Mid-America Apartment Communities Inc (MAA) 2010 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 2010 earnings release conference call. The Company will first share it's 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. Miss Wolfgang you may begin.

Thank you, Denise, and good morning to everyone. This is Leslie Wolfgang, Director of External Reporting for Mid-America Apartment Communities. With me 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 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] filing with the SEC which describes risk factors which may impact results. These reports along with a copy of today's prepared comments and an audio copy of this mornings call will be available on our website. I'll now turn the call over to Eric.

Thanks, Leslie. We appreciate all of you joining our calls this morning. Positive trends continues and leasing fundamentals continued in the fourth quarter with both same store results and FFO performance stronger than we expected. We continued to be very encouraged by operating performance with historically low resident turnover, high occupancy and steady recovery in pricing. Leasing conditions are robust and momentum continues to grow across the portfolio.

Pricing on new resident lease transactions in January grew by just over 7% as compared to January a year ago. Pricing on lease renewals was up almost 7%. As pricing for new residents continues to move higher, we expect to see increasing momentum in renewal pricing in 2011.

Fourth quarter performance from our secondary markets continued to slightly out pace the results form our large market group. While our secondary markets compromising approximately 40% of the portfolio have meaningful revenue upside to capture over the next year, we do expect that our large tier markets will begin to out pace the secondary market group as the recovery cycle builds momentum. A number of these larger markets we're still working through supply issues last year, and as a result, have strong recovery aspects into 2011 and into 2012.

We're optimistic about the outlook for strong leasing conditions in our Texas markets of Dallas, Austin, Houston, and San Antonio. Household formation trends in these markets are expected to out pace the national average by a 100 or more basis points over the next three years. With new supply deliveries running well below historic norms for these markets, we expect solid leasing conditions will persist for a while.

Some of our other large tier markets that are expected to be strong performers for us in 2011 are Raleigh, Durham, Tampa and Jacksonville. We also see leasing conditions firming in Atlanta with new deliveries down very significantly and the employment market beginning to recover. Within our secondary market group our properties in Little Rock, Greenville, Columbus and Memphis all continue to generate very solid performance and are expected to capture steady rent growth during 2011.

Al will provide more details regarding the 2011 forecast, but in general our expectation is for same store NLI growth in the range of 4% to 6%. Revenue growth will largely result from an increase in pricing. In addition to overall market improvement, we have a number of initiatives underway that we expect will also support pricing performance, including an expanded unit interior renovation program, the roll out of a new call center operation that we believe will drive higher leasing traffic and a number of enhancements that we'll be introducing to our online leasing and lease renewal capabilities.

On the expense side, we're forecasting an increase to the 3.5% to 4.5% range. Our biggest worry beads with operating expenses are utility costs and real estate taxes as a number of state and local taxing authorities are facing stress and meeting budgeted funding needs. We're gearing up to aggressively manage this area of expense, but really won't have a definitive read on the 2011 tax bills until later this year.

We remain very active on the transaction front with a number of deals currently under review. Our initial expectation for 2011 is built on completing $200 million of new investments on a wholly own basis and $150 million of investments for our Fund-2-JV. While the acquisition market remains competitive, we're optimistic that our long established network and relationships within the region, our record of discipline, due diligence and success in closing and our ability to move in a very expedient manner will enable us to capture a material amount of new growth in 2011 relative to our current balance sheet size.

While we're looking at a number of existing properties for acquisition, we're also considering several new development opportunities and you'll likely see us announce another development deal or two this year. However, our external growth will be buying existing communities. As outlined in our earnings release, the initial FFO guidance of 2011 is a range of $3.80 to $4.10 per share. It's important to note that in this guidance we're carrying $0.10 of FFO dilution from our new lease up properties that will become accretive for 2012 earnings and beyond.

We're also taking steps in 2011 to further protect future earnings and the balance sheet to rising interest rates by bringing more fixed rate financing on to the balance sheet. It's clear that we have solid earnings momentum developing within our existing portfolio and we're optimistic about the new growth opportunities we're currently evaluating. We're continue to believe that MAA is very well positioned for the emerging recovery cycle. That's all I have and I'm going to turn the call over to Al.

Okay. Thank you, Eric, and good morning everyone. We reported FFO results of $0.95 per share for the fourth quarter which was 3.3% above the prior year and about $0.02 per share above the mid point of our guidance.

Same store NLI performance was better than we expected which grew 2.2% for the quarter. This produced about $0.04 per share of favorable performance which was partially offset by $0.02 of additionalacquisition expenses we incurred during the quarter as our investment pay exceeded what we expected.

Physical occupancy for the same store portfolio ended the year at 95.8% putting us in great position to capture additional pricing opportunities in 2011. Resident turnover reached the historical low of 54.5% during the quarter, as we continued to see few move-outs from home buying which represents about 17% of our units that turn during the quarter.

The positive pricing tends that Eric mentioned continued to work through the portfolio which is producing really an increasing impact on revenue performance as a larger portion of units are priced at current market rates. The average affect of rent per unit which represents the value of our in place leases grew 30 basis points over the prior year, but more importantly grew about 90 basis points over the third quarter reflecting the growth trend.

Operating expenses remained well under control during the fourth quarter, increasing only 1.8% over the prior year. Our personnel expenses remained flat, while increases in utilities and landscaping expenses were partially offset by declines in repair and maintenance costs and real estate tax and insurance expenses for the quarter. As Eric mentioned, the major unknowns in expenses for 2011 are utility costs and real estate taxes. Of course, we will bill back the majority. Somewhere around 75% of the utility cost to our residents but this will be reflected in our reimbursement revenues line on our P&L.

We also expect some upward pressure on real estate taxes as certain states begin increase evaluations and or millage rates in 2011. We've included an increase of about 4% in our current forecast and at this point we believe that's adequate. We expect to know more about this in the second and third quarters as we begin to receive our bills and our assessments for the year.

We remained fairly active in the capital markets during the fourth quarter. We raised $58 million through our ATM program at an average price net of cost of $60 per share or just over $60 per share. The proceeds were primarily used to fund equity portion of our acquisitions and our development projects and at year end we had about 5 million shares remaining under our current ATM program. We continue to protect and improve our balance sheet looking to ensure we have access to the best and lowest cost financing available to us.

At the end of the year with debt to gross assets that 48.8% which is about 150 basis points below the prior year. We also increased the interest rate protection on our outstanding debt, ending the quarter with about 85% of our debt fixed or hedged which is about 350 basis points above the prior year. Our fixed charge coverage ratio also continued to improve reaching 3.4 times during the fourth quarter, well above the prior year and the sector median.

Our debt maturities for 2011 are very manageable, with $100 million maturing in July and another $80 million maturing in December. We've been very encouraged by the continuing improvement in the debt markets over the last several quarters as more providers are beginning to enter the market. We've already begun the process of replacing the July maturity and we expect to replace both maturities during the year with fixed rate debt and interest rates averaging somewhere between 5% to 5.5%.

As outlined in the release, we're providing initial 2011 FFO guidance in the range of $3.80 to $4.10 per share which is 10.6% above the 2010 reported FFO per share, and 4.8% above FFO adjusted for the non routine items during 2010 which were the preferred shared redemption and asset impairment charge.

The 2011 guidance is based on expectations of maintaining strong occupancy with continued pricing momentum through the year. We're projecting same store NLI's to grow in a range of 4% to 6%, as Eric mentioned, which is based primarily on revenues growing 4% to 5% for the year net of cable.

We expect the acquisition pace to continue in 2011 and we also plan to invest about $40 million in development projects and to dispose of around $40 million to $50 million in assets during the year. Consistent with recent practice, we plan to fund the equity portion of these plans through the existing ATM program and we expect to end the year with debt to gross assets in the 46% to 48% range. Given these plans, our equity needs for 2011 will, of course, be in the $90 million to $100 million range.

It's important to note that the projections for 2011 include continued investments in both our portfolio and our balance sheet which do position the Company for future strength but cause some current year dilution. We project about $0.10 per share combined from our dilution from our lease up assets as they continue to become productive and our development projects as we begin to take unit deliveries during the second half of the year. We also plan to continue increasing our interest rate reduction during the year by adding more fixed rate debt and we expect to end 2011 with 90% of our debt fixed or hedged compared to 85% at the end of 2010. This will add another $0.03 to $0.04 per share in dilution for 2011 which is included in our current forecast.

We remain committed to supporting a steady and growing dividend for our shareholders, and as you saw during the fourth quarter, our Board voted to increase the quarterly dividend to $0.6275 pershare. Now the forecast for 2011 is based on this annual rate of $2.51 per share which represents a 64% pay out of FFO at the mid point of our guidance range which remains below the current sector median.

That is all we have in the way of prepared comments. so Denise, I'll turn the call over to you for questions.

Thank you. (Operator Instructions). Our first question comes from Paula Poskon of Robert W. Baird.

Thank you, good morning, (audio tone interference) .

Good morning, Paula.

Good morning, Paula.

How much are you relying on the revenue management system in the up cycle, and are you overriding any of its recommendation either broadly or in certain markets the way you did on the downside?

Hey, Paula, it's Drew. I mean I would say we rely on the revenue management system as much in the up cycle as we do in a down cycle. We typically see that when we review the LRO recommendations that we override about 5% to 7% of what it recommends for pricing, and that stayed pretty consistent despite the market going up or down.

We watched that pretty closely, Paula, and track it and obviously as overrides do occur and we allow that. We know when they happen and we react to it if we need to, but we absolutely are committed to the system, believe in it very much and think it will be a great assistant to us in the [sub final].

Yes, and Paula, Tom, just a quick point. What LRO does is I think makes us face the facts faster. I think it probably encourages us to pull rents down before we were mentally ready to do that, but it showed us that was correct. On the upside it will push rents up before our folks in the field and then we're ready to go. We wouldn't have guessed that January 1 of last year we should have been pushing rents, but that's what it suggested. We verified it and we did it, and it keeps us on the edge of our comfort zone.

Thanks, that's very helpful color. Can you provide a range from what you think the weakest rental rate growth will be and where and what strongest rental rate will be and where for 2011?

I can ball park it park it for you. You need a time machine to answer it with absolute certainty. I think out of the gates on the slower side in the large markets, Phoenix and Houston will be a little slower. Phoenix for obvious reasons. Houston, fairly strong economically just dealing with 30,000 units or so. You also see it a little smaller in the secondary markets. Our smaller Florida markets, Melbourne coastal, that sort of stuff where we've got relatively light exposure.

On the upside, and Eric outlined them a little bit in here, I think we see the ones that have been -- already beginning to turn the corner. We're going to see fun stuff out of Austin and Nashville. I think Jacksonville and Tampa will begin to turn the corner next year on rent growth as well. That's my market overview.

Would you say that the weakest will be flat to slightly positive, or do you think there's any markets that risk going negative on rental rates?

Good question and I probably should have qualified that. It's a matter of speed of recovery at this point. I don't think at the end of next year we're going to see anybody that's at a lower spot than they are right now.

And do you think any market could see double digit?

I can hope for that. I think we've seen a little bit of that early on. Right now I think it is possible to see a few out there with double digit, but, Paula, that's probably getting over my skis a little bit to call that.

Okay. Just to zero in on Phoenix and Orlando, given the market conditions that you're seeing there, how long do you think it will take to close the gap between physical and economic occupancy?

The gap will close -- with Phoenix, it's little bit of a pricing issue and that will close a little bit longer because we went by -- we focus on effective rent and in that market we were using concessions as part of effective rent a little bit more. The important thing on rents there is really to look at our average effective rent and in Phoenix that's begun to flatten and turn up a little bit. Same on Orlando. So a little bit of what you have in those two markets is that gap inflated by the use of the concessions rather than another factor.

And finally, just two questions on the investment side. Given the increase in development, albeit I realize it's not a big portion, but are you budgeting for any capitalized interest from those? And secondly, what are you budgeting for acquisition transaction costs?

This is Al. Good questions. We do. We capitalize interest until the units are delivered and I think there's about a $1 million to a $1.5 million range on each of those two projects I think is what is in the plan.

In terms of acquisition costs, we typically see about 75 basis points. Now it can be a little higher or lower depending on the deal, but a pretty good average of 75 basis points of the cost of the deal. You can do the math on that. We've got about a $1.5 million in the forecast for 2011 based on $200 million in acquisitions.

Super. Thank you very much.

Thanks, Paula.

Our next question comes from Sheila McGrath of KBW.

Yes. Good morning. Eric, I was wondering if you could talk a little bit more about the acquisition development. Are there more opportunities in your pipeline right now and pricing trends, and also how the returns of the acquisitions are comparing to the developments that you have underway?

The transaction volume or the pipeline, if you will, is still very active. We saw it pick up towards the middle part of last year and it continues to be pretty active. We haven't really seen anything fall off as of yet and frankly we've continued to run into the same people that we're competing with, so we haven't seen a significant change per se. I do continue to believe that our markets offer some ability to avoid some of the hyper competitive that you see in places like Boston or Washington or some of the markets where everybody wants to go, so we haven't really seen a whole lot of change.

In terms of the difference between going in yields on stabilized deals versus new development. Generally we're buying on NLI yield somewhere around six. On the two development deals that we've announced and others we are looking at, we generally would see them come in on a stabilized basis -- first year stabilizing yield of about 150 basis points higher than that, putting it somewhere in the 7.5% to maybe close to 8% range.

Okay. Also, are there any larger portfolios that are currently for sale that you expect are on the horizon?

Well, we've looked at several over the past year and I suspect there will be more coming up this year. For us, we certainly look at them. Mostly what we have found with a lot of the pools that we have looked at tend to be, frankly, fairly inferior quality properties that we just really felt like wouldn't be a good fit for us, or the pricing was still a little bit unrealistic relative to the amount of work that was going to be necessary from a CapEx perspective or a repositioning effort. We want to get a good deal, and frankly, the pricing that we were looking at didn't offer that. I do think that really probably over the next two years as a lot of this [CNBS] debt comes due and a lot of these assets have to get dealt with there may be opportunities that may make sense for us, but we haven't found them yet.

Okay, thank you.

You bet.

Our next question comes from David Toti of FBR Capital Markets.

Good morning, everyone.

Good morning.

Just to follow up on one of Paula's question in the [RMS] system. The occupancies picked up a little bit in the period. Should we read into this that it's a call on lower expectation for pricing power or do you think it was really a result of lower turn than you expected?

David, it's Drew. As we mentioned and as we've talked about before, we use LRO to manage that tradeoff between rents and occupancy, but ultimately we're really are managing for revenue. We're looking at the system frequently to make sure that it's balancing those two things appropriately.

We've moved up our, I think an example of that is we moved up our tolerances for exposure at the end of the year to be more aggressive on rents. We think generally that we're balancing occupancies and rents appropriately. I think we had a good combination of solid rent growth and occupancy in 2010 and certainly expect that to continue in 2011.

I think on the points that you raised regarding the increase in occupancy, I wouldn't read into that any sensitivity that we are concerned that we have about pricing trends. We think pricing trends are actually pretty darn strong.

What we're going to be doing is continuing to manage the exposure pretty aggressively and pushing a little bit more actively on pricing over the course of the year. We're really changing our approach for the last couple of years, frankly. We've had a much more focus on the exposure variable. We think things are changing and we'll set up for a pretty good pricing this next year.

Great. A quick question on the new development. Are you guys fully staffed in-house for the expanding pipeline?

We don't have an in-house development operation, David. We used to years ago back in the late 1990's and continue to believe it's not the right thing for our Company at this point. We generally contract out with the developer.

Generally what happens frankly, is the developer comes to us with an opportunity, a site that they've tied up and we enter into some kind of conversation or negotiation about the deal. And if we feel like we can bring value to the transaction by virtue of our financing, by virtue of our operating platform and lease up capabilities, and they bring the development and construction oversight then we potentially have something that begins to make sense. But we don't have an in-house development operation and don't plan to create one.

What kind of fee do you typically pay on outsourcing that service?

It varies by party, frankly, and depends on the situation the developer is in. Frankly, how aggressive they want to be in trying to get the deal done. There's no real hard rule of thumb I can give you on that. It's usually a percent of the deal, but it varies quite a bit based on the people we're talking to.

Okay. And then relative to -- I don't know if you can make any generalizations about the two starts, the potential shadow projects that could be coming online. Are there any common characteristics? Are they a particular region? Are they a lower price point? Is there any theme to the group?

To the two deals we've announced?

The two announced and then the potential adds for the year coming.

Well, the deals that we've announced, the theme would be, one, where the land was and the site was ready to go. It was shovel ready, if you will. In some cases, permits were pulled and the clock was ticking and the developer needed to get underway. I think what you're probably seeing at some of the other things that are being talked about as potential starts later this year maybe into 2012 are land that's already zoned, ready to go. But frankly, we continue to believe that we are going to be in a position in a lot of our markets where development is going to continue to remain reasonably muted for awhile.

I think you have to recognize that in a lot of the financing and a lot of the capital that is gearing up pretty active now on the development front are doing so in the major institutional markets. A lot of the financing that gets done, a lot of the financing that supports development in our region comes from the small regional commercial banks that do business in this area. Frankly, they're still working through all the problems that they created for themselves over the last four or five years with some of the aggressive financing that they've done.

We continue to believe that we're probably going to be in a position were we're going it see new development ramp up efforts really be lagging a little bit. What you're seeing taking place is some of the more institutional markets where you've got the better capitalized developers and the lending institutions are more comfortable, if you will, gearing up development and financing development in those markets as opposed to some of these southeast markets that we're in.

Great. My last question is for Al. Just quickly. Did you mention what your LIBOR assumptions were for the year?

Yes, I can. I didn't, David, but I sure can. Right now, of course, three month LIBOR is around 35 basis points. Something like that. We're projecting, obviously, that will rise in the year about 50 basis points, or something like that. We feel like that what we know right now, that's pretty safe and we'll keep watching that and updating that throughout the year.

Okay, great. Thanks for all of the detail.

Thanks, David.

Our next questions comes from Michael Solinski of RBC Capital Markets.

Good morning, guys.

Good morning.

Good morning.

Tom, first question for you If you look at the revenue guidance for the year, what is that equivalent to if you strip out -- I know you net bulk cable, but if you strip out the bulk cable and you strip out utilities, what is the base rental rate increase in that? Second of all, in terms of market rent for 2011. What kind of market rent are you guys assuming? Obviously, you've got the loss lease carried forward for 2010 carrying forward into the numbers. Just curious on those assumptions.

Good question. Al is about 50 times smarter than I am and has the bridge on the forecast and I'm going to let Al walking through the assumptions on the forecast for 2011, if that's all right with you.

Sure.

Thanks, Mike.

I think I can give you some color there, Mike. There's really two components in the terms of the expectations and the growth in revenues that we have for 2011 in our guidance.

You have the loss of lease that's right now. If you take a look at where our in-place leases were for the fourth quarter and you compare that to what the market rates are on average for the fourth quarter, there's about a 1.5% to 2% loss of lease right now. If you assume that all of our leases are about a year in length, we've captured in revenue performance about half of that in 2011 as we work that totally through.

Then in terms of pricing performance, we're projecting from the beginning of this year until the end of this year, as Eric mentioned, to have the continued strength in our tip of the spear on pricing. They grew, as he said, over 7% from December to December from 2009 to 2010. We're projecting blended to grow in the 6% to 8% range for this year. If you take a look at the supply and demand factors in place, we certainly don't see them deteriorating and we see in the back part of the year maybe some growth in the job performance supporting it and adding some acceleration there.

So again, you assume an average one-year lease will capture about half of that in 2011. You can add that up and it gets you to our midpoint of our revenue guidance in $0.04 to $0.05 range.

I can tell you, Mike, in real simple terms, rental pricing is about 85% to 90% of our revenue growth assumption next year, and the balance, 10% to 15%, is the function of our various fee initiatives including cable, so overwhelmingly it's in the pricing area.

Absolutely.

Okay. That's helpful. Eric, you gave some good color in terms of the acquisition pipeline. I just wonder if you can expand on that a little bit. What are you seeing in the market currently? Are you seeing maybe some more value-add type properties or is it still pretty much core with some of the busted developers out there? Also, just to be interested in what you're seeing over the last 90 to 120 days in terms of pricing given with the movements we've seen from Fanny and Freddy.

We haven't seen pricing change a whole lot. It continues to be pretty close to what we were looking at really the end of the third quarter, end of the fourth quarter, and still think that we're going to be able to bring on the quality assets that we're looking at somewhere in the six cap, maybe five and a half to six cap range.

I will tell you that the market in terms of the higher quality assets continues to be fairly robust for us right now. I do think that begins to peter out at some point, probably in the back half maybe very end of this year. I do think there increasingly is going to be more of the so called B or value-add product coming to market. Frankly, it hasn't been a huge focus for us.

We've come across some and certainly are active from it in the standpoint of looking at it from a JV perspective, but it's going to continue -- some of the better neighborhoods just a product that is at a point where it can be repositioned. So those are really the only two product types that we're looking at.

We haven't seen a significant change take place in the transaction market from where we sit in the last quarter or so. I do think it will probably evolve over the course of this year. As a say, I think you may see less of the A quality assets in the market and more of the value-add product coming in the latter part of the year.

That's helpful. Then finally, just in terms of the of recycling plan for 2011. Are you guys actively marketing any assets right now? Also, what happened to the one asset in the fourth quarter there? I know it was small, you guys recognized an impairment charge and talked about slowing the asset. I didn't see it close and I didn't see it in discontinued operations or anything either.

Hi, Mike, this is Al. In the range of $40 million to $50 million that we had projected for 2011 includes closing of that property. We expect to be about $7 million. It's a small portion of it. It's delayed.

It's a HUD financing which has been from the buyer's prospective it has taken longer than expected. Still planning to close in the first or early second quarter. We don't have specific marking plans for other properties in place right now. Although we've identified a list of candidates and we're making progress on those, we haven't started the marking process yet.

We know which properties it's going to be. We haven't actively listed them yet, but they certainly are identified at this point.

Right.

So it sounds like the dispositions then will be more back end loaded, essentially?

Yes. Second, third, fourth quarter, yes.

Yes.

Okay, great. That's all for me, guys. Thanks.

Our next question comes from Rich Anderson of BMO Capital.

Good morning, guys. Can you hear me?

We can.

Yes.

Hey, Rich.

Couple of questions. I have a question on development. I know you're not a big developer but several of your peers also are ramping up development. I'm wondering about when you think the timing of these projects will be delivered into the market?

Well, we think that a lot of it's in our supplemental, Dave. Initial occupancy on the deal in Charlotte will be second quarter of next year, and then our property in the Cool Springs sub market in Nashville, initial occupancy starting third quarter of this year.

Okay. That's a little bit better because I worry about projects that take longer, and we're talking about 2013 in Houston and whose to know what the market will look like two years from now. We might be able to project a year from now, but anyway, that's the thought process there, so I'll leave that.

In terms of your acquisition pipeline, one of the things I took note of, just to use Phoenix for an example, a lot of those assets are spread fairly wide out in the marketplace and maybe that's a reason why you're able to get some of the six plus cap rates that you're getting. Can you talk about the acquisition strategy as it relates to its proximity to the downtown area? I think of the Phoenix assets of being pretty scattered. Can you just comment on your strategy in terms of location of your acquisitions?

Well, I mean the location for us criteria is proximity to employment centers and in some cases in a lot of these markets it's going to be proximity to major highways and interchanges. People commute. People drive in the Southeast and Southwest. I can tell you that in a lot of these Southeast/Southwest markets, a lot of your employment centers are not downtown.

They are out In Dallas, of course you know, in Las Colinas, in North Dallas and Addison. Even in Memphis here, Fed Ex's world headquarters is about two miles from where we're sitting today in way East Memphis. International Papers corporate headquarters are just down the street in far East Memphis.

Being downtown is not necessarily where you want to be, frankly, in a lot of these markets that we are in. For us our focus is trying to find areas where people want to live. Because either, A, they've got the proximity to employment, suburban office, or they have got great access to wherever the important points are. But more importantly, you also have great school systems, you tend to have newer retail and you tend to have less crime issues, and just a better quality of life. So we find that the suburban product in a lot of our markets is actually very, very appealing, and continue to like it.

Having said that, obviously when we find an opportunity in a downtown area that we feel like can be a terrific investment from a pricing perspective, where we're able to get it and secure it and also stay diversified in a given market. You don't want to be necessarily all suburban. The deal we just did in Charlotte last year in the south end area, obviously near downtown. The failed condominium project we bought in downtown Raleigh, North Carolina. We don't mind, certainly, doing some of the downtown product, but the notion that in these Southeast markets that's where you have to be, or you got to be in downtown Atlanta or Buckhead, or you got to be in downtown Houston, or you got to be in downtown Dallas. I think that concept sometimes is way overdone.

I don't mean necessarily downtown, but I guess within spitting distance of downtown. They spit a lot in the South, so that's all I meant by that. Okay in terms of the real estate taxes. You start the bulk of the appeal process is that in July, if I recall?

Yes, Rich. This is Al. That's typically late second, early third quarters when you really begin to get most of your information back and really get a bead on it. We have done a lot of work with our consultants. Gone through our portfolio to really figure out where we think the pressure is going to be. As we mentioned, 4% or a little above 4% is our best guess across the portfolio, and we feel that is the right number at this time, but we'll certainly update that second, third quarter or so.

If I recall the last few years, you've had pretty good success at chopping that number down.

We have a very aggressive program and we've had over 4% decreases. I think over 8% decrease combined the last two years, and so obviously, as we move forward and the evaluations move up, you expect some pressure particularly in Florida and Texas. Some of those markets where the evaluation came down and they tend to be aggressive. It's part of the business we'll manage very closely and give you an update second, third quarter as we get more news.

Okay. The last question is on the strategy of fixed rates. If I missed some of this color, I apologize. Can you talk about how you think that strategy is impacting your guidance for 2011? Can you quantify it or just give a little more color on the amounts and all that?

Sure. I sure can, Rich. When we ended this year we had about 85% of our debt fixed or hedge. And our financing planes for 2011, we are going to replace our maturing fixed rate debt, provide for our acquisitions, then do an additional, call it $75 million in fixed rate financings above what we would have to do just to move forward interest rate protection on our balance sheet. We think it's a good time in the marketplace given the interest rates where they are, where most people expect them go to. It's a good time to extend our duration of our maturities and get more protection on the balance sheet.

We think we'll end the year at 96% fixed or hedged of our total debt portfolio versus 85% as to where we are today. And the net result is that is going to cost us $0.03 to $0.04 of earnings this year.

Okay. So this has nothing to do with the [GSC's] and where you guys stand on all that. This is a separate issue.

Yes. This just managing our balance sheet and putting us where we want to be at the end of the year, Rich.

Okay for a rising rate environment, right?

Okay. All right. Thank you.

Thank you.

Our next question comes from Carol Kemple of Hilliard Lyons.

Good morning, guys.

Good morning.

On your 2011 guidance the share count that you're using, are you adding in additional shares that you think you'll sell at the market equity offering or are you using the end of this year's number?

We included in our forecast the anticipated shares that we would need to fund our business plan. As I mentioned, our needs for 2011 are between $90 million and $100 million, so we have to make some kind of estimate about that. We've done that, that's included in our projections.

Okay, great. Thank you.

Thank you.

(Operator Instructions). Our next question comes from Tayo Okusanya of Jefferies & Company.

Yes. Good morning. Just two quick questions. The first one going back to preparing for rising interest rate environment. Could you give us a sense of what you're expecting you'll be able to raise fixed rate debt at relative to what your variable rate costs is right now?

If you're in the marketplace today for fixed rate debt in the 5-year, 7-year or 10-year maturity range, you're going to get the treasury at around 200 over treasury. It will be a little different for which [tronce] you pick. I think you can expect fixed rate debt in the five to five and a half range, maybe a little lower than five if you go for 5-year.

We plan to use the longer-term [tranchet] in ours, so five, five and a half is what we expect to put it on at. We're floating right now. Some of our debt is just over 1%. That's where the impact comes from, about 1% to 1.5% this year. We're replacing fixed rate debt, replacing some variable rate at that rate, so that's how you come up with the dilution. Tayo, that's a good point.

Okay. Then the second question. On the real estate tax side of things. I guess with [pre-sale] values starting to rise now. What kind of leverage will you have to successfully challenge any increases in real estate taxes the way you've been able to successfully do it in the past two years?

I think the key is to get in early, know your evaluations early. We've gone through our portfolio in detail. We've projected our income, figured out what we think the values are. Get with your consultants and get in early to the assessors and try to influence their decision making process before those assessments and those bills and those stubs begin to come out.

That's worked for us in the past. You make your best estimates of value, you challenge the ones where you see a lot of opportunity, and you focus on those and spend your time and effort on those. We definitely have got that plan in place for this year. But there are a lot of areas that as we just talked about that we've seen really significant declines over the last couple of years that we do expect some pressure as the values begin to rise. So that's what that forecast is built on.

Okay. That's helpful. Thank you.

Thank you.

Our next question comes from Andrew McCulloch of Green Street Advisors.

Good morning, guys.

Good morning, Andrew.

Most of my questions have been answered. I just had one question. Can you talk a little bit about what your unencumbered pool looks like right now, I guess this is for Al? And any thoughts on positioning your balance sheet to be able to access unsecured market at some point in the future. I know you don't have a stated goal to go that way, but any updated thoughts?

That's a great question, Andy. As we have talked about in the past, we are certainly going to make sure our balance sheet is in a position as we move forward in the next few years to access broader capital and all capital that's available to us. That potentially could include unsecured financing. You're absolutely right.

Right now, obviously, we've been a fixed rate secured borrower for the last ten years, so we have about between 10% and 15% of our portfolio with unencumbered right now. You'll see us take actions over the next couple of years or few years to really begin to do a couple of things. Begin to increase that unencumbered pool to allow us and move us toward an ability to potentially access unsecured if we want to, and you will probably see us begin to move our leverage. We talk about our range, where we would like our balance sheet to be. You'll probably see us keep that at the lower end of the range as we move the next few years to put our balance sheet into a position to transition, if that's the right thing.

Andy, our goal is -- fortunately we're not in a position where we have any immediate crisis or any real immediate pressure that we have to address, and our objective is to over the next two, three, four years is to continue to make incremental changes with the balance sheet, obviously mindful of earnings impact and also mindful of the constant change and evolution taking place in the credit markets and in the capital markets. One of the things that we've long believed that you just don't want to put yourself into a position where you've got to make a quick move with the rebalance sheet. It's a very difficult thing to do. That's really our long-term plan.

Sounds good. Thanks, guys.

Thank you.

Thanks.

Our final question comes from Sameer Baisiwala of Morgan Stanley.

Hi. Good morning.

Good morning.

Just quick questions, Eric. For 2011 acquisitions, I was wondering if you're looking at any new markets? I know you entered Charlotte market last year, but any new markets you're considering for your acquisitions ?

Not really. We continue to believe very much in our Sun Belt region focus and also I will tell you I also believe very much in our need and plan and the benefits of diversifying both in the large and the secondary markets. You may see us pick up something in a secondary market in the Carolinas or in the Virginia area that may be a new market for us. We've been looking at some opportunities in Richmond, as an example, which would be a new market for us. Broadly speaking, you're not going to see us make any strategic change or shift in our portfolio.

I don't know if you track the reasons for move-in, but I was just wondering in a place like Phoenix and Orlando, do you see what percentage of your renters are former homeowners, whether they're condo homeowners or single-family homeowners?

We really don't track the reason where they lived before they lived with us, so that is somewhat hard to track. I think the real trend or the benefit that we really see from the change in homeownership in shifting more in favor of rental is that people aren't leaving us. I mean, it's just been pretty interesting to see how far turnovers have dropped for us and for others in the industry, that's where we see it.

Great, thank you so much.

Thanks, Sameer.

Our next question comes from Rob Stevenson of Macquarie.

Good morning, guys. Eric, when you guys are looking at acquisitions these days, how many that come across your desk are what you would call materially under-occupied? So 80% or less, or something that really entails some significant lease up?

I would tell you that over the last year it's probably been, I don't know, half the deals that we were interested in looking at had that kind of attribute to it and the reason for that is that we knew that frankly the competition to be able to buy them was going to be a lot less, as I think you probably know. The agencies won't finance a non-stabilized asset or a non-stabilized property. So we feel historically we've been the most successful in going after the deals that have either a lot of moving pieces to it, some complication to it or some lease up risk, or for whatever reason it's going to be harder to finance than another asset. Where it's a very easily financed situation stabilized, fully occupied, it gets to be pretty competitive and the pricing can run up pretty quickly. I would say fully half the deals we've been looking at and continue to look at have a some sort of non-stabilized attribute to it.

It seems like those deals, I mean, obviously in 2010, but going forward it seems like those deals largely should have been under so much stress that those would have come to the market earlier rather than languishing at either the bank or the previous owner.

Some of them are pretty darn complicated situations. Sometimes you have the developer involved in some sort of control position. You have the equity involved, obviously, trying to get control from the developer. Then you have the lender just hoping to get repaid, just looking at suing everybody.

So some of these deals get very complicated and they take a long time to get sorted out, and frankly for us, to some degree, ultimately, it's all about trying to find out who's really in charge. These things have taken quite a while.

Then, of course, we all remember the catch phrase last year of kick the can down the road where the banks have frankly been a little bit hesitant to address some of the issues. I think they're getting increasingly prepared and they are increasingly taking action to address some of the things, but there's still more out there than you would think.

Okay. And then one Rich Anderson asked question for Al there. Why the guidance is so wide, especially when you look at the fourth quarter? Or first quarter, excuse me. You guys are like $0.14. I mean, it's like huge. What's the variability between the low end and the upper end of the range especially looking out over the first couple of quarters?

Well, like I say there, Rob, if you look at the major factors in our forecast, you're looking at the same store growth, you have some pretty big assumptions, you have big assumptions on your interest rate and on your lease up pace and those things, so.

And transactions.

And transaction environment, yes.

With the requirement to expense the cost now, that's what got us in Q4. We wound up eating some FFO in Q4 that we didn't anticipate because our transaction volume was better than we expected. There's a lot of moving pieces here and certainly for the year it's still pretty wide open right now. One of the biggest variables being real estate tax as we've been talking quite a bit about. We just think it's prudent to -- we certainly lay out all of the various variables that we're using.

You can look at same store NLI, and you can look at real estate tax assumptions. You can look at all of the individual variables. We try to keep those ranges, if you will, for those individual variables fairly reasonable in terms of the width of the range. But then when you roll all of that together and summarize it at an FFO level it can be a pretty wide range.

Okay. So you guys are including at some point in the range, some amount for acquisitions? Because a number of your peers in the group have started to report some secondary FFO metric and start giving guidance excluding all of that stuff?

We include it all. The acquisition expenses and as well as any dilution, or anything like that. It's all in there, Rob.

Okay. Thanks, guys.

Thank you.

Thanks, Rob.

I'm not showing any further questions at this time.

Okay. We thank everyone for being on the call this morning unless there's other questions, thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Thank you and have a great day.