Mid-America Apartment Communities Inc (MAA) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the MAA first-quarter 2012 earnings 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 investor relations. Ms. Wolfgang, you may begin.

Thank you, Howard, and good morning, everyone. This is Leslie Wolfgang, director of investor relations for MAA. With me is Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO. Before we begin with our prepared comments this morning, I want to point out that, as part of the discussion, Company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the Safe Harbor language included in yesterday's press release and our [34-f] filings with the SEC, which describe risk factors that may impact future results. These reports, along with a copy of today's prepared comments and an audio copy of this morning's call will be available on our website.

I'll now turn the call over to Eric.

Thanks, Leslie, and welcome to everyone on our call this morning. Mid-America's first-quarter result is the highest FFO per share performance in our 18-year history. FFO per share increased 14% over the prior year to $1.12 per share. Leasing conditions are strong and we expect to capture increasing positive momentum from our same-store portfolios as we head into the peak leasing season. As outlined in our earnings release, we have increased FFO guidance for the year to a range of $4.28 to $4.48 per share, or $4.38 at the midpoint. Strong leasing conditions generated positive rent and revenue growth in each of our markets across the portfolio.

As expected, during the first quarter, we did see an increase in resident turnover, with move-outs increasing to 56.4% on a rolling 12-month basis from 54.2% at this time last year. The increase was primarily fueled by our more aggressive push on rents, as move-outs due to rent increases is now driving 12% of our resident turnover, which is up from 6% at this time last year. We're comfortable with this result for two reasons. First, overall resident turnover remains near historic lows as pressure from residents leaving to buy a home continues to fall. Secondly, we captured, on average, close to a 9% rent increase from the new residents moving in as compared to those residents moving out due to the rent increase. We believe the long-term benefits associated with repricing units at this level of increase is worth some uptick in current quarter vacancy loss and the higher turn costs resulting from the forced turnover.

During the quarter, we captured a significant increase in move-ins, growing a strong 13.2% over Q1 of last year. Leasing traffic was up 8% as compared to last year, and fueled the ability to capture the high volume of move-ins during the quarter and also supported the ability to end the quarter at a strong 96.2% physical occupancy. For the quarter, on a sequential basis, we captured 110-basis points growth in occupancy, and as a result, have the portfolio in a great position heading into the busy summer leasing season.

It's important to note that, with this higher volume of move-ins and gain in occupancy, we were also able to capture solid pricing performance, with renewal pricing up 6.5% over the prior year and new lease pricing increasing 3.8%. The higher number of move-ins in the quarter did create some turn-related expense pressure, with unit get-ready expenses up 11%, representing the largest percentage increase item in our same-store operating expenses. We expect to see this expense performance moderate somewhat over the remainder of the year, as the year-over-year increase in occupancy will likely not be as large as what was captured in Q1.

As expected, during this phase of the cycle our large market segment of the portfolio has picked up stronger pricing momentum when compared to our secondary market segment. Our large market segment performance has benefited largely from our Texas markets of Dallas, Houston and Austin. We expect to see continued strong pricing momentum this year from our Texas markets. Jacksonville's a market that continues to lag within our large market group, but with minimal new supply pressure on the horizon, we expect to see some improvement build over the course of this year, and into next year, in Jacksonville.

The transaction market remains active and we're looking at a lot of opportunities at the moment. As noted in last-quarter's call, we are seeing more investment capital chasing deals in our markets, and cap rates have clearly come down. Throughout last year, we were able to tie up a number of deals in the six cap range. It seems that the market now is running closer to 5.5% range this year for high-end properties, with some transactions closing at cap rates closer to 5%. A lot of equity capital looking for better yields and an outlook for continued low interest rates is likely to put more downward pressure on cap rates and it's hard to see cap rates moving up anytime soon in our markets.

Our new development projects are coming online as expected, with initial leasing in both Little Rock and Nashville running slightly ahead of our forecast. Our project in Charlotte is well underway and we expect the delivery of initial units in the fourth quarter. Our new development in Charleston has just broken ground, and we expect initial unit delivery there in early 2013. As outlined in our release, we closed on the sale of two properties in the first quarter. We're currently underway with efforts to sell another seven of our existing properties. We have one of the deals under contract and expect to have the others under contract in the next 60 days or so.

In summary, the operating environment remains very strong and we're encouraged with the momentum in leasing traffic, new move-ins and the pricing that was captured in the first quarter. While we're just now getting into prime leasing season, we expect continued strong trends and are comfortable with our same-store forecast calling for same-store NOI growth in the 5% to 6% range. The transaction environment is very active and we expect to execute at a higher level than we have historically in recycling capital from some of our older properties. We remain committed to our investment disciplines and are optimistic about the ability to capture additional external growth later this year.

That's all I have in the way of prepared comments and I'll turn the call over Al now.

Thank you, Eric, and good morning, everyone. I'll provide comments on earnings performance for the first quarter, as well as a few highlights regarding investing and financing activities. FFO for the quarter was $46.4 million, or $1.12 per share, which is $0.03 per share above the midpoint of our prior guidance, and as Eric mentioned, is a record for the Company. The majority of this FFO per share out-performance compared to our forecast was produced by financing and investing activities during the first quarter. Interest expense for the quarter was $0.02 per share better than forecasted, primarily due to a more favorable than expected execution on the unsecured term loan during the quarter.

Acquisition expenses were also about $0.02 per share favorable to expectations for the quarter. A portion of this relates to lower acquisition volume with no deals closing in the first quarter, while the remainder relates to the capitalization of some prior costs for acquisition and development land. When we originally acquired the land tracts for three of our current development projects, certain costs, mainly commissions, title and attorney fees, were expensed as acquisition costs. During the first quarter we determined that the correct treatment was to capitalize these amounts, along with other development costs, so we recorded a one-time adjustment during the first quarter. These two favorable items during the first quarter were partially offset by about a penny per share of additional dilution related to the equity offering, which occurred earlier than projected in our initial guidance.

The same-store portfolio performed in line with expectations during the quarter, producing 4.5% NOI growth over the prior year based on a 4.7% increase in effective rents to the quarter. And on a sequential basis, NOI grew 1.9% in the first quarter. Same-store operating expenses for the quarter also grew 4.5% over the prior year, with the largest increase coming from repair and maintenance costs, primarily due to the higher level of move-ins during the quarter. Strong quarter ending occupancy, combined with growing leasing traffic, positions the same-store portfolio for accelerating revenue NOI points over the next few quarters of the year.

During the first quarter we sold two communities, one located in Memphis and the other in Houston, as part of our planned recycling program for the year. We received combined proceeds of $29.8 million for the two communities, which represents about a 7% cap rate after deducting a 4% management fee and $350 per unit in capital reserves. We're currently marketing seven other communities as part of the full-year plans and we plan to sell $75 million to $120 million for the full year.

Construction is progressing well on the four communities currently under development, which are projected to cost about $144 million in total. We funded an additional $27 million during the first quarter, bringing the total investment to date to just over $81 million, and we received initial units and began lease-up at two of these communities during the first quarter; Cool Springs in Nashville and Ridge at Chenal Valley in Little Rock. A total of 148-units were delivered during the quarter with 176-units already leased. Just after quarter end, we closed on the acquisition of Adalay Bay, a 240-unit community located in Chesapeake, Virginia. During April we also acquired the remaining two-thirds interest in Legacy at Western Oaks, a 479-unit community located in Austin, from one of our joint venture funds. MAA's blended investment is now about $111,000 per unit in Legacy, which we believe positions the community for a strong return over the next few years.

On the capital market side of the business, we executed two significant transactions during the first quarter, and as you saw in prior releases, we issued about two million shares of common stock through a public offering during the quarter, raising total proceeds of about $120 million, net of underwriter's discounts. This transaction provides the majority of our funding for both development acquisitions for the current year. During the quarter, we also closed on a five-year, or $150 million unsecured term loan with our bank group at very attractive terms and pricing. The new loan is funded in three equal tranches, with the interest rate effectively locked at 2.71% for five years through the use of interest rate swaps. The proceeds of the new loan will be used to repay additional secured borrowings, further increasing the unencumbered asset pool, and at the end of the quarter 35.9% of our gross assets were unencumbered and we expect to increase this percentage by the end of the year, which we believe will put us in a very good position to pursue additional credit ratings.

Finally, as mentioned in the release, we did update our earnings guidance for the full year. While we are maintaining our operating and investing expectations for the year, we're flowing the favorable impact of the financing transactions through the remainder of the year, which increases our FFO per share guidance by $0.03 at the mid point. A large portion of the acquisition-related favorability in the first quarter is timing in nature and will correct itself over the remainder of the year. However, we do expect additional interest savings from the new loan in the next three quarters, partially offset by some additional costs related to the updated financing plans for the year.

We now plan to execute an additional financing transaction over the back half of the year to both increase our fixed rate protection and to further strengthen our balance sheet position as we pursue an investment-grade rating. Our updated FFO guidance for the year is a range of $4.28 to $4.48 per share for the year, which is $4.38 at the midpoint. That's a 10% increase over the prior year.

As a reminder, the key assumptions included in our forecast are our wholly-owned acquisition volume of $250 million to $300 million, disposition volume of $75 million to $125 million and development funding of about $80 million for the year. And we also expect our leverage to find us net debt to gross assets to end the year at about 45%, with about 95% of our debt fixed or hedged and with an average interest rate of around 4% for the full year.

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

(Operator instructions) Our first question or comment comes from the line of David Toti from Cantor Fitzgerald. Your line is open.

Good morning guys.

Hi, Dave.

First question. As we see the cost of capital go lower for the Company, sort of in lock step with cap rates on acquisition potentials, has your underwriting criteria changed at all given that sort of environment over the last couple of quarters?

Dave, this is Eric. To be honest with you, no, it hasn't really changed much. We've -- we continue to look at our cost equity that we define it looking at where our dividend yield is at any given moment in time, which, obviously, to some degree, is affected by our share price.

But we go through a process of defining what we expect our shareholders are looking for, using the dividend discount model and then we had, as we've discussed with many of you in the past, add a premium to that and so the only -- as our cost to equity changes a little bit it affects the model a little bit, but not a significant amount. And we continue to have a hurdle rate that's pretty consistent with what we've had for the last year or so.

We do put in interest costs into our underwriting that's consistent with what we expect to get from the full balance sheet, so over time that does cost (inaudible) and it certainly will be in the underwriting, as well, Dave.

That's true, yes.

Okay, that's helpful. And then along those lines, how does the Company internally weigh or measure how to allocate investment dollars between development versus acquisitions and the CapEx you're spending? There's a pretty wide variety of returns and I'm just wondering how you guys think internally about those allocations given the spreads?

Frankly, our allocation to redevelopment is driven more by just what do we feel comfortable executing on. We look at the opportunity within the portfolio, look at the execution capabilities that we feel like we have, and ramp it up commensurate with our ability to get the work done and to, obviously, achieve the rents that we're looking for. We will push that as aggressively as we feel like we can, particularly in this environment.

On the development side of things, frankly, we've spent a lot of time thinking about this with our Board, and with the Charleston deal now underway that puts us at about $150 million of total capital commitment that is in some stage of development right now and we're pretty comfortable with that level. We don't expect to see it go up much from that, if at all.

We're underway leasing, obviously, in both Nashville and Little Rock, and lease-up there are going very well and we may very well, by the end of this year or early next year, look at getting into another project or two as those begin to lease up. But we're pretty comfortable carrying not more than about $150 million of development.

And on the acquisition side, our goal for this year is somewhere close to $300 million. It typically starts out slow, as it is this year. Q's 2 and 3 will pick up. We may do close to $300 million, we may do something less, we may do something more, we just don't know. That's a number that we're going to push it as hard as we can, but we're going to stay committed to the disciplines that we have always used about how we allocate capital in terms of putting out for acquisition. In terms of just how we allocate between those three that's how we think about it.

Okay, that's helpful. My last question just has to do with the expense growth in the quarter. A little bit higher than most peers, pretty high number for you guys. Given your current ranges that you've held for the year relative to guidance, does that imply that we'll see considerably lower expense growth rates in the second half and then subsequently, potentially stronger NOI results going into the end of the year?

Well, I think it certainly implies that as we expected, some of those costs return that we had in the first quarter will moderate as we move into the back part of the year. Yes, you definitely should see some moderation of overall expenses in the second and third and fourth quarters and coming down to the midpoint of our guidance in the 4% range for the year.

Okay, thanks for the detail.

Our next question or comment comes from the line of Swaroop Yalla from Morgan Stanley. Your line is open.

Hi, good morning. I wanted to touch upon the Jacksonville market a little bit, your second largest market. You're seeing some softness there. Can you comment whether it's due to job growth-related issues or is it supply or single-family homes threat?

Sure, Swaroop, and it's Tom. Jacksonville is one that is making some strides on its comeback; it's just well behind places like Texas. It's primarily been driven by weaker job growth, the -- but it is -- it has turned positive and the signs of encouragement we see in Jacksonville are on the development side.

For the past three years they've only seen on average 200 units delivered a year for the last three years, and that's a market you used to see more than 2,200 a year, and that continues on forward and we expect job growth to pick up in 2013.

So right now, the units-to-job ratio is 6.5 to 1, which is really pretty good or the -- excuse me, the jobs-to-unit is 6.5 to 1 then it jumps to 13 to1 in 2013, so we feel like Jacksonville will begin to pick up steam as we go forward. Its full demand has been very good there in terms of traffic and we're seeing rents pick up. They're doing about 3.7% on rents, but not as strong as some of our other places.

Great. And Eric, you mentioned cap rights of 5.5% in markets. I'm sorry if I missed this, is this for the large markets or for the blended market? And then maybe you can comment on the secondary market. What are the cap rates compression you've seen, as well?

To be honest with you, we're really not seeing a significant spread between buying in Dallas or buying in Charleston. Or as an example, for the good quality assets that come to market the competition is pretty fierce right now. And throughout last year, we were -- as I mentioned, we were able to lock deals down in the 6 cap range and that would include both large and secondary markets and this year it's trending closer to 5.5 and, frankly, as I mentioned, we've seen some deals recently close around 5 caps.

That would be in some of these higher growth secondary markets that we have targeted for acquisitions, as well, such as Charleston and Savannah and some of those type of markets. We saw a deal recently trading in Chattanooga at pricing close to that.

So, it's just -- I think capital just continues to come into the sector and they're coming much more active -- becoming much more active in both the secondary, as well as the large markets, around the southeast. I think that if -- over time I think it's reasonable to assume something around a 25- to 50-basis-point spread between what you typically see in secondary versus the large markets, but given the asset quality that we're chasing we're not seeing a whole lot of difference right now.

Is that making you pause a little bit in your acquisition underwriting? Or are you thinking that folks aren't underwriting this correctly with the NOI growth for the next couple of years?

Well, I think that it's causing us not to lock up as many deals, that's for sure. I think that we've seen assets traded at pricing that, based on our underwriting, either they're assuming some incredibly heroic assumptions regarding performance over the next five to six years. Or the return expectations that they're willing to accept are far lower than what we're willing to accept. So I can't really tell you what they're doing per se, but we feel like that we are pushing as hard as we feel -- as we're comfortable pushing.

I think that we've long had a practice of being very disciplined about how we deploy capital. We understand and appreciate that these markets can get supply from time to time. And in this environment, of course, the higher leverage buyers, the private capital buyers in this rate environment are able to come in with some fairly aggressive debt and make their numbers work. So that's what we're running into and it will change.

I think that as we see interest rates move up at some point down the road, I think the dynamics will change, but for us what we try to continue to do is offer sellers a very efficient and effective execution capabilities and certainty in the ability to execute a deal for them.

And what we typically see is that execution capability tends to have more value, frankly, as we get towards the end of the year and people become a little bit nervous about closing on the deals that they hoped to get done in the calendar year. So we're going to be patient and stick to our disciplines.

Great, that is helpful. Thank you.

Our next question or comment comes from the line of Rob Stevenson from Macquarie. Your line is open.

Good morning, guys. Can you give an indication of what the hard turnover costs are per unit for you guys? And what does -- do you have a ratio as to whatever the right number is, 300 or 500 basis points of turnover if the impact winds up being on same-store expenses rule of thumb?

Rob, I don't have that ratio. I would tell you the answer is, it's a lot. What we did was we increased occupancy by 110 basis points and that's something like 440 units that we turn that we wouldn't -- that we didn't turn last year that we got ready for move-in. So it's a very significant impact in that, and that's the story of the quarter, and we don't expect -- we ended at 96.2% this quarter, we don't expect to end next quarter at 97.2%. This sets us up to just really push rents well a little bit earlier than we had talked.

What I tell you, Rob, the way we think about the trade-off in terms of forcing turnover versus not is, does the overall turnover level remain acceptable, and we're near our historic low so we are comfortable with it. And then we take a hard look at the amount of rent growth we're getting as a result of that forced turnover and we track it very, very carefully and we are getting 9% in the first quarter.

The rents moved 9% up versus what the old customer was paying that left us because they were upset with the rent increase. With those kind of dynamics we're comfortable with what's happening right now. If we saw overall turnover jump up a lot, or we weren't getting that level of rent growth from the market as a result of the forced turnover, we'd back off.

As Tom said, in Q1 the pressure on expenses from repair and maintenance and term-related activities that's not going to repeat itself, it can't because we're already so full right now. And we don't think that we're going to force turnover at a higher level than what we saw in the first quarter, given that we're just now going into the busy traffic season.

With traffic levels running as high as they are we're pretty confident that we're going to continue to see some pretty strong internal growth and we think that expenses will come down over the course of the year given where occupancy already is. I would tell on you a hard turn cost that it varies, obviously, to some degree on the unit, but on average we're going to probably spend somewhere around $700, $750 a unit and then if you put the carpet in it's going to go up a little from there.

Okay, so just in terms of ballpark numbers, $700 or so on 440 units gets you to about $300,000 -- a little over $300,000 of turnover costs that would've been a drag on you guys this year -- this quarter?

Just to give you a context, Rob, about a 1% rise in turn costs a year is probably about $2.5 million to $3.5 million, and so that's how -- because as you said, 1% on 40,000 units in the same store and you can walk through the math at $750 per turn. So every 1% rule of thumb is, call it, $2.5 million to $3.5 million.

Okay. And then, Al, where's property tax? You're a third of the way into the year, where's the conversation on property taxes these days? Is it coming in as expected, less, greater?

We are getting some very early indications, Rob, we've got a lot of information to go, so we went into the year thinking it was four to five, 4.5 at midpoint. We don't see anything at this point that tells us that's not accurate. We need to get a lot more information on the hot spots, which are going to be Texas and Florida.

We are getting some early indications from Austin that it was going to be about as what we thought, that the increases out of there are going to be pretty large, which we had planned and put in our numbers. And we're going to, obviously, fight very aggressively. But we need to get a lot more information on Houston, Dallas, and then the Florida markets. So the short story is, a lot more updates come in the second quarter, but right now we don't see anything that says we were off the mark.

All right. And then given your geographical concentration, was it really any benefit for the warmer winter, lack of snow for you guys this quarter?

To be honest with you, it may have worked the other way. The ACs got cranked up a little sooner, and snow removal's not something we tend to think a lot about. But frankly, the warmer spring probably worked more against us than it helped us.

Well, you keep coming north it's going to be an increasing problem for you, right? (laughter) And then just last question for Tom. Which markets positively, negatively surprised you the most this quarter operationally?

On the surprise side, it's more of the same. Honestly, Rob, there's not much out of the ordinary. On the -- it's Texas rolling along as it has. We were pleased with the improvement in Atlanta, and on the weak side, Jacksonville was about as expected.

Okay. Thanks, guys.

Thanks, Rob.

Our next question or comment comes from the line of [Josh Patekin] from BMO Capital. Your line is open.

Hey, it's Rich Anderson here with our new associate, Josh.

Hi, Rich. Hi, Josh.

Just wanted to make sure I understood the first quarter. You said that it was in line with expectations, except occupancy went up. So what -- can you reconcile that for me? Was it just a trade off in the first quarter between occupancy and rental rate growth that you initially thought would happen going into the quarter?

Well, primarily the first quarter. I'll give you some numbers on it and let Tom give you the operating facts behind risk. But what you saw is physical occupancy rose, but we didn't get a lot of dollar value from that in the first quarter, that'll come in the second and third quarter, so basically --

Okay.

-- that's the impact financially in numbers and Tom can --

Yes, if you look at the economic (inaudible) it's reflective of what we would call effective rent, which takes into account the churn of both a little bit more turnover and then the people moving in. We didn't get the benefit of their rent dollars for the full quarter, roughly, but we're excited about what that indicates going forward.

Okay. So did you expect to see that occupancy pop up like it did by the end of the first quarter, or was that a positive surprise?

That was a positive encouragement. That was -- the traffic in first quarter was better than we expected. We were happy to jump all over it and that was a better thing.

Okay. Can you talk about the economics of the new lease growth rate of 3.8%? I always come back to this, that in a healthy environment usually the new lease rent growth is greater than the renewals and that's just not happening anywhere yet, including you guys. So I'm thinking, if you're only growing at 3.8% -- not only, that's still very good, of course, but the economics of it, including down time and having to get the unit back up in sellable order and all that sort of stuff, does that really make sense?

Wouldn't you rather maybe pull back a little bit on those people that are leaving because the rent's too great, and let them stay just because it's better economically from the standpoint of down time and the rest?

And fairer point, I would just point out that the 3.8 is an average for those move-ins. The people that are leaving us, those were the folks that got 10%, 12%, 13%, 14% increases and we're backfilling them with somebody that's paying 9% more, not 3.8% more. Does that make sense?

Well, that does make sense. I guess I was looking at the wrong number. Okay. Well, we'll leave it at that, I'll go back through that. Regarding the guidance, you guys are well known for ranges that you can drive a truck through, and I'm curious what it is about the guidance -- the quarterly guidance that is creating such a huge range at this point. What are the swing fac -- the main swing factors in your mind? You probably said this, but if you could just crystallize it for me.

Rich, this is Al. First, we did narrow the quarterly a little bit, I think a 7% on -- $0.07 on each side guidance range at first and then we narrowed that to $0.05 on each side. I think the major things that could change are, obviously, the major drivers of the forecast; the operating performance, financing plans and major differences in that. I think it's just us taking into account the worst case scenario that could happen and naturally the best case scenario that could happen, but if you want to know what we think it's the mid-point of that range, obviously.

What you'll see is the range will narrow a little bit as the year unfolds, but as Al said, if you want to know what we think, look at the midpoint.

Okay. But when you look at some of your peers like -- I'm just looking at Equity Residential, theirs is 65 to 69. They have the same forces at work as you do, right? Just the way of going about business is different than your peers, no big deal I guess. And then the last question is, on your comment, Eric, about the larger markets picking up and performing better in the first quarter, I'm sorry if I'm mis-remembering this -- to use a Roger Clemens term -- but isn't that -- the smaller markets have been your leaders, have they not?

They have up until recently.

And what do you think is creating that change?

Well, to a large degree, it's been Dallas and Houston, it's been Texas, but we fully expect at this stage of the cycle that the large market dynamics will support more rent growth, stronger rent growth, and in aggregate that group of the portfolio will begin to surpass performance of the secondary market. Frankly, we expected it to happen sooner, but our secondary market was much more resilient than we expected.

I think that, frankly, for the next several quarters we will see our large segment group out perform our secondary market segment group. But having said that, I think that the size of the delta in any one given quarter, I don't think you need to -- don't read too much into a given quarter's result.

I think over time what we expect to see is, frankly, our secondary market group is likely to begin to show more strength than -- maybe at some level than our larger group, just as a result of the fact that this secondary market group is the group that is really not seeing anything at all really in the way of supply pressure.

And I think that group will continue to be more insulated from supply pressure in late 2013 and 2014, than what you may see begin to ramp up in some of the bigger markets. And recognizing that the secondary market group, places like Greenville, South Carolina, and Chattanooga and Spartanburg, they've got some very good job growth dynamics going on.

Not to lose sight of the fact that San Antonio's in our small seg -- small market group; NOI in the first quarter was up 16%. Spartanburg is in our small market group; NOI was up almost 14% in the first quarter. So we've got some strong performances out that have group that I think are going to continue to be pretty good for the next couple of years. I think on average, Dallas and Houston have just been so strong and Austin that have really boosted the large market group.

I have one more follow-up question and that's on maybe your closest comp. Colonial was able to achieve investment-grade rating recently from S&P, I believe it was. How does that factor into your thinking about your pursuit of them and Moody's? And do you feel like maybe you got a shot to move a little bit faster up the food chain with that news?

That's a good point, Rich. This is Al. Certainly of you look at -- and we've talked about this in the past. If you look at our balance sheet and the metrics, look at the primary metrics that all the agencies look at, whether it's leverage, we look in very good shape compared to Colonial and really all the other peers in the space. Fixed charge coverage, we're actually the highest in the sector this quarter. Debt-to-EBITDA, I think they expect something in the multi-family that's a little higher, a little over seven, we're at 6.7 in the quarter.

And so, I think we will point to that and we'll begin discussion with those guys. I think the one thing that we talked about we needed to work on to get there is clearly the amount of secured debt and unencumbered asset pool and we've made tremendous progress in both those over the last couple of quarters really.

And so I think they would target -- they would tell you that you would need something about 40% of your portfolio to be unencumbered. They like between 40% and 60%, but 40% you begin the investment grade discussions. And so, if you look at the quarter, we were at 35.9% at the end of the second -- I mean, the first quarter and we expect to continue progressing that over the year.

So long story short, we're making a lot of progress and absolutely we'll point to those guys, we'll point to Essex, who recently finished out getting their final portions of that. And definitely, we're going to be having discussions of making the case that we believe we're investment grade and hope to persuade those guys and tell them when you take a close look at the Company we feel good about where we stand. So, yes, I think that we will make that point.

Okay, thanks very much for the color.

Our next question or comment comes from the line of Michael Salinsky from RBC. Your line is open

Good morning, guys.

Morning.

Can you talk a little bit -- I don't recall if you mentioned it or not, but did you give April trends for the portfolio, where you guys ended up -- ended the month in terms of occupancy and also what you saw in terms of new lease and renewal rents? And also where your renewals have gone out for May and June?

Sure, and I'll just try to run through those. If I miss one of those questions, pull me back to it. April was a good month. We saw -- the new leases were almost 4%, renewals we got close to 6%, for blended of almost 5%. Renewals are going out in the 7% range and we're getting mid-6%s on them.

Occupancy was 96.1%; essentially the same place where we ended the quarter. Traffic was exactly where we need it. Move-ins -- or move-outs were actually down. Our turnover trend was down 10% so that's another thing that bodes well for our expense line going forward.

That's a great detail. Eric, a question for you. You talked about acquisition pricing coming down and also potentially as you start to lease up the developments maybe adding another one or two. As you think about cap rates at this point, is there -- and you look at development, is there any thought to potentially expand the development pipeline potentially through joint venture development as a way to grow it but also maintain your risk -- I mean, maintain your overall exposure?

Well, we look at it, Mike. We talk to a number of folks, developers and other capital sources who are always thinking about JV ideas, but I really -- we've obviously got the one JV in place right now that's focused on the value-add play. To be honest with you, I would be reluctant to get into any extensive JV relationship for purposes of doing new development.

I think it just adds increasing complexity to what we're trying to execute on, and I think for us, the development that we're doing, we feel great about it. It's got -- it's going to be great returns, we feel very comfortable executing at the level that we are. But this is a region of the country that, as you well know, can get supply quicker than most other regions of the country, and we just believe that it's more prudent long term to not try and ramp up a development operation, either in house or on a JV basis.

Do it on a selected basis, as we're doing it now where we're essentially outsourcing our development to a developer who we just pay a fee for and -- or pay a fee to and we feel pretty comfortable with that level of execution. I think that by the time we get to 2014, 2015, and presumably supplies coming into the markets at more robust pace, frankly that's a great opportunity for us to not be in the development business at the time.

We'd much rather have our balance sheet where we're getting it to and be in the position to capitalize on that supply coming into the market that inevitably some of it's going to run into trouble and it's going to create great capital deployment opportunities at that time for fairly new product.

That's helpful. Just staying on terms of the investment, the Austin joint venture buyout there, was that motivated by your partner, or was that motivated by MAA?

It was -- our partner frankly had some things they were trying to do with their fund and for their investors and made a decision that they wanted to cycle out of some holdings. We took a look at that deal, we felt very -- we feel great about Austin, we've got a great presence there, this is a terrific property that we think is going to be a great performer long term. Given the ability of the relationship we had with our partner we were able to execute a transaction that worked for them and for us, but they really brought it up and we were glad to work it out the way we did.

Are you guys marketing any additional fund assets?

No, not at the moment.

Okay, and then final question. It sounds like you guys got disposition activities (inaudible) increase there in the second quarter, is that earlier than what you had guided to before, and is that impacting the earnings results relative to your original expectations?

Not really, Mike. That's about as we expected. We went into the first of the year with a pretty clear plan and we've been progressing and pricing and timing all that's about what we thought, so no real change there.

Okay, thank you much.

Our next question or comment comes from the line of Ms. Paula Poskon from Robert Baird. Your line is open.

Thank you. Good morning, everyone.

Morning, Paula.

I apologize if I missed this in your prepared comments, Al, did you discuss the percentage of move-outs to home ownership?

I don't I did not but Tom has that for you.

Oh, thank you.

It is -- the percentage of move-outs to home buying for the quarter was 16.5%, which was surprisingly down from last year -- down again.

Thanks. And Eric, are you still getting the same velocity of inbound calls from private developers looking for capital partners?

To be honest with you, it's slowed down a little bit because there's so many of the capital partners that are making themselves available right now, Paula. We still talked to a lot of them, but we're seeing developers having more options thrown at them at this point. What we find is developers have increasingly more interest in trying to stay involved in the ownership and looking for much more complicated arrangements that we really feel like is not the right way we want to deploy capital. We're still seeing a lot, but it's not -- they've got more options.

Thanks, and then just a final question. On previous calls over the last year you'd talked about the difference in permitting between your large and secondary markets. Any changes there, or anything that is on your radar screen as a concern that maybe wasn't six months ago?

Not really Paula. It's still -- still continue to see most of the permitting activity running higher in the bigger cities, and particularly in Texas. We're seeing some pick up in Florida and in the Carolinas. There still remains a very clear differentiation between permitting activity between large and secondary markets.

Secondary markets are not seeing near the pressure at the moment and I think that's why, as I mentioned earlier, I think it bodes well for this secondary market group to be more resilient later in the cycle than what's happening right now. Because I think that by the time we get to 2014 and 2015 and you see moderation taking place in the bigger cities because of supply, I think the secondary markets will be in a stronger position.

And then, Paula, just to build on that a little bit, for 2013 taking the permits and converting them over to completions, these large markets will see 9.4 jobs per unit completed, which is pretty healthy, but the secondary markets are at 13 to 1.

That's very helpful, thank you very much.

Our next question or comment comes from the line of Omotayo Okusanya from Jefferies. Your line is open.

Yes, good morning, all my questions have basically been answered, but just one quick one. Eric, I believe you mentioned -- or Al, that you were contemplating doing one more capital transaction at the back end of the year to further delever the balance sheet, is that correct? What are you possibly contemplating?

Tayo, this is Al. We are contemplating one other transaction, not to delever but really to do two things. One to increase our fixed rate protection at the end of the year so we have -- right now we have 89% fixed or hedged, we'll be well over 90% at the end of the year, probably 93% to 95% range. And two, it'll be an unsecured financing of some form.

We've moved tactically over the last few quarters with the best product at the right time, so it'll be some form of unsecured financing that allows us to move forward with our plans for investment grade. So it's a debt transaction that we're contemplating to complete our long-term plans.

And how much dilution are you factoring into your numbers as a result of that?

In the fourth quarter, if you look at the real change in guidance for the year it's $0.03 for the year and I know it would assume you need to take the first quarter and push it through, but that's really not what happened. It's really -- the thing that is causing the full year is interest expense, which is a component of the first quarter, a couple cents in the first quarter favorable. We have another, call it a penny in the second quarter and a penny in the third quarter from very good execution of that term loan transaction.

In the fourth quarter we'll give up $0.01 to $0.02 in terms of this transaction and so that we can fix rates higher and protect our balance sheet and be ready for investment-grade rating. So at the end of this -- probably -- for modeling purposes, in essence I would think of it a transaction late this year, $100 million to $200 million in range, probably midpoint of that. Call it a financing cost of 4.5%, because it will likely be a 10-year type of thing.

All right. Okay, that's helpful. Thank you.

Our next question or comment comes from the line of Dave Bragg from Zelman & Associates. Your line is open.

Hi, good morning. What was the move out to rent single-family home rate during the quarter, and also first quarter of last year?

The move out to single-family home rental rate was 6.6% last year and it was 6.5% this year.

We still don't see it as a meaningful pressure point, Dave.

Okay. And then just, Eric, back to your opening comments. I think you made an interesting connection between move-outs to rent increases and move-outs to buy. And I think what you said is that you feel more comfortable with the higher move-out to rent increase rate today, in part because move-outs to buy remains low.

So assuming that the move-out to buy rate does start to rise at some point in the next several quarters or so, at what point does that cause you to be less aggressive on pushing rents? And can you just talk in general about how you think about the interaction between the two?

Well, our goal, of course, is to be sensitive to the overall turnover level that we see happening, and I think that if turnover begins to pick up associated with people leaving us to buy a home, and vacancy loss and the churn costs begin to pick up as a result of that, our tolerance for forcing turnover to a rent increase will moderate at some level and we will begin to think a little bit differently about how aggressively we're willing to push on the rent increase, on a renewal.

But for the moment, as I said, we're comfortable with the trade-off for -- really for two reasons. We're comfortable with the trade-off in terms of forcing turnover because we're seeing the turnover associated with home buying so low, as you point out.

But we're also comfortable with the change, if you will, in the forced turnover because we're getting 9% rent increases on average from those folks moving in versus what the people that left us were paying. So, with those two dynamics, it's pretty strong. I think if move-outs to home buying picks up then we'll have to reconsider.

But, Dave, I would think before move-outs to home buyings pick up, the psychology of the situation has to change a bit and that likely would generate -- that means jobs are back, the economy's rolling, things like that. So we become less dependent on people staying with us and more dependent on new household creation. So the demand dynamic, we would hope and we would think, changes that way where the shift comes from where our strength has been lower turnover our strength becomes higher demand.

Okay. And on that point, given the better job growth across your markets lately and despite the fact that the move-out to buy rate is basically flat, are you getting feedback from the field about improved psychology as it relates to home purchasing?

We are not. David, I would have told you last year that move-outs to home buying had bottomed last year and in this quarter they're out and they're down again, so we're not seeing much about that. The psychology of getting a rent increase definitely hasn't changed. People don't really love that, but the market supports it and we educate them as to their options as best we can.

Okay, that's helpful. And the other question is just on Cool Springs. Looks like the stabilization date has been pushed out a couple of times, and this is despite what looks like a pretty healthy lease-up so could you talk about that?

Yes, David. Our developer had trouble with the framing contractor and that delayed us a bit. But because the leasing has gone so well and because we've planned for these things, the yield is intact and the internal rate of return is intact, the leasing's going extraordinarily well really on both deals.

But particularly at Cool Springs, we budgeted these to come online with concessions almost more than a half of a month free per move in, and we're not offering any concessions and our base rents are higher than we planned. So slight delay on the construction, but not material and we're excited with the leasing.

Okay, thank you.

Thanks, David.

Our next question or comment comes from the lane of Andrew McCulloch from Green Street. Your line is open.

Thanks, good morning. In your secondary market segment in that quote unquote other secondary category, which has, I think, almost 10,000 units in it, can you just talk about that 3% revenue growing in that bucket and just how different the markets in there are performing? You touched on it briefly, but how wide is the variability in the performance of those markets?

Well, it's pretty wide. I can tell you that in that secondary bucket, places like -- in terms of revenue, year-over-year revenue growth, Chattanooga was 5.3%, Birmingham was almost 6%, Bowling Green, Kentucky, was right at 6%, Greenville, South Carolina, was 6.6%, Gainesville, Florida, was 8.1%, Spartanburg was almost 10%. So, obviously, we've some that are less than that. Warner Robins, Georgia, Macon, Georgia, I don't have those numbers handy -- Tom, you may have them -- but they're going to be closer to 1% to 2% broadly.

And the weaker response were really generated by an increase in turnover there. Occupancies are in reasonably good shape, but you'll see -- at the top of that same page you'll see the term difference between the secondary and large markets is substantial and that's what's generated that a bit.

One of the markets in that secondary market group that pressured us a little bit was Columbus, Georgia, where it's got a high exposure to Ft. Benning there. We had some pretty extensive troop redeployment took place in the first quarter and resultingly we had a very high churn take place that pressured the performance in that market. Overall, all the secondary markets were up, it's just some were affected by different factors and in particular ones I remember that had a little unique pressure was Columbus, Georgia and to some degree, the --

San Antonio.

Yes, San Antonio.

Great, thanks for the color. A big picture question on the acquisition front. In any given year, can you give us a rough estimate on what percent of the deals that you actually underwrite and bid that you will actually close on?

Well, there's an underwrite bid and then there's a best and final and there's what we actually close on, and I would tell you what we underwrite and look at, the percent of those that we get into best and finals is probably pretty high, 50% to 60%.

Frankly, in a lot of these markets and the relationships that we have, people generally always want us in the best and final, because we're just -- we're kind of a sure thing as they see it, and then it drops off considerably from there. Probably the best and final, those that we actually wind up closing on, are less than 5%.

And when you do get outbid, that ones that do fall out, what is the delta generally between your bid and the winning bidder?

10% to 15%.

Okay, great, that's all I had. Thank you very much.

Thanks, Andy.

Our next question or comment from the line of Mr. Buck Horne from Raymond James. Your line is open.

Hi, good morning, question for you. Are you noticing your rent-to-income ratios in terms of your renters changing at all? I'm curious, are you seeing any higher-income residents moving in now?

Yes. In terms of our portfolio, that point has changed a bit. The rent-to-income ratio has moved from 19% at the peak of the recession to 16%, which is a bit of an all-time high or all-time -- or low, I guess you could say, an all-time good. The thing that's been interesting to watch of that is the change in our average incomes, which last year average income for the portfolio by unit was $43,000, this year it's $62,000.

Wow and I guess I'm curious about your -- the people that are moving in. What percentage of those, if you know, are first-time renters versus those that may be moving in from another apartment? Are you seeing -- I guess the question is, are you seeing any benefit from a trade down of people leaving higher-priced apartments for your apartments?

We are not.

Okay. Thanks, that's all.

I'm showing no additional questions or comments at this time and I'll turn the conference back over to you.

Okay. Well, we appreciate everyone joining us on this morning and we will, I'm sure, see you at NAREIT. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, you may now disconnect. Everyone, have a wonderful day.