice blend of very nice amenities to newer product, it's relatively affordable and it's in affordable markets. To what extent is that giving you a bit of a competitive advantage in this market? I know job growth drives so much of multi-family demand, certainly, but the affordability, the amenity package, the affordable markets, how much of a competitive advantage do you have versus your competition in a market like this? People have to live somewhere and not everybody's going to move back home with mom and dad. I mean, I know would hate to do that, personally, but, you know -- .

Well, I mean, I do think that we may in fact have a little bit of an advantage in this cycle and that as you point out, I think we offer a very good value for the renter. You know, in that we do provide I think a -- generally in all the sub markets and the markets where we compete, we tend to have one of the newer products. We have one of the you newer portfolios in the REIT sector and we -- and in our region of the country, the newer product tends to sell very well. And we're not in the downtown areas we're not -- we don't have the heavy urban element to our portfolio. We're frankly in our region of the country, we are -- we're out where people really want to live. These are good school districts, good retail shopping, good amenities and the crime issues are a lot less than out in the suburbs where we tend to have a lot of our assets and I think that we offer -- I think we offer people a good value in this environment. So, we'll see but certainly during the last downturn as we did mention in the call, the company did pretty well on a relative basis and I think that that may very well play out again this time.

Are you -- and again, you may have addressed this in the opening remarks, but are you seeing -- you know, are tenants, I'm sure, coming to you and looking to negotiate rents, et cetera, just trying to stay in the property, just because they need to live somewhere but they don't really want to move and, you know, how much of that are you seeing?

We're seeing some of it. But the overall -- you know, we send our offer out. We follow up with it very quickly. We negotiate, if needed and if pushed, but really, you can see it, I mean, the inverse of our turnover rate is our retention rate and our turnover rate is down and our retention rate is up and we are -- we're providing really sort of a better alternative for people than the substitute, for sure, which is as you said, you don't want to move back with your parents and not many folks are interested in buying a house right now.

Is your portfolio still in all or most of its markets, still outperforming in terms of an occupancy standpoint? And then if you can -- I don't know if you can calculate it or not, but even from an operating margin standpoint?

You know, we track -- the best information we have is versus Reece and in that case we're significantly outperforming the REIT index of our -- you know, we do a composite of our markets and compare it to our actual occupancy and we're outperforming that.

Okay, okay. Thank you very much.

Thank you, sir. Our the next question is from Michael Salinsky of RBC Capital Markets.

Just had a follow-up question real quickly. Can you talk about cap rates right now across your markets? I mean, how much have cap rates moved in the past 90 days?

Well, you know, it's kind of hard to get a real read on that, any sort of definitive way, because frankly the transaction volume is so down right now and nothing's really been trading for the last 90 days. I think that the seller pricing probably is looking still for six, maybe even sub-six, to mid-six range and the buyers are wanting something well north of that and so you've got this sort of stalemate right now. Having said that, you know, we just sold a 25-year-old asset in Greensboro, North Carolina, which is, you know, by any definition I think a tertiary market so a 25-year-old asset in a tertiary market sold for a 7, 7 credit rate, you know, we've got two other assets, one here in Memphis which is one of our older assets and one in Grenada, Mississippi, which is maybe sub tertiary, I don't know. But its -- you know, we've got those both on a contract of 6, 6 cap rate. So, I you know, I think that it's hard to know exactly how they moved in a broad sense right now. But clearly, buyers are looking for a better deal and I think that we think that it's likely that the cap rates are in general, when the transaction volume picks up, are going to show something probably approaching 6.5 and 7. Maybe a little higher than that. I don't know. It will vary quite a bit.

What does the buyer contingent look like right now.

I'm sorry, the buyer contingent?

Yes, I mean what is the -- the people that are actively bidding on these properties, I mean what is that?

You know its, there's -- a lot of -- you know, some of the private capital buyers that have some of these funds are out there and we -- that's usually who we're running into right now is some of the smaller guys who have got money that they're representing somebody else on and kind of the vulture buyer kind of mindset is sort of out there right now.

I think there's plenty of people out there, Mike, because they see what we see and that is that 2011, '12, look pretty incredible for the multi-family sector so a lot of people that appreciate that. But there is, as Eric says, this just big (inaudible) spread right now. Everybody is kind of waiting to see what happens and that's been going on for a while, it may continue for another three or six months. I don't know. We are beginning to see more signs of sort of stress with some of these over leveraged with portfolios with (mez) debt or bridge debt that's not being able to be handled. And that may cause a bit of a break. We'll see. But there's still plenty of buyers and of course, agencies out there are willing to finance a sensibly underwritten deal. They're certainly not giving their money away and they're certainly underwriting as they always have done in my view in an intelligent manner. But it's -- so we -- I think the deals will be out there but it may be just a little while yet.

You haven't seen any shift in focus? I mean is it still primarily on the value added or have you seen a shift back to quality?

Well, I think where we're seeing most of the transactions that are clearing right now are taking place at the lower end of the quality scale, kind of the C quality, B quality assets, B minus quality assets. That's where you're starting to see more transaction volume pace pick up as a result of -- I mean frankly, I think that's where most of the financing stress is currently. The upper end product quality which is where we're focusing our efforts on, we haven't really -- we haven't seen -- that's where the bid (inaudible) is pretty heavy and the transaction volume is really just not there.

Great, thank you very much.

Thanks, Mike.

Thank you. Our next question is from Rich Anderson. Sir, your line is open.

Thanks and good morning. Sorry, I got in the queue earlier but I think I got black balled.

Yes, we gave special instructions.

We're just glad it's the real Rich Anderson.

Well, I got in the queue as Bruce Springsteen. That might have been the reason. So, now we know that people are doing their job for you. So, anyway. Just couple quick questions. The 20% floating rate debt, is that a level you're comfortable with? Or, could you see that maybe come down now with rates being where they are? Would you consider that?

You know, we are, Rich, that's a great question and as we move into the 2009 forecast we expect our 80% to move down a little bit and it will go down maybe come back up as we end the year, trying to take care of some of that transactions that come due at the end of the year. We expect about a 78% to 80% average for 2009. We do have another, to put a point there, another 6% capped which we only have 14% of our debt just totally unhedged, so we're benefiting from a low floating rate of 420 with a hedge for 60%, that's an important point, I think.

Okay, and Simon, you mentioned the $0.08 annual impact from the repricing of the swap and other factors, right? But it's only a penny in 2008. Could you explain why it's happening in April?

Right. Well, there were really two tranches. One is a swap that matures April 1 and there's a lot more, $65 million that reprices December 1.

Oh, okay.

And that's the high interest rate one, really, where we really get the juice is on that December 1 maturity.

Okay, now I know you have a lot of -- you know you have a lineup of swap expirations in forward years. What is it in 2010 that you have expiring?

$140 million in swaps, Rich, $148 million in total of everything.

Okay. Great. Real quickly, Eric, you mentioned lower CapEx for 2009. Is that a smart thing to do in this environment and potentially incurring some deferred maintenance?

Well, we're not incurring any deferred maintenance. We are -- we've maintained very active CapEx program for 15 years and properties are in terrific shape and we go through various cycles sometimes where paint jobs and other things tend to be a little higher and the numbers can move around a little bit. But, Drew, you want to add something to that?

Yes, I was just going to say we're planning the same level of recurring CapEx next year that we planned this year. Slightly less on the revenue enhancing and I think as Eric mentioned, significantly less on the redevelopment.

Okay. On the accounting change, FAS 141R has -- is not a new pronouncement. I'm curious, why didn't you have these expenses in 2008?

The implementation is required for January 1 of this year, Rich.

Of this expense element to the -- ?

Yes, to input the expense, the brokerage, and accounting costs, or the legal costs of some things and earnings instead of being capitalized into the deal.

Okay, and they'll show up in operating expenses, I assume?

Yes, they'll show up in the full G&A.

Probably be in G&A.

G&A, excuse me. Okay. And then lastly, you're looking to Texas as a couple of good markets for 2009. I mean, how long can that hold up when you consider oil prices and some other factors? I mean, does Texas have the fire power to stay a top market for you throughout the year?

Yes, I mean Rich, for '09, those are the strongest markets that are out there. They're all positive. And honestly, in terms of job growth, for forecasts for 2009, you know, are they going to add 10% new jobs or 4% new jobs? Absolutely not. But on a relative basis they'll be our strongest markets and then we'll monitor a little bit, we'll monitor the new construction there and as I mentioned Austin is up a little bit but Houston's number drops in half. You know, so, I think we'll still continue to see some job growth out there which compared to the rest of the country, these days, is pretty darn good. Okay, good thanks, appreciate it, good call. Thanks Rich.

Our final question in the queue is from Cassandra Kimberly of Commercial Appeal. Your line is open.

Hello, good morning, everyone.

Good morning.

Good morning, Cassandra.

Hello, I was hoping that you could speak directly to the Memphis market for a second. How are we faring compared to the other markets that you all are in?

In terms of our portfolio, Cassandra, to the Memphis market and I think you're relatively familiar with it, our occupancy and our revenue levels are significantly higher than the market right now.

Okay. Great. And is this just due to the properties that you all are just maintaining them and being higher quality or what would you attribute this to?

I would certainly credit the Asset Management and Property Management teams and how we operate the properties but again, your familiarity with Memphis, it's our location as well. We've picked our sub markets very carefully. We've limited our exposures to the areas in the south of Memphis that have been tougher over the last ten years. And, so it's really a combination of Mid-America, sort of people practices and then its location of its product.

Great, alright. Wonderful. Well, thank you very much. And I appreciate it.

Thanks, Cassandra.

Thank you, sir. I show no further questions in the queue. Please proceed with any further remarks.

No further remarks. Thanks for being on the call. Thanks.

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