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Associated Estates Realty Corporation (NYSE:AEC)

Q1 2013 Earnings Conference Call

April 24, 2013 14:00 ET

Executives

Jeremy Goldberg - Vice President, Corporate Finance and Investor Relations

Jeff Friedman - President and Chief Executive Officer

Lou Fatica - Chief Financial Officer

John Shannon - Senior Vice President, Operations

Analysts

David Toti - Cantor Fitzgerald

Jeff Donnelly - Wells Fargo

Nick Joseph - Citi

Wilkes Graham - Compass Point

Jana Galan - Bank of America/Merrill Lynch

Alexander Goldfarb - Sandler O’Neill

Operator

Good afternoon, and welcome to the Associated Estates’ First Quarter 2013 Earnings Conference Call. My name is Rocco and I will be the operator for your call today. Before we begin, I would like to apologize for the technical issues we had earlier today and we appreciate everybody’s patience on the line. At this time, all participants are in listen-only mode. Following prepared remarks by the company, we will conduct a question-and-answer session and instructions for asking questions will follow at that time. Please also note that this event is being recorded.

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

Jeremy Goldberg - Vice President, Corporate Finance and Investor Relations

Thanks Rocco. I’d first like to apologize for everyone. I know a lot of you have e-mailed me and we apologize for the technical difficulties. We will have a contingency plan in place going forward and appreciate everyone’s patience.

I would like to remind everyone that our call today is being webcast and will be archived on the Associated Estates’ website for 90 days. Prepared remarks will be presented by Jeff Friedman, our President and Chief Executive Officer; Lou Fatica, our Chief Financial Officer; and John Shannon, our Senior Vice President of Operations. Additionally, other members of our management team are available for the Q&A.

Before we begin our prepared comments, we would like to note that certain statements made during this call, including answers we give in response to your questions, will be forward-looking statements that are based on the current expectations and beliefs of management. These forward-looking statements are subject to certain risks and trends that could cause actual results to differ materially from projections. Further information about these risks and trends can be found in our filings with the SEC, and we encourage everyone to review them. As a reminder, Associated Estates’ first quarter earnings release and supplemental financial information are available in the Investor Relations section of our website, and they include reconciliations to FFO and other non-GAAP financial measures, which will be discussed on this call.

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

Jeff Friedman - President and Chief Executive Officer

Thanks Jeremy. Welcome everyone. Another nice quarter for Associated Estates, market conditions and fundamentals in our sub-markets remained solid. Let me explain, rent growth compared to any period you want to measure strong. Occupancy compared to any period you want to measure, strong. Household formation continues to increase more than we expected. Our renter cohorts’ propensity to rent continues to grow. It should not be a surprise to anyone that apartment rent growth is moderating with 2013 expectations still significantly higher than the long-term trends.

I’d like to touch on three areas, before I turn the call over to Lou and John, new supply, ability to continue to push from rents, and percentage of rent to income. First, new supply, the potential impact of new supply must be analyzed some market by some market. John will get into this in more detail in his prepared remarks. New projects in our submarkets will not have a negative impact on our 2013 occupancy. We do have four properties in our portfolio, where we expect some pressure on rents during the lease up of the new properties. The high barrier to entry nature of our locations combined with how our properties are positioned in each submarket insulates us from any significant concern about oversupply. Our ability to push rents, you probably heard me say many times, household formation drives demand.

Occupancy, what’s going on with jobs and wages impacts rents? How much we can charge? Increased payroll taxes, sequestration, concerns about a slow growing U.S. economy certainly must be impacting many consumers including some of our residence and prospects.

The first quarter is typically our slowest. And by design, we make sure we have the fewest leases coming up for renewal. New lease rent increases in the first quarter were a little less than we expected. At the same time, new lease rents in April and May are moving up more than they did in the first quarter. Q1 renewal rents were in line with our expectations. My last point relates to the length of runway, how much more room do we have to raise rents. Portfolio wide our residents pay 18.4% of their household income in rent. The ratio where we may start to be concerned is around 25%, thus leaving significant room for rent growth as the broader economy improves. We worked really hard to position Associated Estates to continue to leave the apartment group as evidenced by our long-term performance, it’s about the bricks and sticks, but it’s also about the talent we have at every level of our company.

I will now turn the call over to Lou.

Lou Fatica - Chief Financial Officer

Thank you, Jeff. For the first quarter FFO was $0.31 per share in line with internal expectations. Same community quarter-over-quarter NOI was up 5.9%. Midwest markets remain the strongest with a 5.1% revenue increase. With the sale of our Duluth, Georgia asset in Q1, we ended the quarter with nothing drawn on our line of credit in cash of just under $20 million.

Leverage is measured by debt to undeprecated book value was 47% at quarter end. Secured debt to gross book value was 26% and will continue to trend down to below 20% with the anticipated repayments of our 2013 maturities on October 1st. Unencumbered assets accounted for 60% of Q1 NOI and our Q1 fixed charged coverage ratio was three times. Continuing to our balance sheet remains the top priority. We have also focused on minimizing our floating rate debt exposure, $125 of our $150 million term loan is now swapped to fixed, due its maturity in January 2018 leaving just $25 million of current floating rate debt. We are reaffirming our 2013 FFO as adjusted guidance range of $1.29 to $1.33 per share.

Full year same community expectations remain unchanged from our previous guidance. We plan to revisit our guidance in conjunction with our second quarter earnings call. Additional details regarding our full year guidance for 2013 can be found on page 24 of the supplemental. At this time I will turn the call over to John.

John Shannon - Senior Vice President, Operations

Thank you, Lou. We are please with our first quarter performance. As Lou pointed out our same community NOI was up 5.9% over Q1 2112. We finished the quarter at 96.6% physical occupancy. Revenue was up 4.3% and expenses were up 2%. On a sequential basis same community revenue was flat as compared to Q4 2012. This compares favorably to our historical seasonal pattern. Additionally sequential physical occupancy was up 50 basis points, in line with historical levels.

Currently all of our 14 markets are performing in line with our expectations. As it relates to new supply, only 10 of our 51 properties will compete with new communities. All of our properties continue to be well occupied with only four of the 10 properties experiencing some downward pressure in rents. Three of those – of these four properties are in Northern Virginia and one is in Cary, North Carolina.

We focused on staying full in Q1 to position the properties to gain pricing power as we moved into the peak leasing season. We were sensitive to pricing which resulted in same community new lease rents being flat for the first quarter similar to Q1 last year. Renewed lease rents were up 4.3% for the quarter. We are currently 95.7% occupied.

Renewal letters for May and June were sent out with increases of 4% to 5% and available units are priced with increases of 3% to 5%. April to-date for the same community renewal rents are up 4.1% and we are starting to see an acceleration in new lease pricing. New leases for the first two weeks of April were up 2.3% and for the recent two weeks new leases were up 5.1%. So, I would say as we move into the peak leasing season, we expect that we will see revenue growth within our guidance range of 4% to 5%. Regarding our 2012 acquisitions that are not part of our Q1 same community results three properties in Raleigh-Durham and one property in the Medical District of Dallas were all performed well and collectively finished the quarter at 96.3% physical occupancy.

Turning to development we are approximately 50% complete with the expansion of our San Raphael property in Dallas. We remain on schedule to deliver the first unit in new amenity areas in the third quarter of this year. We have finalized our guaranteed maximize price contracts Bethesda and at our total quick project in Dallas. Both are inline with our original estimates at our development in Bethesda we have raised the old post office in grading and underground utilities have begun and our total quick project site work is underway. The remainder of our current development pipeline 175 units in Los Angeles is on track with design and approvals continuing to move forward as anticipated with construction expected to start this quarter.

With regard to dispositions in late March we closed on the sale of our 843 unit Idlewylde property in Duluth, Georgia. The sales price of $63.2 million represents a 6.6% nominal cap rate and a 5.3% economic cap rate assuming $650 per unit in CapEx and a 3% management fee both the trailing 12 months NOI. Additionally, we are beginning to market two non-core properties in Columbus, Ohio. From an acquisition standpoint, we expect transactional activity for core properties picked up later this year. I want to thank all of our employees for another terrific quarter.

I will now turn the call back over to Jeff.

Jeff Friedman - President and Chief Executive Officer

Thanks John. Nice quarter. I’d also like to apologize to everyone for the problems PR Newswire is having today and hopefully you all will be able to enter the Q&A. So, Rocco, at this time let’s open up the call for questions and hopefully those that would like will be able to enter the queue.

Question-and-Answer Session

Operator

Absolutely sir. We now begin the question-and-answer session. (Operator Instructions)

Jeff Friedman

Rocco, you are still with us?

Operator

Yes sir. I was just waiting for the first question here. It looks like we have our first question comes from David Toti of Cantor Fitzgerald. Please go ahead.

David Toti - Cantor Fitzgerald

Hi guys.

Jeff Friedman

Hi David.

David Toti - Cantor Fitzgerald

Quick question more just maybe on the strategy level when you look at the revenue performance in the portfolio for the last couple of quarters is been really strong in your Midwestern market for the most part and I know for the long time you been sort of attempting to diversify way from the Midwest for growth and development there is the reason sort of strength kind of change your view on that bigger strategy, does it keep you sort of more interested in the Midwestern assets at this point given that kind of performance sustainability?

Jeff Friedman

David, make no mistake we love the Midwest, and what we have been going through is a process, where we have been calling our total portfolio and reducing our exposure from what once was a 100% Midwest to what we have said we wanted to be 30% to 40% Midwest. And clearly as we grow in other markets that will require refocusing on uncertain submarkets in the Midwest, which we are doing at this time, but better is better and so we will continue to look for properties that we believe will contribute to our long-term growth and that includes certain Midwest submarkets.

David Toti - Cantor Fitzgerald

Okay. So, what I am hearing is you are more focused on the growth profile than just the absolute footprint at this point given somewhat of a performance convergence?

Jeff Friedman

Well, that’s the short-term. And if you look at our long-term performance, our out performance on a relative basis to the other companies whether you look at it on a revenue basis or an NOI basis can, as I often say, we would like to say it’s because we are so handsome and smart, but really the main difference between us and the other companies is the fact that we do have a significant presence in the Midwest. We recognized that a low data contribution and we’ll continue to look into Midwest as we grow our platform.

David Toti - Cantor Fitzgerald

Okay, great. And then could you provide an update on the California project, where you are – are you still in the pre-design and entitlements?

Jason Friedman

David, this is Jason. As John said in his prepared remarks, Desmond and Wilshire is moving forward with your design and approvals on schedule. It’s really a fantastic project. We are really fired up about it and expect to start construction here at the end of the quarter.

David Toti - Cantor Fitzgerald

Okay, great. And then my final question, I know you talk about this a little bit was the kind of the occupancy versus rent growth mix, and I am just wondering the RMS system is so relatively new for you guys from an operational perspective. How did you see the system perform during the quarter relative to the results that you posted, how much more kind of hands-on of the systems did it need or was it some really kind of running itself to get to the revenue growth that you reported?

John Shannon

David, this is John. The LRO program certainly has been a data point and a good tool for us since we fully implemented it last year. As you know, it’s really a balance between staying full and raising rents and we really have stayed full for most of 2012 and here into 2013. So, as I said in my remarks, we maintain that high occupancy, 96% through Q1 and where they are now, it did here in April. So, it positions us to be able to start tweaking the rents up as we move into the peak leasing season. And like I said right now, the first two weeks of April, we saw new lease rents up 2.3%, for the second two weeks were up 5.1%. So, we are really starting to see an acceleration on the new lease rents. And our renewals continue to be solid in the 4% to 5% range.

David Toti - Cantor Fitzgerald

Okay, great. Thanks for the detail today.

Operator

Our next question comes from Jeff Donnelly of Wells Fargo. Please go ahead.

Jeff Donnelly - Wells Fargo

Good afternoon, guys. And if I could I just want to build on David’s question, the cap rate differential between, I guess, close to markets where you guys have been acquiring and developing of late is now quite wide versus the Midwestern markets. Is there a point there which you feel that, that gap might be too extreme and you might look to invest marginal capital in the Midwest or at least delay the rotation towards coastal markets?

Jeff Friedman

Well, Jeff, this is Jeff. And I really can’t answer that any differently than I did before except to say that we have been very disciplined of late by not chasing deals given the low cap rates and the low returns given what we believe are realistic assumptions. And what’s very interesting about that is that it almost doesn’t matter where the property is located. For example, the 5.4 economic cap rate that John referred to that we sold Atlanta at, we think about that, but the cap rates that we are seeing in our core deals in most markets today are well below 5 with realistic assumptions. Now, when we look at the Midwest properties we look at where you would think they are a higher cap rate markets. They are not much different. Now, they may not be sub-5, but when you look at core new properties whether it be Minneapolis, Indianapolis, Columbus, Ohio, you can’t get into suburban Cleveland, you can’t get into suburban Detroit. Those cap rates are within 50 basis points of the all-time low cap rates in these coastal markets.

Now, what is that saying is that there is a lot of money chasing yield and we believe that the assumptions that have to be baked into the returns that are necessary to make the deals work even at this part of the cycle maybe overly aggressive. And so from a development standpoint, where we have off-market opportunities to buy land or to joint venture with property owners to develop property and get anywhere from 100 to 300 basis points additional spread from a development deal in high barrier to entry submarkets, we think that, that’s a better use of our capital at this point in the cycle.

Jeff Donnelly - Wells Fargo

If you think that buyer underwriting is maybe getting a little frothy in some markets, does that lead you to think that you might be apt to maybe exceed your original guidance on disposition to this year? Is there an interest in maybe putting more out to market, then you have already talked about thus far?

Jeff Friedman

We are talking about that and looking at that. I believe John also said, we said on our last call we are planning market two additional assets. We are looking at others. We have talked Jeff about the top down, bottom up ranking that we go through a couple of times a year, these low cap rates and the interest in good properties that have been well maintained like our properties is such that we are looking at that. Now there are other issues that come along with that shrinking the company, tax implications, what happens those in some cases are high-class problems to have. But without the 1031 opportunity or just buying something to shelter the gain there are other problems associated with that and we like these properties, we like their positioning in the sub markets. We like our basis in these properties and just from the yield standpoint we like owning them as well.

Jeff Donnelly - Wells Fargo

And just you mentioned this in some of your remarks, but can you guys talk maybe about the sequential rent trends, not revenue which is rent trends in your core Midwest markets as many of those areas are running at I think that some people have said are historically higher occupancies rates and it should point to healthy pricing power for you guys. I am just curious what your 2013 kind of outlook or expectation is for rents NOI growth in just your Midwestern market?

Jeff Friedman

Yeah, in the Midwest, the first quarter mirrored first quarter of last year, so we feel comfortable that we are well positioned with the Midwest properties. The Midwest will continue to be the top performer for us. We are seeing new deals and renewals in the Midwest anywhere to 4% to 8% in some cases. So, we will believe the Midwest will continue to be strong and that will all flow to NOI.

Jeff Donnelly - Wells Fargo

And just last question, of the 10 assets you mentioned that were facing incremental supply you named, where four of them are, where are the other six assets that are maybe not seeing downward pressure on rents. And I guess are they seeing any erosion in rent growth as a result of supply?

Patrick Duffy

Jeff, this is Patrick Duffy, the other six properties, two are located at South Florida, one is located in Nashville, our Vista Germantown property and the other two are located in Raleigh, North Carolina.

Jeff Donnelly - Wells Fargo

Thanks Jeff.

Operator

Our next question comes from Nick Joseph of Citi. Please go ahead.

Nick Joseph - Citi

Thanks. Same store revenue growth of 4.3 in the first quarter and maintained 4-5 mid point for the full year. So, how did the first quarter number come in with regards your original expectations and how do you expect same store revenue I guess by quarter-to-quarter basis to trend going forward?

John Shannon

Nick, this is John. As Jeff mentioned, the new deals were a little bit lower than had anticipated coming in at flat. The renewal deals our anticipation was that – excuse me the renewals would come in 4% to 5%, we are at 4.3%. So, I would say the renewals pretty much performed as we anticipated, the new deals slightly up in Q2 as I said we are starting to see an acceleration in our rent. So, we are going to really during the peak season see some pretty decent numbers in Q2 and then Q3, Q4 as we are coming up against some tougher comps we will see a little bit pullback in new deals, little bit harder to come by in the third and forth quarters.

Nick Joseph - Citi

Alright, but just to get to that 4% or 5% you are going to have see some acceleration in terms of just the overall revenue, so is that what you are still expecting or are you kind of trending more towards the bottom of your original guidance range after your 1Q came and maybe a little below what you thought?

John Shannon

I would say where we sit today we are in line with our expectations and where we thought we would be at this point though he first quarter and as we trend up through April, so we think that we will be with in that range of 4% to 5% of revenue growth. We are also seeing a growth in other fees whether it would be water and sewer collections and administrative fees and those type of things we are seeing a little bit of growth in our other fees as well.

Nick Joseph - Citi

Okay. And then in terms of occupancy in the first quarter, you actually the increase, you would benefit from average occupancy being up over the last quarter but and I realize just one data point but at the end of the quarter you are now 80 bps behind where you were last year. So, do you expect to – is that going to be a headwind going forward are going to be losing occupancy year-over-year, is that just one data point that shouldn’t be very concerning?

John Shannon

I would suggest that, that’s one data point that is not concerning. I mean, we are full. There is really no question, we are very well occupied and that’s a snapshot in time that occupancy is at quarter end. And if I look back on a, if you would, a financial occupancy Q1 of this year we were at 95.8% and Q4 of ‘12 we were at 95.9%. So, we are full today and we anticipate staying full throughout the year.

Nick Joseph - Citi

Thanks. And then Jeff you mentioned in terms of the development that land prices have been increasing and you are looking for JV partners who already on the land partner with, so can you update us on how those conversations are going?

Jeff Friedman

Well, Nick congratulations by the way on new responsibilities. This isn’t something that we just sort of decide we are going to go look for people that own entitled land. We have boots on the ground and markets and have for quite some time developing these relationships talking through the market conditions the type of product the timing the expected returns and what I would refer to at the Citi Conference that I attended in March was that we see the planting of the seeds developing and evolving into opportunities that would be joint venture and what they would be is with land owners who would be contributing the land and we would then be involved in the development and this is happening in all of the markets that we’re targeting. And so we see this as an opportunity for growth we see the good way probably for a small company like us a way to do deals that larger companies may say this too much here and too much complexity and maybe avoid. But a good opportunity for us to get into these fields and we also see owners who are willing to contribute these land parcels at reasonable prices with the upside of having a participation in the development itself.

Nick Joseph - Citi

Great thanks guys.

Operator

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

Wilkes Graham - Compass Point

Hi good afternoon guys. The very end of your prepared remarks I think I want to make sure I heard you right as you said you expect transactional activity in core properties pickup in the second half of the year is that right?

Jeff Friedman

Yes.

Wilkes Graham - Compass Point

And is that are you referring to dispositions or are you talking about acquisitions and dispositions?

Jeff Friedman

We are referring to the general transaction environment on the acquisition side.

Wilkes Graham - Compass Point

Okay.

Jeff Friedman

During the last six months or so there is been very few trades of core product but we do expect that will pick up later in the year.

Wilkes Graham - Compass Point

Okay that’s what I’m getting at or do you – can you say where you think that activity may come?

Jeff Friedman

Well, it’s going to be a general spread across most of the markets throughout the country as always we continue to monitor top 20 or so markets in the country with a particular focus on the markets where we already have a footprint. But I don’t anticipate that one or few markets are going to have anymore activity than others think it will be pretty good spread amongst them.

Wilkes Graham - Compass Point

Okay and given the move that you’re seeing we’ve all seen in cap rates in the apartment space the past year or so and before. And certainly as cost of funds have come down, are you targeting the same IRRs or levered yields or acquisitions that you were maybe a year ago?

Jeff Friedman

We haven’t changed our yield target we’re still generally looking for an 8% un-levered return we are as always we’re disciplined in both the product we look at as well as locations but more so on the underwriting itself. But we’re not going to low our returns to trying to get down for sub-5 cap rate make it make sense I think an 8% is still our target.

Wilkes Graham - Compass Point

Okay thanks.

Operator

Our next question comes from Jana Galan of Bank of America/Merrill Lynch. Please go ahead.

Jana Galan - Bank of America/Merrill Lynch

Thank you, John. I appreciate your comments on the communities impacted by new supply. I was wondering if you could give us more detail on if you’re seeing more of an impact on new leases on renewal rates or is it even impacting occupancies up to three Northern Virginia, and the one Kerry community?

John Shannon

Well, just give you a sense of the new supply for the three Northern Virginia properties. We have two properties in Eastern Loudon County and those two properties are competing against one property in lease up, the lease up property has approximately 400 units. And then the third Northern Virginia property that is competing against new supply that’s having an impact from the rental rate is located in Woodbridge. And our Woodbridge property, Riverside Station is competing against two properties with about 600 units between those two properties. And then it Kerry, our arboretum deal is competing against three properties in lease up. And generally, what we are seeing at the impact is one new lease rents. And what we are seeing that rents are probably 3% to 5% off of where the peak rents were in 2012.

Jeff Friedman

Is it impacting occupancy?

John Shannon

No, not occupancy just rental rate, all of the property, the four properties I just mentioned are operating at approximately 95 occupancy.

Jana Galan - Bank of America/Merrill Lynch

Thank you. And then just on the Kerry community and some of your Raleigh assets were acquired last year, I guess maybe just some update on are they performing in line with what you thought when you had purchased those assets?

John Shannon

Yes.

Jana Galan - Bank of America/Merrill Lynch

Okay. And just quickly on the two properties in Columbus, Ohio, do you think that, that will achieve roughly the same kind of cap rates that we saw in the Duluth property or are they maybe better quality or are they older assets?

John Shannon

They are great quality and very low cap rates.

Jana Galan - Bank of America/Merrill Lynch

Thank you.

Operator

Our next question comes from Alexander Goldfarb of Sandler O’Neill. Please go ahead.

Alexander Goldfarb - Sandler O’Neill

Good afternoon. Just a few quick questions here. First one, can we just get an update and where we stand with the S&P looking on your website, it looks like the last exam was back in September of 2011, so just sort of curious where we stand there?

Lou Fatica

Yeah, Alex this is Lou. We just recently, our outlook was raised from stable to positive in March from S&P. So, we continue to be one notch below investment grade at BB plus. And we believe with continued improvements to our balance sheet that we are in a position to earn and upgrade in the near-term.

Alexander Goldfarb - Sandler O’Neill

Okay. And then as far as the $130 million of mortgages that comes to I think you said October 1, would you consider replacing those with unsecured perhaps private placement just given the smaller size and you guys could custom tailor it. We have seen others smaller issues do the custom tailor and get some pretty good pricing. What are your thoughts on that route?

Lou Fatica

Yeah, I mean, I think we positioned ourselves to really have maximum financial flexibility as it relates to those maturities with nothing drawn in our line of credit. Certainly, that’s an option for us. And as you mentioned the private placement route is another route that we would look to take. Clearly, we would look to replace that with unsecured borrowings. So, whether that’s our line, additional term loan, privately placed bonds or other types of unsecured borrowings, that’s our objective.

Alexander Goldfarb - Sandler O’Neill

Okay. And then as far as Desmond goes, I think originally when we discussed this deal about a year ago the pricing was somewhere around 420 a door. Can you just tell us how pricing is today as you look at the deal and then where rents are, where you think they are now versus then just to get a sense of what the yields maybe?

Jason Friedman

Alex, this is Jason. Pricing really has in that market gone up a little bit from a construction cost standpoint, but we factored that in our underwrites, and assumed that there would be increase over the time before we started actually started construction. So, we haven’t seen anything in recent estimating that would cause us to change that. Again, we expect to start at the end of this quarter. So, we are pretty close to finishing the plans and having solid numbers in entering into a GMP contract. The rents, we think the rents has improved in that submarket, so hopefully that continues and by the time we open we have continued to grow we think LA has performed well and hopefully we will be able to take advantage of that.

Alexander Goldfarb - Sandler O’Neill

Okay and just the final question is going back I think it may have been Wilkes who was asking it but on the JVing with land owners for development, can you just comment whether doing presales will be something that you would increasingly look at just you didn’t have the risk of development on your balance sheet or maybe if that is in fact what you guys were talking about.

Jeff Friedman

Alex, Jeff here. Yes on presales is they are something that we are interested in and something that we would like to do. The real issue becomes negotiating the prices today given that presales come are stabilized year and a half, two years down the road. But it’s a combination of all of them. Its presales – presales will be pricier than developing them ourselves, the returns will be lower. But yes, from an execution standpoint there is somewhat less risk. One thing I would like to say about presales, we are only going to be interested in presales where our development team and our operation team can influence the design and the finish and the end product that we have. We are not interested in most of the products that maybe being built that was build by merchant builders who simply plan to sell it at the end of construction. The design is very important to the long-term competitiveness of the product.

Alexander Goldfarb - Sandler O’Neill

Okay, thank you.

Operator

Our next question is a follow-up from Jeff Donnelly of Wells Fargo. Please go ahead.

Jeff Donnelly - Wells Fargo

Thanks guys. Yeah, just a quick question, Jeff based on your earlier comments it might sound like dispositions are sort of better source of capital for you, but I am just curious with your stock that’s done very well, that’s up $3 or $4 a share in the past six months to what is nearly like a one or two year high, I think you have outpaced the group’s performance. How do you think about the near term dilution from equity issuance where even though you might not have an immediate use of proceeds further proceed vis-à-vis reducing the risk profile of your company in any event there is a downturn ahead of us that they usually come and we can’t see them?

Jeff Friedman

Well, this is for all of us, for all of us responsible for the capital allocation decisions at publicly traded companies, that really is what we are paid to do. Sometimes it’s easier when your stocks trading at NAV or above and sometimes it’s not as easier or popular of a decision. First of all we are going to continue to focus on improving the balance sheet. And although that’s dilutive as it was when we paid off 1.75% line of credit money with 4.2% of 9.2 year money we de-levered by un-encumbering, put us in a position to continue to unencumbered assets, minimize floating rate debt. So, where issuing shares comes into that it really relates to one continued to improve the balance sheet, but also the opportunity to invest those moneys in accretive acquisitions.

And every time we have gone back to the equity market, we have done that to either improve the balance sheet or to make accretive acquisitions. And whoever asked the question a few minutes ago about how 2012 acquisitions are doing against performance and expectations, that’s just another example of that. And then lastly we have a slide in of our presentations which shows the value creation. And we take that back to 2010 and 2011 and the assets that we purchased with the precious capital that we have raised from the sale of shares. And we believe we have demonstrated that we have created a significant amount of value as a result of allocating capital that way. So, we study it. We think about it all the time, Jeff.

Jeff Donnelly - Wells Fargo

Do you think then on acquisitions going forward you sort of looked at, I guess over-equitize them, if you will, meaning that you did buy them for – without using leverage is another way to continue to grow the company, but at the same time reduce financial leverage?

Jeff Friedman

Well, I think what is it Lou, we’re over 60% of our properties have no mortgages of our NOI has no mortgages I mean that really is the model going forward. The – we have the flexibility of doing business with the insurance companies or Freddie or Fannie sometimes we – there is an advantage to buying the property with agency debt on it because some buyers unable to write the equity check and we just waited out until we can prepay it. But associated estates is principally an unsecured borrower and as Lou said whether that’s through term loans or a line of credit or privately placed or ultimately publicly placed publicly traded index bond deals we’re going to grow as an unsecured borrower.

Jeff Donnelly - Wells Fargo

Okay thanks Jeff.

Operator

Thank you, sir. This concludes our question-and-answer session. I would now like to turn the conference back over to Jeff Friedman for any closing remarks.

Jeff Friedman - President and Chief Executive Officer

Well, thanks everyone, and now for the fourth time I want to apologize for the interruption and delay this morning or this afternoon with our call. Thanks for your interest and keep in touch.

Operator

Thank you, sir. We thank you for your time and patience. The conference is now concluded. We thank everyone for attending today’s presentation. You may now disconnect and have a wonderful day.

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Source: Associated Estates Realty's CEO Discusses Q1 2013 Results - Earnings Call Transcript

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