Mid-America Apartment Communities Inc (MAA) 2009 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, Lee. 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-X 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 this morning's call, can be found on our website. I'll no turn the call over it Eric.

Thanks, Leslie. And thanks for joining us this morning. As outlined in our pre-announcement a couple of weeks ago, and detailed in our full earnings release yesterday, first-quarter results were better than expected, with FFO per share at a record high for any quarter in our history. The outperformance was due to lower than expected property operating costs and interest expense.

Overall, the quarter's operating performance was generally in line with what we expected and reflects our focus to combat what we knew were going to be more challenging leasing conditions throughout the year. While we're encouraged with the quarter's performance, we recognize that the bulk of our leasing season is still in front of us, and as a result we remain cautious in our outlook. And while we're confident that we're in a good position to play defense as needed, we're optimistic about what we believe will be increasing opportunities to capture new value growth from both our existing properties as well as from new acquisitions.

We have a number of new initiatives and programs underway this year that will enhance the earnings capabilities of our existing portfolio, both this year and long term. The deal flow we're seeing is becoming increasingly attractive, as the few transactions we were unsuccessful in getting under contract a few months ago at pricing we are comfortable with, have recently come back around. In my comments this morning, I'll address a couple of points pertaining to our operating outlook and new growth prospects before turning the call over to Simon to provide more details on the quarter and updated guidance. Our focus in protecting occupancy and maximizing revenue results this year centers on a few key variables.

First, we knew that it would be important to ramp up efforts to increase traffic levels and ensure we were capturing more than our fair share of potential renters in the market. In this environment, proactively driving more walk-in traffic to our properties, and then closing on them is hugely important. Secondly, we made a decision to concede on pricing, as individual market and submarket conditions warranted, but only in a very controlled and closely monitored fashion.

Third, we re-committed to our long-standing practice of not compromising credit and leasing standards, as we sought to close on more lease applicants. And fourth, we re-energized and enhanced the number of processes associated with our resident retention and lease renewal programs. We believe the operating strategy is working as shown by our first-quarter results.

While weak employment trends across the country are clearly impacting apartment fundamentals, a combination of our portfolio strategy that allocates capital across both primary and secondary markets, coupled with the strength and intensity of our operating platform, puts Mid-America in a solid position to work through the weaker cycle this year and into 2010. Taking a look at leasing traffic in the first quarter, we captured 6.6% increase in walk-in traffic, as compared to last year. And importantly we also captured a 4.3% increase in our closing ratio, driving 7.4% more move-ins in Q1 as compared to last year. This helped to increase same-store occupancy by quarter end to 95.5%. Which is only 20 basis point off the record high first-quarter occupancy we posted last year. And 200 basis points higher than the preceding quarter end.

In managing our revenue results, we also believe the programs and procedures we've introduced over the past year to proactively manage pricing decisions through our yield management program, have made a positive impact. At the start of the year, our focus was on proving occupancy prior to reaching the busy summer leasing season, with a particular emphasis on Atlanta and Jacksonville, where we're facing our toughest leasing conditions. In addition to increasing traffic levels, we also felt it was important to price competitively with the market to capture new leases. As a result, we saw the pricing for new leases in Q1 decline by an average of 4.1%, with a significant improvement in occupancy as our portfolio gained 200 basis points in occupancy from year end.

We were particularly pleased with the results in Atlanta, where we gained 380 basis points in occupancy, and in Jacksonville where we gained 210 basis points in occupancy from year end. It's worth noting that the average decline in the quarter's new lease pricing improves by 80 basis points, when you exclude Atlanta and Jacksonville from the analysis. With occupancy now at a very solid position and given the stable pricing trend we've seen over the last three months, I'm optimistic that pricing will continue to stabilize over the next few months.

Our strategy to maintain high credit and leasing standards is also generating very good results. Net collection loss in Q1 was a very low 0.14% of the total contractual rents owed, as compared to record low of four tenths of one percent in Q1 of last year. And importantly, net collection loss improved on a sequential basis from the fourth quarter by 40 basis points. Capturing the strong level of performance and collections, despite a significantly weaker economic environment, speaks to the high quality of our properties and our commitment to not compromise resident profile and long-term property value in an effort to maximize occupancy.

Resident turnover continued to decline with move-outs down 7% in Q1, as compared to last year. The lower turnover performance was of course helpful to our efforts to keep expenses down, and was a large part of what drove property operating expenses lower than we expected. In summary, we like where the portfolio's position for the busy summer leasing season. Occupancy further improved in April, and we ended the month with same-store occupancy at a very strong 95.9%, which is notably 50 basis points higher than last year.

With occupancy this strong and resident turnover continuing to trend lower, we're optimistic that we'll be able to achieve pricing at the levels assumed in our updated guidance. As outlined in our supplemental schedules, Atlanta and Jacksonville remain our two weakest markets, as weak employment trends coupled with new supply delivered over the last six to nine months make an impact. However, with the Atlanta new apartment starts now headed toward a 20-year low and Jacksonville new starts beginning to trend well below historic levels, we do not expect to see a material deterioration in leasing conditions from this point forward. And of course the prior-year comparisons could come easier later this year for both of these markets.

Austin is the only market where we see pressure building as a result of more recent new supply. We expect leasing in Austin will be increasingly challenged this year before improving late next year. We remain positive on our expectations for the year at our Raleigh properties. We also believe the Memphis market will hold up well over the peak leasing season as we ended the first quarter at a very strong 97.7% occupancy, representing an almost 400 basis point improvement from year end.

Our other two Texas markets with large concentrations, Dallas and Houston, while showing signs of moderation from last year, are holding up well, with revenue growth running in positive territory on both a year-over-year and a sequential quarterly basis. We continue to believe that our secondary market segment will provide effective portfolio support and stable performance in this weak part of the economic cycle. From our perspective, the single-most important variable impacting apartment leasing conditions across the country is the employment picture. We continue to see that employment conditions in our secondary market are better than in our primary market segment and collectively Mid-America's markets are outperforming national employment trends.

In the first quarter on a non-seasonally adjusted basis, national employment trends were down 2.8%. On a comparative basis, Mid-America's primary market segment was stronger with a decline in employment of 2.1% and our secondary market segment performing even better with an employment trend down 1.6%. We expect this outperformance of Mid-America's markets will continue in the down cycle with an even higher level of outperformance developing as the economy stabilizes later this year and into 2010.

On the transaction front, we're actively looking at a number of acquisition opportunities. We're increasingly encouraged with the trends we see developing as sellers seem to be finally adjusting to pricing requirements. The number of opportunities associated with stressed financing situations is growing, and we see lenders taking a more active role. And as noted earlier, we're also seeing more deals starting to come back around a second time.

Our investment discipline and strategy remains focused on capturing those opportunities where we believe we're buying at a discount to replacement value, and where we feel we can create positive net present value to shareholder value based on a realistic set of assumptions and forecasts. We're currently in conversation with a potential new partner for our joint venture initiative that we mentioned earlier this year we were interested in putting together.

I'm optimistic that we'll have this initiative underway in the second quarter and, thereby, establish an additional growth opportunity for Mid-America, targeting value-add investment opportunities. I'll now turn the call over to Simon to get into more details on the quarter. Simon?

All right. Thanks and good morning. Our fourth quarter FFO per share of $1.01 was an all time record, $0.09 ahead of the mid point of our guidance, and 5% ahead of the first quarter of 2008. About half of the upside from our original guidance was contributed by the properties. Same Store NOI was considerably better than we forecasted and down just 1.1% compared to a year ago. High occupancy and excellent collections helped revenue.

As Eric mentioned, expenses were the primary driver of the NOI outperformance, with Same Store property operating expenses 0.4% below the same quarter of 2008. Some of this was due to new programs. Some due to lower resident turnover, and some due to some nonrecurring adjustments. The other half of the upside from our forecast was due to lower interest expense. Our average interest rate dropped to 4.3%, compared to our forecast of 4.8%. And an average of 5.1% in the first quarter of last year. As we benefited from low agency rates.

Eric mentioned that we did lose a little effective rent, which declined 0.2% from the first quarter of last year to $735. The average effective rent on leases written to new residents dropped by 7.1% over the same quarter a year ago. But rents on lease renewals were up an average of 2.7%. Bringing our average rent on all leases written in the first quarter down only 4.1%. We believe that it was the correct decision in the current market environment to concede rent on new leases to build occupancy.

We think that the close-to-record occupancy we achieved at the end of the first quarter will help us regain a little of our pricing power. As a result of our successful program to build occupancy in the first few month of this year, we expect that our average rent for new leases will improve from the first quarter and be down just 3% for the balance of the year. Year-over-year Same Store revenues declined 0.8% on slightly lower rental rates. But this was still about 10 basis point better than we projected. As I mentioned, expenses were down 0.4%, compared to the same period of 2008. Reductions in repair and maintenance expenses were in part due to lower resident turnover. And also due to improved systems and procedures that we implemented toward the end of last year.

In the fourth quarter, we rolled out a web-based system to help us manage our get ready inventory process which is proving to be quite helpful. We saw benefit from our new purchasing system that we introduced at our properties last year. We were also helped by favorable, nonrecurring adjustments of about $400,000. And marketing costs were trending lower as we increasingly move to online media.

As a result, the reduction in Same-Store NOI was about 200 basis points better than we forecasted. Down just 1.1% compared to the first quarter of 2008. Resident turnover in our Same Store portfolio decreased 7% from the quarter, compared to the same period a year ago. Mainly because residents leading us to buy a house dropped from 31% to 25.6% of move-outs in the first quarter of 2008, to 18.9%. On a trailing 12-month basis, resident turnover is only 60.4%, compared to 63.2% a year ago.

We saw residents moving out for credit reasons rise from 11% of turnover to 12.9% this past quarter. House rental continues to be a very small part of our competition. The number of residents moving out to rent a house increased slightly from 4.5% of move-outs a year ago to just 5.4% of move-outs this quarter. You probably have seen the home ownership nationally dropped to 68.2% of households in the first quarter. Down by 50 basis points compared to the first quarter of 2008. This represents over 600,000 households, a substantial increase to the rental pool which reduces the impact of job losses on the rental market.

We believe that this trend will continue as a result of sound lending standards. For the quarter, AFFO was $0.88 per share, comfortably ahead of our $0.615 dividend, and one of the best dividend coverages for the sector. Excluding the redevelopment program, total property capital expenditures on existing property was only $5.4 million, compared to our full-year budget of $29.5 million. As is traditionally lower earlier in the year.

We completed the sale of one property in Greensboro, North Carolina, Woodstream, 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 in Grenada, Mississippi, which is expected to be completed this month, and River Trace in Memphis, which is now targeted for August. With total proceeds estimated in the $18 million range. Around a 6.75% cap rate. Both properties were listed as held for sale at quarter end. We haven't forecast additional dispositions in 2009.

We continue to have one of the stronger financial positions in the Apartment REITs. On April 1st, we refinanced our only 2009 debt maturity, a $38.3 million bank loan. After this refinancing, we have $175 million of unused capacity available under our credit facilities. In 2010, we have only our $50 million bank credit facilities that matures, which we expect to refinance with our current lenders. Although, as I mentioned we have capacity to take it out if needed. At March 31, our debt-to-total gross assets was 51%. Down 100 basis points from a year ago, and about 300 basis points below the apartment sector medium.

Our fixed charge coverage in the first quarter was 2.77, well ahead of 2.39 a year ago. And also well ahead of the sector median of 2.1. In 2009, we expect to pick up $0.02 a share from debt repricing opportunities on the $38 million of refinancing that we just completed. We have $65 million of debt that resets to variable rate on December 1, and based on our refinancing assumptions expect to pick up $0.08 a share of savings on a full year basis. This does not represent mortgage maturities, but just the repricing of an in-place credit facility.

Despite the feverish pace of equity issuances by REITs over the past couple of months, we have no current plans to issue new equity, and we have not been active with our continuous equity program. Our balance sheet's in great shape, and we have no need to issue equity for defensive purposes. We continue to monitor the capital markets, however, as well as the investment environment, and our position on issuing new equity will change if we begin to see more attractive investment opportunities develop that will accrete net present value per share. We want to remain ahead of the curve to ensure we maintain a strong and flexible balance sheet.

In our press release, we give more details on our full-year forecast, which we've increased by $0.07, to a range of $3.47 to $3.67 per share. Because of the weaker job market, we're projecting FFO for the rest of the year to be slightly below our original forecast, which are originally assumed unemployment averaging 8% to 8.5%. Given the continuing job losses, we think it's prudent to revise our forecast based on unemployment averaging 9% to 10%. The impact of this is partially mitigated by the continuation of the shift of household back to the rental market.

And the reduction of resident turnover, as well as relatively more robust unemployment in our markets, compared to the national picture. Further, we've initiated a number of programs including improved systems, and (inaudible) revenues and expense reimbursement opportunities that are helping improve our top-line revenues and offset increasing expenses.

We're now projecting around a 1.5% to 2.5% reduction in Same Store revenues, which takes into account the impact of the weaker pricing we saw in the first quarter, and approximately a 4% to 6% reduction in Same-Store NOI. We project our average interest rate for the year of 4.4%, compared to our original forecast of 4.8%. We see agency interest rates continue to be very favorable, both overall and compared to LIBOR. 24% of our debt is floating rate, of which one third is capped, and much of our fixed rate debt is swapped against LIBOR. So as the agency rate is trading well below LIBOR, this helped current earnings.

In 2009, we expect property capital expenditure to approximate $29.5 million or $0.96 per share, with recurring CapEx in the region of $21.5 million or $0.69 a share. In addition, we project full-year development funding of $9 million, down from $25 million last year, and $9 million of redevelopment expenditures, about half the level of 2008.

We continue to anticipate that we'll invest approximately $75 million in new acquisitions, and contribute about $9 million for our share of the equity in Fund Two, our proposed new joint venture that Eric discussed. We assume that this second joint venture will be structured similarly to Fund One. We'll invest one third of the equity in an entity that is 65% leveraged. Our forecast also assumes that Fund Two makes $75 million of acquisitions in the second half year. About $0.03 of our FFO guidance is based on the acquisitions being completed in 2009, less than might otherwise be expected due to the impact of FAS 141R, which requires that acquisition transaction costs be expensed.

We plan to finance our investment program with a $30 million of asset sales and our existing credit facilities which we've mentioned have plenty of capacity. We forecast leverage to grow only 60 basis points from current levels by the end of the year with debt rising to about 51.5% of gross assets. We're increasing our full-year AFFO guidance to a range of $2.78 to $2.98 per share.

Our dividend payout ratio in 2008 was 82% of AFFO, one of the lowest per sector. And compares to a sector median of 90%. In 2009, we're projecting our payout to rise to 85% of the mid-point of our forecast, still a strong position compared to most of the others. Absent a major deterioration in the apartment or the financing markets, we don't plan any changes to our cash distributions for 2009. Eric?

Thanks, Simon. We're excited about the opportunities in front of us. I'm confident that we have our operating platform and systems properly focused. Occupancy is in a very strong position as we move into our peak leasing period.

Our new programs aim at driving more traffic to our properties are having a real impact, and our processes associated with pricing and revenue management are working well. We remain convinced that our portfolio strategy, focused on the high gross sunbelt region with diversification in both primary and secondary markets, will continue to yield a more stable level of performance and cash flow during this weak part of the leasing cycle. While also yielding strong results as leasing conditions improve.

And we also endorsed the notion that some of the markets that experienced job loss and leasing pressure first, such as our Florida markets, will be the first to snap back as the economy begins to gain some positive traction. In summary, we continue to believe that our defensive game plan has Mid-America in a good position. Mid-America's balance sheet is also in a terrific position, coverage ratios are strong, we have ample capacity to meet the growth plans outlined in our guidance.

We have a successful history of discipline and proven processes for deploying capital, which has enabled Mid-America to avoid value write downs and the stress of executing forced diluted transactions in this environment to repair a damaged or at-risk balance sheet. We're optimistic that the opportunities to capture new acquisitions that meet our investment disciplines are improving. We look forward to further leveraging the strong operating platform and organizational capabilities that we have in place through new investments for both our own account and through our new Fund Two. That's all we have in terms of prepared comments. And Lee, I'm going to turn it back to you now for any Q&A.

(Operator Instructions). Our first question comes from the line of Rob Stevenson from Fox-Pitt Kelton.

Thanks. Eric or Tom, can you talk about the operating trends through January, through April, and sort of when you saw the occupancy increases, the most notable occupancy increases, then what was happening with rental rate around those times.

Yeah, Rob. I mean, we noticed it obviously the beginning of the first quarter. Where especially plays like Atlanta and Jacksonville were in the low 90s and we weren't particularly comfortable with that. We made some pushes there to generate traffic and be more competitive on rent in both those markets. And those really began to build for us throughout the quarter.

We ended April in Atlanta at 94.3, which is about 10 basis points higher than the prior year. And in Jacks we were over 96. Both those markets were sort of leading places for us as far as new rent erosions which are in the range of 9% to 12%. But we're pretty excited about the build-up of occupancy and then we'll go from strength. So I think we'll see new rent prices actually improve from where they were the first quarter in those two markets.

Okay. And then, Eric, can you talk about in the release you got to talk about the gains that you're seeing on the redevelopment unit. Can you sort of talk about what the trend that you've been seeing was -- has that been pretty consistent, those returns up until recently? I mean, or was there any sort of pushback on the ability to drive the significantly higher rents on the redevelopment units in March and April, price wise?

Well, Rob, I mean in general, we went into this year with the expectation that we were going to approach our renovation effort slightly different than we have for the last couple of years. Knowing we were having a more challenging pricing environment. And so we went to what we refer to as our renovate light program. And doing less of the renovate heavy if you will.

But overall, you know, the program is still playing out in line with generally what he we expected. And, Drew, is there anything? Drew runs the asset management end the program. What would you add?

Thanks. I would add, as Eric said, we knew that 2009 would be a tougher year for redevelopment. So our plan was to continue with really the most successful locations, the most successful projects.

And so what that meant in total is that we expected to do just, simply less units. About 50% less this year than we did last year. About 1,800 to 2,000 units this year. We rented close to 600 apartment as the release said in the first quarter, with about a 9% rent increase.

And I'll add, Rob, that one of the programs that we ramped up this year in connection with the renovate is sort of a renewal renovate effort where we're we've got specific marketing pieces. We're reaching out to a lot of our existing residents in an effort to try and get some excitement for staying with us, and go through a renovation process, of course at a higher rent. It's working well.

Okay. And then a couple of quick questions for Simon. Simon, what have you been seeing on real estate taxes? Was there anything that hit materially in the first quarter or anything that you started receiving in April, or this first week of May, that would give you greater insight as to where that sort of is trending?

Rob, first of all, we did receive some favorable judgments in Texas from last year, from 2008, lawsuits that we had filed, which helped a little bit. But overall, we're just getting valuations in on Texas which are a mixed bag.

And in short, it really is too early to tell at this point where it's going to stand. I hope by the end of the second quarter we'll have a lot more clarity. But we're still running at the same forecast level that we were three months ago.

Okay. One last one. Did you guys mention a number as to where unemployment is trending in your markets specifically?

I think that what we're seeing is unemployment, the numbers that we're looking at substantially less than the national numbers.

Yes. We didn't quote a specific unemployment number per se for all of our markets. It varies quite a bit. Obviously its a significant difference in some of the Florida markets and Atlanta, as compared to Houston and Dallas.

But certainly what I did mention is that on a national average, again without adjusting for the seasonality factors in the Q1, national trend was down 2.8 as compared to mid America, which was down a much smaller number, closer to 100 basis points less, I think. You know, we continue to feel that a combination of our secondary market component is going to shore up the pressure we're seeing from job loss trend.

Rob, just a little blurb that we noticed in the statistics on March's early numbers. Our secondary markets between February and March added 30,000 jobs. Which is, I mean that's not going to fix anything overnight. But frankly, just that we're adding, we're able to see the words adding jobs places was pretty fun to see.

Great. Thanks, guys.

Our next question comes from the line of Buck Horne from Raymond James. (Operator Instructions).

Good morning. Just wondering if you could talk a little bit about the credit profile of some of your new applicants. Are you having to turn away more people that have foreclosures on their credit record?

This is Drew, Buck. We haven't seen a whole lot of change in the profile. Our decline rate was up, at around 8%. We denied 171 more residents in the quarter than we did in the same quarter a year before. I think that tells you a little something.

So we're seeing I guess a little bit lower profile in the front end. But frankly, we're keeping our credit scores up and strong and I think we've got a very good front-end system and also a very good monthly process to make sure that our delinquency stays good.

And Buck, I'll add we did not modify our program to, if you will try to call out good renters that just happened to, should not have bought a home, to have foreclosure. We really don't endorse that whole approach.

We've got a standardized credit scoring system, and we don't specifically target those folks who have had homes foreclosed on. But as Drew mentioned, we're pretty satisfied with what's happening on the quality front given that our net collection loss is running,still very low, very strong relative to historical standards. And in fact, if you look at the percentage of our residents that pay late, pay after the 5th of the month, it was lower in Q1 as compared to the same period last year, and it is even better than on a sequential basis, as well. So it's something we're watching very closely. But feel pretty good about it.

Great. Thanks. And just on a related kind of note, what's your thoughts and do you have any concerns about the uptick in the tenants leaving to rent houses, meaning I guess are you starting to see an increased number of foreclosures in and around your particular properties that are starting to come back as rental units?

No. That is, we're like 4% to 5% of our total move outs for that. It's remained relatively flat. I think Jackson, Mississippi, was up slightly by five people moving out for home buying. I mean for home renting, excuse me. Its not been a factor thus far, but we sure watch it.

Okay. Great, thanks, guys.

Our next question comes from the line of Rich Anderson from BMO Capital Markets. (Operator Instructions).

Thanks and good morning, folks.

Good morning.

On the interest expense savings, that's all just your variable rate debt. And there's no like refinancing at lower rates that had effect on that number for the full year, is that right?

This is Al. I can give you color on that. Really, you got a few things going on that. One is just in general, LIBOR rates are lower in the quarter than we projected going in. But the biggest impact was really the discount between LIBOR and agency as Simon mentioned in the call. Agencies have traditionally traded somewhere between zero and 15 basis point below LIBOR.

Over the last couple of quarters, because of what is going on in the market, it was much, much lower than that, and it just was lower than what we expected in the first quarter, which made up the bulk of that in the first quarter. We expect that to continue somewhat throughout the rest of the year. But we do expect that that discount to narrow a bit as we get to year end. But that's the majority of it.

Great. Eric, you guys seem like, you are, a bit earlier in having the conversation about acquisitions, than a lot of your peers within multifamily and outside of the sector. Why do you suppose that is the case? Is it something about your markets that is moving the needle a bit quicker? Or is it just about the company and your view of the world vis-a-vis the rest of your peers?

You know, Rich, I can't really offer any insights on what others are doing or looking at. I can just tell you that from our perspective, we are seeing, as I mentioned, some deals starting to come back around. We're seeing a little more distress. We're very, being regionally focused as we are in these southeast markets, southwest markets, and having done it for 15 years, our group is very in tune with what's happening in this region.

There's been a lot of sellers going through a process of sort of denial and gradually coming to sort of accept the new paradigm. And I think there's been this belief that, you know, with Fannie and Freddie available, that some of the sellers were hopeful that they could continue to get the same kind of pricing. Frankly the buyers for the most part, I think have been continuing to stay on the sidelines just as a function of, frankly how do you underwrite what's going to happen over the next two years? People were reluctant to really pull the trigger.

But we're seeing frankly, things come back around now where the sellers are just that much more motivated, given the fact there's nothing been happening. And I think they're feeling a little more pressure. And, we just take a very conservative approach to what we think is going to happen over the next couple of years. And,if the deals start to pencil out, we'll start to pull the trigger.

Obviously we haven't bought anything since I guess last October. And we're not, I'm not suggesting we're going to go out and buy a bunch tomorrow. But we are seeing just evidence that things are starting to pick up a little bit in terms of moving our way. So we're optimistic. But we're still being pretty cautious before we pull the trigger on anything.

You say $75 million the second half through the fund?

Yes. That's correct.

That will contribute $0.03 to the full year FFO?

It'sa combination of $75 million for Fund Two, as well as $75 million for our own balance sheet. That's a total of $150. Of course in the JV we'll own a third of it. And then whatever that accounting rule is, FAS 141R, that impacts us. That's why it's only $0.03.

Okay. Because you have to expense the cost.

Correct.

What are your views getting back to the debt picture, about 24% of your debt being variable rate? Do you have any designs on reducing that at this point in time?

That's a good question. As you saw, I think we had our fixed rate debt in the quarter was about 76%. That is lower than we normally run. We normally are 86% fixed. We had another 6% of our debt capped. Which brought the total to about 82% hedged.

I think what you're seeing there is in today's marketplace, there is a pricing advantage. Certain circumstances to do a cap instead of a swap. We're able to put in caps in place, about 5.5% all in costs. Which we think is a very good pricing comparison. So you may see us make that tradeoff a little bit over the next couple of quarters as it makes sense in pricing.

And so you may see our, technically our variable rate go up. But we will maintain very good protection, very low rate caps in place.

Yeah, but if you get up to the cap it's going to be damaging to your earnings.

Yes, but all end rate on a cap, that's a good point. But at 5.5% all in with all cost, that's very comparable to the marginal financing that you'd see in the marketplace today, which is somewhere between 5.5% and 6% that people are putting on for new caps.

We're using these caps to continue to manage the rate on our very favorable contracts with Fannie Mae and Freddie Mac that we have outstanding. And so the all-in rate on that is very good if it were to go that. But we believe for a very long time it will be way below that and we're going to have a tremendous benefit.

Okay. Then I think you guys said the net new leasing rent was down 4.1%. Is that right? A combination of up 2.7% for renewals and down 7% for new leases. Are those were the numbers?

That's correct.

Was it 7% for new leases down or 7% and change?

7.1.

Okay. You said you have these retention programs in place. And that, can you give more color on what a retention program is.

Drew, can you handle that? Go ahead.

Certainly I think as we went into this year we knew that keeping people living with us was going to be important. And so we really had an institutional focus on retention.

And I think the main components of that were looking at the last 90 days of a resident's tenancy or occupancy. We started at the annual leadership conference talking about it. And we worked on it through the whole first quarter. Really looking at the last 90 days and our marketing efforts, what we're doing to stay in good contact with those residents. The marketing collateral that we used. We've upgraded all of that.

We've upgraded our reporting that gives our property teams sort of a real-time look at who's renewed, who hasn't renewed, who we still need to talk to, so that we can be as effective at renewing residents as possible, in that last 90-day period.

And what we've also entered is, as Drew mentioned, we've got a number of enhanced reporting processes between here at the home office, as well as our multisite folks out in the field, where we can monitor real time, frankly, where we are in our renewal effort for everything that's showing exposure over the next 90 days.

And if we see that we're not getting the responses or we're not getting the progress as quickly as we can, we're in the position to respond much more proactively and get our marketing folks involved or get some help out to the property, whatever we need to do. It's just frankly a little bit more aggressive, hands-on approach that we're taking, in addition to the more robust marketing and so forth that we're doing.

And Rich, as part of the explanation, too, I think there's a school of thought out there that a flat rent increase these days is a good one. And our strategy really, building on what Drew and Eric are saying, is to ask how the first letter comes out. And we're asking for an increase in most cases. When you do that, though, you've got to really be on the follow-up with them, and then if it's warranted and if it's in a market we'll negotiate down a bit. That's helped us keep the renewal rates above market rates if you will.

Okay. Thank you very much.

Thank you.

Our next question comes from the line of Michael Salinsky from RBC Capital Markets. (Operator Instructions).

Good morning, guys. The first question, the Same Store guidance, the revenue and NOI forecast you guys put out there. I'm assuming that it includes the bulk cable. What are those ranges excluding the bulk cable and other fee income?

I can tell you that the bulk cable adds about, this year about $0.5 million dollars into our plan. Sorry, if you can do the math. We don't have that.

We'd be glad to get it to you after the call. But that's about $0.5 million in the Same Store group.

That's helpful then. Secondly, Eric, you touched upon a couple of opportunity coming back that you walked away from before, that pricing was not coming in. Can you give us a sense of where pricing is? And what markets are looking the most attractive from an acquisition standpoint right now?

Well, pricing, from a cap rate perspective, depending on how you define cap rate, I mean at least the way we define cap rate, the kind of in the 6.5 to maybe 7.25 range, for the kind of quality that we're looking at buying. Course, that that's coming off some weak to declining NOI numbers, but that kind of cap rate pricing range is typically what we're seeing.

Then in terms of the markets that we're interested in, where we're seeing some of the opportunities, some of the Florida markets are looking increasingly attractive. Phoenix, of course, is a market that's kind of flat on its back and probably will be for a while. And a little more stress out there that we're looking at. I think the opportunities may start to build a little bit better in Austin, just as a function of that market starting to show some weakness.

So, you know, those would probably be the most active areas that we're looking at at the moment. And, our JV initiative is, I think we may have touched on briefly, is really focusing on sort of the value add opportunity. And, you know, we're starting to see a little bit more there, as well. But, you know, the other thing is coming back around more, and we're seeing more of, is some of these failed condominium projects. And, those are pretty complicated to try and execute on. And we've looked at a few of them.

And just continue to feel like it's just not worth the brain damage if you've got a high percentage of the units that have already been sold or are in some level of foreclosure. You've got to have a very conservative approach to how you're going to try to convert that property back to rental. I don't know exactly how a lot of those projects get ultimately unwound. But there's more and more stress on those showing. Pricing may get attractive enough at some point that it's worth the effort. But so far, we haven't seen that.

That's helpful. Finally, not to leave you out, Simon, here. I know you guys have good relationship with both GSEs. Can you give a sense of what you're hearing from them as of late here? There's been rumors about the government possibly looking to combine the two. Just what are you hearing, what are they saying with pricing, capital availability as such?

Al, if you want to?

Sure. I'll give you color on that. I think in general we're continuing to see the same commitments from both agencies, that if they have the capital, they're still virtually the only, certainly the most valuable player in our space.

We have seen over the last few weeks their costs, their spreads come in a little bit. I think particularly Freddie. So they're still very strong in the industry. I think they both have the capital to keep providing support for these. I think you will see them use different types of products for the future.

Maybe more securitized type products. Keeping more off balance sheet, maximizing the impact of the capital they have, providing liquidity in the marketplace. We have heard the rumors that you're talking about. Who knows what's going to go on there. My guess is if they do, they will break apart based on the types of business, and give different type of business to each one as it makes sense. But, who knows what's going to happen there.

Thanks, guys. That's helpful.

Our next question comes from the line of Nap Overton from Morgan Keegan. (Operator Instructions).

Yeah, just a couple of follow-up comments on the potential acquisition opportunities. Those cap rates you talked about being in the 6.5 to 7.25 range, is that on trailing NOI numbers, forward NOI numbers? And what kind of reserve do you use as you evaluate those?

Generally the way we define cap rate is forward-looking NOI. A 350 CapEx reserve allowance and 4% management fee. So that's how we define it.

Okay. And then what -- so what kind of opportunities would -- you said you're not interested in raising equity, don't need to. That's interesting. You could do it without considerable dilution. What kind of opportunities might -- what would have to develop to cause you to consider another slug of substantial long-term capital?

Well, frankly, Nap, it comes down to our belief and the ability to put the capital out on a basis that's accretive to NPV to our shareholders. It would strictly be an offensive mindset that would compel us to do anything along those lines. So, if pricing opportunities in the transaction environment continue to improve and we see that spread between how the public markets are pricing real estate, and particularly our real estate, versus how the value of these assets that are out there in the marketplace, and if there's a positive arbitrage that develops there so that we feel like we can really build NPV for our shareholder at, then we begin to think about the equity issuance a little differently.

But, as it always has been, it comes down to really, can we put money to work and can we put it to work on a basis that meets our investment disciplines. And meets the strategy that's guided us for 15 years. And if we think we can, we'll do it. And if we can't, we won't. And it's that simple.

But it's sure good to be in a position right now that, we certainly don't have a gun at our head. We feel very comfortable in our ability to execute the game plan that we've got for this calendar year and the transactions that we plan to hopefully get. We don't have anything under contract at the moment. But, we're looking at a lot.

And to be able to do that and still keep leverage at a level that we're very comfortable with, that defined as a percent of gross assets and coverage ratios and dividend coverage ratios, that are better than frankly the sector average, we're thinking about it strictly from an opportunistic perspective. And what guides us ultimately is, can we put it out on a basis that makes sense and that's where we sit today.

The other other add I'd just make, Nap, is to Eric's comment is that we feel very good about it. He said about leveraged levels we're at and where we're heading this year. Next year, obviously we'll have another game plan and we'll have to look at what our forecast will be when we get closer to the end of this year.

But at some point obviously if we continue to grow, then we'll need to be back to the well. And I would anticipate that if we do plan to have a growth plan that's similar to this year next year, then sometime between now and then we'll want to be back at the equity markets again.

But for the present time what we can see on the horizon, we're saying we're fine. We're going to obviously carefully, as I said in my comments, carefully monitor the capital markets and the investment opportunities between now and then and see how that plays out.

Okay. Then one other thing. In the wake of the after math of 9/11, Mid-America outperformed multifamily group pretty nicely there for a season. Other than the clear difference of the credit situation now versus then, are there other interesting things to compare and contrast between the situation now and then when it appears your outperforming again now and might be expected to continue to. Is there anything to contrast now versus then that is substantially different other than the credit situation?

Yes. There's two things frankly. The biggest variable I think is the fact that we're seeing new supply in our markets virtually shut down. And back in the 2001, 2002, 2003 timeframe, developers still had access to capital.

So the ability for our markets, which arguably demonstrate better job resiliency and better job growth in general, coupled with the fact that we are likely facing virtually no real supply pressure for the next couple of years, I think puts this scenario, this situation if you will, in a much better position than we were back in 2002, 2003. The second variable would be the fact that, frankly this continued correction going on in the single-family housing market. We were really back in 2002, 2003, still losing a lot of our customers to buying a house.

And it was a function of undisciplined mortgage financing practices, where no down payment was required, and frankly no real credit history was required. While single family home prices are coming down, and the affordability is improving to buy a home, I don't think we're going to go back to undisciplined financing and extending credit practices. And a down payment is still required. And, paperwork has to be completed. And, the ability to pay the loan back has to be there. And so I think that again that's another positive factor in our favor, this cycle versus the prior cycle you were referring to.

Good. Thank you.

Yeah. Thank you.

Next question comes from the line of Carol Kemple from Hilliard Lyons.

Good morning, congratulations on a nice quarter, guys.

Thank, Carol.

Thanks, Carol.

In your NOI guidance, Same Store NOI guidance for the year, where are you all assuming occupancy will be at December 31?

I think we're assuming occupancy to be in the 94.5% range. From that's most of the back half of the year, Carol.

Okay. Are you all seeing any pickup in tenants wanting, either new or existing tenants, wanting to move to one-bedroom units compared to sharing an apartment with a roommate?

We watch that. The one-bedroom apartments, we're not seeing a ton of transfers on that line. But our one-bedroom units are more occupied than almost any floorplan. It's our leading floorplan. But we're not -- and we're seeing some trade down and some pick up roommates. But it's not a huge trend in any direction, Carol.

Okay. Thank you very much.

Thank you.

Our next question comes from the line of Lindsay Yao from Robert W. Baird. (Operator Instructions).

Good morning. I wanted to touch on the initiatives again, like the moving to web-based operations and renovate light. I remember you gave us a list of initiatives, this is probably for Drew. Have there been any of those that have fallen off or that you're modifying for the rest of the year?

Hey. This is Drew. No, I think there still continues to be four primary changes or initiatives for 2009 that we're still moving ahead with. We increased our trash and pets fees in February.

Our bulk cable program is, we rolled out 21 properties in the first quarter, and we rolled out 12 more in April. And we're continuing to forge ahead with that. We reduced our resident screening costs with a new partnership with a second partner. And then our statement billing project which moves our billing of our utilities in house is still on track for June, July.

So really those are the four main things that we've got. And they're continuing to move forward like we had planned.

The only real modification was the fact that we're doing fewer and lighter renovates really.

Right.

This year compared to last year.

But , yes. And that was

Exactly. Right.

Okay. And then just one final question. Are there any new employers that you're putting on some sort of watch list going through the rest of the year?

Employers?

Just when you're monitoring the employment market or employment environment?

Yes. That's a good question. You know, not really. I think that, we fortunately don't have a presence in Charlotte. If we had a big presence there, I'd be a little bit worried about some of the financial service employers in that Market.

But broadly speaking, there's not any, going forward, the financial services employment base is probably the one I'd be a little nervous about right now. But, we do not have a presence up in the upper midwest, or anything where you've potentially got exposure to some of the major auto manufacturing industries and so forth.

Most of the auto manufacturing businesses in our region tend to be the foreign manufacturers, who frankly are doing okay. In terms of employment. So, nothing in particular I could point to. Tom, you want to?

Yes. The only one that comes to mind that's gotten a ton of press lately is FedEx. I mean, we obviously in Memphis pretty supportive of them. And they announced sort of global cuts. But they employed 30,000 people in Memphis and today they employ 29, 500 in Memphis. So that's somebody that we watch. But it's not on a watch list in the sense that we're worried about them. They're super solid.

Okay. Great. Thank you.

Thank you.

(Operator Instructions). I'm showing no additional questions at this time, sir.

Okay. We appreciate it. If you've got any followup questions, give us a call. Thank you.

Ladies and gentlemen, this concludes today's presentation. Thank you for your participation. (Operator Instructions). Everyone, have a wonderful day.