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Associated Estates Realty Corporation (NYSE:AEC)

Q4 2012 Earnings Call

February 06, 2013, 02:00 pm ET

Executives

Jeremy Goldberg - VP, Corporate Finance & Investor Relations

Jeff Friedman - Chairman, President & CEO

Lou Fatica - VP & CFO

John Shannon - SVP, Operations

John Hinkle - VP, Acquisitions

Patrick Duffy - VP, Strategic Marketing

Jason Friedman - VP, Construction & Development

Analysts

Andrew Shapiro - Sandler O'Neill

Gaurav Mehta - Cantor Fitzgerald

Buck Horne - Raymond James

Jana Galan - Bank of America

Eric Wolfe - Citi

Wilkes Graham - Compass Point Research

Andrew McCulloch - Green Street Advisors

Operator

Good afternoon and welcome to the Associated Estates’ Fourth Quarter 2012 Earnings Conference Call. My name is Jamie and I will be the operator for your call today. At this time, all participants are in a listen-only mode. Following prepared remarks by the company, we will conduct a question-and-answer session and instructions for asking questions will follow at that time. Please also note that today's event is being recorded.

Now I would like to turn the conference call over to Jeremy Goldberg, Vice President of Corporate Finance and Investor Relations for opening remarks and introductions. Please go ahead.

Jeremy Goldberg

Thank you, Jamie. Good afternoon everyone, and thank you for joining the Associated Estates’ fourth quarter 2012 conference call. I would like to remind everyone that our call today is being webcast and will be archived on the Associated Estates’ website for 90 days.

Prepared remarks will be presented by Jeff Friedman, our President and Chief Executive Officer; Lou Fatica, our Chief Financial Officer and John Shannon, our Senior Vice President of Operations. Additionally, other members of our management team are available for the Q&A.

Before we begin our prepared comments, we would like to note that certain statements made during this call, including answers we give in response to your questions, will be forward-looking statements that are based on the current expectations and beliefs of management. These forward-looking statements are subject to certain risks and trends that could cause actual results to differ materially from projections. Further information about these risks and trends can be found in our filings with the SEC and we encourage everyone to review them.

As a reminder, Associated Estates’ fourth quarter earnings release and supplemental are available in the Investor Relations section of our website and they include reconciliations to FFO and other non-GAAP financial measures which will be discussed on this call.

At this time, I will turn the call over to Jeff Friedman.

Jeff Friedman

Thank you, Jeremy. And thanks to everyone for calling in. Normally, I finish up by thanking our operations team for their hard work and focus. But today, I wanted to start off acknowledging them and their many contributions to our continued success. Our business is a 24-hour, seven days a week business.

Although, household formation, the primary driver of apartment demand is only getting stronger and doesn't tend to change quickly, nuances at every property and at every submarket require constant monitoring. Evidence about the great job our teams have done couldn't be stronger than 6% revenue growth, the increased occupancy and our improved margins. Those of us at corporate office certainly play a role, but make no mistake; our operations folks do the real heavy lifting.

People often say the proof is in the pudding and sure enough the proof, that value of our portfolio is only exceeded by the quality of our people, is our very strong, relative performance. For those who have often commented about the defensive nature of our portfolio, our outstanding results, especially at this point in the apartment cycle must be a very positive surprise.

We look at trailing five years, a period that encompasses both down and up cycles, Associated Estates has achieved the highest cumulative same-community revenue growth of the publicly traded apartment REITs that have reported 2012 results. Given the high-barrier nature of our specific submarkets, we expect a relative performance to continue to be most competitive.

Having earned our investment grade ratings, we now have another capital source to access via unsecured corporate bonds. This additional flexibility not only enables us to minimize risk by reducing floating rate debt, but predominance of unencumbered properties positions us to be able to sell properties without the burdens associated with property specific debt.

Let me talk a little about 2013 in a broader economy as it relates to our business. As I said, household formation is high with no sign of abatement; headline job statistics indicate unemployment has gone down since last year, but it sure doesn’t feel like the benefits of stronger employment have trickled down to apartment rents as real household income has not meaningfully increased.

Higher demand and little new supply seem to be driving strong results. In addition, existing households that were typically been inclined to buy are making a decision to rent. This increased propensity to rent and the increased number of renters by choice when added to the new households will be most favorable for professionally managed apartments and for much of the new supply that we expect will be delivered in the coming years. It’s a submarket story and new supply in highly sort after locations will do just fine and so will the rest of the competitive inventory.

With any significant job and income growth we should see rent growth like we have never seen before. With interest rates expected to remain low for at least the next two to three years. With fundamentals of the apartment business solid; pricing for apartment should remain strong and cap rates low. Companies with development expertise have a clear advantage given the additional spreads on development versus acquisitions. We are very excited about the projects in our current pipeline; all are on schedule having cutting edge design features and will compliment the other assets in our portfolio.

I will now turn the call over to Lou.

Lou Fatica

Thank you, Jeff. 2012 was another stellar year for Associated Estates. We ended the year in a very positive way. FFO as adjusted which excludes prepayment costs and the write-off on amortized loan fees, net of defeasance credits was $1.27 per share. This was $0.02 per share better than the midpoint of our prior guidance driven by better than expected Q4 operating results and lower interest costs.

Highlights for 2012 include 6% same-community revenue growth; 6.9% same-community NOI growth; FFO as adjusted per share growth of better than 23%. Successful completion and lease up of our Vista Germantown development in Nashville resulting year one stabilized yield of 7.3%. Commencement of construction are 99 unit expansion towards San Raphael property in Dallas and the development of our Bethesda site, near Bethesda Row.

Acquisition of four core stabilized deals in our targeted markets; three in Raleigh-Durham and one in Dallas. Disposition of six non core properties for a total $67.3 million having the average age of 25 years resulting in GAAP gains of just under $27 million. Improvement in our fixed charge coverage ratio to 2.98 times from 2.34 times a year ago.

Reduction in leverage as measured by debt to undepreciated book value by 200 basis points to 47.4%. Reduction in secured debt levels by nearly 11% to 24.9%. Increase in the market value of our unencumbered property pool is over $1.1 billion. The percentage of NOI derived from our unencumbered property pool was 62% at year-end, up from 46% at year-end 2011 and achievement of investment grade ratings.

All of these accomplishments have positioned us for another terrific year. We kicked off 2013 with our inaugural bond yield issuing a 115 million of eight and 10-year notes with an average term of 9.2 years at a weighted average interest rate of 4.27%.

The deal was upsized from our $75 million launch and allowed us to extend our maturities throughout years with no other debt repayment obligations at very attractive rates and reduce our floating rate debt. From issuances were used to pay down our revolver, which currently has a balance of $40 million.

From a balance sheet perspective, we won't rest on our laurels and our focus will be on continued improvement and our overall leverage metrics, reducing secured debt and continuing to increase the size of our unencumbered pool.

Turning to our guidance for 2013, we expect FFO to be in the range of $1.29 to $1.33 per share. This assumes $50.2 million weighted average shares outstanding. At the midpoint of our FFO guidance range, we are projecting same community revenue to increase 4.5% and expenses to increase by 2.5%, resulting in same community NOI increasing by 5.75% at the midpoint.

Our guidance also contemplates acquisitions of zero to $100 million, the sale of $60 million to $100 million of properties and development spend of $60 million to $70 million. Dispositions are expected to be weighted towards the first half of the year, while any acquisitions are expected to be weighted towards the second half of the year.

Cap rate spreads between what we sell and what we buy are expected to be in the range of 150 basis points to 200 basis points. Quarterly FFO should mimic historical patterns with Q1 reflecting the ballpoint as a result of seasonal property operating expenses and higher G&A associated with restricted shares linked to incentive compensation programs.

Additional details regarding our full year guidance for 2013 that can be found on page 30 of the supplemental.

At this time, I will turn the call over to John.

John Shannon

Thank you, Lou. We are very pleased with our fourth quarter and full year property performance. Our same community NOI was up 7.9% over Q4, 2011. We finished the quarter at 96% physical occupancy, up from 95.2% a year ago. Total same community revenue was up 6.7%.

Regionally, same community revenue was up 5% in the Mid-Atlantic, up 7.1% at our Midwest properties and revenue up a very strong 8.3% at our Southeast properties. Q4 same community new lease rents were up 1.5% and renewal lease rents were up 5.8% across the portfolio.

For January, we finished the month at 96% physical occupancy and our net collected rents were better than 5%. In Q4, expenses were up 4.7%, advertising, utilities, repairs and maintenance and other operating expenses combined were flat when compared to Q4 2011.

Payroll was up 5.4% for the quarter primarily associated with performance driven incentive compensation. Our largest increase in operating expenses came from real estate taxes which were up 9.8% quarter-over-quarter due to increased values and millage rates. On a sequential basis, Q4 versus Q3, occupancy was down 120 basis points which is in line with our five-year historical pattern.

Additionally, sequential total revenue was up 10 basis points, better from the historical levels. Regard to the 2012 acquisitions that are not part of our Q4 same community results, three properties in Raleigh-Durham and one property in the Medical District of Dallas, all are performing quite well and collectively finished the quarter at 95% physical occupancy.

As an update on our listed Germantown development in Nashville, we completed construction in Q4 and finish the quarter at 97% physical occupancy. At the expansion of our San Raphael property in Dallas, the structured garage is a 100% complete and framing is well underway.

We're on schedule to deliver the first unit in amenity areas in the third quarter of 2013. And our development in Bethesda, we will be raising the old post office and distribution center this month with gradings starting shortly thereafter. The remainder of our current development pipeline, 250 units in Dallas, at a 175 units in Los Angeles is on track with design and approvals continuing to move forward as anticipated, both with spring starts.

With regard to dispositions, our 843 unit Idlewylde property in Duluth, Georgia was listed in the fall and we expect the first quarter closing. In addition, we've identified a couple non-core Midwest assets to sell.

As Jeff stated, apartment fundamentals remain strong and we're well positioned to have another good year in 2013. Our 2013 guidance at the midpoints reflect same community revenue growth of 4.5% and NOI increasing by 5.75%. It is important to note that we stayed full most of 2012 at an average occupancy of 96% with approximately 25% of our total 2012 revenue growth coming from year-over-year occupancy gains and 75% from rent increases.

For 2013, our guidance reflects another year of high occupancy and therefore virtually all the revenue growth in 2013 is expected to come from rent increases.

Regarding expenses, let me start by saying that over the past five years, our average annual total expense growth is 1.5% in line with the peer average of 1.5%. For the full year 2012, advertising, utilities, [R&M] and other operating expenses were up 1.3%. And as I touched on earlier about the quarter where we have seen higher increases for the year is in payroll and real estate taxes.

Looking at real estate taxes, we have seen above average growth in most of the markets outside of the Midwest as a result of increases in property values and millage rates. In regards to payroll, expense being up is really a good thing. Our property employees receive revenue and NOI bonuses for outperformance when compared to budget, and in 2012, we outperformed and paid out full bonuses.

Turning to 2013, in our guidance of 2.5% growth at the mid-point, advertising, utilities, R&M and other operating expenses are projected to be up approximately 1.2%. Payroll is projected to be flat to 2012 as it reflects the net of a 3% merit increased pool in more normalized bonus payouts in 2013. And lastly, taxes are projected to be up better than 5%.

In closing, department fundamentals remain strong. More importantly, our well located and well maintained properties are managed by talented and focused employees who drive results and continue to provide exceptional service to our residents and prospects each and everyday.

I want to eco Jeff’s comments, and thank everyone for another outstanding quarter and year.

We will now turn the call back over to Jeff.

Jeff Friedman

Thanks, John. Jamie, why don't we open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Andrew Shapiro from Sandler O'Neill. Please go ahead with your question.

Andrew Shapiro - Sandler O'Neill

So first, I want to know about the depositions and regard to the leverage and then concern, so kind of give a better outlook for your capital needs in 2013?

Lou Fatica

Andrew, this is Lou, can you repeat that question, I am sorry, I didn't get you?

Andrew Shapiro - Sandler O'Neill

Yes, I am just trying to get a better grasp under your capital needs in 2013 and so depositions, you know, there are kind of LTVs on them?

Lou Fatica

There is no data associated with any of the dispositions that we targeted for 2013, as I indicated in my prepared remarks, we finished the quarter at 47.4% and (inaudible) depreciated book value and based on our guidance we can fund, we can choose to fund all of the spend for both acquisitions and develop and stay within our stated leverage metrics.

Andrew Shapiro - Sandler O'Neill

Okay, thanks, fair enough. Finally, in regards to Midwest portfolio that’s clearly performing pretty well. I was wondering if you talk about your expectations for those markets in relation to other markets and that kind of relative to outperformance you see or do not see?

John Shannon

Yeah, this is John. When we look at the revenue growth for 2013 the midpoint being 4.5%, that regionally which goes from a low of 3.5% from our southeast portfolio up to a 5% revenue growth in the Midwest markets.

Operator

Our next question comes from Gaurav Mehta from Cantor Fitzgerald.

Gaurav Mehta - Cantor Fitzgerald

First question I have is on your acquisition and disposition guidance. So it looks like you are aiming to sell $60 to $ $100 million in assets and then you are requiring $0 million to $100 million. So I was wondering if you could talk about what would you need to see in the market to hit the upper end of your acquisition guidance.

John Hinkle

This is John Hinkle, VP of Acquisitions. Across the board market activity has been pretty slow for about the last six months. We are going to continue to be patient and monitor not only all of the markets where we currently have a footprint, but other markets as well and try and focus really on as many off market transactions as we can do. Based on our past history if you look at the previous two years of activity over 25% of our acquisitions have been off market and a 100% of our development deals have been off market. So we think we've got a good competitive advantage there and those deals tend to have higher returns than fully marketed deals, so we will try and focus on that but also monitor every deal that comes to market.

Gaurav Mehta - Cantor Fitzgerald

And then in regards to timing you mentioned that disposition are expected in first half and acquisitions in second half so what's driving that.

John Hinkle

Part of the acquisition side is really as I mentioned the transaction volume over the last six plus months has been relatively slow for the product type that we are looking for in the markets we are focused on and based on the previous three months and looking forward to the next three to six months we don't really see that activity picking up much and hoping that through the spring leasing season after people are able to get through that and the economy settles down a bit I think you will see more products come to market in the second half of the year.

Lou Fatica

And Gaurav I think on the disposition front as John mentioned we have a 843 unit property dilutive under the contract that we would expect to close in the first quarter.

Gaurav Mehta - Cantor Fitzgerald

And I think in the prepared remarks Jeff mentioned that development spreads today are more attractive than what you think in the acquisition market, could you perhaps quantify your expected development yields and acquisition yields.

Jeff Friedman

I can talk to the development yields. We typically on our development deals look for 100 to 200 basis points spread on the going cap rate. On our three development deals the Bethesda deal, we are targeting 5.75% to 6.25% return on cost. On our Dallas deal, our Turtle Creek deal we are looking at about 6% to 6.5%, and on our Wilshire Boulevard Desmond deal it will be 5% to 5.5% and those are untrended return on costs.

John Hinkle

And then on the acquisitions historically we've been high seven to mid 8% five year unlevered IRR which equates an 11% to 12% levered IRR of five years and we would anticipate that yields will continue to be in that same range.

Gaurav Mehta - Cantor Fitzgerald

And then lastly you mentioned that revenue growth in ’13 is expected to come from rent, could you perhaps breakdown your expectations as to new and renewal rent throughout in 2013.

John Hinkle

Sure. We think that the new deals will be 3% to 4% and renewal deals will be in the 4% to 5% range and that’s really where we are seeing things with letters that went out for renewals for February and March and that’s how we're pricing our vacant non-noticed units right now.

Operator

Our next question comes from Buck Horne from Raymond James. Please go ahead with your question.

Buck Horne - Raymond James

Can you talk a little bit about SG&A and maybe just help me understand, it looks the midpoint of your guidance, your projected SG&A is rising, really just almost as fast as your same store revenue growth, maybe a little faster with the planned dispositions. How do you explain why that number is still inflating so rapidly given the company size and you know that number just looks out of balance relative to the rest of your peers. Help us understand why that number keeps going up every year?

Lou Fatica

Buck, this is Lou. You know, we look at G&A, we look at it from a total low perspective, which includes office allocations that are allocated to the property for most companies. When we look at the peer average, that’s about 3.5% allocation from G&A to the properties. Our allocation is about 2.4%. That delta equates to about 1.9 million incremental allocations that we would have if we were to move that up to the peer average. You know, our focus is to continue to reduce G&A as a percentage of revenue and as we said, in the past, that’s really going to come from additional scale and volumes. There is a minimum level that we need to have from a G&A perspective to operate as a public company.

Buck Horne - Raymond James

Okay, still trying to understand the difference there, but can you help us understand just what are the larger components of the G&A spends? What’s in that number. why does is it still going up rising, because it was up pretty good this past year and its projected to be up again this year so is there a driver to that?

Lou Fatica

The two biggest components are salary and incentive compensation programs.

Buck Horne - Raymond James

Okay. And in terms of new acquisitions can you give us any indication of which markets you are targeting looking at for new acquisitions this year?

Lou Fatica

We continue to monitor and pursue deals primarily in markets where we currently have a footprint we also look at pretty much every transaction that

occurs in other markets as well, but our primary focus is where we currently own and operate properties.

Buck Horne - Raymond James

Last one is on Indianapolis I just noticed that market seem their (inaudible) assets seems to have a bit of a slowdown in Indianapolis, anything specific to the market or community wise what that resident turnover kind of jumped while rents didn’t moved that much and wondering if move-outs to ownership or any other factor was a calls for concern in Indianapolis or any other market?

John Shannon

This is John. No, we don’t see any trend that concerns us. We still have for the Indianapolis market 3.9% at the mid-point revenue growth for 2013 and we forecast that we were going to becoming through the winter months a little bit lower than that till we anticipate seeing Indianapolis picking back up through the part of the a leasing fees.

Operator

Our next question comes from Jana Galan from Bank of America. Please go ahead with your question.

Jana Galan - Bank of America

I don't know if I missed this, but can you let us know what the cap rate lies for the Columbus, Ohio community distribution in fourth quarter?

Patrick Duffy

This is Patrick Duffy. The property we sold was a 164 unit property and the economic cap rate on the trailing 12 months was 7.2.

Jana Galan - Bank of America

And then in addition to the acquisitions, are you also reviewing land or other development deals?

Jason Friedman

This is Jason. We continue to monitor all the markets like John said. So we are looking at opportunities primarily upmarket possibilities in all the markets that we are in and we continue to do so.

Jana Galan - Bank of America

And any preference for increasing the development pipeline at this point or are you more focused on acquisitions?

Jeff Friedman

This is Jeff Friedman. I would say that as Jason said we are keeping our ear to the ground, have a number of discussion is going on off market of some potential joint ventures, but the developments that we have in the queue now are really capturing practically all of our tension with regard to the development portfolio, and again we are looking for good opportunities. But with the fields the way they are on an unlevered basis, we would prefer where we can to develop rather than buy properties at these extremely low cap rates with what we consider to be outsized expectations for rent growth in the future.

Operator

Our next question comes from Eric Wolfe from Citi. Please go ahead with your question.

Eric Wolfe - Citi

Hey guys. For the, I think you said 843 units I think the Duluth property that is under contract; can you just tell us what the anticipated pricing is on that, just on a per unit basis or cap rate however you are looking at it?

John Shannon

Eric, this is John Shannon; we’d rather not answer that until we've closed the deal and then we'd be more than happy to share the information.

Eric Wolfe - Citi

Okay. But just presumably this will make up the majority of well, I guess close to the majority of your transaction activity, dispositions for the year right, just because it’s quite a large asset?

John Shannon

A higher percentage of it, but I wouldn't say most of it.

Eric Wolfe - Citi

Right, okay. And I am just trying to figure out also from a guidance perspective how the transaction activity is influencing your FFO; so you are going to sell this asset, its larger than the rest, presumably you are going to pay off the $40 million that's on your line of credit or that would be the use of the proceeds?

Jeff Friedman

Yes.

Eric Wolfe - Citi

Okay. And then are the rest of the acquisitions that you have in guidance, I guess the rest of the dispositions, are they, are you going to sell those regardless of whether you find acquisition opportunities or are they contingent upon you finding the right acquisition opportunities later this year?

Lou Fatica

We haven't listed them for sale yet and we would expect to go-to-market on those kind of in the late spring and summer, or early summer timeframe.

Jeff Friedman

Eric, this is Jeff Friedman; we've talked on these calls and individually a number of times about the analysis we go through on a portfolio-wide basis top down and bottom up. I think John’s prepared remarks referred to identifying a couple of smaller non-core deals in Columbus that have popped up on that. Given the floppiness of the markets, we are evaluating a number of opportunities where even in markets where we would like to continue to grow, given the low cap rates and price expectations where we may even consider sales as well, but as Lou said, no additional properties have been listed yet.

Eric Wolfe - Citi

Sure. And I guess what I am wondering is whether because are you willing to dispose off those without finding suitable acquisition opportunities to recycle the capital into or just the fact that cap rates are low enough you are willing to sell $80 million without and sit on the cash until you find the right acquisition opportunities?

Jeff Friedman

Well, in a perfect world we would like to be able to time it where the sale closes on the day that we close the acquisition, but it doesn't really work that way. We are also sensitive to the gains associated with the sales to the extent that it would create a tax issue, so or special dividend requirement, so to that extent we would need to coordinate that with the 1031. But, clearly the sale of the Duluth property will happen as we've said without any acquisitions lined up and if we decide to sell another property and we haven't found another asset that we want to own, we’d sell it without having identified another acquisition as well.

Eric Wolfe - Citi

Okay, that’s helpful. And then just in regards to your fourth quarter revenue growth, obviously you saw a nice pop there from 5.9 to 6.7, trying to understand where that was relative to your expectations, was that at the top end, well above the top end? Seems like a nice pop, just wondering whether you are expecting that.

John Shannon

Yes, Eric, this is John again. It was definitely at the top end of it and again I think we saw a lot of the pop from staying full for most of the quarter, whereas, historically at the beginning of the month, you started at, say, 90% to 93% occupancy and you move up to the 96%. We stayed well occupied for the entire quarter. So we got a good percentage of that revenue growth from occupancy gains as well as rent growth.

Eric Wolfe - Citi

Right, understood and I guess, along that vein, if we think about your guidance for this year and sort of the pace of revenue growth that’s embedded in your guidance for next year, should we expect those, I guess, the amount of occupancy that’s sort of embedded in your numbers right now, just to pop up first quarter and then sort of have that trail out through the year as you don’t get that occupancy benefit. I am just trying to understand, whether we should expect another large sort of same-store growth number in the first quarter and then kind of have a trail off through the year?

John Shannon

Well, I think if you just look at the performance from 2012, just inherently built in with the comps, they certainly get a little bit tougher as we go through the year because we did start to really outperform in the second half of 2012.

Operator

(Operator Instructions) Our next question comes from Wilkes Graham from Compass Point Research. Please go ahead with your question.

Wilkes Graham - Compass Point Research

Jeff, maybe a question for you. You know, and this is really sort of following up on some of the other questions. You know, if lets say rent growth remains strong and interest rates remain low and cap rates remain low for the next two or three years, and we remain in this (inaudible) acquisition environment, are you comfortable remaining at the size that you are at may be disposing off an asset here and there, given sort of in the larger context of your longer term strategy to try to grow and try to increase the scale of the company?

Jeff Friedman

Well, better isn’t better, bigger isn’t necessarily better to the point Lou made, we have a certain built in cost which I guess in some ways could be considered a disadvantage of investing in a small company, the load associated with the G&A of a small company.

The good news is that it doesn’t take nearly as much to move the needle as indicated by the great buys that the team were able to find and uncover and the job that management team has done. So, a lot will have to do with I think the broader economic conditions and that is to the extent that there isn’t a sense of confidence and certainty with regard to taxes and the overall economy then we have a different feeling about buying properties at what we consider to be good buys.

I have said the markets (inaudible) but to the extent that we can buy a property below replacement cost and that’s getting harder to find today, but with any inflation then and historically there is not a linear effect relating to price inflation of the properties and necessarily what’s going on with the rents because of what would be an increase in the cap rates and so that’s the dance we dance in terms of acquiring and that’s why I said we would be much more inclined to want to develop and spin those precious dollars where we are able to pick up 100 to 200 basis point additional spread recognizing that there is additional risk associated with development of properties but something that we don't find concerning.

Operator

And our next question comes from Andrew McCulloch from Green Street Advisors. Please go ahead with your question.

Andrew McCulloch - Green Street Advisors

Good morning. Jeff, on your comments about tender JV development, can you expand on that, how many deals, what markets, what do you see as pro rata share in those and what is going to be?

Jeff Friedman

With regard to the JVs well, its starts for example, the deal that we did in Nashville with the local developer was at 90-10 deal and some of the opportunities that we are looking at in this off market transactions where the owner of the land for example would like to have an opportunity to participate in some of the upside and so we will value the land and then in some cases give them a contribution to the JV equal to the value of the land.

We will retain in most of those situations, the right to control the design and we will manage the lease up, and so really it’s a way to give the owner of the land an opportunity to participate in what they consider to be the upside. And then there are some situations that we are looking at and some JV partners, potential partners that we are talking to who would like more of a 50-50 joint venture that could potentially be a conduit for us for additional growth where they would contribute assets to a joint venture, we would be responsible for the management of those properties with the hopes that we would ultimately be able to buy out our joint venture partners.

So that's a bit of a long winded answer but it really is the spectrum from the 90-10 to what would be a 50-50 kind of a deal.

Andrew McCulloch - Green Street Advisors

It’s probably early but any idea on kind of dollar commitment from AEC calls it over the next two years?

Jeff Friedman

No, these as you know Andy; these relationships are relationships that we've been nurturing for quite some time. In the apartment sector it’s been difficult to promise JV partners the kind of returns they need from the core kind of investments that we typically invest in.

It’s easy to run a pro forma where you can come up with an 8.5% or 9% and then after you take these away, you can meet the box on a pro forma for the investor but from a practical standpoint those returns have been hard to come by and so we are more concerned about the returns and the expectations for the returns.

We've been nurturing the relationships with the JV partners for quite some time. We are not in a position to discuss an amount of a contribution but we would look at that money, the same way we would look at any other spend in terms of how much money we were able to spend. We would look at the acquisitions, our development needs as well as any obligations to joint ventures.

Andrew McCulloch - Green Street Advisors

And then just one question on property taxes. You said you are seeing less pressure from your Midwest assets. These assets have been doing great, rents have been going up, I'm sure asset values are being going up, can you just educate me why there's just generally less pressure on property taxes from that region of your portfolio?

Jeff Friedman

Well, this is Jeff again, let me address that. Two things, one it’s the old, we never had a bus because we never had a boo. First of all the inflation in the values of those properties didn't really happen like in many other markets. It was more of a steady climb of when the markets got hurt, the reductions in those Midwest values didn't happen as steep as either in many cases because the tax values were in many cases the way they are computed below what you might consider to be the market value just because of the way the municipalities compute the values. And so today as the markets have come back, the increases in those market values have been more in relationship to the way the rents have grown as opposed to gaping up to make up for example in South Florida where we get a 20% reduction one year because values went down and then we gap back up 10%. In the Midwest they never went down 20% and now they are going to pretty much grow with rents. Lou do you have some specific numbers.

Lou Fatica

Yeah, I mean they are going up, they are just not going up as high as Jeff mentioned. In 2012 they went up about 5% compared to the 6% average for the entire portfolio with the outside growth coming in Southeast Florida and Virginia and in 2012, we're projecting, we saw 4.5% increase. I think I may have said in 2013, but they are going up in the 4.5% to 5% range but not as much as the other ones.

Operator

And we have a follow up question from Buck Horne from Raymond James. Please go ahead with your question.

Buck Horne - Raymond James

Just want to add, see if I can phrase it this way. I mean, just given the persistent, unusually wide discount to NAV this company has traded at over the past several years, really, is the Board open to or even actively considering any strategic alternatives to close this gap and just hypothetically if there was a potential buyer for the company, what are the top considerations the Board would be looking at to evaluate any offers?

Jeff Friedman

Well, Buck, the Board certainly understands their obligations. The members of the Board are very involved in constantly evaluating and participating with management in ways to maximize both the returns and the value to all of our shareholders. And clearly, we, the Board, understand that responsibility. And so in terms of being open, we're open to any anything that maximizes the value to all of our shareholders. And we're hard at work trying to narrow that gap that you referred to, but we really are most focused on certainly the people in this room and on this call today, on the things that we can control such as the revenue and the NOI that over that same period of time we have proven that we are able to outperform the other companies and we are confident that that gap will get closed.

Buck Horne - Raymond James

Okay I am thinking of it in context of the FFO growth at the mid-point of your guidance for this year is that down to call it 4% or so, and I know you guys are pursuing the long-term objectives of improving the quality of the portfolio. But now the time to keep pursuing that course as aggressively would just thinking about it would it be better to maximize the value of the existing assets.

Jeff Friedman

Well as associated to states we no one here is incented based on FFO per share growth, and we never have been. So we are really not focused on that, we are focused on the NOI because that’s what drives the value of our properties and so the decisions that we are making impact the ability to improve the NOI and ultimately enhance the overall value of our assets. We are not going to lever up to do that. We work very hard to continue to improve our balance sheet. Earning the investment grade ratings, as I said gives us that additional arrow in our quiver to be able to continue that growth. If we wanted to drive year-over-year FFO performance, all we had to do is do a $75 million bond deal instead of a $150 million deal and or things like that but that is not in the long term best interest of the company. We remember the tough times over the last 20 years and we are going to be sure we position the company to be able to come out the other side of the tough times as strong as we did this last time.

Operator

Ladies and gentlemen, at this time, showing no additional questions. I would like to turn the conference call back over to management for closing remarks.

Jeff Friedman

Thank you, Jamie. We are really excited about 2013. Thanks all for joining our call. And we look forward to speaking with everyone next quarter if not before.

Operator

Ladies and Gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

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