Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Leslie Wolfgang – Director, IR

Eric Bolton – Chairman and CEO

Al Campbell – EVP and CFO

Tom Grimes – EVP and COO

Analysts

Karin Ford – KeyBanc

Rob Stevenson – Macquarie

Gaurav Mehta – Cantor Fitzgerald

Rich Anderson – BMO Capital Markets

Paula Poskon – Robert Baird

Mike Salinsky – RBC Capital Markets

Buck Horne – Raymond James

Tayo Okusanya – Jefferies

Carol Kemple – Hilliard Lyons

Mid-America Apartment Communities, Inc. (MAA) Q4 2012 Earnings Call February 7, 2013 10:00 AM ET

Operator

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.

Leslie Wolfgang

Thank you, Tammie 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 Tom 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-X filings with the SEC, which describe risk factors that may impact future results. These reports, along with a copy of today’s prepared comments and an audio copy of this morning’s call, will be available on our website.

I’ll now turn the call over to Eric.

Eric Bolton

Thanks, Leslie. Good morning, everyone. 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 don’t believe the current pipeline of new apartment construction in our markets and submarkets 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 and 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 9:1, while the secondary market segment of the portfolio will be slightly stronger at close to 12:1.

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, a 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’re 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’re 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. It’s 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’ve modeled $250 million to $300 million of wholly-owned acquisitions in 2013, which is down slightly from the $345 million in acquisitions completed in 2012.

In our base case modeling for 2013, we’ve not assumed any additional JV acquisitions as we expect the environment for value add or repositioning place to remain very pricey. Our strategy and approach for deploying capital remains consistent with the 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 objective for shareholders remains centered on strengthening MAA’s full cycle performance platform. As increasing levels of new construction come online in 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?

Al Campbell

Okay. Thank you, Eric, and good morning everyone. I’ll provide a few comments on earnings performance for the fourth quarter and on our balance sheet. And then I’ll 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 a $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 in 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 and produced 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 acquisitions 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’ll notice in the supplement to the release that the total – our disclosure of total estimated cost for the development project has been revised. The total cost presented now represents all costs 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 projects remain intact and well above our investment hurdle rate.

Our balance sheet ended the quarter in great position and we continue progress towards achieving full and efficient access to the public debt market. During the quarter, we issued around 343,000 common shares to 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’ll discuss just a bit more in just a moment.

Now, I’ll turn to earnings guidance for 2013, and we’ve outlined the major assumptions in the supplement to our release, but in summary, we projected diluted FFO per share for the full year of $4.83, the midpoint of our projected range of $4.73 to $4.93 per share. FFO is expected to be 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 of 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 a quarter of our operating expenses, to produce the largest increase in expenses project 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 rate expected to be about 100 basis points higher on average.

We expect to fund an additional $40 million to $50 million on the development pipeline to 2013 with no new developments currently planned. We also expect to spend an additional $8.5 million of redevelopment capital on the interior renovation program and on 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 to our 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, prepaying 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 cap resources.

We expect our leverage to find as debt to 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% to 4% 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 million and $38 million for the year, declining about 20 basis points as a percent of total revenue.

That’s all that we have in the way of prepared comments. Tammie, I’ll turn the call over to you for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Karin Ford of KeyBanc. Your line is open.

Karin Ford – KeyBanc

Hi, 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 – could you explain the gap and why was that up so much on a year-over-year basis?

Tom Grimes

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

Karin Ford – KeyBanc

Okay. That’s helpful. Thank you. Next question is, can you just talk about what the post quarter trend has been in January, what’s occupancy today and where have renewal increases been so far this year?

Tom Grimes

Sure. It’s continuing on with – it’s very good trajectory occupancy. At the same point, it was last year at 95.5%. And our renewal increases, we’re getting around a little above 6% right now.

Karin Ford – KeyBanc

Okay, great. And last question is just a bigger picture one for, Eric. Can you just talk about your view on the right size of the development pipelines 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?

Eric Bolton

I would tell you, Karin, that we’re – as Al mentioned, we haven’t delved in any expectation 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’s 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 make sense is to be more focused on looking for opportunistic buys of some of these new constructions that is going to be coming out of the ground particularly in 2014 or 2015.

We think that over time, we’re able to generate better returns for capital and certainly take on a risk adjusted basis that we’re better able to just be there in 2014 and 2015 while this new project comes out of the ground. All of it won’t work and there maybe some that ultimately provides a better way to bring that new product in the portfolio. Having said that, as I mentioned don’t be surprised if we announced 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.

Karin Ford – KeyBanc

Great. Thanks for the color.

Tom Grimes

Thank you, Karin.

Operator

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

Rob Stevenson – Macquarie

Good morning, guys. Just a follow up on the last question on development. What’s the expected stabilized yield on those three projects in the pipeline today?

Al Campbell

Rob, this is Al. It’s about 7.5% to 8%. That really hasn’t changed, and so that’s the expectations.

Rob Stevenson – Macquarie

Okay.

Al Campbell

So lease up is going well, we’re meeting those targets.

Rob Stevenson – Macquarie

Okay. So with those projects coming in and the other projects coming out from basically being in leased up, it’s still 7% to 8%, you said?

Al Campbell

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

Rob Stevenson – Macquarie

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

Al Campbell

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

Rob Stevenson – Macquarie

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

Al Campbell

Yeah. If you look at the quarterly guidance, I think for the year, yeah, you have to assume like you sold assets faster than we thought. We bought assets later than we thought, I’m taking for a negative result, and things like that. And then, obviously, our same-store performance that we didn’t quite meet the targets there that we had set out. We don’t think that’s the case, but that’s what the guidance range is there to cover.

Rob Stevenson – Macquarie

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

Eric Bolton

Well, 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 really 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, I believe though it’s just prudent to cycle out some of the large margin investments every year. We’ve 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 far 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.

Rob Stevenson – Macquarie

Okay. And then lastly, what’s your view today on moving further Northern Virginia? Does any of the sort of issues that you’re seeing in sort of north of the core, sort of Northern Virginia, DC, suburbs make you hesitate about moving further north? Do you see opportunity, something that you guys have been taking a more active look at these days?

Eric Bolton

We have been looking more in Northern Virginia. We certainly don’t envision going into DC itself and I think that really doesn’t fit with what we’re trying to do from a strategy perspective. But, Northern Virginia certainly is a market that we continue to like. We’ve added a couple and are looking at some other opportunities up there now.

Rob Stevenson – Macquarie

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

Eric Bolton

It’s still pretty tight, it’s still pretty tight.

Rob Stevenson – Macquarie

Okay. Thanks, guys.

Eric Bolton

Thanks, Rob.

Operator

Thank you. Our next question comes from Gaurav Mehta of Cantor Fitzgerald. Your line is open.

Gaurav Mehta – Cantor Fitzgerald

Good morning.

Eric Bolton

Good morning.

Al Campbell

Good morning.

Gaurav Mehta – Cantor Fitzgerald

Couple of question on your guidance. So, if I look back, your large market had 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?

Eric Bolton

Well, 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 in the large markets, that ratio weakened slightly in 2013 as compared to 2012, we don’t 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’d certainly expect that by the time we get to late in 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 picture works out and how the economy and job growth picture works 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’s really the piece 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.

Gaurav Mehta – Cantor Fitzgerald

Okay. That’s Helpful. Second question I have is on your balance sheet. So, if I look at your guidance, it looks like you’re expecting $0.01 debt refinancing charge in 2013. And then you also talked about your desire to access public bond market. So can you perhaps expand on your refinancing activities in 2013? When I look at your maturity table, it seemed like you don’t have any debt expiring in 2013. So would you be looking to refinance perhaps from that from 2014 and 2015?

Al Campbell

Well, that’s 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 do a couple of things. One, to continue increasing our unencumbered asset portfolio. As we talked about, our targets are 55% to 60%, which we think is – 60% is where long-term we think we want to be. Also to increase our fixed rate protection, so we think that in the end of the year, we’ll be closer to somewhere call it 93% to 95% of our debt fixed and which is taking a little bit higher. It’s a good time to do that and it’s something we want to do to protect the balance sheet.

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

Gaurav Mehta – Cantor Fitzgerald

Okay. And then last question I have is on your JV. You mentioned in your prepared remarks that you’re 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?

Eric Bolton

Well, the expectation at least in our initial guidance that we won’t have any JV acquisitions is purely just a function of we think the market to buy and that those sort of value adds older properties which is what our JV is focused on doing. The pricing in that market is just really frothy right now and we’ve not been able to make any deals work as 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 products.

JV for development probably not something we’re interested in doing. We continue to believe that the right approach for JV or for development is for us is essentially a pre-purchase model. It’s not to say we would never consider it. But at this point, it’s certainly not something we’re focused on doing.

Gaurav Mehta – Cantor Fitzgerald

Thank you. That’s all I had.

Operator

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

Rich Anderson – BMO Capital Markets

Hey, thanks. Good morning folks.

Eric Bolton

Good morning, Rich.

Rich Anderson – BMO Capital Markets

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

Al Campbell

No, debt-to-gross-assets compared to prior year-end is down a couple of 100 basis points really.

Rich Anderson – BMO Capital Markets

No, I mean talking about your guidance. So, I think you were 43.9%, right, as of the end of the quarter...

Al Campbell

Yeah...

Rich Anderson – BMO Capital Markets:...and the guidance is 43% to 45%?

Al Campbell

Yeah. The guidance is to stay about where we are plus or minus a few bps. But 44% is sort of the midpoint of the guidance and that’s really our target.

Rich Anderson – BMO Capital Markets

Okay.

Al Campbell

You might see us go a little bit below that as we progress in the year, but that’s really – given our strategy, Rich, sort of a lower risk strategy and the reception that we’ve gotten from the rating agencies, we think that’s pretty much the right level.

Rich Anderson – BMO Capital Markets

Okay. Eric, you talked about 2014, 2015 supply risk and I think you kind of said – you kind of explained some of the strategy that you’ve put in place that mitigate some of that risk for you guys in your markets and one of them being I guess buying out products coming out of the ground and 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 kind of rain on the parade at least to some degree for you? And how your behaviors might change from maybe the past few cycles with other cycle?

Eric Bolton

Well, I think that for us we think that now given our markets and just given our strategy, now is not the time to ramp up a big development pipeline. I think that there’s 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 that while there’s a lot of handwringing in one sense from an operating perspective about, worry about supply trends, in another sense I’m looking forward to it, because I think it’s going to yield for us some terrific buying opportunities down the road and that’s why the work underway on the balance sheet is so important. And for us it’s all about just 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 in the market, certain submarkets, without a doubt are going to get a little bit soft in 2014 and 2015 and we hope to be there with a checkbook in hand and create some great buying opportunities.

So, I think that for us it’s all about just making sure we’re positioned for some inevitable submarket weaknesses 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’s just – that’s not the way we operate.

Rich Anderson – BMO Capital Markets

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

Eric Bolton

I think that’s basically it. I think that just being disciplined with how we deploy capital is the best thing you can do to mitigate risks when things weaken. And 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’ll buy. If not, we won’t.

Rich Anderson – BMO Capital Markets

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

Eric Bolton

Correct.

Al Campbell

Correct.

Rich Anderson – BMO Capital Markets

What’s the trouble down there? I assume it’s not 1 to 1, right? So I assume you got to have some number, is it 5 or 6 to 1 where you’re kind of equilibrium? Like how far above are those numbers from where if you kind of get into an equilibrium-type stage?

Eric Bolton

I’ve seen a couple of different reports or several different reports and it’s either 5 to 1 or 6 to 1 is kind of where the equilibrium. Different people go through different allocations in terms of certain number of households will choose to own versus rent and certain ones will choose to rent a home versus rent an apartment. And so, most suggests that 5 to 1, 6 to 1 you’re kind of at equilibrium.

Rich Anderson – BMO Capital Markets

Okay. Back to you, Al. If you were to hold everything else constant except for the fact that you now have three investment grade ratings. How much do you think the company saves if, 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 what – more than, less than that, what do you think?

Al Campbell

Well, I think we’ve already captured to the process on our credit facility 30 to 40 basis points, Rich, and that was – you need one – you need two ratings to do that. With this final rating, I think that the next step will be at full access on an efficient basis to the bond market should get you another 20 or 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’s very realistic, I think. So that’s the goal.

Rich Anderson – BMO Capital Markets

Okay. And last question is on the same-store guidance of 4% to 6% NOI. How much would that be if you kind of took out the ancillary stuff in the revenue line, would it be 100 basis points less or maybe not that much. Can you just kind of...

Al Campbell

Maybe 40 to 50 basis points, Rich, somewhere in that line. It’s a contributor but certainly rents are the primary driver.

Rich Anderson – BMO Capital Markets

Okay, fine. Thank you very much, guys.

Operator

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

Paula Poskon – Robert Baird

Thanks. Good morning, everyone.

Eric Bolton

Good morning, Paula.

Paula Poskon – Robert Baird

Eric, regarding your acquisition guidance, can you just 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’ve looked at those and whether or not you think even just having that additional activity has attracted new buyers to your markets?

Eric Bolton

Well, the market is pretty active. I mean our deal flow remains very, very full. We’re looking at a lot of different opportunities at the moment. I think that whether it’s the EQR transactions, or properties or whether it’s just capital broadly being drawn to the apartment sector, there is certainly a lot of capital in all the markets than we’re seeing more activity in secondary markets as well.

As it relates specifically to the EQR assets, honestly, we’ve seen a couple of them. But for the most part, it’s really not the product that we’re targeting to buy. We’ve added a little over $1 billion worth of new assets in the last four years. The average age has been four years old. The product that we’ve been seeing that EQR is putting out there was 15 and in some cases 20 years old and that’s really not what we’re targeting to add to the balance sheet.

Paula Poskon – Robert Baird

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

Tom Grimes

Paula, it’s Tom. I think surprised not so much in fourth quarter because it’s been sort of the story all year down to flat, flat to down, down to flat. It’s not materially down to be honest with you, but it’s at an all time low. I think this time last year, I would have thought it would have picked up a little bit, but it’s 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 homebuyers and a lower percentage in the secondary markets.

Paula Poskon – Robert Baird

Interesting. And finally, are you seeing any competition from the single-family rental product that’s also been so much in the news in recent months?

Tom Grimes

Just none. And we’re really glad we’re not doing it because it seems like a very, very hard business to make money doing on an ongoing operating basis. But I mean there’s just not been that move-outs, renting homes has stayed between 5% and 6% for the last two years. I would think now is the best time it’s ever going to be to rent a home and it doesn’t seem to move the needle and certainly not with the folks that we’re renting to. My sort of sense is that home renter is most likely going to be an ex-homeowner and that people just want to be in a house aren’t coming back to us, they’re going to that pool.

Paula Poskon – Robert Baird

Thanks very much. That’s all I have today.

Eric Bolton

Thanks, Paula.

Operator

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

Mike Salinsky – RBC Capital Markets

Good morning, guys.

Eric Bolton

Hi, Mike.

Al Campbell

Hi.

Mike Salinsky – RBC Capital Markets

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

Al Campbell

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

Mike Salinsky – RBC Capital Markets

Okay. So pick the interest expense savings that you’ve dialed into the numbers is pretty minimal, the way its set up there?

Al Campbell

It is. It is. It is. And obviously because we’re also moving fixed rate debt up as a percentage, so that we’re taking it closer to 93%, 94% fixed at the end of the year versus we’ve average more or like 90% fixed or hedged this year. So that has impact on as well, Mike.

Mike Salinsky – RBC Capital Markets

Okay. I 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 markets? Do you expect to change that around a bit over the next couple years?

Eric Bolton

Well, it’s a good question, Mike. And yes, we do. What we’re really driven by, as I mentioned, is a desire to continue to harvest value out of the lower margin investments and reinvest in a 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. And so as a consequence of that, you will see the tertiary market component of that secondary market segment begin to shrink.

And as it relates to – and you look at the dispositions we have planned for this year of the markets like Brunswick, Georgia, Valdosta, Thomasville, Melbourne, Florida, Athens, and Lagrange, Georgia. Those are all targeted dispositions this year. And we believe that in our goal is honestly just to be sure that we’re getting this capital recycled into investments that we think over the next 10 years will produce higher margins.

And to the extent that we’re able to cycle out of some of those markets, those names I just mentioned and go into some other secondary market 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.

Mike Salinsky – RBC Capital Markets

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

Tom Grimes

It will be just sort of a continuation of what we’ve got, it will be on market rents between 4% and 4.5% and in terms of what average effective will be throughout the year. And then ask that question again about loss to lease – where we are loss to lease or is that sort of what’s baked in?

Mike Salinsky – RBC Capital Markets

Yeah, kind of what’s – kind of where does – what are portfolio rents like how much have you captured kind of what’s the earning in 2013 versus how much do you expect in terms of market? I’m just trying to walk through the dynamics of that.

Tom Grimes

Yeah. I mean a lot of it is based on the good work that was done this year on moving renewals and new rents out. So I think it’s a blended effort between new rents and renewals and that it’s – we’re probably 30% of the way done, something like that.

Mike Salinsky – RBC Capital Markets

Okay. Thank you much.

Operator

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

Buck Horne – Raymond James

Hey, thanks. Good morning, gentlemen.

Eric Bolton

Hi, Buck.

Buck Horne – Raymond James

Eric, if the market for older value add assets is still 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?

Eric Bolton

Well, we are selling more than we’ve ever sold. We sold more last year than we’ve ever sold in a given year and we’ll sell more this year. I think that to some degree it’s a function of also being able to redeploy those proceeds. We’re mindful of how much earnings dilution we’re willing to take in a given calendar year to complete this recycling effort. I would say that, we’re pretty comfortable executing at this level. Having said that, I mean, 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 that the volume that we’re contemplating is about right given our ability to reinvest the proceeds. As I mentioned earlier, we’re not under any sort of pressure. I don’t feel – we’re not trying to strategically change anything about our portfolio. We’re not trying to do anything fundamentally different. It’s 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.

Buck Horne – Raymond James

Okay. Also thinking about your markets right now, there is a couple that kind of pop out of me, I’m just kind of curious about specifically Jacksonville, Nashville, and maybe Raleigh is 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 hasn’t quite met what some economists might have thought would have occurred in those markets. And I’m wondering what your thoughts are. I know you’re expanding into Jacksonville and that maybe a kind of a bit of a unique opportunity. But what are your thoughts about those types of markets? And then separately from that, what are your thoughts about Texas and what your maximum exposure to Texas ought to be?

Tom Grimes

All right. I’ll jump in, Buck, this is Tom on the market stuff and I’ll let Eric cover the exposure to Texas. I’ll be glad to talk about what we see happening there. But just – I think you said Raleigh, Jacks, Nashville and was there a fourth?

Buck Horne – Raymond James

No, just those three would be – just at a high level, talk about those areas?

Tom Grimes

Sure. No, I think Raleigh is pretty encouraging on the job growth front, but it has some new construction coming into the market they were watching carefully. It tends to – it’s spread out a bit. It’s a little bit of exposure in our Brier Creek submarket, not so much in our Cary properties and virtually nothing that competes with the Hue, Downtown. So, we’re optimistic on that one. It’s been good for us. We think it’ll 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’s just, as Eric described in the call comments, sort of a super opportunity. But right now, Jacksonville is chugging along at 5% on a revenue growth rate, growth of 37 and occupancy at 96. And I think you’ll see out of markets like Jacksonville and Raleigh just kind of continued steady good growth. It is not going to compare to – it’s certainly not early in the year to Austin, Dallas, Houston, those kind of places. So I would expect it just to continue to do well.

Nashville, we’re expecting to be strong again. It’s jobs to completions ratios, 8:1 and we’re pretty optimistic about what Nashville can do next year.

Buck Horne – Raymond James

Okay, great. Texas, real quick, it’s obviously very strong. What do you think maximum exposure in Mid-America’s portfolio ought to be to Texas?

Eric Bolton

Well, I think that, I mean, as far as Dallas and Houston are concerned from a broad portfolio allocation perspective, we’re pretty much there. We started recycle some money out of Dallas little bit last year and the year before and Houston, somewhat similar. I would tell you that we’re 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’s 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.

Buck Horne – Raymond James

Thanks, guys.

Eric Bolton

Thanks, Buck.

Operator

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

Tayo Okusanya – Jefferies

Yes. Good morning. Congrats ongoing three-for-three with the rating agencies. Most of my questions have been answered, but just a quick one. The increase in recurring CapEx, that’s in the numbers 2013 versus 2012, could you talk a little bit about that and what’s driving that?

Al Campbell

I think the important thing to note – Tayo, this is Al, good morning. I think the important thing to note about that is over the long-term there is a increase from the prior year, I think it’s by 6% – $0.06 to $0.07 somewhere in that range. But I think if you look over the last five years, CapEx has grown probably 2.5% on average for the five-year period. So, the recurring capital tends to be a little bit volatile depending on the project you have going on. Paint jobs, roofing are pretty significant projects and can be pushed forward or backward here or there and 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.

Tayo Okusanya – Jefferies

Got it. Okay, that’s helpful. And then also could you talk a little bit just about what you’re seeing from a tax perspective, as well as increases on property taxes?

Al Campbell

I can. Interesting thing, you’ve seen, you’ve followed us, we went into this year thinking taxes would grow 4% to 5% having 4.5%. We ended up seeing about 3% this year. The main pressure as 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. I mean, they are definitely aggressive on their program.

Florida and Georgia what we saw was the values began to come up, but we didn’t really see the rise in millage rates that we had and thought might happen. That’s a little bit more of a political situation, a lot of things involved in that. So that was part of that favorability coming in the fourth quarter.

Going into 2013, we do expect at least in the short term some continued pressure in this area and in those key markets, Texas, Florida, Georgia, and add Tennessee in there for 2013 at least because it’s on a revaluation cycle and 2013 is a revaluation year. So, all 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’re going to get less than a 2% growth in taxes over the last six years. And so, again, important to note, though we’re seeing pressure now and maybe some in 2014 over long term more modest growth, the states and municipalities are really getting back a little bit of the declines that they gave up back in 2009 and 2010.

Tayo Okusanya – Jefferies

Very helpful. Thank you.

Operator

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

Carol Kemple – Hilliard Lyons

Good morning.

Eric Bolton

Good morning.

Carol Kemple – Hilliard Lyons

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

Eric Bolton

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 just decided that – that’s a JV that we capped. It’s not active in the market looking to add any assets. They were interested in just cleaning that up and so we’re just going to buy them out of those two properties.

Our other JV, Fund II that we have, it’s an active JV. It’s one that’s targeting the value-add reposition in place. It’s still – our partner is still very much interested in finding ways to deploy capital as we are, but as I mentioned, it’s just the pricing for those value-add opportunities is very, very competitive and we just didn’t feel comfortable forecasting any acquisition activity in that this year. But the assets that we co-own with them at this point, they’re comfortable continuing to own as we are and so that one is still active.

Carol Kemple – Hilliard Lyons

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

Al Campbell

No. I can’t tell you specifically for that portfolio. I can tell you this, Carol, this is Al. If you take the property that we’ve sold over the last few years, you’re talking about a difference in dispositions, the average is less than $700, call it $650 to $700, and then the ones we’re acquiring are more like $1,000, $1,100 on average per unit. So there is a pretty big difference there.

Eric Bolton

And that would hold true for this group as well.

Al Campbell

Yes.

Carol Kemple – Hilliard Lyons

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

Al Campbell

I would expect that, yes.

Carol Kemple – Hilliard Lyons

Okay. Great. Thank you.

Operator

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

Rich Anderson – BMO Capital Markets

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

Al Campbell

What we do, Rich, is very simple. We take 75 to 80 basis points of the acquisition volumes, so you can take $250, $300 what you dial-in times call it 80 basis points, and that would be what we’d use. That’s over long term what we’re seeing to be the average of that cost.

Rich Anderson – BMO Capital Markets

Is that – just out of curiosity, has there been a way to manage those costs now that they’ve been expensed in the FFO calculation or is there no real way to kind of lower that exposure?

Al Campbell

You’re talking about primarily like commissions and legal costs. I mean if you buy a bigger deal, it’s a little more efficient because of the leap on all the activities, but other than that, it’s really tough to manage that much more than that. It used to be – I’ll give you this, it has come down, it used to be closer to 100 basis points.

Rich Anderson – BMO Capital Markets

Right. That’s what I mean, yeah.

Al Campbell

75 to 80 basis points because of the size of deals and we are working on...

Eric Bolton

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

Rich Anderson – BMO Capital Markets

Okay. That’s helpful. Thanks.

Operator

Thank you. There are no further questions. If you’d like to – any closing remarks?

Eric Bolton

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mid-America Apartment Communities' CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts