Mid-America Apartment Communities Inc (MAA) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the MAA fourth quarter 2012 earnings conference call. The Company will 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, Tammy, and good morning everybody. This is Leslie Wolfgang, Director of Investor Relations for MAA. With me this morning are Eric Bolton, our CEO, Al Campbell, our CFO, and Thomas Grimes, our COO.

Before we begin with our prepared comments, I want to point out that as part of the discussion this morning 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-Act filings with the SEC which describe risk factors that may impact future results. These reports along with a copy of today's prepared comments and an audio copy of this morning's call will be available on our website.

I will now turn the call over to Eric.

Thanks, Leslie. Good morning, everyone. I appreciate you joining us this morning.

As outlined in yesterday's earnings release MAA wrapped up 2012 in a strong fashion, generating same-store NOI growth of 8.5% for the fourth quarter. For the full year same-store NOI increased 6.6%. In 2013 we expect another year of solid same-store results with NOI increasing in a range of 4% to 6%. We do not believe the current pipeline of new apartment construction in our markets and sub markets is sufficient to materially weaken leasing fundamentals during 2013.

The outlook for continued recovery and job growth across our portfolio along with positive demographic trends are expected to generate continued growth in demand and net positive absorption. Across our large tier market segment of the portfolio the ratio of new jobs to new unit deliveries is expected to remain very healthy in 2013 at almost 9 to 1. While the secondary market segment of the portfolio will be slightly stronger at close to 12 to 1.

During the fourth quarter resident turnover declined 4.5% as compared to the prior year. Move-outs to buy a home declined 1.8%. Move outs to rent a home moved up only slightly from 5% to 6% during the quarter and remain an insignificant factor in driving resident turnover. The number of new resident move-ins in the fourth quarter increased 2.5% when compared to the prior year. Effective rent across the same-store portfolio grew 4.8% in the fourth quarter. On a year-over-year basis new lease rents grew 3.2% in the fourth quarter. Renewal pricing for existing residents on a lease over lease basis increased an average of 5.5%.

We continue to make progress on positioning the balance sheet for broader access to the unsecured debt market. We ended the year with over 52% of the portfolio unencumbered and expect to see the unencumbered asset pool grow in 2013. As reported a couple of weeks ago S&P issued an initial investment grade rating on MAA at BBB minus with a positive outlook.

Leasing continues to go well on our new development projects in Nashville and Little Rock with rents running ahead of pro forma. Initial occupancy started last month at our new lease-up in Charlotte and while still early in the process we are on track to meet expectations at this phase II project. Construction is underway at our project in Charleston, and we expect to begin pre-leasing late this quarter.

We are excited about our new project in Jacksonville that broke ground in Q4. Our 220 Riverside project is located in a highly desirable urban location across the street from the headquarters of three of the city's largest employers, is adjacent to Unity Park, Jacksonville's newest urban park, and is within easy walking distance of the city's Riverside Arts Market.

We expect the acquisition environment to remain competitive in 2013 as capital continues to chase yield and investment opportunity. We have modeled $250 million to $300 million of wholly-owned acquisitions in 2012, which is down slightly from the $345 million acquisition completed in 2012. In our base case modeling for 2013 we have not assumed any additional JV acquisition as we expect the environment for value-add or repositioning play to remain very pricey. Our strategy and approach for deploying capital remains consistent with a focus on both large and secondary markets across our Sunbelt footprint.

As noted in our earnings release, we expect to increase our disposition activity again this year with dispositions ranging from $150 million to $160 million. We remain committed to a steady program of recycling capital from lower after-CapEx margin investments into higher margin properties.

As we head into 2013 our performance objectives for shareholders remains centered on strengthening MAA's full cycle performance platform. As increasing levels of new construction come on in line 2014 and 2015, we expect our disciplined approach to investing across both large and secondary markets, combined with a significantly strengthened balance sheet, will position the Company to both capture steady external growth and generate superior, stable, long term same-store results.

I'm going to now turn the call over to Al to update you more on Q4 and 2013 guidance. Al?

Okay. Thank you , Eric, and good morning, everyone. I will provide a few comments on earnings performance for the fourth quarter and on our balance sheet, and then I will outline the key assumptions included in the 2013 guidance.

FFO for the fourth quarter was $53.4 million or $1.21 per diluted share, which represents 13% growth over the prior year and is $0.06 per share above the midpoint of our previous guidance. About two-thirds or $0.04 per share of this favorability from expectations was produced by property performance with $0.03 related to the same-store portfolio and another $0.01 related to development and recent acquisition properties.

Revenue performance for the fourth quarter was essentially in line with expectations while utilities, repair and maintenance and real estate tax expenses combined to produce the majority of this favorability for the quarter with roughly equal contributions. An additional $0.02 per share was related to interest expense and acquisition costs for the quarter, primarily due to no acquisition occurring during the fourth quarter. FFO for the full year was $196.3 million or $4.57 per share, which is a record for the Company and represents 15% growth over the prior year.

During the fourth quarter we sold one additional community for $13.6 million, completing recycling plans for the year and bringing year-to-date gross proceeds from dispositions to about $113 million. And as Eric mentioned, we continue to make good progress on the development pipeline. During the fourth quarter we funded an additional $20.5 million toward completion, leaving just over $57 million to complete all projects currently underway.

You will notice in the supplement to the release that our disclosure of total estimate costs for the development projects has been revised. The total costs presented now represents all cost expected to be capitalized for the projects instead of primarily construction related costs included in the prior disclosure. And I should note that the projected cash flows and expected returns for these project remain intact and well above our investment hurdle rate.

Our balance sheet ended the quarter in great position, and we continue progress toward achieving full and efficient access to the public debt market. During the quarter we issued around 343,000 common shares through the ATM program at an average price of $65.67 per share for total net proceeds of $22.2 million which was primarily used to fund development activity.

Also as Eric mentioned, in January we received a first time issuers rating from Standard & Poor's which reflects the strength of our balance sheet and really completes our goal of receiving investment grade ratings from all three rating agencies. We plan to put these ratings to good use in 2013, which I will discuss just a bit more in just a moment.

Now I will turn to earnings guidance for 2013. We have outlined the major assumptions in the supplement to our release, but in summary we project diluted FFO per share for the full year of $4.83, the midpoint of a projected range of $4.73 to $4.93 per share. FFO is expected to between $1.13 and $1.25 for the first quarter, $1.18 and $1.30 for the second quarter, $1.12 and $1.24 for the third quarter,and between $1.16 and $1.28 for the fourth quarter. Our quarterly guidance range reflects the potential impact of timing for our significant transaction, disposition and financing activity planned for the year.

The primary driver of 2013 growth is expected to be continued strong performance from the same-store portfolio. Our estimate includes full year same-store NOI growth of 4% to 6%, based on a 4% to 5% growth in revenues and a 3.5% to 4.5% growth in operating expenses. We expect solid pricing performance to continue in 2013 with some moderation as we move into the back half of the year. And our estimate is based on occupancy levels remaining essentially constant with pricing growth in the 4% to 4.5% range. We expect real estate taxes which, remember, represent about 25% of our operating expenses to produce the largest increase in expenses projected to grow 5.5% to 6.5% over the same-store portfolio in 2013.

Our guidance includes acquisitions of wholly owned communities of $250 million to $300 million, including the planned acquisition of two communities from Fund I, our joint venture with Fannie Mae. We also plan to sell $150 million to $160 million of wholly owned communities during the year. And our cap rate expectations for acquisitions are in the 5.5% to 6% range with disposition cap rates expected to about 100 basis points higher on average. We expect to fund an additional $40 million to $50 million on the development pipeline in 2013, with no new developments currently planned, and we also expect to spend an additional $18.5 million of redevelopment capital on the interior renovation program and recent acquisition communities combined.

Capital spending on the existing properties is projected to be around $41 million or $840 per unit, with $30 million going toward recurring capital expenditures and an additional $11 million toward revenue enhancing projects. Other key assumptions include plans to refinance about $150 million of existing debt, pre paying a portion of our 2014 maturities. We do currently plan to access the public bond market in 2013, most likely in the back half of the year, as we continue to transition our balance sheet, fund growth and broaden our capital sources.

We expect our leverage, defined as debt-gross-assets, to range between 43% and 45% while we expect our unencumbered asset portfolio to increase to a range of 55% to 60% of gross assets by year end. Interest costs are expected to be 3.8% to4% for the full year, of course, depending on the timing of financing transactions mentioned earlier. We anticipate combined property management and G&A expenses to be between $37 [billion] and $38 [billion] (sic - see press release) for the year, declining about 20 basis points as a percent of total revenue.

That is all we have in the way of prepared comments. Tammy, I will turn the call over to you for questions.

(Operator Instructions). Our first question comes from Karin Ford from KeyBanc. Your line is open.

Good morning. Just wanted a quick question on your fourth quarter revenue growth, just looking specifically at the large markets but I guess it applies to both. You posted 7.1% revenue growth but it looks like rent was up 5.9% and occupancy was up 10 basis points, so was ancillary income to explain the gap and why was that up so much on a year-over-year basis?

Thanks for asking that question, Karin. It is two pieces of it and you mentioned one. Ancillary income is a component of that. We have been able to push through larger cable increases in our larger market groups and that is showing up for part of it. And the other piece of it is we are reporting our quarter end physical occupancy and our average physical occupancy for the quarter for the large markets group was up 70 basis points, so that's a pretty big driver of it as well.

That is helpful. Thank you. Next question is can you just talk about what the post quarters trends have been in January, what is the occupancy today and where have renewal increases been so far this year?

Sure. It is continuing on with its very good trajectory. Occupancy is at the same point it was last year at 95.5%, and our renewal increases we are getting a little above 6% right now.

Okay. Great, and last question is just a bigger picture one for Eric. Can you talk about your view on the right size of the development pipeline for Mid-America at this point in the cycle and do you expect it to be increasing or decreasing here as we push through 2013?

I would tell you, Karin, as Al mentioned, we have not dialed in any expectations starting anything new in this year other than the 220 Riverside project in Jacksonville. Having said that, we continue to look at a number of opportunities and developers continue to approach us. It is conceivable that we might do another project or two. Broadly speaking we are comfortable carrying roughly somewhere around $150 million to as much as $200 million of development on the balance sheet. We just continue to believe in the strategy for us that makes sense is to be more focused on looking for opportunistic buys of some of this new construction that is going to be coming out of the ground particularly in 2014 or 2015.

We think that over time we are able to generate better returns for capital and certainly take on a risk adjusted basis that we are better able to be there in 2014 and 2015 as a lot of this new project comes out of the ground. All of it won't work, and there may be some that ultimately provide a better way to bring that new product into the portfolio. Having said that, as I mentioned, do not be surprised if we announce another deal or two this year. But with the other projects leasing up as well as they are and the funding pretty well set, we feel like we could probably start another one or two if we find the opportunity.

Great. Thanks for the color.

Thank you, Karin.

Thank you. Our next question comes from Rob Stevenson with Macquarie. Your line is open.

Good morning, guys. Just to follow-up on the last question on developments. What is the expected stabilized yield on the three projects in the pipeline today?

Rob, this is Al. It is about 7.5% to 8%. That really has not changes, so that is the expectations. And the lease up is going well. We are meeting those targets.

Okay. With those projects coming in and the other projects coming out from basically being in lease-up it's still 7.5% to 8%,you said?

It is, but the latest project is at the lower end of that. I think because it is at a different point in the cycle, but still 7.5% to 8% for that group is the right number.

Okay. And then if I think about the $121 million you did in the fourth quarter, Al, what is the two or three major levers that would drop you towards the low end of your first quarter guidance range?

You've got a couple of things going on in Q1, Rob. One is a little bit of normal seasonality as the winter leasing plays out in the first quarter, but then you have some timing of some G&A costs, really, that are bigger in the first quarter related to some gearing work and things we have going on with our bond program this year that we expect in the first quarter. So that is causing the largest part of that decrease. And I think to go beyond that to the bottom end of the range you would have to have some transaction timing that we have planned in the year be significantly different in the first quarter.

Okay. So basically you would have to sell $160 million at some point already in the past year to get that type of dilution?

Yes. If you look at the quarterly guidance for the year you would have to assume you sold assets faster than we thought, we bought assets later than we thought -- I'm talking for negative results -- and things like that, and obviously our same-store performance that we did not quite meet the targets there that we had set out. We do not think that is the case, but that is what the guidance range is there to cover.

Okay. And then can you talk about what the -- how much non-core assets you have today. You are targeting $150 million to $160 million of dispositions. What is the size of the entire -- when you take a look at your portfolio today that if you had an opportunity to redeploy proceeds what is the size of the potential disposition over the next couple of years for you guys?

We don't really -- to be honest with you Rob, we don't have a core versus a non-core definition. For us we don't have any desire to make any sort of strategic shift from our footprint, no strategic shift from our allocation between large and secondary; we like the strategy. Having said that, our disposition program is driven by a belief that it is just prudent to cycle out some of the lower margin investments every year. We have gotten to a point now with coverage ratios and other aspects of the balance sheet now able to support a little bit more of a robust effort as it relates to recycling. We think going forward for the next couple of years or more that something around $150 million to $170 million is likely what we will be doing every year going forward.

Okay. And lastly, what is your view today on moving further north in Virginia? Does any of the issues that you are seeing in the core northern Virginia, D.C. suburbs make you hesitate about moving further north, do you see opportunity , something you have been taking a more active look at these days?

We have been looking more in northern Virginia. We certainly don't envision going into D.C. I think that really does not fit with what we are trying to do from a strategy perspective. But Northern Virginia certainly is a market that we continue to like. We have added a couple and are looking at some other opportunities up there now.

Are you seeing better opportunities today as a result of concerns about sequestration and things like or is it still a pretty tight asset pricing market in your view?

It is still pretty tight. It is still pretty tight.

Thanks, guys.

Thanks, Rob.

Thank you. Our next question comes from [Garad Meta] of Cantor Fitzgerald. Your line is open.

Good morning.

Good morning.

Couple of questions on guidance. If I look back your large markets have been outperforming your secondary market, what do you expect in 2013? Do you expect the gap to widen or narrow, and would you be able to break down your NOI guidance by large and secondary markets?

Broadly speaking we think that given the ratio of new job growth to supply that I mentioned earlier and the fact that the ratio is actually stronger in the secondary markets in 2013 as compared to what it was in 2011 and the fact that in the large markets that ratio weakened slightly 2013 as compared to 2012. We do not think that the gap gets any wider. We think that 2013 is probably an inflection year and that the secondary markets will perform in a more aligned or closer to the large markets. It just really depends on how much supply does come into some of the larger markets in 2014 and 2015.

But I certainly expect by the time we get into late 2013 and into 2014 that the gap is fairly narrow between the two segments in terms of their performance. And just depending on again how the supply pictures works out and how the economy and job growth picture work out, we very well could see the secondary market performance begin to pick up and surpass large markets at some point down the road. That is really the thesis of our whole strategy is to try to create a more, in aggregate stable level of performance by trading off a little bit between the large and the secondary markets.

Okay, that is helpful. Second question I have is on your balance sheet. If I look at your guidance , it looks like you are expecting $0.01 debt refinancing charge in 2013, and then you also talked about your desire to access public bond market. Can you perhaps expand on your refinancing activities in 2013? When I look at your maturity table it seems like you don't have any debt expiring in 2013, so would you be looking to refinance debt from 2014 and 2015?

That is a good point. I think in general we don't have to do anything in 2013, as you mentioned; we have no maturities. But we do have plans to continue our progress and to do a couple of things, one, to continue increasing our unencumbered asset portfolio. As we've talked about our targets are 55% to 60%, which we think 60% is where, long term, we think we want to be. Also to increase our fixed rate protection. We think in the end of the year we will be closer somewhere call it 93% to 95% of our debt fixed, which is taking a little bit higher. It is a good time to do that, and it is something we want to do to protect the balance sheet.

I think those two things are part of our plans. To execute that we do plan to be in the -- and obviously we want to put our ratings, the progress we made to this point, to good use in 2013. So we plan to go to the bond market probably the back half of the year to do a transaction. A good way to model it would be a transaction that is the minimal size to be index eligible somewhere at Treasury plus 200 basis points. Hope we can beat that, but given first time issuer and those kind of things that is how we look at it and the plans we have. And also the funds of that will be used to knock down the 2014 maturity stack you see there and get us ahead of that.

Okay. And last question I have is on your JV. You mentioned in your prepared remarks that you are not looking to acquire anything via JV. Is that because of the economics that do not make sense for you or you do not have interest from the JV partners, and also what are your thoughts on future development via JVs?

The expectation at least in our initial guidance that we do not want to have any JV acquisitions is purely a function of we think the market to buy and those sort of value-adds older properties, which is what our JV is focused on doing, that the pricing in that market is really frothy right now, and we have not been able to make any deals work. Those projects are easy to finance, frankly, buyers are able to get a little bit more creative with some of their underwriting. And we just see that the pricing is really tough to make work right now in that regard for the older product. JV for development -- probably not something we are interesting in doing. We continue to believe that the right approach for development is for us essentially a pre purchase model. It's not to say we would never consider it, but at this point it is certainly not something we are focused on doing.

Thank you. That is all I had.

Thank you. Our next question comes from Rich Anderson of BMO Capital Markets. Your line is open.

Thanks, good morning, folks.

Good morning, Rich.

Hey, Al, I just noticed the one thing about the balance sheet now that you have gotten the investment grade rating from all three agencies, debt to total gross assets reflects maybe even a little bit of increase over the course of the year, can you explain that?

No. Debt to gross assets compared to prior year end is down a couple of hundred basis points, Rich.

No, I am talking about your guidance. I think you were 43.9%, right, as the end of the quarter and the guidance is 43% to 45%?

The guidance is to stay about where we are plus or minus a few bps, but 44% is the sort of the midpoint of the guidance and that is really our target. You may see us go a little bit below that as we progress throughout the year. But that's really, given our strategy, Rich, a lower risk strategy and the reception we have gotten from the rating agencies -- we think that is pretty much the right level.

Okay. Eric, you talked 2014, 2015 supply risk and I think you said, you explained some of the strategies that you've put in place that mitigate some of that risk you guys in your markets, and one of them being buying out products coming out of the ground in lieu of developing it yourself. But what other strategies? Can you provide a little bit more color on what MAA is going to do differently this time when supply does inevitably rain on the parade at least to some degree for you? And how your behaviours might change from maybe the past few cycles, other cycles?

I think for us we think now, given our markets and given our strategy, now is not the time to ramp up a big development pipeline. I think that there is plenty of that happening and plenty of it coming. And we find that particularly in some of the secondary markets that a lot of these developers are not really building this product with the intent of holding it. We also find a lot of them are not particularly adept at leasing and lease up, and we find while there is a lot of hand wringing in one sense from an operating perspective about worry about supply trends, in another sense I am looking forward to it, because I think it is going to yield for us some terrific buying opportunities down the road. And that is why the work underway on the balance sheet is so important, and for us it is all about trying to find a way to create a competitive advantage for our capital.

And with the balance sheet and with the execution capabilities that we have, as some of this product comes into the market certain sub markets without a doubt are going to get a little bit soft in 2014 and 2015 and we hope to be there with checkbook in hand and create some great buying opportunities. I think for us it is all about making sure we are positioned for some inevitable sub market weakness that will pop up from here or there and not get enamored with the idea that everybody is building and we need to build too and let's just ramp up a big development pipeline. That is not the way we operate.

So would you say that is the biggest difference for the Company, the balance sheet and your ability to participate on the buy side versus previous cycles and is there anything strategic you can do besides that to mitigate some of the risks or is that basically it?

I think that is basically it. I think just being disciplined with how we deploy capital is the best thing you can do to mitigate risks when things weaken. As we look to deploy capital in 2013, our expectation in the underwriting will reflect some level of rent growth moderating in 2014 and 2015, and if we can buy on a basis that has that assumption built into it, we will buy ; if not, we won't.

Okay, fair enough. On your commentary you said 9 to 1 jobs to units for the large markets I think, right, and 12 to 1 for secondary. Is that what the numbers were?

Correct.

What is the trouble zone there? I assume it is not 1 to 1, right, so I assume you have to have some number. Is it 5 or 6 to 1 where you are equilibrium? How far above are those numbers from where you get into an equilibrium type stage?

I have seen several different reports and it is either 5 to 1 or 6 to 1 is where equilibrium. Different people go through different allocations in terms of a certain number of households will choice to own versus rent and certain ones will choice to rent a home versus rent an apartment. So most suggest that at 5 to 1, 6 to 1 you are kind of at equilibrium.

Okay. Back to you, Al. If you were to hold everything else constant expect for the fact that you now have three investment grade ratings, how much do you think the Company saves notwithstanding the change in interest rates and all that sort of stuff just holding everything else stationary? Is it 50 basis points call it 10 year money, more than that, less than that ? What do you think?

I think we have already captured through the process in our credit facility 30 to 40 basis points, Rich. You need two ratings to do that. With this final rating I think the next step would be full access on a sufficient basis to the bond market should get you another 20 basis points to 30 basis points, I think. Now, you may not see all of that the first issuance, but certainly as you become a seasoned issuer that is very realistic, I think. So that is the goal.

Okay. Last question is on the same-store guidance of 4% to 6% NOI. How much would that be if you took out at the ancillary stuff in the revenue line? Would it be 100 basis points less or maybe not that much?

Maybe 40 to 50 basis points, Rich, somewhere in that line. It is a contributor, but it certainly ramps to the primary driver.

Okay. Fine. Thank you very much, guys.

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

Thanks. Good morning everyone.

Good morning, Paula.

Eric, regarding your acquisition guidance can you talk about what deal flow has looked like recently in particular with EQR selling so many of their assets in many of your core markets and whether or not you have looked at those and whether or not you think even just having that additional activity has attracted new buyers to your markets?

Well, the market is pretty active our deal flow remains very, very full. We are looking at a lot of different opportunities at the moment. I think whether it is the EQR transactions or properties or whether it is just capital broadly being drawn to apartment sector there is certainly a lot of capital in all the markets and we are seeing more activity in secondary markets as well. As it relates specifically to the EQR assets, honestly we have seen a couple of them but for the most part it is really not the product that we are targeting to buy. We have added a little over $1 billion worth of new assets in the last four year, and the average age has been 4 years old. The product that we have been seeing that EQR was putting out there was 15 and in some cases 20 years old, and that is really not what we are targeting to add to the balance sheet.

That is helpful. Thanks, Eric. Are you guys surprised that move-outs to home ownership is down, given all the euphoria about the housing recovery, and I guess relatedly how is that metric varying across your markets?

Paula, it's Tom. I think surprised not so much in fourth quarter because it has been the story all year down to flat, flat to down, down to flat. It is not materially down, to be honest with you, but it is at an all time low. I think this time last year I would have thought it would have picked up a little bit. It is not that surprising, to be honest with you. As far as how it varies by market, we see a higher percentage in the large markets moving out to home buyers and a lower percentage in the secondary markets.

Interesting. Finally are you seeing any competition from the single family rental product that has also been so much in the news in recent months?

Just none. We are really glad we are not doing because it seems like a very, very hard business to make money doing on an ongoing operating basis. There has just not been move-outs to renting homes has stayed between 5% and 6%, but for the last two years. I would think now it is the best time it is ever going to be to rent a home and it does not seem to have moved the needle. Certainly not with the folks we are renting to. My sort of sense is that home renter is most likely going to be an ex-home owner and that people who just want to be in a house are not coming back to us, they are going to that pool.

Thanks very much. That is all I have today.

Thank you. Our next question comes from Michael Salinsky with RBC Capital Markets . Your line is open.

Good morning, guys. Al, just to go back to the debt offering situation. I know you don't have a lot of debt maturing but you do have a bunch swap maturities maturing. Is kind of the plan as those maturities come due to then do the unsecured offering and time that so there is no significant benefit? I think you threw out a number of Treasuries plus 200 basis points would probably put you at right around 4% versus the 5.2% maturities. Just kind of wondering what you have got embedded in terms of interest rate savings on that.

You are right on top of it, Mike. That is a very good number you put together, and you are exactly right. We are knocking down 2014 maturities and we are going to do that after the swaps mature. Since you do a bond transaction in one big deal we are going to let the $100 million to $150 million of those swaps mature before. That is why we say we will be in the bond market in the latter part call it late second/third quarter time range to let the majority of those swaps mature so we can match that very well. But you are on top of that. It is to replace those costs and around 4% is what we have, that is a good estimate to dial in right now.

Okay. So the interest expense savings that you have dialed into the numbers is pretty minimal the way it is set up?

It is. It is. And obviously because we are also moving fixed rate debt up as a percentage so we are taking it closer to 93% to 94% fixed at the end of the year versus we have averaged more like 90% fixed hedge this year, so that has an impact on it as well, Mike.

Okay. Appreciate that. Eric, You talked about the disposition strategy, not wanting to change your exposure between primary and secondary markets, but can you talk a little bit about your exposure between secondary and kind of tertiary share markets, if you expect to change that around a bit over the next couple of years?

Good question, Mike. Yes, we do. What we are really driven by as I mentioned is a desire to continue to harvest value out of the lower margin investments and reinvest in the higher margin investments. What that generally translates to is selling older properties and buying newer properties. As it so happens a lot of our older assets are in the more tertiary markets that we have, so as a consequence of that you will see the tertiary market component of that secondary market segment begin to shrink.

And you look at the dispositions we have planned for this year of the markets like Brunswick, Georgia, Valdosta, Thomasville, Melbourne, Florida, Athens LaGrange, Georgia, those are all targeted dispositions this year and we believe and our goal is honestly just to be sure that we are getting this capital recycled into investment we think over the next 10 years will produce higher margins. And to the extent that we are able to cycle out of some of those markets, those names I just mentioned, and go into some other secondary markets such as Kansas City, such as Charleston, such as Savannah. The hope is that that creates maybe a little bit more comfort with the secondary market segment of our portfolio and we hope the market appreciates that change. .

Tom, not to leave you out. I think you said 40 basis points to 60 basis points embedded in the outlook for 2013 related to ancillary income. What is the forecast in terms of market rent growth you are thinking about for 2013 and dialing in, and also I am not sure if you have this number but what is the loss to lease or embedded like where the market is versus where the portfolio is today?

It would be a continuation of what we got. We will be on market rents between 4% and 4.5%,in terms of what average effective will be throughout the year. Ask the question again about loss to lease, where we are loss to lease, is that sort of the what is baked in ?

Yes. Where do portfolio rents, like, how much have you captured, what is the earn-in in 2013 versus how much do you expect in terms of market? I'm just trying to walk through the dynamics of that.

A lot of it is based on the good work that was done this year on move-in renewals and new rents out. I would think it is a blended effort between new rents and renewals and we are probably 30% of the way done, something like that.

Okay. Thank you much.

Thank you. (Operator Instructions). Our next question comes from Buck Horne with Raymond James . Your line is open.

Thanks. Good morning, gentlemen. Eric, if the market for older value add assets is so frothy right now, why not accelerate the capital recycling efforts a little bit more aggressively and really try to lower the average age of the portfolio into this market right now?

Well, we are selling more than we have ever sold. We sold more last year than we ever sold in a given year and we will sell more this year. I think to some degree it is a function of also being able to redeploy those proceeds. We are mindful of how much earnings dilution we are willing to take in a given calendar year to complete this recycling effort. I would say we are pretty comfortable executing at this level.

Having said that, obviously if we see an opportunity to sell two or three more assets than what we had contemplated, we certainly won't hesitate to pull the trigger on that. But broadly speaking we think the volume we are contemplating is about right given our ability to reinvest the proceeds. As I mentioned earlier, we are not under any sort of pressure. We are not trying to strategically change anything about our portfolio. We are not trying to do anything fundamentally different. It is really just a steady diet of continuing to recycle, harvest value, recycle into higher margin investments, and we expect to be at this level for quite some time.

All right. Also thinking about your markets right now and there is a couple that pop out at me. I am curious about specifically Jacksonville, Nashville and maybe Raleigh as places where it seems like a lot of new housing supply has started to ramp up in those areas but maybe the job growth and/or the income growth in those markets has not quite met what some economist might have thought would have occurred in those markets. And I am wondering what your thoughts are? I know you are expanding into Jacksonville and that maybe a unique opportunity. But what are your thoughts about those type of markets and separately from that what are your thoughts about Texas and what your maximum exposure to Texas ought to be?

I will jump in -- Buck, this is Tom -- on the market stuff and I will let Eric cover the exposure to Texas. I will be glad to talk about what we see happening there. I think you said Raleigh, Jacksonville and Nashville and was there a fourth?

No, just those three would be -- just the high level to talk about those areas.

Sure. I think Raleigh is pretty encouraging on the job growth front, but it has some new construction coming into the market that we are watching carefully. It tends to --it's spread out a bit. It is a little bit of exposure in our Brier Creek sub market. Not so much in our Cary Properties and virtually nothing that competes with the Hue downtown. We are optimistic on that one. It has been good to us good. We think it will continue to put out good growth but not over the top growth. And Jacksonville is one where that opportunity is unique and we can go into that further if you want to.

But it is just, as Eric described in the call comments, a super activity. But right now Jacksonville is chugging along at 5% revenue growth, rent growth of 3.7% and occupancy at 96%. And I think you will see out of markets like Jacksonville and Raleigh continued steady, good growth. It is not going to compare, certainly not early in the year, to Austin, Dallas, Houston, those kind of places. I would expect it to continue to do well. Nashville we are expecting to be strong again. Its jobs to completion ratios is 8 to 1, and we are pretty optimistic about what Nashville can do next year.

Great. Texas real quick. It is obviously very strong. What do you think maximum exposure in Mid-America's portfolio ought to be to Texas?

As far as Dallas and Houston are concerned from a broad portfolio allocation perspective we are pretty much there. We started recycling -- recycled some money out of Dallas a little bit last year and the year before and Houston somewhat similar. I would tell you we are looking at more opportunity in Austin and looking at a little bit more opportunity in San Antonio, two markets where our exposure from a portfolio perspective is not too great at this point. I wouldn't see Texas broadly as a market that gets a lot more growth in our portfolio, but as you know it is a pretty strong economy there, and we like the long term dynamics. We just have to be mindful of the supply issue from time to time.

Thanks, guys.

Thanks, Buck.

Thank you. Our next question comes from the line of Omotayo Okusanya of Jefferies .Your line is open.

Good morning. Congrats on going 3 for 3 with the rating agencies. Most of my questions have been answered but just a quick one. The increase in recurring CapEx that is in the numbers 2013 versus 2012, could you talk a little bit about that or what is driving that?

Omotayo, this is Al. Good morning. I think the important thing to note about that is over the long term there is an increase from the prior year. I think is 6% , 6% to 7% somewhere in that range , but I think if you look over the last five years CapEx has grown probably 2.5% on an average for the 5 year period. So the recurring capital tends to be a little volatile depending on the projects you have going on; paint jobs and roofing are pretty significant projects and can be pushed forward or backward here or there so that has a little bit of impact. Long term 2.5% growth we think the current spending level is a good level and over the long term the inflationary growth is about right.

Got it, okay, that is helpful. Also could you talk a little bit about what you are seeing from a tax perspective as well as increases in property taxes?

I can. Interesting thing you have seen, you have followed us, we went into this year thinking taxes would grow 4% to 5%, 4.5%. We ended up seeing about 3% this year. The main pressure areas we expected were Texas, Florida and Georgia. We expected both value increases and millage rate increases in those three key areas and we saw all of that in Texas. They are definitely aggressive on their programs. Florida and Georgia -- what we say was the values began to come up, but we did not see the rise in millage rates that we had thought might happen. That is a little bit more of a political situation. A lot of things involved in that. So that was part of that favorability coming in, in the fourth quarter.

Going into 2013 we do expect at least in the short term some continued pressure in this area in those key markets Texas, Florida, Georgia and add Tennessee in there for 2013 at least because it is on a revaluation cycle and 2013 is a revaluation year, so all of those things are part of that growth. I think important again to take a long term perspective on taxes just like I mentioned capital.

If you take our projected 6% midpoint growth in taxes for 2013 and you add that in to the last six years, you are going to get less than a 2% growth in taxes over the last 6 years, so again important to note though we are seeing pressure now and maybe some in 2014 over the long term more modest growth, States and municipalities are really getting back a little bit of the declines that they gave up back in 2009 and 2010.

Very helpful. Thank you.

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

Good morning.

Good morning.

Earlier in the call you mentioned buying a couple of properties from the JV. At this point do you think you will look to buy the JV out or why these two properties in particular?

Well, this is the Fund I JV that we had with Fannie Mae, and we just approached them and began conversations some months ago and decided that --That is a JV we capped. It is not active in the market looking to add any assets. They were interested in cleaning that up, so we are just going to buy them out of those two properties. Our other JV Fund II that we have -- it is an active JV. It is one that is targeting the value add repositioning plays.

Our partner is still very much interesting in finding ways to deploy capital, as we are, but as I mentioned it is just the pricing for those value add opportunities is very, very competitive. And we just did not feel comfortable forecasting any acquisition activity in that this year. And the assets that we co-own with them at this point they are comfortable continuing to own, as we are, and that one is still active.

Okay. And then do you know what the properties you targeted for disposition this year, what their average effective rent rate would be on a monthly basis?

I can't tell you specifically for that portfolio. I can tell you this, Carol -- this is Al -- if you take the properties that we sold over the last few years you are talking about a difference in dispositions; the average is less than $700 call it $650 to $700, and then the ones we are acquiring are more like $1,000 to $1,100 on average per unit. So pretty big difference.

That would hold true for this group as well.

Okay. So the $650 to $700 would probably be true.

I would expect so.

Thank you.

Thank you. Our last question is a follow-up from Rich Anderson with BMO Capital Markets.

Sorry for keeping you around. Just a small one. Al, what do you have dialed into G&A for acquisition related expenses?

What we do ,Rich, is very simple we take 75 basis points to 80 basis points of the acquisition volume, so you can take 250 to 300 what you dial in times call it 80 basis points and that would be what we'd use. That is over the long term what we have seen to be the average of that cost.

Just out of curiosity, has there been a way to manage those costs now that they have been expensed in the FFO calculation or is there no real way to lower that exposure?

You are talking about primarily commissions and legal costs. If you buy a bigger deal it is a little more efficient because of the legal and all the activities, but other than that it is really tough to manage that much more than that. T used t be, I will give you this, it has come down. It used to be closer to 100 basis points.

Right, the financing.

75 basis points to 80 basis points because of the size of the deals, and we are working on (multiple speakers).

I think the size of the deals and frankly several years ago some of the deals we were buying had legal issues or financing issues and some of the legal issues were a little more challenging . Frankly going forward what we are seeing is things are a little cleaner and not nearly the level of distress, so it may come down a little bit.

Okay. That is helpful. Thanks.

Thank you. There are no further questions. If you would like to make any closing remarks.

No closing remarks. Thanks, everyone, for joining us, and you know where to get a hold of us if you need anything. Thanks.

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may disconnect at this time. Everyone have a great day.