Mid-America Apartment Communities Inc (MAA) 2009 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, [Sean], 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; Al Campbell, our CFO; 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 this 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 of this morning's call, will be available on our website.

I will now turn the call over to Eric.

Thanks, Leslie. And good morning, everyone. Mid-America reported better than expected results yesterday. The operating performance is stronger than we had forecasted. The upside was due to better than expected pricing and collections performance, as well as lower real estate taxes. In the year that presented significant challenges for the apartment business, Mid-America same store revenues for all of 2009 declined an average of only 1.2%. And NOI declined only 1.5%. For the year, FFO per share grew 1.6% and set an all time high for our Company. As outlined at the beginning of 2009, we expected that Mid-America's portfolio strategy and financing program coupled with the strong operating platform, would generate results that would hold up better than most during this tough economic cycle. As we look ahead towards another challenging leasing environment in 2010, we believe Mid-America is well positioned to once again deliver solid results.

Our same store forecast for 2010 is of course coming off one of the best performances in the sector for 2009, and thus, the benchmark comparison for Mid-America will be tougher than the sector average. Nevertheless, with pricing trends and our portfolio showing early signs of stabilizing, and occupancy continuing to hold up well, we remain convinced that a long and strong recovery cycle for Mid-America will emerge late this year. After several quarters of downward pressure on rents, we're encouraged by early signs suggesting that we have reached a point where we should be able to hold strong occupancy at current pricing levels. On a year-over-year basis, rents on leases written for new residents moving in were down 6.3% for all of 2009, as compared to all of 2008. Over the course of 2009, January to December, new resident rents declined at a slower rate, down 3.2%. And over the last three months, new resident rents were down only 1%. This flattening trajectory, coupled with the fact that our occupancy has remained very strong, and our 90-day exposure, which considers current vacancy plus notices to move out, is lower than we've seen in quite a while, suggest to us that we should begin to capture greater stability in new lease pricing this year at most of our properties.

Looking at pricing on leases written for renewal transactions, as you would expect, rent trends were not under quite as much pressure as new resident pricing. Renewal lease pricing declined by 2.8% over the course of 2009. As compared to 3.2% for new resident pricing. However, rent trend for renewing residents will generally lag the trend for new resident rent, and thus, we expect to see some continued pressure on renewal pricing over the next few months. Given the expectation that the decline in new resident pricing is bottoming out, and that overall leasing conditions are set to improve in the second half of this year, we expect that pricing for renewal leases will likewise begin to bottom out mid-year and start to recover late this year and into 2011.

In summary, with occupancy levels high, with our 90-day exposure very much under control, with employment trends showing signs of stabilizing, and with new supply deliveries in most markets continuing to decline, we believe leasing fundamentals will support the start of pricing recovery in the second half of 2010. It is worth noting that according to the Bureau of Labor Statistics, the total job loss incurred across Mid-America's markets in 2009 was roughly 731,000 jobs. The projection for 2010 is that 126,000 new jobs will be added across our markets. The majority of the revenue pressure we expect to see in 2010 is a result of the pricing actions taken during 2009. As we work through the heavy leasing season of the summer, we expect to reprice the bulk of the portfolio at generally flat to slightly higher rents which will then set up for stronger recovery in 2011. Taking a look at expectations from our various market concentrations, based on employment outlook and new supply deliveries, we expect continued weakness this year in Atlanta, Jacksonville, and Raleigh, as a limited amount of new supply from projects started prior to the credit market pull back come online.

Markets that have had some weakness over the last few quarters that we believe are beginning to stabilize and are likely to be somewhat flat in 2010 are Houston, Austin, Charleston, Greenville, and Tampa. Markets where we expect to capture more stable performance this year as compared to 2009 are Memphis, Dallas, and Nashville. As we've discussed in the past, we believe that our portfolio strategy of diversifying capital across the high growth Sun Belt region, in both large and select secondary markets, is a key attribute to our goal of providing shareholders strong full cycle performance. As detailed in our earnings release, our secondary market segment continues to deliver a more stable level of performance during this part of the cycle. But as we begin to look towards recovery, with nearly 60% of our asset base in the large tier market segment, that will deliver some of the most robust job growth numbers in the country between now and 2013, and with all of these markets expected to see drops in new supply delivery that are well below long-established historical delivery rates, we believe the Company is in a terrific position to deliver strong results over the next two to three years.

We were pleased with the three acquisitions completed during the fourth quarter, which included our initial investment into the San Antonio market. We're also pleased to get another investment into our new joint venture. We believe all three acquisitions will be good long-term investments that will meet or exceed our performance goals. And in each case, we achieve very good pricing as compared to replacement values. A lot has been said concerning the challenges by our space given the limited number of quality properties brought to market thus far, with a significant amount of new investment capital chasing deals. Despite the competitive transaction environment, we believe that we will be successful in capturing a meaningful level of attractive new growth for our shareholders over the next couple of years. We have a long record of strong performance for sellers and brokers in this region. And we are generally provided an opportunity to look at most deals. Our strong public REIT balance sheet provides a competitive advantage in a number of markets where we are competing with private and less well capitalized buyers. In addition to our normal channels for sourcing deals, we are also working with regional and national lenders to identify situations where we can provide a situation for some of their distressed loans that match up with our investment objectives. Our acquisitions focus in 2010 will continue to center on the Sun Belt region with a commitment to both large and select secondary markets, and our goal of delivering strong full cycle performance for shareholders.

That's all I have in the way of comments. I am going to turn the call over Al. Al?

Okay. Thank you, Eric. Good morning, everyone. Our fourth quarter FFO per share of $0.92 was $0.05 ahead of the midpoint of our guidance, and as Eric mentioned, this outperformance was driven by solid operating results for the quarter. With both revenues and expenses contributing to the results. Same store NOI for the fourth quarter was forecasted to decline between 5.5% and 6%. While actual performance was down only 2.6%. Occupancy remains strong during the quarter. While lease pricing, collections, and fee income were all a bit better than projected, producing an additional $0.03 per share in revenues. Property operating expenses remained under control in the quarter, with real estate tax expense continuing to benefit from successful prior year appeals and favorable assessments, producing the majority of a $0.02 per share favorability to forecast.

Our balance sheet is in great shape. And we continue to have one of the strongest financial positions in the apartment sector. Our fixed charge coverage remains at 2.68 and our leverage at 50% debt to gross assets is well below the sector average of 56%. As Eric mentioned, we were busy on the acquisition front during the fourth quarter. Which led us to issue a small amount of additional equity about $8.2 million under our continuous equity program to maintain the strength of our balance sheet. As we've discussed in the past, our usage of this program will remain controlled and closely related to acquisition activity. Our only debt maturity during 2010 is our $50 million bank credit facility which matures in May. Negotiations for this have gone well. And we expect to close the renewal of this in the first quarter 2010. We also have $180 million maturing mid to late 2011, and we have begun preliminary discussions on these refinancings. Our current plans are to replace these maturities with fixed rate agency debt, which easily remains the most available and best option in today's environment.

During 2010, we also have $148 million of debt repricing. As four interest rate swaps mature an NR rate of 5.7%. Of course, as outlined in our press release these are interest rate maturities only and not contract or mortgage maturities, and we currently plan to replace these maturities with combination of new interest rate swaps and caps, with an average cost of approximately 4.5% to 5% during the first year. These transactions, along with the current yield curve, support our current expectation of continued low interest cost for 2010, which we are projecting to be about 4.2%. At year end, just over 81% of our debt was fixed, swapped, or capped, remaining well protected against a significant rise in interest rates. We've historically maintained around 20% of our debt floating rate or unhedged, but we expect that percentage to move a bit lower during 2010 as we move to further protect our balance sheet from rising interest rates.

Our initial earnings guidance for 2010, which is detailed in the press release, is built on continued strong occupancy and a stable lease pricing environment through much of the year. Total revenues for 2010 are projected to continue declining for the first couple of quarters, as new leases are repricing to the current rent levels. Expenses are projected to remain under control for the year. With real estate tax expense, nearly a quarter of our operating expenses, projected to grow about 4% in 2010, as more rate increases are expected from local governments beginning to deal with revenue short falls. As mentioned in our release, the revenues expenses related to our bulk cable program continue to grow in 2009 and will become more sizable in 2010. Contracts under our former program were essentially fee-sharing arrangements, where as under the current program we purchased cable and pass it on to our residents at a markup. This new program requires different accounting treatment, resulting in revenues and expenses reported gross on separate line items on the P&L, and since this new program is ramping up, and the financial statement presentation is a change from our prior program, we plan to report same store performance both before and after the new presentation throughout 2010, in order to provide more clarity for you.

As outlined in the release, we expect NOI to decline 6% in 2010 at the midpoint of the range. We believe that the cumulative two-year decline of 7.5% when combined with the 2009 results, will compare favorably to the apartment REIT sector. We have several property revenue and expense savings initiatives which contribute to the 2010 same store performance, many of which be during 2009. These include the bulk cable program, trash and pest fee increases, resident screening and billing improvements, and decreased print advertising costs. Which in the total, are expected to add about $1.8 million to same store results. We also expect an additional contribution of between $0.08 and $0.09 per share from our recent development and lease-up and acquisition pipeline as it continues to mature in 2010. We expect capital expenditures for 2010 on existing properties to be near historical levels. Somewhere around $770 per unit in total. We also expect an additional $9 million to be invested in our re-development program, generating rent increases of around 8%. We have projected $150 million of acquisitions during 2010 for our own balance sheet, as well as for Fund 2, which we spread fairly evenly throughout next year in our projections. We plan to finance our investment program with a combination of debt and equity funding during the year as necessary in the year with the debt total gross asset somewhere in the range of 50%.

Thank concludes our prepared remarks, Sean, so now we will turn the line back over to you for questions.

Thank you. (Operator Instructions). Our first question comes from [Sarupt Galba] with Morgan Stanley.

Hi, good morning. I was wondering if you could tell us a little bit about cap rate differential between the coastal markets and your markets, and also what markets are you looking for new acquisitions in 2010?

Well, this is Eric. In terms of differentiation, as far as cap rates are concerned, when you talk about coastal markets, I assume you're referring to the more traditional high barrier coastal markets on the West Coast, and Northeast markets. Versus the markets that we have operated in the Southeast/Southwest. Honestly, I don't know if there has been enough clarity in terms of transaction volume, enough volume to really draw any meaningful conclusion as to where cap rates are -- and spreads are sort of selling out. My sense is that I've heard of some cap rates associated with assets and the more traditional high barrier markets trading in the sub six range. For what we're seeing, in our region of the country, the kind of quality assets, good quality assets, fairly new assets, in the markets we are pursuing investment in, we're seeing cap rates in the 6% range, low 6%, maybe 6.25% range.

But as you may know, and I think we may have talked about in the past, honestly, we don't spend a lot of time focused on cap rates and thinking about it. Our focus is really and our decision making as it relates to how we deploy capital is all based on internal rate of return and trying to look for ways to create the highest MPV we can for our shareholders. But I think there is still not -- there is not a lot of transaction volume that comes to market, there is a lot of capital chasing deals and well located assets and good quality assets are commanding a lot of attention. Having said that, where we're finding some of the better buying opportunities are those that are in some significant level of distress, maybe a brand new property in lease-up, or some other kind of issue like that, and of course, going end cap rate in those kind of nonstabilized situations doesn't make a lot of sense. So another reason we don't really spend a lot of time on it.

In terms of the markets, we continue to like the footprint that we have, we continue to believe that where some of these markets are in the most distressed situations such as the Phoenix, and some of -- perhaps down in south Florida where potentially you may see a little bit heavier levels of distress, I think that those may provide some of the best buying opportunities over the coming year, so we will continue to look in those markets. And we continue to like the Texas markets, in general, Dallas, Houston, Austin, and of course we're now into the San Antonio market. We would be looking to fill out our presence in San Antonio. And we continue to like the Carolina region and would also be looking to potentially move into the Charlotte market at some point if we found the right opportunity there. Thus far, we haven't. So no real change in terms of our portfolio strategy or the market focus that we have.

Okay. Another question I have is on the occupancy. I notice that sequentially it is down 90 bips. Is that seasonal? Or is that due to the fact that you're now looking at rent increases, stabilizing the new leases?

Well, it is Tom. It is a seasonal. And if there is an anomaly there, it is frankly that it didn't move down as much as it has in past years. As of the fourth quarter, is generally a very spoiled leasing season. We usually see occupancy dip a bit more than it did. And that's one of those things that we take heart in, that the fourth quarter looked frankly as good as it did. For hope. Not knocking it out of the park in 2010 but that's a hope item.

That's very helpful.

Thank you.

Our next question comes from Michael Levy with Macquarie. Michael your line, is open could you try pressing your mute button, please? We will go to the next question. Michael can press star one to re-queue. Our next question comes from [Michael Salinsky] with [RBV].

That's Salinsky. Good morning, guys. A couple of quick questions here. First on your assumptions for 2010, what is the employment forecast you guys have kind of built those on? And also just curious as to what your assumptions were for LIBOR or relative rate. Have you assumed any kind of increase as the year goes on there?

Mike, I will take the first one and I will let Al take the second one. As far as sort of broad economic assumptions, we generally think that there is not going to be much in the way of employment recovery broadly speaking across the country in 2010. We think that sort of this tennis-type unemployment rate will persist through really most of 2010. As I mentioned, at least according to the Bureau of Labor statistics, we are expected to see net job add of roughly 126,000 127,000 across our market, new jobs in 2010, but broadly speaking, we think that kind of this 10% unemployment rate will persist for a while. And we will see what really drives the belief that we are, if you will, bottoming out and potentially starting to get some pricing traction in the last half of the year. It is not so much a function of recovering economy and employment as much as it is the supply line is absolutely turned off, and we've got a few projects here and there that are continuing to come online this year that are pressing us. But broadly speaking, it is the lack of new supply in a stabilizing employment market that suggests to us that we're reaching a point of sort of equilibrium as far as absorption goes, and thus should be able to stabilize pricing over the last, as we say, last part of the year. I do think that hopefully we begin to see the economy really pick up steam in 2011 and the jobs follow, next year would be my guess.

I will take the LIBOR question. We do have an increase built into our forecast. And just basically we used the yield curve, and right now, it is very steep, and the short-term rates remain to be very low. But over the course of the year they are projected to sort of rise 50 to 75 basis points or something like that, last I looked at it. And so we basically have baked that in, and I think deeper part of the question may be we're continuing to hold our interest rate at very low 4.2% this next year, like we did in 2009, and that's really a function of the refinancing, so rate maturities that we have going on, we have the $65 million end of last year, which it was 7.7%, and we refinanced it, very low rate, and then we will have the $148 million that I talked about this year, and so a combination of all of those things, combined with the current yield curve, rising somewhat over this year, hold our rate very low 4.2%.

That's helpful there. Second question though, the three purchases during the quarter, I think you disclosed the one in Tampa before. What were the purchase prices for the one in San Antonio as well as the one in Austin? Cap rates on those and what kind of IRR's were written on those?

The one in San Antonio, I don't have the IRR in front of me. I will get that for you, Mike. But it is going to be somewhere around $13 million to $13.5 million kind of range for both of these deals, based on the way we underwrote them. As far as the San Antonio deal, we paid $29.8 million for it, so roughly about 75,000 a unit for a brand new property in San Antonio, Texas, that I would put replacement value somewhere in the $105,000 maybe $110,000 range. And then as far as the Legacy at Western Oaks in Austin, Texas, we paid $46.5 million for that property, putting the per unit price at roughly around $97,000 a unit. This is in a terrific location in Austin. The property has done extremely well from holding up in terms of this current environment. Around 95% occupancy at the time we bought the property. Of course, they've had to back off on pricing a little bit, as we all have. And again, I would put replacement value for this location in Austin probably somewhere around $120,000 range for the quality asset that we bought. Cap rates on these I'm going to -- I don't know, because frankly, we didn't spend a lot of time on it --

They average about 7% for the three deals, Mike.

And that's on 412.

It is.

Perfect. And then finally just curious, if you're looking at your portfolio versus the market right now, is there a gain of lease or loss of lease at this point? And if so, how would you quantify that?

Well, I think that this is going to be a year of transition. I think that what we've got going on to -- and you almost have to sort of -- when you look at the in place leases that we have right now, I think that for the leases that were written in, say the last six months of 2009, that mature over the next six months of 2010, or maybe actually written in early 2009, first three quarters of 2009, I would say there is probably sort of a loss to lease, if you will, that has yet to be recognized, and that's why we forecast that we're going to continue to see some downward pressure on rental rates over the first, call it, six to eight months of the year. But I think that as conditions flatten out, and by sort of Q3, Q4 of 2010, as we begin to reprice the leases that were written in the last half of 2009, we really think that the gain to lease relationship starts to come back into the equation. And of course, the challenge with all of this, the way the math works, is it takes a little time and several months, and depending on the time of the year where you're leasing and repricing, the summer being the busier time where we reprice the bulk of our portfolio, it takes a while for all of these trends to really manifest themselves, in terms of overall revenue results. But I think -- and broadly speaking, that's why we think that on the net basis, we will probably see more of a loss to lease over the first six to eight months, we will start to see gain to lease building over the last, call it, several months of the year, and then that momentum really carries us into 2011 in a pretty strong way.

The interesting point though to keep in mind is that in 2009, I think as you think about 2010, versus 2009, and then 2011 beyond that, you think about the upside inherent in different portfolios, you have to really begin to look at the different pricing, or the different revenue variables, and you have to also look at how various companies battle through the recession period, if you will, in 2009 and 2010. And in our particular case, of course, we really only conceded, if you will, on one variable and that was price. And what we did not concede on is we did not concede on the occupancy. We did not concede on resident quality as evidenced by the very strong collections performance that we had, and we didn't concede on some of these other ways that frankly other does not necessarily in the REIT sector, but I've seen it, in some cases, where in my opinion, it makes recovery very difficult. And in our case, with the revenue variable being really the only variable that, if you will, we conceded on, in a recovering market, particularly one that -- the kind of strength of recovery that we're anticipating where there is really no supply issue, and we think going to be some of the best job growth prospects in the country, it sets up for a scenario where that particular variable of pricing can be pushed very aggressively. And thus that's why we believe that Mid-America will actually do very well in this recovery cycle.

Thank you, guys. That's very helpful.

Thanks, Mike.

Our next question comes from Sheila McGrath with KBW.

Good morning. On the financing front, have you noticed any change in attitude on new financings from Fannie and Freddie? Or an increase in interest from other sources of financing?

Good question, Sheila. This is Al. We have not seen any changes really from the agencies. Still there, still very active, still warranting business, and are the best option right now in general. We are seeing a little bit of picked up interest, maybe commercial banks and some other sources, but still small compared to the agency's impact right now.

And then Al, on the real estate tax increase, you did mention 4%. I was just wondering, is this from early indications of increases that you're having? Or is it just your best guess at this point?

Sheila, we meet with our consultants early on in the year and really try to, best we can, figure out what we're going to see. You got two things going on there; you got the valuations and the rate increases to consider. And so, we've met with our consultants, we really won't know until the middle of the year on both of those items, but we made our best projection on those, and I think the context is, if you look at 2009, we had very good valuations, came down in a couple of areas, Texas and Florida, and the millage rates, the increases weren't as strong as we had originally thought because the environment just didn't allow it, and so moving into 2010, I think the thought process is valuations are probably pretty stable, but you will begin to see millage rate increases as some of these local governments begin to deal with these budget issues. That is sort of the consensus of our consultants right now. We will give you more clarity middle of the year I think.

Thanks. One last question. On the acquisitions, should we assume that it is going to be balanced in terms of what goes into the JV and what goes on your own account?

Yes, Sheila, our assumptions for our forecast are $150 million each in 2010. So in general, the answer to your question is yes, it will be generally balanced.

All right. Thank you.

Our next question comes from Rich Anderson with BMO Capital.

Yes, thanks. Strange not to hear a British voice emanating from there. (Laughter). Anyway, a couple of things that I just need to get some clarification on your prepared remarks. You said you should be able to hold occupancy at current pricing levels, and you also said that you would reprice the bulk of your portfolio at flat to slightly higher rents. And yet it is easily understood that rents are still rolling down, which you also said, so can you kind of reconcile those comments and explain what you meant by those?

Well, I think it really depends on whether you're talking about new leases for new residents or renewal leases for renewing residents. And I think that that may be part of where the confusion came in. I think on new leases, for new residents, what we believe is that we are in a scenario where we are approaching a flattening of the curve, if you will, and would expect, as I mentioned over the last three months, the rate of decline is 1%, which is significantly down from what we had seen earlier in 2009, and I would expect that what we will see on new leases is generally, maybe slightly down for the first few months of this year, and then it flattens out over the bulk of the summer, where you tend to get a little bit more active leasing season going on, and then hopefully we begin to see slightly positive movement up towards the last half of the year.

Renewal transactions tends to lag, if you will, new resident pricing. And on balance, that scenario I just described to you for new resident pricing, you can put kind of a two to three month lag on that, as it relates to new resident -- or I'm sorry renewal resident pricing, and I think that that is what you come up with. And then depending on the percent of your portfolio that is for a new resident versus a renewing resident, you kind of roll all of that together, and we think on balance what that tends to generate is probably a slightly overall net down year, in terms of pricing, but of course, we think we're going to be able to offset some of this, with some of these initiatives and other things that we talked about. But I don't know if that --

So new, you said new leases are down 3.2%?

In the comments I said on a year-over-year -- if you look at just the course of 2009, and you look at January, versus December, they fell by 3.2%.

Okay. And renewals fell by 1.8% in 2009?

2.8%.

Fell by 2.8%?

Correct.

Okay. So that's kind of unique relative to your peers. And I wonder if is just a market thing, southeastern kind of market thing, because a lot of your peers are seeing renewals up and new leases down much more significantly. Do you have any idea why that would be different in your world?

You're asking a good question, and I'm going to let Drew articulate the way you have to think about this, Rich, because it depends on whether you're talking about actual calendar year over calendar year, or whether you're talking about more of a trending over the course of the year. So Drew, why don't you --

Yes, Rich, there is really two ways to look at it. The first is sort of a lease over lease method, which I think is probably how the peers are looking at it. And that's comparing a new rental rate versus the expiring rate, if you will. The other method which Eric mentioned is in the 2.8%, is if you look at renewal pricing over a period of time, and look at it as specific time and compare it to another specific time, and so if you look at pricing in the lease over lease method, if you will, our leases were actually up 90 basis points. So we aggressively manage that process. We're always looking to push through an increase, if we can, and so from that perspective, they were up, but if you look at it over time, which Eric mentioned, from January through December, in a declining rate environment, the result is down 2.8%.

And it is that period over period Rich, and I think you really have to think about it. As it relates to your guidance and in terms of your earnings forecast.

Okay. That makes sense. And I didn't get that exactly. So thanks for that. So on the lease-over-lease basis, what would be your renewals as of the fourth quarter, kind of point in time, and what would be the new leases percentage, assuming that would be a decline?

The new leases were down 7.2%. The renewals were up 90 basis points, as I mentioned. And the aggregate, we were down 3.7%.

Okay. That helps there. Thank you. Now, turning to acquisitions, you mentioned in the release that you would fund -- or finance them with the line, and Fannie and Freddie, but you kind of alluded to the ATM program in your remarks as well. Would you suggest that your $150 million on balance sheet and $150 million to be funded through Fund 2 will be balance sheet neutral come this time next year? Or do you think you will be levering up a little bit?

Our goal is to keep the activity balance sheet neutral.

Okay. And so you just -- we could maybe assume some ATM draws as you go throughout the year? Is that it?

Correct, Rich.

Okay. And then, actually I just e-mailed you this, and I just wanted to make sure I got clarity on it. What you call loss to lease, I call gain to lease. I don't know if -- I think of loss to lease as an opportunity to roll up to market, or roll, yes, roll up to market. Is that just semantics?

Yes, it is. If you go back to the years ago, the way you're defining it is the right way and I would agree with that.

I just want to make sure I was on the same page. And finally, on your guidance, what you guys did in 2009 was kind of regularly do better than expectations that were set by you, and I do have a theory about guidance, and I will take this with me to my grave if I have to, but the guidance is set by the same companies that beat the guidance, and I'm not sure you're sandbagging, and I would say this is true for all REITs to some degree, that there is an element of conservatism that has to be imparted to make sure you don't overpromise, particularly in this environment. So assuming there was a conservative sort of haircut going into 2009, would you say your conservative approach is equally apparent for 2010, or do you feel a little bit more -- less -- it is kind of a less of a necessary component to your guidance?

What I would say is this, Rich. Is that I think the ability to forecast the various variables at a macro level and a micro level are much better this year than they were in 2009. I think in early 2009, the world was very, very uncertain. And I think that it was necessary and prudent to be putting guidance out with that recognition in mind. I think 2010, we have a lot more clarity on things. And so I will leave it at that.

Okay. That's fair enough. Thanks, guys.

Thank you.

Our next question comes from Paula Poskon with Robert Baird.

Thank you very much. Good morning, everybody. I have a a couple of perspective anecdotal question for you. First, just thinking about this -- hopefully a period of stabilization, what are you hearing from your tenants? Are they still nervous about losing their jobs? Do they have more of a sense of security? What are you hearing from them?

Paula, the way to kind of listen, other than just being out on-site is to sort of go through the reasons that they have left us or what the stability is, and those things related to job loss are better now. And I think we're sensing, just as sort of Eric said, there was a -- I think everybody was scared to death in the beginning of last year, and I think we saw that in our residents, they were in our office, we were back and forth with them, and it just seems to have stabilized a good bit. Now, is that -- I don't know what that holds. But there just seems to be less anxiety, on-site, with our associates, and with our residents. And I would love to tell you a stat, that is our anxiety index and measure it and that is down 10 points and we don't have one and you're getting a gut feel. But there is just a little bit more comfort there on both our side on-site, which are good indicators, as well as our residents.

Well, that's exactly what I was asking, so thank you for your gut response.

All right.

Returning to the acquisition environment, can you just give a little color on what kinds of opportunities that you're seeing in terms of -- are you seeing a plethora of what you would call attractive opportunities for you, or is it more of a needle in the hay stack environment?

It is going to be honestly more of a needle in the hay stack environment, from what we're seeing thus far, Paula. I think it is going to be a lot of rifle shot kind of opportunities, and I think that we're not seeing anything at this point that would suggest just a lot of product coming to market. I think it is going to be buyer -- or sellers, institutional investors, that have various reasons that they need to cycle out of an asset, perhaps they've got issues elsewhere in their portfolio, and they view the opportunity to sell a multi-family stabilized asset as a better way to monetize value than trying to sell a retail shopping center. So I think that -- and what they tend to do is in those cases, they may or may not get a broker involved, and they generally do at that -- with that kind of a seller, and hopefully we can come in and provide, based on the relationship we have with the broker, and potentially even in some cases the institutional seller, and offer them, some advantage in terms of timing and certainty of close, and we think that in 2010, probably half the deals we will get will be off-market deals, based on relationships and based on a track record.

The other area of opportunity of course I alluded to, is with some of the banks, some of the regional banks that I think we do sense that there is some momentum building to begin to address some of those troubled loans in their portfolio, and where as throughout most of 2009, we were really just seeing the most distressed situations, which are probably lease-up deals that are just way, way, way behind in terms of debt service and way past due on the loan, and I think that we're seeing now potentially some of the banks beginning to address deals that are clearly distressed but not perhaps quite the level of distress that we saw in 2009. But more interestingly, some of these regional lenders will come to us, we hope, and we're starting to see some evidence of it, to say look, I've got this deal in Dallas, I've got this deal in Nashville, I've got this deal in Tampa, and I would like to kind of knock all three of them out at one time. Would you guys have an interest? And I think that that is the kind of transaction where we would be in somewhat of an advantage position relative to some of the other buyers out there.

That's helpful. Thanks. And conversely, given the capital that is on the sidelines that is out looking for opportunities, and we keep hearing that it is very much the buyers outnumbering sellers those days. Would it not make sense to think about recycling some capital out of your older assets and put those on the market?

Well, we continue to look at it, and I think that from our perspective, if -- of course we have no real need to cycle capital for purposes of fixing a balance sheet or raising liquidity issues, or anything of that nature, and it would be strictly just an opportunistic play, where we think we can -- and we don't really want to change our portfolio market allocation, if you will. We like where we are, and we don't really feel that we've got to cycle out certain markets or regions from a strategic perspective. So having said that, I think we will just continue to look at -- and if we feel that an opportunity to sell an asset, of course you have to think about look at where your current NOI performance is, and evaluate whether or not this is the best time to maximize value, given depressed NOI levels, and even though there is a lot of buyer interest out there.

So there is no clear answer on it. But I will tell you this, that we continue to look at some of the assets that we think over the next two or three years that we likely are going to want to sell and whether, if an opportunity presents itself this year, to sell one or two of them despite -- we haven't dialed any of this into our guidance because we can't really predict it, so there is nothing -- whether it is sold this year or next year, next year recognizing we might have a slightly higher NOI level there, and the capital may be there and the opportunity to capture higher NOI value may be stronger in some respects depending on the situation next year. So we're continuing to monitor it.

Appreciate that, and finally just to come back to the agencies, what are your hearing from your friends there in terms of any concerns that they have around all of the saber rattling that is going on on the Hill right now?

Good question, Paula. We're really not hearing anything that different from the recent past. I think the consensus still is in the short term, a lot of that is politics, and politicians are going to do what they do, and nothing in the short term, really is going to change, because of the impact it would have, it would be just too great, I think. But the question is coming forth more, is what is going to happen in the long term, and I think the truth is, no one really knows, no one really knows long term what is going to happen. There is probably going to be some restructuring. I think in terms of Mid-America, the important thing to remember is we're watching that very closely, and we have long-term contracts that if we needed to make a transition, we can do that in an orderly process. So I think what we're hearing from them, nothing really that concerning at this point.

That's all I have. Thanks so much.

Thanks, Paula.

Our next question comes from Michael Levy with Macquarie.

Sorry about those phone issues. I was on and off. Can you please remind me whether there was any share issuance imbedded in the guidance?

Mike, the answer was given there that basically we're going to maintain our balance sheet leverage where it is right now, about 50%, and so you can back into that, if we're going to acquire $150 million for our own balance sheet, and $150 million for our joint venture, that is -- the joint venture is about 65% leverage, and we take a third of that, you can kind of dial in and figure out what that would be, but there would be share into it to maintain and support that program, and maintain our balance sheet strength.

Okay. And the higher fourth quarter number for this year relative to the third quarter, did you give any commentary as to what is driving that?

Fourth quarter number, you mean in earnings? Or -- you mean the earnings?

Yes, is that related to the acquisitions or --

I can share that with you. It is really two things. The good news, it is basically all essentially operating performance.

No, no, I'm sorry. The 2010, if I just look at the range, do you expect for 2010?

I think there what you got Mike is a combination of a lot of factors. You've got the downward trend on revenues that we talked about as we continue to reprice our portfolio in the first couple of quarters, is impacting the first couple of quarter, and by the late part of the year, what we're seeing as jobs, small amount of jobs, the stability continues in the marketplace, it will be a slight bit of improvement in the fourth quarter, and so that is probably what you're seeing. That plus the fourth quarter is typically a very low expense period compared to the third quarter that you're coming off of, so I think it is those factors coming together.

Thanks. Great quarter. Congratulations.

Thank you.

Thanks, Mike.

Our final question comes from the [Steve Sweat] with Morgan Stanley.

Good morning. Just a couple of questions. When you look at the -- I guess expectations for markets to begin to improve later this year is, it -- the markets that you would characterize as better today, beginning to improve first, is it markets that are weaker coming back? Or is it across your whole portfolio?

I think it is markets that have been weak for a longer period of time that are -- they're just further along in the cycle, if you will, broadly speaking. I think it is -- where Dallas and Houston as an example, were kind of late to the party. Last year. And so they're not quite as far along. But they're starting to, so there is some sort of just cycle timing on this, but honestly, it also gets to be a very market specific sort of issue as it relates to whether that market happened to get some supply in late 2009. And Tom, you want to add to that?

That was the point I was going to make really. It is cycle, but some of those, like the larger markets, the Texas markets, they dipped later but they didn't dip as far, but really what we're sorting through in Houston and Austin really has to do more with supply coming online than the jobs totally imploding as they did in a place like Atlanta, so as we work through that, we just have the supply issue. The supply in this market drops off sharply in 2010 and beyond. So there is a little bit of base there. But it is, as Eric said, it is sort of market by market. You got to balance all of those characteristics.

Thanks. And then Al, just one question for you. I'm just trying to reconcile the guidance where you've got expected interest costs that are up a little bit from where things are at the start of the year. You expect to, I think, roll the swaps over at or below the cost threat today. So what is the assumption driving up the interest cost? Is it higher variable rates interest cost? Is it the rate on the incremental debt? Or is it the line rolling over this year?

That's a good question. I think it is going to be that the yield curve, the variable rate debt that we projected on the yield curve is expected to increase 50 to 75 basis points from the current level, as you move into the year. I think as you look at the refinancings that we talked about, you do the math on that and all of those will contribute to savings. But the yield curve will rise and bring it up a little bit in total. So 4.2% for the year is combined and really, the rising curve impact.

Thanks a lot.

Thank you.

John, are you still there?

Yes, I am with you.

Okay. Do we have any other?

We do have one more question from Buck Horne with Raymond James.

Good morning. Hi, guys. Just wondering what your thoughts are in terms of the single family market and the spring selling season here given the push to use tax credits and low mortgage rates and FHA loans. Is that a factor in how you're thinking about the quarterly progression of the your resident move-outs or new lease pricing? And I guess secondly, have you seen any ambitious home builders out there putting flyers out in your communities trying to push renters out there?

I haven't seen an ambitious home build builder in some time to be honest with you. And as we think about looking forward, we expect that turnover will go up a bit, based on home buying gaining ground over time, but not much. And we really look at that as sort of a long-term healthy component to the economy. We would like to see home buying come back a little bit. The anomaly, in home buying for us this year, speaking to the credit and incentives, is we saw, although overall turnovers still drop, we saw home buying, which had been under 20% of our move-outs in Q4, bump up to 25%, which is more what we would expect to be the long-term normal rate. We attribute that almost completely to the incentives and the uncertainty they be carried forward to the spring season. January home buying then plummeted back down to 17% of our move-out. So I think in our markets we saw a good bit of the home buying capable money move out in January. I mean in December. With the fourth quarter, with that jump up to 25%. But it seems to go right back down to 17% in January, so we will be monitoring that. And like I said, would like to see it pick up modestly over time. We think we will also see decreases in things like job loss, as the economy picks up, that won't cause turnover to go up massively.

Great. Very help. Thanks.

Thanks.

I am not showing any further questions at this time, gentlemen.

Okay, well thank you, Shawn. Thanks everyone for joining us this morning. Let us know if you have any questions. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.