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Colonial Properties Trust (NYSE:CLP)

Q4 2008 Earnings Call

February 3, 2009 2:00 pm ET

Executives

Jerry A. Brewer – Executive Vice President Finance

Thomas H. Lowder – Chairman of the Board of Trustee & Chief Executive Officer

C. Reynolds Thompson, III – President, Chief Financial Officer & Trustee

Paul F. Earle – Chief Operating Officer

Analysts

David Bragg – Merrill Lynch

Steve Swett – Keefe, Bruyette & Woods

[Michelle Co – UBS]

David Toti – Citigroup Smith Barney

Michael Bilerman – Citigroup Smith Barney

Rich Anderson – BMO Capital Markets

Alexander Goldfarb – Sandler O’Neill

Alan Calderon – European Investment

Operator

My name is Pamela and I will be your conference operator today. At this time, I would like to welcome everyone to the Colonial Properties fourth quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker’ remarks there will be a question and answer session. (Operator Instructions) Mr. Jerry A. Brewer you may begin your conference.

Jerry A. Brewer

Welcome to everyone joining us today. We released our earnings this morning via business wire. A copy of this earnings release may be found on our website at www.ColonialProp.com. We’re also webcasting this call for your convenience. A replay will be available on our website for one week after the call.

Today’s call will be led by Tom Lowder, Chairman and Chief Executive Officer and Reynolds Thompson, III, President and Chief Financial Officer. On the call they will present an overview of our business developments, discuss our financial results for the fourth quarter and guidance for 2009. After their comments we’ll open up the call and take your questions.

Let me remind you that much of the information we discuss on this call including the answers we given in response to your questions may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities law.

These estimates are also based on a number of assumptions, any of which if unrealized could adversely affect their accuracy. Please see our latest SEC filings for the detail and explanations of risk. Any non-GAAP financial measures we discuss are reconciled to the closets GAAP financial measure in filings that can be found on our website.

Before I turn the call over to Tom I’d like to point out that on Page Nine of our supplemental package the capitalized expenditure amounts that had not been updated from the third quarter in the supplemental that was posted this morning. We have subsequently updated this schedule with the fourth quarter information and this has been reposted to our website. We apologize for any confusion this may have caused.

I will now turn the call over to Tom.

Thomas H. Lowder

Our board of trustees has asked for me to return to active management as CEO after being away three years to provide the leadership and to make decisions to get us through this difficult environment. Some of you may recall that I have been CEO of Colonial Properties Trust and its predecessor since 1976 until April of 2006. During that tenure I went through a number of down cycles in the real estate industry but this downturn is certainly a challenging one.

Accordingly, I’ve established the following five priorities for 2009 to address the current economy: first, we will strengthen our balance sheet; secondly, we’ll improve our liquidity; third, we will address near term debt maturities this year and the maturities in 2010; number four, we will reduce our overhead; and lastly we will postpone our developments. Let me discuss each one of those points with you.

The first point being strengthening the balance sheet, we’ll of course need to do this by deleveraging the company and one way to do that is to sell assets. The impairment that we’ll discuss later will enable us to accelerate our efforts and increase the opportunities for these sales. Secondly, our next move is to improve liquidity. We intend to close up to $500 million in secured loans through Fannie Mae and Freddie Mac. Over 90% of our multifamily portfolio is unencumbered so we have the room to do this attractive financing. Again, our asset sales will improve liquidity and we’re making credible progress on a very long list. Just yesterday we closed a sale on one or our retail developments.

The third item was addressing our near term debt maturities in 2009 and 2010. I’ll ask Reynolds to speak to the details of our agency financings in just a moment. A fourth item was reducing our overhead. We have a long history of successful development in all product types but this is not the part of the cycle to be a developer. Consequently, we have made a 10% reduction in our total workforce approximating $13 million in savings, 50% of which was being expensed and 50% capitalized.

Many of these positions were in the development and construction areas of the company. We have frozen wages on all employees at $75,000 and up. We’re working on additional overhead savings to preserve capital and improve liquidity. Lastly, we are postponing our developments. Some has said when you’re in a hole the first thing you do is stop digging. By postponing developments we will preserve our capital and wait until the appropriate time to build again.

Of course, the flip side of all of this is that there will be opportunities. In real estate recessions previous to this, we stopped our development and concentrated on managing our properties for cash flow. Some of the opportunities that came our way were in the area of helping many lenders manage and lease problem assets. Looking back to recent history, we made the right move to sell commercial assets in 2007 and move in to primarily multifamily assets. In 2008 our multifamily portfolio contributed 75% of our net operating income. We’ll continue to move in that direction to simplify the management structure by looking for opportunities in the apartment business.

Now, Reynolds will provide some details on the fourth quarter operating performance and financing activities. After that, I’ll give guidance for 2009.

C. Reynolds Thompson, III

FFO for the fourth quarter was a loss of $92 million or $1.73 per diluted share and $1.6 million or $0.03 per share for the year. The results for the fourth quarter included a $116.9 million non-cash impairment charge related to our for sales residential assets, land held for future development at Colonial Promenade Nor du Lac retail development and a number of one-time items. I’ll touch on each of these.

We have elected to accelerate our exit from the for sale residential business and halt all new development activity. This is the right move to make in light of current economic environment. $116.9 million charge breaks down as follows: $61.4 million is associated with completed for sale residential properties and condo converges; $36.2 million is related to land held for future mix use and for sale residential developments; and $19.3 million is related to Colonial Promenade Nor du Lac. The impairment charge is non-cash and does not affect our compliance with financial or debt covenants.

In conjunction with the delay of all new development activities, we wrote off $3.4 million in pursuit cost in the fourth quarter, further reduced our development staff and other personnel which resulted in a $1 million charge for severance. Going forward we will not be capitalizing interest or overhead on future development projects or on for sale residential land that we still hold. We expect this impact to be approximately $0.20 per share on an annual basis.

Other items of note, $5.2 million in gains from the repurchase of $55.5 million in unsecured notes, $1.7 million of casualty losses as a result of fire damage at four apartment communities and a $1.4 million tax indemnity payment. Excluding the impairment FFO would have been $24.9 million or $0.44 per share for the quarter and $118.5 million or $2.09 per share for the year putting us right at the midpoint of our expected range.

Operating FFO which we define as FFO before transaction income was a loss of $98.6 million or $1.73 per share for the quarter and a loss of $21.6 million or $0.38 per share for the year. Excluding the impairment, operating FFO would have been $0.32 per share for the quarter and $1.67 for the year.

Turning to operations, our fourth quarter same property NOI growth was flat compared to the prior year. NOI growth in our major markets representing 86% of our NOI was .8% for the fourth quarter. Our best performing markets were Richmond, Raleigh, Dallas, Fort Worth and Atlanta. Our most challenging markets this quarter were Charleston, Savannah, Austin and Orlando. For the year, same property NOI growth was 2.7%.

Annual revenues grew at 2.2% with 80 basis points of growth obtained through cable income growth. Our average rental rate improved 1.5% on an annual basis. Expenses increased 1.4% for the year. Revenue increased .6% in the fourth quarter compared to the fourth quarter of 2007. Sequentially, revenues were down 1.3% compared to the third quarter and occupancy was down 180 basis points to 94.3%.

Traffic continues to trend down but rest of turnover is down 300 basis points as compared to last year. As expected turnover related to home buyers has continued to decline with a reduction of 600 basis points to 13% in the fourth quarter. However, turnover from financial and job related reasons has jumped roughly 600 basis points since the first quarter to 24%, a trend that is expected to continue in 2009. Turnover due to renting a home was 2.1% in the second half of 2008.

Our total disposition activity for 2008 was $202 million. We completed the sale of Colonial Promenade Fultondale on February 2nd. Sale proceeds were $30 million and will result in a gain of approximately $0.07 to $0.08 per share that will be recognized in the first quarter 2009. As part of the transactions, we provided seller financing of 55% at an interest rate of 5.6% for five years. The net proceeds were used to pay down our unsecured line of credit.

We have three other retail developments currently under contract and going through due diligence. These sales could close in the first half of the year subject to successful diligence. Our fourth quarter interest rate coverage ratio was 2.2 times and our fixed charge coverage was 1.9 times. The ratio of net debt plus preferred to gross asset value was 59.3%.

Our multifamily portfolio is currently 90% unencumbered that unencumbered basis giving us the opportunity to success a new credit facility with Fannie Mae. Last week we locked the interest rate on $259 million of loan proceeds at a fixed rate of 6.07% for a 10 year term that will be secured by $15 multifamily properties. We have four additional properties that will be included in the credit facility that will provide an additional $100 million of financing bringing the total credit facility to approximately $350 million. The facility is expected to close later this month.

We’re also in negotiations with Fannie Mae and Freddie Mac to provide additional financing of up to $150 million which should close in the first quarter. Combined the financings will total up to $500 million and be used to pay down our unsecured line, complete remaining developments, continued our unsecured bond repurchase program and provide liquidity for our debt maturities through 2010.

Four debt maturities over the next two years remain very manageable. We do not have any loans for which Colonial is entirely responsible maturing in 2009. We do have $117 million that represents our pro rata portion of the secured debt in our joint ventures. 70% of these loans have extension provisions and we continue to work with our partners on financing options. We have $272 million of unsecured bond maturities in 2010 which we expect to be taken care of with the proceeds from our Fannie Mae and Freddie Mac financings.

We purchased a total of $195 million in unsecured senior notes during 2008 for total gains of $16 million or $0.28 per share. $48 million of the amount repurchased was part of our 2010 maturities. We have projected that for 2009 we could recognize $0.15 to $0.20 per share in gains from the repurchase of unsecured notes and preferred shares which would equate to roughly $200 million to $250 million in total repurchases. The current market for these repurchases remains very attractive given the discounts in yields to maturity. There is no guarantee that they will remain at those levels throughout the year.

Moving on to our remaining development activity, we had three multifamily developments totaling 1,042 apartment homes under construction at year end with unfunded commitments remaining of only $17.8 million. We had two active retail projects totaling 500,000 square feet under construction at year end with $6.9 million remaining to be spent to complete them. These projects are Colonial Promenade Tannehill and Colonial Pinnacle Turkey Creek Phase-3.

During the fourth quarter we completed the retail portion of the Metropolitan in Charlotte and we opened Colonial Promenade Smyrna 93% leased. The Colonial Promenade Nor du Lac development has been reclassified to a future development instead of a current one as we have delayed the project. Given the current economic environment, it did not make sense for us to continues with development at this time.

Our liquidity remains strong with $363 million of availability on our $675 million line of credit and only $30 to $40 million of development spending projected for 2009. Projected dispositions and financing activity will improve our liquidity. With respect to supply, multifamily building permits in our major markets were down 50% in November and starts are down 8% on a three month trailing average.

Given the state of the economy and the lack of financing, we expect these trends to continue in 2009 creating a different set of circumstances than the last recession that saw new supply as a challenge entering the recovery cycle. Job losses and the overall soft housing market will create a difficult 2009 environment for Orlando, Atlanta, Charleston and Phoenix. Despite mildly positive 2009 job growth prospects, Austin is expected to experience near term difficulty from new supply.

In Charlotte, new supply, bank merger and consolidation associated job losses will put pressure n the operating fundamentals there. While we expect negative NOI growth in Dallas, Birmingham and Raleigh, they will be among our most resilient markets in 2009.

Now, I’ll turn the call back over to Tom for a discussion of our 2009 guidance.

Thomas H. Lowder

Reynolds has mentioned a number of numbers and items in our guidance for 2009 and our expectations but, let me try to lay it out for you here. Our 2009 guidance range is as follows: net loss of $0.15 per share to net income of $0.10 per share. Our total funds from operations is expected to be $1.35 to $1.50 per share with operating FFO in the range of $1.13 to $1.20 per share.

Probably job losses will be the primary driver of our same store performance and given the uncertainties in the economy we’re giving wide annual guidance of net operating income of a decrease of 3% to 5%. Revenue growth is expected to be flat to -1%. Expenses are expected to increase 5% to 6%.

This guidance is inclusive of our cable program which is bolstering our revenue growth by 170 basis points, increasing expenses 300 basis points and enhancing our net operating income growth 90 basis points. So, I hope that gives some clarity to our view about the multifamily business and any questions you might have as to the expense range that we see increasing between 5% and 6%.

Our development spending will be much lower than previous years at roughly $30 to $40 million with no capitalization of interest on land held for future development. The impact of no longer capitalizing interest or overhead on our land held for future developments compared to 2008 has reduced our guidance approximately $0.20 per share annually.

Dispositions of commercial developments, for sale residential properties, land and outparcels will be $50 to $150 million, $30 million of which has already occurred with the sale of the Colonial Promenade Fultondale yesterday. Transaction gains from developments and out parcels are expected to be in the range of $0.07 to $0.10 per diluted share. We’ve achieved the bottom part of that guidance with the closing of Colonial Promenade Fultondale yesterday as I just mentioned.

Gains from the repurchase of our corporate securities are expected to be $0.15 to $0.20 per share. Our corporate G&A is expected to be $18 to $20 million which is down approximately 20% from a year ago. Additionally, for common dividends to be paid beginning in May of 2009, it is our intention to pay the common dividend in a combination of common shares and cash with the common share portion being a substantial percent. This could further improve our balance sheet and liquidity position.

However, our board does reserve the right to continue to pay dividends in cash depending on our progress with other initiatives. Our guidance range that I’ve given you includes any dilution from those stock dividends. While this guidance is below the current street expectations, our strategic decisions to postpone developments and no longer capitalize interest and overhead on future developments, results in a $0.20 per share impact.

The paying of a portion of our dividends in common shares results in a dilution of approximately $0.04 to $0.06 per share and our third party management and leasing income is expected to be $0.05 to $0.08 lower in 2009 versus 2008. These items were most likely not included in your current expectations and I hope that gives some clarity between where you were on your numbers as to where our guidance is in this call.

Our expectations for 2009 reflect a challenging year. Again, our priorities for the year are to strengthen the balance sheet, improve liquidity, address near term debt maturities, reduce overhead and postpone developments. Our plan is simple but not easy. It requires a lot of hard work. The decisions we’ve made and the right downs we’ve taken to streamline the business and accelerate our multifamily strategy will make us a much stronger company in the future.

Before I turn the call over for questions, may I remind our investors that we have one of the youngest apartment portfolios in the business. We also have good sunbelt market diversification, where jobs will grow when the economy does turn. These markets will continue to have superior demographics. We believe in the sunbelt. We also have the liquidity, if that is your concern, to get us through this down cycle.

We have a number of our staff here with Reynolds and me today and we’ll now open up the call to questions and perhaps we may ask some of our participants to participate with you in the questions. Operator, if you’ll now open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Bragg – Merrill Lynch.

David Bragg – Merrill Lynch

Could you talk about the job loss assumptions that you have baked in to your outlook for 2009 either nationally or specific to your key markets?

Thomas H. Lowder

Sure, we can do that. Paul, if you would, we’ve got a number of stats but David has asked – let’s speak specifically to our markets first. I know Reynolds you were going to speak about job losses nationally but we actually cut that out of our remarks.

Paul F. Earle

Let me just give you a feel for how we anticipate some of our major markets to behave. Atlanta, we expect approximately 62,000 to 65,000 additional job losses, in Austin we expect about 20,000 job losses, in Birmingham 5,000 to 10,000 job losses, Charleston 10,00 job losses, Charlotte, we have a wide range in Charlotte because of the consolidation that may occur in the banking sector, somewhere between 25,000 and 35,000 additional job losses, Dallas approximately 50,000 job losses, Fort Worth approximately 20,000, Orlando we’re anticipating approximately 25,000 to 30,000 additional job losses, Phoenix approximately 70,000 job losses and Raleigh approximately 20,000 additional job losses. Those are all baked in to our same store NOI numbers.

David Bragg – Merrill Lynch

Are there any markets where you are expecting same store NOI to be positive?

Paul F. Earle

No.

David Bragg – Merrill Lynch

Also, I believe it was Reynolds, you mentioned traffic being down in general, can you quantify that across the portfolio and maybe provide any specific outliers among markets?

C. Reynolds Thompson, III

Sure, we can do that for you, let us get our stats and we can give you some color on that.

Paul F. Earle

We’ve experienced traffic declines across almost all of our markets but we experienced a heavier percentage drop in Atlanta, Austin, Charleston, Orlando and Phoenix. But, across the board we felt some real weakening late in the third quarter and all the way through the fourth quarter and that trend has continued through January.

C. Reynolds Thompson, III

[Inaudible] going up in August and September and accelerated throughout the fall.

David Bragg – Merrill Lynch

But in terms of the fourth quarter, maybe specific to January, across the portfolio would you say down 5%, 10%, in terms of traffic?

Paul F. Earle

We were down approximately 3.5%.

Thomas H. Lowder

I think our preliminary numbers for January show the business being flat which we quite honestly were excited about.

David Bragg – Merrill Lynch

Just the last question, on the Fannie facility, how many assets are included in that?

C. Reynolds Thompson, III

We’ve got 15 in the first tranche that we have locked the rate on and we’ve got four additional assets that Fannie is underwriting that would bring that facility up to something approximately close to $350 million and then we’ve got an additional nine assets that we’re looking for, for that second piece that I discussed, the up to another $150 million.

David Bragg – Merrill Lynch

I was just looking at your [Neary] presentation, I believe that had you were anticipating a $350 million facility with 16 assets. I was just curious, as you went through this process what adjustments did you see made on behalf of the GSA’s from a valuation perspective or perhaps LTV etc.

C. Reynolds Thompson, III

First of all big picture we had decided to go after a larger amount in terms of what we’re looking for to secure because we feel like it’s prudent to go ahead and put that extra liquidity on the balance sheet today to take advantage of these opportunities. I’m going to let Jerry give you a feel for kind of how the underwriting went with the GSA

Jerry A. Brewer

John, I think big picture wise at that point in time we were kind of viewing this and looking at a kind of 75 LTV and we had chosen to go down one of the tiers in that agency financing and so this represents a 65% loan-to-value and that’s why you have additional properties above that 16% and most likely the 19 that we’re talking about will most likely be a little bit north of $350.

Operator

Your next question comes from Steve Swett – Keefe, Bruyette & Woods.

Steve Swett – Keefe, Bruyette & Woods

A question on the cable rollout, I think Reynolds you said that that adds 300 basis points to expenses?

C. Reynolds Thompson, III

Correct.

Steve Swett – Keefe, Bruyette & Woods

So if for 2009 that is about half of the expense inflation?

C. Reynolds Thompson, III

That’s right. If you strip that you’re really looking at expense growth of 2% to 3%.

Steve Swett – Keefe, Bruyette & Woods

Is there some reason that that is coming in next year? Did you have any of that impact this year as you were rolling out the program?

C. Reynolds Thompson, III

Yes, we had some this year and what that represents is more of a full year look as opposed to a partial year but the revenue is also being improved by that as well.

Steve Swett – Keefe, Bruyette & Woods

The proceeds from the financing that it sounds like you’re going to get largely done in the first quarter, how long have you assumed that excess cash, if any, over and above what you use to pay down to your line for example?

C. Reynolds Thompson, III

It’s got roughly $320 million out on the line today and so this first financing that comes in will largely take that line down to let’s call it just about zero. We are going to be very active starting today in the bond market looking for securities to repurchase and our plan is to cut down on that negative arbitrage is to make those repurchases as soon as possible. We’ll do that in the open market and if we need to we may even look at doing a tender at some point depending on our success in the open market.

Steve Swett – Keefe, Bruyette & Woods

On the capitalized interest does it essentially get to zero by the end of the year as you just finished the projects you’re completing?

C. Reynolds Thompson, III

There are kind of two pieces to that. We do have a number of projects that are nearly [inaudible] and interest being capitalized [inaudible] with the projects that are being completed is naturally winding down when those projects are completed. The part that we talked about in our comments really relates to the land that we have on the balance sheet that we do not have current development plans for. That’s the interest expense that is being moved from being capitalized to being expenses.

Steve Swett – Keefe, Bruyette & Woods

Okay so that happens immediately and then the rest of the reduction happens as 2009 progresses and you complete the projects?

C. Reynolds Thompson, III

That’s correct.

Steve Swett – Keefe, Bruyette & Woods

Then last question, Tom you said that the share issuance as a part of the dividend payment was assumed in the guidance?

Thomas H. Lowder

Yes.

Steve Swett – Keefe, Bruyette & Woods

What portion of the dividend was assumed to be stock versus cash?

Thomas H. Lowder

Well, we actually ran our numbers at the maximum. We ran our numbers at the 90% but the board has discussed a 50/50, 60/40 but to give the maximum dilution effect in our guidance we ran it at a 90/10.

Operator

Your next question comes from [Michelle Co – UBS].

[Michelle Co – UBS]

I just wanted to go back to some of those numbers that the cable program had contributed to in terms of the numbers for ’09? If we strip out the cable from the revenue impact does that mean then revenue would have been down about 2% to 3% really on a same store basis?

C. Reynolds Thompson, III

In ’09 guidance without the cable the revenue should range would be down 1.5% to 3%. Without the cable on the expense side expenses would grow 2% to 3%.

[Michelle Co – UBS]

So then NOI without the cable would really be down something like 4% to 6%?

C. Reynolds Thompson, III

Yes, it’s roughly 90 basis points if you took all the cable income out.

[Michelle Co – UBS]

I was just wondering if you could quickly just go over your sources and uses for next year?

C. Reynolds Thompson, III

Sure. Big pictures the sources will be the Fannie Mae Freddie financing that will provide roughly $500 million, we’ve got –

Thomas H. Lowder

The line is $675 and currently we’re –

C. Reynolds Thompson, III

We’re currently about $320 million on that, we’ll have agency financings coming in then we’ll have the $500 million, $30 million to $40 million of development expenditures and then we have the balance will be our bond repurchase program that we have estimated at roughly $200 to $250 million of that and as we discussed we do not have any wholly owed debt maturities coming due this year so we expect most of that to get refinanced at some point in time but there may be a portion that we have to pay down so there’s roughly another $15 million of equity pay downs that we have anticipated in our numbers.

[Michelle Co – UBS]

What about minimum in terms of maintenance cap ex?

C. Reynolds Thompson, III

Cap ex we’ve got roughly about –

Jerry A. Brewer

$650 per unit in multifamily cap ex.

C. Reynolds Thompson, III

$650 per unit and we’re roughly $18 to $20 million.

[Michelle Co – UBS]

Just in terms of the decision whether or not to continue paying your dividend or possibly trying to cut it to preserve capital can you talk just a little bit more about that? I mean given that your dividend yield is about 14% right now?

Thomas H. Lowder

Well, we did not discuss at the board meeting reducing the dividend. Once again, we did move from $2 to $1 and we believe our game plan and our projections will carry us through adequately to handle the dividend. If the board feels like we’re going to do the stock dividend side of course, the cash portion will be well covered by operations then. So, we’ll take a look at it in April and it’s our intention to pay, as I said, at least 50% of the dividend out in stock.

But, I have to be honest with you, it was a very controversial discussion in the board meeting and a long, long discussion and management I think won today to get the board to agree to this. Then, my old friend Marty Cohen the next day I’m delivering my [inaudible] of Saturday morning and he said paying dividends in stock instead of cash is the industry’s worse idea in a long time which created about four or five emails from board members.

We’ll do whatever we need to do in April, depending on our other initiatives to make sure that the balance sheet is stronger this year. That is what 2009 is about, making sure that we strengthen the balance sheet and that we prepare the company for growth and really 2011. I think 2010 is also going to be a tough year operating environment so it’s about just setting the company up for future growth.

Operator

Your next question comes from David Toti – Citigroup Smith Barney.

David Toti – Citigroup Smith Barney

A couple of questions around your disposition agenda, can you talk a little bit about your pricing expectations for some of those assets?

C. Reynolds Thompson, III

As you look at our opportunities to improve liquidity in the balance sheet through sales we really are focused on some of these non-core assets being our for sale residential assets. Obviously, going through the exercise that we went through in making the strategy shift in pricing these things in such a way that they could be sold sooner rather than later, that is where our focus is going to be. So, we’d like to make some headwind there.

Then, the second part is continuing to look at some of the commercial assets, particularly the retail development projects that we’ve always had a strategy of selling once developed. Pricing wise, the deal that we just sold is roughly and 8.5 cap type of an asset sale and I think that’s the range that we’ll be looking at doing some of these additional asset sales at.

Thomas H. Lowder

But, the residential for sale I would have to say if you look at the details of the impairment, they’ve been taken down 30% to 40%. I think the average decrease in home prices nationally has been somewhere in the last 12 months around 18% to 20%. So, we think the impairment is appropriate but we also think we have some room there to accelerate some transactions.

David Toti – Citigroup Smith Barney

Then along those lines, I see that you’re fairly comfortable providing some seller financing, can you discuss you comfort level around those types of levels given balance sheet conditions? And also, what types of rates you’re seeing on that debt?

Thomas H. Lowder

Well, we did provide seller financing for the recent shopping center sale yesterday and the three shopping centers that we have under contract we anticipate that we will provide seller financing. Those are at 55% of value, they’re priced somewhere – they were initially negotiated back in November somewhere around 300 to 350 basis points over the treasury, a five year term so it ends up being less, between 5.5% and 6%.

David Toti – Citigroup Smith Barney

Then just lastly for myself, can you talk a little bit about the types of buyers you are seeing for these assets and how deep is the pool of demand?

Thomas H. Lowder

The purchaser for the shopping centers is a private REIT and the purchasers on the for sale product condos we’re seeing two type of purchasers, we’re seeing end users which is still taking place. Those come sparingly and after long negotiations and are usually people transferring in and out of communities and towns where we have the product. The majority of the contracts that are in the pipeline now are going to small investors that are buying units, as many as two at a time to 10 at a time and that’s where the heavier discounts are taking place.

In some cases those units have already been leased by us so the purchaser is buying those with current income and parking that asset for three or four years to wait to reap a harvest in value in those assets in a sale.

Michael Bilerman – Citigroup Smith Barney

Reynolds, can you just go over in terms of the capitalization policy in terms of what changed sequentially? You had about $450 million total underdevelopment as of last quarter which included the $140 million of the undeveloped land and other predevelopment costs. You obviously took a $16 million write off this quarter, part of that was for the residential side and part of that was for development. I’m just trying to piece together what pieces were you capitalizing before that you’re not anymore?

C. Reynolds Thompson, III

If you’re looking at that page in our supplemental, one big pieces would be all of the multifamily future development pipeline that was in some phase of predevelopment, that we have stopped all of the capitalization on, that’s a big piece. As you work your way down, the projects that are in the retail section, we’ve also stopped the capitalization on those. Then, when you get in to the last section, the land and other parts then you’ve got some of those assets were being capitalized and some were not.

That’s where you’ve got different projects that were in different phases of development. Some of those had been turned off earlier in the year because we had stopped any new development work with regard to those. But, at this point, all of that is off now.

Michael Bilerman – Citigroup Smith Barney

How much of that $140 million would have been capitalized? We’re talking about half of it previously?

C. Reynolds Thompson, III

Mike, it was probably a little bit less than half would have had capitalization on it.

Michael Bilerman – Citigroup Smith Barney

So that’s about the $200 million of effective assets that were previously capitalized that’s not.

C. Reynolds Thompson, III

One other thing that has changed is we do have some assets that are new in to that bucket that weren’t in there before. We’d be happy to follow up with you off line to tell you what’s gone in and out of that. For instance, there are a couple of the for sale residential lot development projects that are now part of that number that weren’t in our previous supplemental.

Operator

Your next question comes from Rich Anderson – BMO Capital Markets.

Rich Anderson – BMO Capital Markets

I guess now that you sort of have charted a course to get yourself out of the for sale business does that also include are you wrapping that in the same wrapping paper as the condominium conversion business? Is it all one same thing that you want to get out of?

Thomas H. Lowder

Yes.

Rich Anderson – BMO Capital Markets

Could you hazard a guess of what a time frame would be to where you would have a company that’s just a multifamily company with joint ventures in office space and a REIT again? How long do you think that process could take is it a year, is it five years, what would you guess?

Thomas H. Lowder

I would be disappointed as CEO if we couldn’t get through this in 24 months but we’re going to try and plow through as much as we can in this environment in 2009. That’s part of our strategy of this impairment is to try to motor through this and get as much done as possible. This is my first call in three years but I don’t enjoy talking about this.

Rich Anderson – BMO Capital Markets

Well, you may remember in third quarter of ’07 there was another write off of the for sale business and now we’re five quarters later and we still own the stuff. Do you use that as a lesson to maybe jump start the process a little bit more because it didn’t move that fast at all, if at all over five quarters?

Thomas H. Lowder

Well, let’s just say Tom Lowder has a different management style and we’re putting people’s names attached to not only these assets but all operating assets and we’re asking for accountability and we’re given those people support. This impairment is just another move to give us an opportunity to accelerate what needs to be done. Five quarters ago I would say the majority of what we impaired were actually cost overruns and what you’re looking at now is a market adjustment that we find ourselves in, still five quarters later.

I’m not making light of where we are and not thinking that we can do this overnight. I remember the 80s and early 90s, that down cycle did last an extended period of time but we did work through it and we’ll work through this one. I would be disappointed if I couldn’t meet your requirements in 24 months.

Rich Anderson – BMO Capital Markets

Just to reiterate, I’m not going to hold you to 24 months but say it is 24 months, you will be out of the for sale business entirely and you will just be an owner of multifamily REITs and a joint venture partner in office and retail properties.

Thomas H. Lowder

Yes. We want to be your choice when you think of buying multifamily investments in the sunbelt, we want you to think about Colonial Properties, it’s that simple.

Rich Anderson – BMO Capital Markets

The other question is on the balance sheet, now you’re talking a lot about liquidity and doing a lot of things and tapping some of those unencumbered assets but are you prepared to defend your investment grade rating or are you going to allow that to slip below investment grade?

Thomas H. Lowder

The moves we’ve made and the priorities I’ve set for 2009 are to keep our investment grade rating. We obviously don’t control that but for the things we can control and take action on, they’re built around keeping our investment grade rating.

Rich Anderson – BMO Capital Markets

Just an item for modeling purposes, you mentioned asset sales, did you mention the volume of assets sales that you have sort of teed up that haven’t yet close that could be closing in this quarter?

C. Reynolds Thompson, III

Our guidance for the year is $50 to $150 million.

Rich Anderson – BMO Capital Markets

Right but weren’t there some that were more immediate?

C. Reynolds Thompson, III

Yes. You’ve got the one that closed yesterday, $30 million so we’re on the way and then we’ve got three additional retail projects that are currently going through due diligence.

Rich Anderson – BMO Capital Markets

And the volume on that is?

C. Reynolds Thompson, III

It would be roughly $100 million.

Rich Anderson – BMO Capital Markets

When do you expect, if at all, to book the tax benefit from there impairments?

C. Reynolds Thompson, III

We have already got a deferred tax asset on the balance sheet that we are continuing to use as we go forward and we did not feel comfortable at this point putting any more on the balance sheet with regard to that. Obviously, as actual results happen going forward, there may actually be some of those but we did not feel like we’re in a position today to project those out. But, there absolutely could be some going forward.

Rich Anderson – BMO Capital Markets

Turning again to the balance sheet, the line of credit, how would you characterize the commitment of the banks supporting your line of credit?

C. Reynolds Thompson, III

We feel very good about their commitment. Bank of America and Wells are our two lead banks and we’ve got good long standing relationships with both of them and we expect that they’re going to be there for us long term.

Rich Anderson – BMO Capital Markets

Then last quick housekeeping one, income from partially owned investments is down sequentially. Do you have a run rate for that line item for 2009?

C. Reynolds Thompson, III

We’re going to need to call you on that and give you some detail. I do not have that ready.

Operator

Your next question comes from Alexander Goldfarb – Sandler O’Neill.

Alexander Goldfarb – Sandler O’Neill

Just sort of piggybacking off of Rich’s question on the rating agencies, can you just give a sense of what their thoughts were on the write downs? And also, as you do this $500 million of secured financing, how much incremental secured financing can you do over and above that and still maintain your current rating?

Thomas H. Lowder

We believe we are at the limit at that $500.

Alexander Goldfarb – Sandler O’Neill

Okay so, that’s it on that?

Thomas H. Lowder

It’s not the absolute number but that’s where we in good conscious feel we should be to not exceed.

Alexander Goldfarb – Sandler O’Neill

What were their thoughts on the write downs? Were there any feedback?

Thomas H. Lowder

Well, I think they will be putting out reports here.

C. Reynolds Thompson, III

The next couple of weeks and what we’re going to do with both of them is probably get up and visit face-to-face in the next four to six weeks to have a discussion about what our plan is going forward to give them the information they need to continue to evaluate our company.

Alexander Goldfarb – Sandler O’Neill

The next question just goes to the seller’s financing. I think you referenced that you were looking at $350 over the 10 year? My understanding that’s inside where even [life] companies are offering financing and it looks to be under your cost of debt. Can you just walk us through what comps you used as far as the cost of debt that you’re going to provide?

C. Reynolds Thompson, III

First of all, it was the five year not 10. Bigger picture, this deal was under contract last time we had this call back in October and it died. In order to get the buyer back to the table we had to sweeten the deal and that is part of what it took to get him to the table. It’s not that we’re trying to underwrite this thing and be a lender or come up with something, we’re trying to simplify our business and get some of these non-core assets moved off of our balance sheet and that was our strategy for doing that.

Thomas H. Lowder

Obviously trying to negotiate this in the midst of the greatest credit crisis in the fall did not help us for them to find other financing for these projects. So, we thought it would be the best move to provide this. If we were to get the property back at 55% of value I’d be happy to have it back but it’s not a core property for us.

C. Reynolds Thompson, III

55% loan-to-value we feel very good about. That’s a very low leverage loan.

Alexander Goldfarb – Sandler O’Neill

Okay so going forward when we see if there is, it sounds like there may be some more seller’s financing, the terms would be more reflective of the current environment?

C. Reynolds Thompson, III

No, not necessarily. I think we’ll be looking at it from the same way.

Alexander Goldfarb – Sandler O’Neill

So then just as far as that 8.5 cap rate goes, would you say that’s a good proxy to where properties are trading these days or do you think that reflects some sort of premium because of the financing provided?

C. Reynolds Thompson, III

I can’t say that’s a premium. We’ve been working on this deal since last summer, it’s been a very difficult market to price assets in and the buyer pool is not very deep today. It is just what it took to get this deal done.

Thomas H. Lowder

But, I do think it’s from 8% to 9% in that range.

Alexander Goldfarb – Sandler O’Neill

Then the final question just goes to the Nor du Lac project, just looking back that was a deal that you guys announced about six months ago and now there is a write down on that. Can you just walk us through what was the investment decision that the board discussed then given that we were already well underway in this credit crisis and what the board has now determined six months later?

Thomas H. Lowder

Let me take this call because I’ve given leadership on this. Management kept the board informed about where they were, what they wanted to do, what the execution was and then purchased the property and moved forward. We had a good start with leasing, management had a good start with leasing but as the economic crisis and credit crisis came in to being leasing started to drop off.

When I came back on the scene I made a very tough decision that even though we had started developing this property that we should stop. That we could not successfully lease in this environment and meet our co-tenancy and lease up requirements on this property for it to be a successful development by the fall of 2009. Once we made the decision that we could not meet the opening by 2009 or the co-tenancy then that put us in a position of having to go back to our major merchants and the people that we had signed leases and letters of intent with to explain we needed to change our opening on this center.

I’m the guy that made the call and I believe I made the correct call because the last thing we wanted to do was complete the construction and not have the leasing and the co-tenancy in place to require these merchants to open in the fall of ’09. I made the call and we will take it from here and try to put the development back on its feet when the retail leasing environment is such that we can make this a viable, profitable transaction. That’s the reason why we took the impairment and stopped development on this property.

Operator

Your final question comes from the line Alan Calderon – European Investment.

Alan Calderon – European Investment

A couple of questions, first of all, one of the theories out there has been that some of the markets that were the first one in the problems could be the first one out of the housing problems. What are your thoughts on that?

Thomas H. Lowder

Well, you’re exactly correct. Paul was mentioning to me today believe it or not and don’t hang up on me when I say this but Paul said, “Believe it or not we’re seeing a little light in Las Vegas.” It was the worse market but because of the big hotel openings that have taken place out there you’re seeing some job traction and so you’re right. The worst and the deepest is always the quickest to come back. Paul, you might have some more color on that.

Paul F. Earle

If you look at past recessions, that’s exactly what has happened. Once the excess inventory of housing is absorbed and then you turn back to positive job growth and with this recession we have the credit crunch so new supply won’t come in quite as aggressively. We really have the foundation to have a nice bounce up but we really do need to see the job growth turn positive for an extending period of time. But, I think we’re positioned well and Phoenix and Las Vegas are certainly not on the decline at this point, we’re seeing a real bottom for them so we’re looking forward to 2011 and 2012.

Alan Calderon – European Investment

Are you seeing any real evidence that it is bottoming in some of these markets?

Paul F. Earle

Well, if you look at Phoenix as a good example, what first recovers is occupancy and if you look at our supplemental you’ll see that our occupancy in Phoenix is above 97% [inaudible] begin to gain some pricing power and if you have properties that are well located and in an employment market that is no longer in deterioration you’ll then see real economic events start to turn.

I don’t want to end this call with enthusiasm and make everyone feel that all markets are going to behave identical to what we’re seeing in Phoenix but there signs that the markets that went in to the recession first and experienced the greatest number of job losses and started dealing with the overhang of housing inventory will in fact probably come out of the recession in pretty good shape.

Thomas H. Lowder

But, at the same time we don’t want to lose our credibility on this call. We know that when the [inaudible] real estate investor and developer, he created the world’s ultimate and eternal optimist but we’re going to keep our feet grounded in reality and we are giving you the projections in the numbers for 2009 that we think 2009 is going to be a very, very tough year and because we’re in the business of writing six to 12 month leases that will roll in to 2010 making 2010 a tough operating year as well. I think our sites are on 2011 for being a real turning point for growth in this industry.

Alan Calderon – European Investment

Can you talk a little bit about Dallas and Fort Worth, what’s going on in those markets?

Paul F. Earle

Dallas and Fort Worth are still experiencing positive job growth surprisingly. So, they have not turned negative on job growth. There is some supply that will come in to the market in 2009 and the trends are that Dallas will turn negative and we’re going to experience some job losses, as I mentioned earlier in the call. So, Dallas and Fort Worth are entering this recession behind the rest of our major cities but we will see those two cities go negative in ’09.

Alan Calderon – European Investment

My final question, when I look at your JV relationships, can you just comment on your discussions with DRA and [Agzip]? Are they looking for more real estate, less real estate? If they had the option would the want to terminate some of these relationships? Just kind of the thought process there?

C. Reynolds Thompson, III

Well, I can’t really speak to what their company plans are. From what we are focused on with those guys we’re looking at in the case of our DRA relationship, getting some of those properties refinanced and that’s where our attention is and then in the case of both DRA and [Agzip] all our attention is on the operating side. We’re going to run these properties very hard and work through what’s a tough leasing environment to absolutely maximize what these properties can deliver for those partnerships.

Alan Calderon – European Investment

Could the discussion on the refinancing go towards potentially disposing of the properties versus refinancing them?

C. Reynolds Thompson, III

I suppose that could be, meaning the case of the more recent JVs we’ve done we don’t have any near term financing issues. With the case of some of our older more mature JVs we do have some of those and we have been a regular recycler of capital in those JVs in the past and that could be something that gets looked at in the future.

Operator

Mr. Jerry Brewer do you have any final remarks?

Jerry A. Brewer

I’d just thank everyone for joining us on the call today. We look forward to speaking with you soon.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Colonial Properties Trust Q4 2008 Earnings Call Transcript
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