Colonial Properties Trust Q1 2009 Earnings Call Transcript

Colonial Properties Trust (CLP)

Q1 2009 Earnings Call

April 23, 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

Richard Anderson - BMO Capital Markets

Napoleon Overton - Morgan, Keegan & Company, Inc.

David Tody – Citigroup

Michael Bilerman – Citigroup

Andy McCulloch - Green Street Advisers

Presentation

Operator

Good afternoon. My name is [Casey] and I will be your conference operator today. At this time I would like to welcome everyone to the Colonial Properties Trust first quarter 2009 earnings conference call. (Operator Instructions)

Mr. Brewer, you may begin your conference.

Jerry A. Brewer

Thank you, Casey, and 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 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, President and Chief Financial Officer. On the call they'll present an overview of our business developments, discuss our financial results for the first quarter, and guide us for 2009. After their comments we'll open up the call to take your questions.

Let me remind you that much of the information that we discuss on this call, including the answers we give 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 closest GAAP financial measures in filings that can be found on our website.

I will now turn the call over to Tom.

Thomas H. Lowder

Thank you, Jerry, and good afternoon to everyone and good morning to our friends on the West Coast.

Last quarter you might recall that I outlined the top five priorities I'd established for 2009 to address the current economy. I will update you on these initiatives this morning as well as the new guidance that we issued earlier this month. We've made significant progress on each of these initiatives to date and we remain fully committed to executing on these priorities.

Our first initiative was to strengthen the balance sheet. Our repurchase of unsecured notes at a discount has allowed us to deleverage the company. The discounts recognized on these notes operate much like equity offering without the dilution. In the first quarter we repurchased $96.9 million in notes for $70.6 million, representing a 27.1% discount or net gains of $24.3 million or $0.43 per share. To date we've improved our equity position through our repurchase program by approximately $50 million.

Also we noted we would deleverage through asset sales. As we discussed on our last call, we sold Colonial Promenade Fultondale for $30 million. Additionally, we executed a bulk sale of the remaining 17 units at Regents Park in Atlanta for $16.3 million and closed an additional 16 units at our other condo projects for sales proceeds of $3 million. We've closed seven more units so far in the second quarter and we have contracts in place for another 36 condo units.

Our second initiative was to improve liquidity. We targeted $500 million in new secured loans. In early March we closed on the first piece of this with $350 million, a 10-year secured facility with Fannie Mae. This week we locked the rate on an additional $145 million secured credit facility with Fannie Mae as well that's expected to close in this quarter. The first financing, together with the asset sales, allowed us to pay down the outstanding balance on our $675 million line of credit. We currently have $637 million or 94% of the line available.

Our third initiative was to address near-term debt maturities this year and in 2010. The Fannie Mae financings have helped us address these maturities. Reynolds will speak to more of the details in just a moment to what is left, but I'd like to highlight our recent tender offer for $250 million of our 2010 and 2011 unsecured notes. The early tender results have proven successful and we should be able to eliminate over 70% of these notes through the tender. After applying the results of the tender offer so far, our 2010 bond maturities will only be $46 million and our 2011 maturities will be $51 million.

Our fourth priority was to reduce overhead. In the first quarter we eliminated an additional 30 positions, which resulted in severance charges of approximately $800,000, but the annual savings will more than offset the charges taken. Most of these positions were, again, in the development and construction areas of the company. Since the fall of last year we've made cuts representing $15 million in annual savings, with roughly 50% of that total being expensed and 50% of it as being capitalized, so you can look for half of it to hit the bottom line.

And last, our fifth initiative was to postpone our development program. Our development pipeline today is a fraction of what it was in years past. We've intentionally postponed as many projects as possible with the expectation of only $30 to $40 million to be spent this year, of which we've already spent $21 million in the first quarter. We have two multi-family and two commercial assets currently under construction and we'll continue to keep you updated on these developments. Of course, our priority is to preserve capital and time further development activity appropriately.

We've already seen a measurable impact from our actions in all of these areas on our liquidity and streamlined operations. Of course, I don't want us to lose sight of the bigger picture here. Our objectives are to simplify the business and focus on our core operations. Our core business is multi-family and that net operating income is approaching 80% of our total NOI.

We have a high-quality multi-family portfolio that's diversified in over 20 high-growth Sunbelt markets where the long-term demographics will continue to be favorable. We also have one of the youngest portfolios in the industry.

With the population migration continuing in the Sunbelt, we expect to see a lot of demand from the echo-boomers, which of course is the renting age of the 20-year to 34-year-old group, and of course that group has the greatest propensity to rent. So we're expecting to see good growth in the Sunbelt areas over the next 10 years.

When you combine that growth with the lack of new supply that you see in the market these days, we certainly look to see better days ahead as the supply/demand equation turns favorably over the long term.

Now, Reynolds, it's your opportunity to provide our investors and shareholders and analysts details of our first quarter performance and our financing activities. After Reynolds speaks I'll update you on our guidance for 2009.

C. Reynolds Thompson, III

Thanks, Tom.

FFO for the first quarter was $50 million or $0.88 per diluted share compared with $33 million or $0.58 per share for the prior year. The results for the first quarter include $0.43 per share of gains from notes repurchased and $0.07 per share of gains from the sale of Colonial Promenade Fultondale compared with $0.10 per share of gains from notes repurchased and $0.03 per share of development gains in the prior year period.

There were some one-time charges related to our activity in the first quarter as well. First, we took a charge of $800,000 in severance for further reductions in development and other overhead personnel. The savings from these reductions will be over $1 million annually, more than offsetting the charge during the quarter.

Second, we closed on the sale of all the remaining units at the Regents Park for sale residential project in Atlanta for $16.3 million. As a result, we recorded a loss of $300,000.

Third, we agreed in principle to transfer our remaining 15% minority interest in the Colonial Pinnacle Kraft Farms I joint venture to the majority partner. The transfer is expect to close in the second quarter, but the resulting valuation required us to record a charge of $700,000.

While it's disappointing to take these charges, it was the right financial decision for the company and allowed us to make progress on our 2009 initiatives. The Regents Park sale will allow us to save over $1 million annually in NOI drag and the Kraft Farms transaction is an additional step towards simplifying our business.

Operating FFO, which we define as FFO before transaction income, was $22 million or $0.39 per share compared with $25.6 million or $0.46 per share for the prior year period.

Turing to operations, our first quarter same property NOI results came in at negative 3.2% as compared to the prior year. Revenues declined 0.9% and expenses increased 2.8%. Excluding the influence of the cable program, revenues would have decreased 2.1% and expense would have decreased 0.5%. Average rental rates were down 0.6% and occupancy fell 150 basis points to 94.7% compared to the first quarter of 2008.

Our performance in Dallas, Fort Worth, Raleigh and Richmond showed the most resilience as year-over-year rents and total revenues grew in each of these markets. Furthermore, each of these markets experienced positive NOI growth except in Richmond, where the bulk cable program is in the early stages of deployment.

In Charlotte, the troubles in the banking industry along with new supply were reflected in our first quarter results as NOI declined 2.2% from a year ago. Additionally, we are feeling pressure in Austin, where NOI declined 3.3% because of a deteriorating job environment and excess new supply.

We continue to feel pressure in Atlanta, Orlando, Charleston and Phoenix because of accelerating job losses and increased competition from the condo for rent market.

Traffic was at the same level as last year; however, we have seen a decrease in credit quality. Application denials are up to 16.1% from 4.6% a year ago.

Overall resident turnover is up 180 basis points as compared to last year and up 40 basis points sequentially.

As expected, financial and job-related turnover was up roughly 870 basis points to 27.1%, a trend that we expect to continue. However, turnover related to homebuyers was 12.8%, down 700 basis points from a year ago.

For the quarter, turnover due to renting a home was 2.3%, which was up 20 basis points sequentially. Consistent with the deterioration in the economic environment, rates on new leases decreased 4% for the quarter based on 5,200 new leases. Renewal rates for the quarter were flat based on 3,500 renewals.

We have 103 properties participating in the Colonial bulk cable program. Full implementation has occurred at 52 properties, with the remaining 51 properties to be fully deployed by year's end.

Our disposition activity for the quarter resulted in $50 million of sales, which was comprised of the Colonial Promenade Fultondale sale, as we discussed earlier, the sale of the remaining units at Regents Park, and 16 other condo units and for sale residential lots.

Moving on to our remaining development activity, we had two multi-family developments totaling 742 apartment homes under construction at quarter end with unfunded commitments remaining of only 8.4 million. We have two active retail projects totaling 500,000 square feet under construction, with $8 million remaining to be spent to complete them.

Our first quarter interest coverage ratio was 2.3 times and our fixed charge coverage was 1.8 times. The ratio of net debt plus preferred to gross asset value was 58.2%. Our multi-family portfolio is currently 75% unencumbered, including the $350 million Fannie Mae facility we closed in March.

Earlier this week we locked the rate with Fannie Mae on an additional secured facility to provide financing of $145 million with a 10-year term and an interest rate of 5.29%. We're adding one additional property to this facility, which will bring total proceeds to approximately $155 million. The facility will be secured by eight multi-family properties and is expected to close later in the second quarter.

Forward 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 $88 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 the refinancing options available. After giving effect to our preliminary tender offer results, we will only have $46 million in unsecured bond maturities in 2010 and only $51 million in 2011.

We repurchased a total of $96.9 million in unsecured senior notes during the first quarter at discounts totaling $24.3 million or $0.43 per share. We had originally projected that we could recognize $0.15 to $0.20 per share in gains from the repurchase of unsecured notes and preferred shares in 2009. Based on the success we've had in the first quarter and the tender offer, we've increased total repurchase gains to $0.65 to $0.70 per share for the full year. During the second quarter we've already repurchased $35 million of bonds for $22 million, representing a 35% discount or gains of approximately $11 million.

I'll now turn the call back over to Tom to discuss 2009 guidance.

Thomas H. Lowder

Thank you, Reynolds.

Our 2009 guidance range, which is consistent with our pre-announcement on April 6th, is as follows: Net income of $0.10 to $0.35 per share; total funds from operation is expected to be $1.85 to $2 per share, with operating FFO in the range of $1.13 to $1.20 per share; our same property net operating income is expected to show a decline of 3% to 5% in 2009. This guidance is inclusive of our cable program, but without the cable program the same store NOI numbers would be a negative 4% to 6%. With the current environment we expect to see our results on the high side of the negative range.

Development spending will be roughly $30 to $40 million. Dispositions of commercial development, for sale residential properties and land in outparcels will be $50 to $150 million, of which $50 million has already occurred. Transaction gains from these developments and outparcels are expected to be in the range of $0.07 to $0.10 per diluted share and we've already achieved $0.07 in the first quarter's activity.

Gains from the repurchase of our corporate securities are now expected to be $0.65 to $0.70 per share and that represents an upward revision of $0.50 per share from our initial guidance at the beginning of the year.

Corporate G&A is expected to be $18 to $20 million, which is down approximately 20% from a year ago.

Yesterday our Board reviewed our options for raising additional equity to strengthen the balance sheet and debated over our options to do so.

We've had a lot of feedback on our announcement last quarter that we intended to pay the common dividend beginning next month through a combination of cash and stock. After further analysis of the required payout ratio for the company this year, the Board decided to revise the cash dividend payout instead. Commencing with the May dividend, the quarterly rate will be $0.15 per share, which will be paid in cash. Coupled with the first quarter dividend of $0.25 per share, the annual dividend for 2009 is expected to be $0.70 per share.

This new rate allows us to conserve approximately $23 million in capital on an annualized basis, but without the substantial dilution of a stock dividend. Coupled with the earlier reduction of $1 per share, we will conserve approximately $80 million on an annualized basis.

The Board has also approved a continuous equity issuance program and the company is reinstated a discount of 3% on its dividend reinvestment program beginning with the next dividend payment.

All of these actions will continue to retain and raise additional capital, which will help strengthen the balance sheet. I feel good about the progress we've made in the first quarter.

Operator, we'll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Anderson - BMO Capital Markets.

Richard Anderson - BMO Capital Markets

The debt maturities, $45 and $51 million I think you mentioned, Tom, for '10 and '11, does that include secured debt? Is that everything?

Thomas H. Lowder

No, it does not. Let us go through the details we have and I think Reynolds spoke to some of those details, but we'll give them to you again.

C. Reynolds Thompson, III

In 2009 we don't have any unsecured corporate level debt maturities. We do have $88 million in 2009 and approximately $118 million in 2010 that represent our pro rata share of the various joint ventures that we're in.

Thomas H. Lowder

While you've got the sheet out there, give him 2011.

C. Reynolds Thompson, III

In 2011 we have $11 million worth of joint venture debt and only $51 million of corporate unsecured debt coming due.

Richard Anderson - BMO Capital Markets

So in terms of that exposure, what are LTVs currently? What's the math for you to get through that unscathed over the next couple of years?

C. Reynolds Thompson, III

Rich, what we have experienced to date and what we believe will play out if each one of those loans is revisited and reworked, we're anticipating that we'll have to pay down approximately 20% of the principal balance. And accordingly, we have allocated dollars in our model looking forward to satisfy our share of that principal paydown.

If you look at the dollars outstanding, it's roughly $200 million; 20% represents about $40 million in capital that we would put into those deals to get those loans refinanced over the next couple of years.

Richard Anderson - BMO Capital Markets

And then beyond that and the unsecured that you mentioned, that's it?

C. Reynolds Thompson, III

That's it.

Richard Anderson - BMO Capital Markets

Okay, when does the line expire?

C. Reynolds Thompson, III

2012.

Richard Anderson - BMO Capital Markets

Now, the Fannie Mae facility, the pricing dropped pretty substantially from February to now. Is that the market or is there something different about the terms of the new one that you plan to do?

C. Reynolds Thompson, III

No, the terms are the same. It's a 10-year interest only facility. It really was a function of spreads and what the 10-year Treasury was doing at the time. It was timing and fortunate timing from where we sit.

Richard Anderson - BMO Capital Markets

Another balance sheet question. Your fixed-rate debt is 97% of the total. Is that a number you're comfortable with? Maybe 91% if you include your exposure to unconsolidated. That's a pretty high number, not that I'm complaining, but do you have any designs on having that go up over time?

C. Reynolds Thompson, III

No specific designs. Obviously if we had more outstanding on the line of credit you could have some more exposure to the floating rate side, but we like these long-term fixed rates and it's an opportunity for us to tie down variables as we look out. At some point rate interest rates are going to rise and we like the long-term nature of these fixed rates that we've been able to put in place.

Richard Anderson - BMO Capital Markets

Just a couple of quick shotgun questions here. The Colonial Promenade Fultondale, the $0.07 gain, did you book any depreciation on that property?

C. Reynolds Thompson, III

No.

Richard Anderson - BMO Capital Markets

So it was completed and it was held for sale before it came into the operating portfolio?

Thomas H. Lowder

It was part of the retail merchant build program.

C. Reynolds Thompson, III

It was built with the intention to sell and as such it never was placed into service and never depreciated.

Richard Anderson - BMO Capital Markets

And last question, what do you guys think about this whole idea of first-in, first-out? Some of your peers are saying that about the markets that really took the hit initially, like Florida, Phoenix or markets that are close to you, do you see that those will recover sooner than others or do you think it's sort of everyone's in it, no matter when they came into it; everyone's in it for themselves at this point no matter when the weakness started?

Thomas H. Lowder

Well, you know, in the past - Rich, you would have a view on this as well - but in past recessions it's been our experience the high-growth markets are the ones that take the deepest dive and the hardest fall and they, in the past, have been the ones that recover as well.

Now what will be a different ingredient for our core business, which is multi-family, of course, will be what will happen with the overhang of residential homes in those markets because in some of those markets - well, in most of those markets - you've had an oversupply of homes and as those homes have discounted that will mute somewhat the bounce back in the multi-family because people will be purchasing those lower-priced homes and working off of that inventory.

So that's probably the ingredient that makes this a little bit different than the recoveries in the past as specific to our business.

Richard Anderson - BMO Capital Markets

So you can't really say that boy, you know, you can see yourself outperforming your peers in 2010 necessarily because of that whole first-in type of concept?

Thomas H. Lowder

Just for that reason, those of us who operate in markets like Atlanta or if you have properties in Phoenix or Las Vegas, you'll have that influence where the housing recovery and the unsold inventory of houses will perhaps mute some of the bounce back in the multi-family business.

Operator

Your next question comes from Napoleon Overton - Morgan, Keegan & Company, Inc..

Napoleon Overton - Morgan, Keegan & Company, Inc.

Just one question, really, regarding how much capital you feel like you need and I'm just curious if you could give us just a little color on your decision to open up that continuous equity offering to issue up to $50 million worth of common stock through that program as opposed to the route that some REITs have been taking the last couple of weeks, just to do a big equity offering at current prices to alleviate immediate financial stress. Could you talk about that a little bit?

C. Reynolds Thompson, III

Sure. Nap, this is Reynolds and I'm sure Tom will have some color on this as well, but we don't view ourselves as having immediate financial stress. Our debt maturity schedule is well in hand. And when you look at the cost of raising equity today it's frankly not something that's very attractive and we're in a position that we believe we can take a more measured approach and start chipping away at this but not have to dive in at a very big level and hopefully play this out for some better pricing down the road.

Ultimately our goal is to continue to delever the company. We just don't feel like we've got to do it all today.

Thomas H. Lowder

I think Reynolds has said it well. If you'll look at our near-term maturities and look at that chart, I think we have slayed that dragon.

Napoleon Overton - Morgan, Keegan & Company, Inc.

And do you consider it to be any substantial risk that any of your joint venture partners would not fund their 85% or so of the 20% paydown that you expect to have to make to refinance that debt?

Thomas H. Lowder

I think on a property-by-property basis, that's always a possibility. We are in a very good position on our 15% ownership as far as the financial impact to the company.

C. Reynolds Thompson, III

I think, Nap, those will play out on a case-by-case basis. We stand ready to do what we think's necessary to work through that, but in most cases, as you're aware, we are not the majority owner and don't ultimately make that decision.

Operator

Your next question comes from David Tody – Citigroup.

David Tody – Citigroup

Just a couple of scattered questions. The $0.39 operating FFO implies a much higher run rate to your core guidance of $1.13 to $1.20. Could you just provide some detail on what comprises the drop off towards the end of the year aside from top line declines?

C. Reynolds Thompson, III

Well, it really is top line declines, David. We're expecting to see additional pressure in our business as we move through the year and that's reflected in our guidance.

Thomas H. Lowder

Also, Reynolds, there's some dilution in there for the continuous equity program.

C. Reynolds Thompson, III

And we've put in this fixed-rate debt from the Fannie Mae facilities. That will begin to play into those numbers as well. It's a combination of those things.

David Tody - Citigroup

And Tom, you said that the equity [inaudible] deal is in guidance?

Thomas H. Lowder

Yes.

C. Reynolds Thompson, III

We have feathered in some shares between now and the end of the year, yes.

David Tody - Citigroup

And did you provide details on the retail contract that had been signed in terms of pricing?

C. Reynolds Thompson, III

No, we don't have any current properties under contract.

David Tody - Citigroup

Are you able to share any of the details of the contracts that were cancelled in terms of the pricing?

Thomas H. Lowder

Pricing was in a range between 8 and 9 caps.

Michael Bilerman – Citigroup

It's Mike Bilerman speaking. I want to come back on the equity for a second and I can certainly appreciate the great steps in terms of pushing out the maturity profile and making sure that you've taken care at least a little bit on having enough proceeds on refinancing the debt, but can you talk a little bit about overall leverage and the need to delever? If you take a look at just your overall debt-to-EBITDA, your fixed charge and debt-to-GAV, all of them are towards the bottom half of the group that may be a re-cap or a large equity issuance would put some of those concerns to bed rather than having a maturity issue, but just having a leverage issue.

And can you just talk a little bit about how you think about where you see leverage, where you want to get it to and the plan to get to that spot?

Thomas H. Lowder

We acknowledge that when the company did its transaction in 2007 and sold the commercial business and became primarily a multi-family business that we became somewhat of an outlier by having to pay out the $10.75 rather than let that work towards the balance sheet. So we acknowledge that we feel like the company is over levered and our initiatives this year are towards raising equity, paying down debt.

And we are working on a long list of not only asset sales but cutting the dividend; also issuing, as you can see, we've been authorized to do up to $50 million in the continuous equity program.

All of these are efforts that over the next several years will continue to delever the company and if you do the math on all those numbers you're probably looking at $200 to $300 million of additional equity being raised through those efforts over the next year and a half to two years.

C. Reynolds Thompson, III

From a priority standpoint, we're a little bit unique in that we don't have the debt maturity pressure and so we've got some time to work on things like our non-core asset sales, which help us delever and raise capital without diluting the company. We've made some significant progress on the balance sheet by being able to repurchase debt at a discount, which again has allowed us to delever the company without having to dilute the company.

And so we're kind of looking at these things in a priority type of a list where we're focusing on the things that are least dilutive first. And because we don't have the debt maturity pressure, we feel like we've got some time to work on some of these other things without having to put ourselves in a position of big dilution right now.

Thomas H. Lowder

Unlike other REITs that perhaps have raised some equity - and those have primarily been commercial companies and certainly if we had not disposed of our commercial portfolio we would be faced with a lot of those same issues - but we do have the availability of our unencumbered portfolio to a great degree to fall back on as far as liquidity, so I think Reynolds has expressed it well. We can do these in measured steps. But bottom line we don't like where the stock price is today either as far as issuing equity.

Michael Bilerman - Citigroup

But I guess, you know, $50 million is north of 10% of your equity base. If you were going to raise that capital, why not take a larger bite out of your leverage, plead your case to the investor base, and raise a sizeable amount to sort of just take it off the table and put the shares into long-term hands rather than doing dribble out equity?

Thomas H. Lowder

Well, I guess our answer was we feel like we don't have any near-term maturities that we need to take that debt down on, and so we can take a more measured approach to this rather than raising it overnight tonight.

C. Reynolds Thompson, III

Michael, I would say, as opposed to having to do it all at the pricing that we're at today, our hope is that pricing will move up over time and as we do introduce more equity into the equation it has a chance to be at a better price. If the price doesn't go up any, we haven't lost anything if it's still where it is. So we don't really see much of an upside in this.

Michael Bilerman - Citigroup

And can you talk a little bit on the dividend, I mean, where is taxable net income and given the fact that you are targeting asset sales, won't that have some impact on the dividend level?

C. Reynolds Thompson, III

Obviously. But we have factored that into the dividend levels and we feel very comfortable with where our required payout ratio is. A tremendous level of asset sales with big gains could change that, but we don't see that in our game plan. We think we've got that well in hand with the levels that we've laid out.

Thomas H. Lowder

And of course you're aware of all these bond gains we're able, under the new law, to defer those.

Michael Bilerman - Citigroup

And where would the new level, I mean, is there room to cut it further or is this really matching up perfectly with 90% of taxable net income?

Thomas H. Lowder

Well, I mean, that's a moving target, as you know. We think it's reasonable. The one thing the Board did not want to do is cut the dividend to a level that then we come back next quarter and we have to talk to you about paying out a special dividend. So it was a measured approach. But we also wanted on a quarterly run basis to get down to a level that we viewed as worst-case scenario for us, still covering the dividend with pay FFO. And at that level, that was about the $0.60 level and that's where we ended up at $0.15 per quarter.

Operator

Your next question comes from Richard Anderson - BMO Capital Markets.

Richard Anderson - BMO Capital Markets

Speaking of slaying dragons, as you put it, Tom, where are you guys now - well, I guess I know you're at, in terms of book value, the residential exposure, both for sale lots and condominiums for sale is, I think, around $60 million in terms of book value. Are you looking at that getting to zero this year or next? I can't remember what the plan is for you.

Thomas H. Lowder

It's over a two-year period. The action we took last quarter, where we took the impairment and we got our sales programs together, we're gaining traction here, we're gaining some velocity on sales. And I think we came up with a very good number; on a couple of these sales, we were a little bit short, like the bulk sale. When you sell in bulk to investors, you get a heavier discount; when you sell to end users, you get a better than an impairment price on the property. But we're seeing, obviously, with the number of contracts we've got, every week we're just chipping away between 3 and 8 contracts a week has been what we're seeing so far this year.

Richard Anderson - BMO Capital Markets

So the $60 million or whatever the number is, you would be disappointed if that number wasn't zero by the end of next year?

Thomas H. Lowder

Yes.

Richard Anderson - BMO Capital Markets

And then you talked about the priority is to simplify the business. What happens when things recover and we're back to forgetting about all this and all that kind of stuff. Is Colonial going to come back and start doing some of these fancy schmancy things or are you comfortable just being a multi-family developer in the Southeast and you don't anticipate going down these sort of unconventional paths again, no matter how good the market gets in the future?

Thomas H. Lowder

In the near term we'll be 80% multi-family with 20% ancillary. In the long term we'll be 90% multi-family, 10% ancillary. And that 10% ancillary will always be activity, creative activities around the multi-family business and our ongoing relationships with partners like DRA. But you can look at us for the long term as a multi-family company, Rich, 90%.

Richard Anderson - BMO Capital Markets

So you're saying you could get back more into the residential business and the for sale stuff when the market starts to recover?

Thomas H. Lowder

No. I'm just saying that if you look at us over the next five years, we'll continue to have some land sales. We've got ongoing relationships with some very good partners - AEW, DRA - and those operations continue and have a life of their own and they're set out for you in the financial highlights.

But you have the mission for the company to be your choice for a multi-family purchase in the Sunbelt.

Operator

Your next question comes from Andy McCulloch - Green Street Advisers.

Andy McCulloch - Green Street Advisers

A question on your guidance, on the revenue guidance. You had a decline in [top line] revenue of 0.9% in 1Q. If your guidance for the year is between flat and down 1%, how are you not going to blow through the low side of that guidance, especially after you said that you expect fundamentals to weaken throughout the rest of the year? What am I missing there?

Thomas H. Lowder

Well, I think what we've said here is that we've got some additional room in our guidance for a little bit of dilution, a little bit of equity issuance. We've got some room, quite honestly, we're just being conservative. We could be wrong. If job losses get to be a heck of a lot worse, we could be wrong on that 3 to 5, 4 to 6 range where most of our peers sit as well in this area. We could be wrong. But we will still stand by our guidance for the year based on the room we see in our numbers. And some of that comes from we probably have built in a very conservative difference between what our budget number is and what our guidance number is.

Andy McCulloch - Green Street Advisers

But just on that top line revenue?

C. Reynolds Thompson, III

Andrew, one other factor just to keep in mind is we continue to get some traction out of the cable program. If you pull that out, our revenue number would be down more like 1 to 2.

Andy McCulloch - Green Street Advisers

Okay, so if you forget the cable stuff and you had a decline in revenue for 1Q year-over-year of 2.1%, do you expect that to get worse throughout the year?

C. Reynolds Thompson, III

No, because revenue was declining last year as well. It's kind of a relative comparison.

Andy McCulloch - Green Street Advisers

And then on NOI declines for this year - and obviously I know you're not going to give guidance for next year - but how big can NOI declines be by your calculations before you run into any problems on your covenants?

C. Reynolds Thompson, III

Our covenant calculation is based on a quarter-to-quarter look with regard to our line of credit, and it would need to decline - and obviously there are a lot of things going on with this, depending if you took a static look at where things are today, assuming we weren't able to get any more asset sales or pay down debt or any of those kind of things or raising equity - somewhere in the 8% to 10% range.

Andy McCulloch - Green Street Advisers

So if 2010 is as bad as 2009, there could be issues?

Thomas H. Lowder

It would have to be basically twice as bad as what we're seeing right now is the way we look at it.

Andy McCulloch - Green Street Advisers

Well, your guidance is down - what's your NOI guidance down, 3 to 5?

C. Reynolds Thompson, III

Yes.

Thomas H. Lowder

3 to 5 or you can use 4 to 6, depending on how you feel about the cable business.

Andy McCulloch - Green Street Advisers

So it really wouldn't need to be twice as bad, right? It would just need to be just as bad if NOI declines and you start tripping those?

C. Reynolds Thompson, III

Yes. And that's assuming nothing changed, but we're making progress on improving the balance sheet side at the same time. So as we reduce our leverage, that also helps the ratio.

Andy McCulloch - Green Street Advisers

What is the process if you started taking out more of that or if you're forced to take out the unsecured, what are the costs to you guys to do something like that?

C. Reynolds Thompson, III

Ask again?

Andy McCulloch - Green Street Advisers

What's the overall process, if you could just walk us through, let's say you trip one of those covenants some time in 2010. Do you have to pay a fee? Is there a grace period? What is the process of getting around that if something is tripped?

C. Reynolds Thompson, III

We would do something long before we tripped something. We wouldn't get to the point of tripping it. You'd have to go in and renegotiate the line.

Thomas H. Lowder

We think the consequence of tripping that obviously is a repricing of the line, which in today's terms would probably be 350 basis points over some agreed-to level of LIBOR, with additional fees to the line, and it would have to be secured. So those would be the consequences of violating the line, where you'd go from an unsecured level, where we are at a 105 basis points, and that would be where you would end up.

C. Reynolds Thompson, III

We're in constant communication with our bank group and have a very good handle on forward-looking projections and we're going to keep this in front of us.

One other piece of information, just to make sure that it's out there, bond gains also factor into our line of credit covenant calculations.

Andy McCulloch - Green Street Advisers

So there could be some leeway beyond NOI declines that could get you around some of those covenants.

Thomas H. Lowder

We could buy preferred or we could buy bonds and create income for the quarter.

C. Reynolds Thompson, III

Also you've got the ability to call the preferred, which is not something that we would want to do today because of the capital, but it would improve our fixed charge coverage ration.

Andy McCulloch - Green Street Advisers

Okay, I guess it gets back to the bigger equity question. It seems like you don't think you're going to trip anything, but if job losses get worse it's a possibility. How do you think about, again, getting back to equity questions, just raising equity and putting that to bed.

Thomas H. Lowder

We don't like the price where we are right now.

Operator

Your next question comes from Michael Bilerman - Citigroup.

Michael Bilerman - Citigroup

Just thinking on the unsecured side for a second, you obviously have historically been primarily an unsecured borrower with basically a series coming due in each of the next years. As those come due and given where your new unsecured ratings are, I assume that cost becomes pretty prohibitive, in which case you'd go down the secured route similar to the Fannie facility you just did.

But at some point, as you secure more of the balance sheet, all of a sudden the unsecured covenants start becoming a little bit more stretched - you lay this out in very good detail on Page 19 of your supplemental in terms of the secured debt to total assets and unencumbered to unsecured debt - how does all that sort of play in to an equity and also a debt level that you're thinking about?

C. Reynolds Thompson, III

Well, obviously it's something we're very cognizant of. We do have a pretty significant amount of room left in those bond covenants with regard to secured versus unsecured at this point, probably a little bit more than $500 million. So that's something that's in front of us and we'll keep an eye on it. And as we work through the balance sheet and continue to delever, it actually takes pressure off of that, but that's something that we're just going to have to factor into the mix. At this point we view the unsecured market as prohibitively expensive and we would be looking at the secured route, but that's not to say that the unsecured market may not come into play at some point with some pricing that looks better.

Michael Bilerman - Citigroup

Right. But the amount of unsecured bonds that you have, I mean, it's not going to give you enough room to sort of secure your balance sheet.

C. Reynolds Thompson, III

That's true. If we wanted to totally change that today, that's true.

Michael Bilerman - Citigroup

I'm just saying from a relative perspective, you're a little bit, just given the fact that the ratings have been notched down so significantly, ratings on the unsecured debt I assume is more difficult, which then limits your options on capital.

Thomas H. Lowder

Well, it's impossible right now, so we have to go the secured route. But what we're modeling in is a deleveraging of the company and accomplishing that over a measured period of time, over a couple of years. Does that answer your question?

Michael Bilerman - Citigroup

We can follow back offline. I think David has a couple of questions as well.

David Tody - Citigroup

Actually, can you guys talk a little bit about what you're seeing in Atlanta specifically in terms of concessions and demands?

Paul F. Earle

Job loss accelerated in the first quarter noticeably, which put a lot of pressure on concessions, some 8% increase up to over a month free, in some cases a month and three-quarters free. We're seeing traffic hold up. The credit quality of the traffic was noticeably down, but there was about 24,000 jobs lost just in the last 90 days in Atlanta, so that's starting to show up in the numbers throughout all of he Atlanta properties.

Operator

And there are no further questions. Mr. Brewer, do you have any further comments?

Jerry A. Brewer

No. Thank you for your participation today and we look forward to seeing everyone at NAREIT. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference call. We appreciate your participation. You may now disconnect.

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