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Mid-America Apartment Communities (NYSE:MAA)

Q4 2009 Earnings Call

February 5, 2010 10:15 AM ET

Executives:

Leslie Wolfgang - Director of External Reporting

H. Eric Bolton Jr. - Chairman & CEO

Albert M. Campbell - Executive Vice President & Director of Financial Planning

Thomas L. Grimes, Jr. - Executive Vice President & Director of Property Management

James Andrew Taylor - Executive Vice President & Director of Asset Management

Analysts:

Swaroop Yalla - Morgan Stanley

Michael Salinsky - RBC Capital Markets

Sheila McGrath - KBW

Richard Anderson - BMO Capital Markets Corp.

Paula Poskon - Robert W. Baird

Michael Levy - Macquarie

Steve Smith - Morgan Stanley

Buck Horne - Raymond James Financial Inc.

Presentation:

Operator

Good morning ladies and gentlemen and thank you for participating in the Mid-America Apartment Communities Fourth Quarter Earnings Release Conference Call. The company will first share its prepared comments followed by a question and answer session. At this time I would like to turn the call over to Leslie Wolfgang, Director of External Reporting. Ms. Wolfgang, you may begin.

Leslie Wolfgang

Thanks Sean and good morning everyone. This is Leslie Wolfgang Director of External Reporting for Mid-America Apartment Communities. With me this morning are Eric Bolton, our CEO, Al Campbell, our CFO, Tom Grimes, Director of Property Management and Drew Taylor, Director of Asset Management.

Before we begin, I want to point out that as part of the discussion this morning, company management will make forward-looking statements. Please refer to the Safe Harbor language included in yesterday’s press release and our 34-X filings with the SEC, which describe risk factors that may impact future results. These reports, along with a copy of today’s prepared comments and an audio copy of this morning’s call can be found on our website.

I’ll now turn the call over to Eric.

Eric Bolton Jr.

Thanks Leslie and good morning everyone. Mid-America reported better than expected results yesterday, as the operating performance was stronger than we had forecast. The upside was due to better than expected pricing and collections performance as well as lower real estate taxes.

In a year that presented significant challenges for the apartment business, Mid-America’s same revenues for all of 2009 declined an average of only 1.2% and NOI declined only 1.5%. For the year, FFO per share grew 1.6% and set an all-time high for our company.

As outlined in the beginning of 2009, we expected that Mid-America’s portfolio strategy and financing program, coupled with a strong operating platform, would generate results that would hold out better than most during this tough economic cycle.

As we look ahead towards another challenging leasing environment in 2010, we believe Mid-America is well positioned to once again deliver solid results.

Our same store forecast for 2010 is of course coming off one of the best performances in the sector for 2009 and thus the benchmark comparison for Mid-America will be tougher than the sector average.

Nevertheless, with pricing trends in our portfolio showing early signs of stabilizing and occupancy continuing to hold up well, we remain convinced that a long and strong recovery cycle for Mid-America will emerge late this year. After several quarters of downward pressure on rents, we’re encouraged by early signs suggesting that we've reached a point where we should be able to hold strong occupancy at current pricing levels.

On a year-over-year basis, rents on leases written for new residents moving in were down 6.3% for all of 2009 as compared to all of 2008. Over the course of 2009, January to December, new resident rents declined at a slower rate down 3.2% and over the last three months, new resident rents were down only 1%.

This flattening trajectory coupled with the fact that our occupancy has remained very strong and our 90-day exposure, which considers current vacancy plus notices to move out, is lower than we've seen in quite awhile, suggests us that we should begin to capture greater stability in new lease pricing this year at most of our properties.

Looking at pricing on leases written for renewal transactions, as you would expect, rent trends were not under quite as much pressure as new resident pricing. Renewal lease pricing declined by 2.8% over the course of 2009 as compared to 3.2% for new resident pricing.

However, rent trends for renewing residents will generally lag the trend for new resident rents and thus we expect to see some continued pressure on renewal pricing over the next few months.

Given the expectation that the decline in new resident pricing is bottoming out and that overall leasing conditions are set to improve in the second half of this year. We expect that pricing for renewably since we likewise begin to bottom out midyear, and start to recover late this year and into 2011.

In summary, with occupancy level high with our 90 day exposure very much under control with employment trends showing signs of stabilizing and with new supply deliveries in most markets continuing to decline.

We believe leasing fundamentals will support the start of pricing recovery in the second half of 2010. It's worth noting that according to the Bureau of Labor Statistics, the total job loss incur across Mid-American markets, Mid-American's markets in 2009 was roughly 731,000 jobs. The projection for 2010 is that 126,000 new jobs will be added across our market.

The majority of the revenue pressure we expect to see in 2010 is a result of the pricing actions taken during 2009 as we work to the heavy leasing season of the summer, we expect to re-price the book of the portfolio it generally flat, just slightly higher range which will then setup for a stronger recovery in 2011.

Taking a look at expectations from our various market concentrations based on employment outlook in new supplied deliveries, we expect continued weakness this year in Atlanta, Jacksonville and Rowley is a limited amount of new supply from project started prior to the credit market pullback come online.

Markets have had some weakness over the last few quarters that we believe are beginning to stabilize and/or likely to be somewhat flat in 2010 are Houston, Austin, Charleston, Greenville and Tampa.

Markets were expected to capture more stable performance this year as compared to 2009 are Memphis, Dallas and Nashville. As we've discussed in the past, we believe that our portfolio strategy are diversifying capital across the high growth Sunbelt region in both large and select secondary markets with a key attribute to our goal of providing shareholders strong, full cycle performance.

As detailed in our earnings release, our secondary market segment continues to deliver a more stable level of performance during this part of the cycle. But as we begin to look towards recovery with nearly 60% of our asset base in the large share market segment that would deliver some of the most robust numbers in the country between now and 2013 and with all these markets expected to see drops in new supply delivery that are well below long established historical delivery rates.

We believe the company is in a terrific position to deliver strong results over the next two to three years. We are pleased with the three acquisitions completed during the fourth quarter, which included our initial investments to the San Antonio market.

We are also pleased to get another investment into our new joint venture. We believe all three acquisitions would be good long-term investments that will meet or exceed our performance goals. And in each case, we achieved very good pricing as compared to replacement values.

A lot has been said concerning the challenges by our states given the limited number of quality properties brought to market thus far with the significant amount of new investment of capital chasing deals.

Despite the competitive transaction environment, we believe that we will be successful in capturing a meaningful level of attractive new growth for our shareholders over the next couple of years.

We have a long record of strong performance for sellers and brokers in this region and we have generally provided an opportunity to look at most deals. Our strong public read balance sheet provides a competitive advantage in a number of markets where we are competing with private and less well-capitalized buyers.

In addition to our normal channels for sourcing deals, we are also working with regional and national lenders to identify situations where we can provide a solution for some of interest less loans that match up with our investment objectives.

Our acquisitions focus in 2010 will continue to center on the Sunbelt region with a commitment to both large and select secondary market and our goal of delivering strong full cycle performance for shareholders.

That’s all I have in the way of comments. I’ll now turn the call over to Al.

Al?

Albert Campbell III

Okay, thank you Eric. Good morning everyone. Our fourth quarter FFO per share $0.92 was $0.05 ahead of the mid-point of our guidance. As Eric mentioned this out performance was driven solid operating results for the quarter with both revenues and expenses contributing to the result.

Same store NOI for the fourth quarter was forecasted to decline between 5.5% and 6%, well actual performance was down only 2.6%.

Occupancy remain strong during the quarter, while lease pricing, collections and fee income were are all a bit better than projected producing an additional $0.03 per share in revenues.

Property operating expenses remained on neutral during the quarter, with real estate tax expense continuing to benefit from successful prior year appeals and favorable assessments producing majority of $0.02 per share favorable to the forecast.

Our balance sheet is in great shape and we continue to have one of the strongest financial positions in the apartment sector. Our fixed charge coverage remains at 8.68 and our leverage at 50% debt-to-gross assets is well below the sector average of 56%.

As Eric mentioned we were busy on the acquisition front during the fourth quarter, which led us to issue a small amount of additional equity about $8.2 million under our continuous equity programs to maintain the strength of our balance sheet.

As we have discussed in the past, our usage of this program will remain controlled and closely related to the acquisition activity. Our only debt maturity in the year 2010 is our $50 million bank credit facility, which matures in May. Negotiations for this are going well and we expect to close the renewal of this in the first quarter of 2010.

We also have a $180 million maturing mid-to-late 2011 and we have begun preliminary discussions on these refinancing. Our current plan to replace these maturities with fixed price agency debt, which easily remains the most available and best option in today's environment.

During 2010, we also have $148 million of debt reprising as full interest rate swaps mature at an average rate of 5.7%. Of course that’s outlined in our press release, these are interest rate maturities only not contract, or mortgage maturities and we currently plan to replace these maturities with combination of new interest rate swaps and caps with an average cost of approximately 4.5% to 5% during the first year.

These transactions along with the current yield curve support our expectation of continued low interest cost for 2010 which we're projecting to be about 4.2%. At year end just over 81% of our debt was fixed or swapped or capped remaining well protected against the significant raise in interest rates.

We've historically maintained around 20% of our debt floating rate or un-hedged but we expect that percentage a bit lower during 2010 as we move to further protect our balance sheet from raising interest rates.

Our initial earnings guidance for 2010 which is detailed in the press release is built on continued strong occupancy and a stable lease pricing environment for much of the year. Total revenues for 2010 are projected to continue declining for first couple of quarters as new leases are reprising for the current rent.

Expense are projected to remain under control for the year with real estate tax expense nearly a quarter of our operating expenses projects to grow about 4% in 2010 as more rate increases are expected from local governments beginning to deal revenue short falls.

As mentioned in our release, the revenues and expenses related to our bulk cable program continue to grow in 2009 and will become more sizable in 2010. Contacts under our former program were essentially fee sharing arrangements whereas under the current program we purchase cable and pass it on to our residents at (inaudible).

This new program requires different accounting treatment resulting in revenues and expense pretty gross in separate lines in the P&L and since this new program is ramping up and the financial statement presentation is a change a from our prior program we plan to report same store performance both before and after the new presentation throughout 2010 in order to provide more clarity.

As outlined in the release, we expect NOI to decline 6% in 2010 at the mid point of the range. We believe the cumulative two-year decline of 7.5% when combined with 2009 results will compare favorably to the apartment reach sector.

We have several property revenue and expense savings initiatives, which contributed to the 2010 same-store performance, many of which began during 2009. These include the bulk cable program, trash and pest fees increase, resident screening and billing improvements and decreased print, advertising cost, which in the total are expected to add about $1.8 million to same-store results.

We also expect an additional contribution of between $0.08 and $0.09 per share from our recent development leased up in acquisition pipeline as it continues to mature in 2010. We expect capital expenditures for 2010 on existing property to be near historical levels, somewhere around $770 per unit in total. We also expect an additional $9 million to be invested in our redevelopment program, generating rent increases of around 8%.

We have projected $150 million in acquisitions during 2010 for our own balance sheet as well as for Fund II, which we spread fairly evenly throughout next year in our projections. We plan to finance our investment program with the combination of debt and equity funding during the year as necessary in the year with gross assets somewhere in the range of 50%.

That concludes our prepared comments Sean, so now we'll turn the line back over to you for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Swaroop Yalla - Morgan Stanley.

Swaroop Yalla - Morgan Stanley

I was wondering if you can tell us a little bit about the Cap rate differential between costal markets and your markets? And also, what markets are you looking for new acquisitions in 2010?

Eric Bolton Jr.

In terms of differentiation, as far as Cap rates are concerned, when you talk about costal markets, I assume you're referring to the more traditional high barrier costal markets on the West Coast and the North-East markets versus the markets that we’ve operated in the South-East, South-West.

And, honestly I don’t know if there has been enough clarity in terms of transaction volume, enough volume to really draw any meaningful conclusion as to where Cap rates and spreads are as sort of settling out. My sense is that - I’ve heard of Cap rates associated with assets in the more traditional high barrier markets, trading in the sub six range.

For what we’re seeing in our region of the country, the kind of good quality assets, fairly new assets in the markets that we are perusing investment in, we’re seeing Cap rates in the six range, low six, maybe 6.25 range. But as you may know, I think we may have talked about the past, honestly we don’t spend a lot of time focused on Cap rates and thinking about it.

Our focus is really - our decision making is related to how we deploy capital, are all based on internal rate of return and trying to look for ways to create the highest MPV we can for our shareholders.

But, I think that there is still - there’s not a lot of transaction volumes when it comes to market - clearly there’s a lot of cap chasing deals. So well located assets, good quality assets are commanding a lot of attention.

Now having said that, where we’re finding some of the better buying opportunities, are those that are in some significant level of distress, maybe a brand new property on lease or some other kind of issue like that and of course the going on cap rate on those kind of non-stabilized situations doesn’t make a lot of sense. So, another reason we don’t really spend a lot time on it.

In terms of the markets, we continue to like the footprint that we have. We continue to believe that where some of these markets are in the most distressed situation such as the Phoenix and perhaps down in South Florida, where potentially you may see a little bit heavier levels of distress, I think that those may provide some of the best buying opportunities over the coming years. So we will continue to look in those markets.

We continue to like the Texas markets in general, Dallas, Houston and Austin. Of course we are now into the San Antonio market. We will be looking to fill out our presence in San Antonio and we continue to like the Carolina region and we would also be looking to potentially move into the Charlotte market at some point if we found the right opportunity there, thus far we haven't.

So no real change in terms of our portfolio strategy of the market focus that we have.

Swaroop Yalla - Morgan Stanley

Another question I have is on the occupancy. I notice that sequentially its down 90 points. Is that seasonal or is that due to the fact that you are now looking at rent increases or stabilizing the new leases?

Thomas L. Grimes, Jr.

Swaroop, hey. It’s Tom. It's seasonal and if there is an anomaly there, it's frankly that it didn’t move down as much as it has in the past years as the fourth quarter is generally a very slow leasing season and we usually see occupancy dip a bit more than it did, and that's one of those things that we take hard and that the fourth quarter would frankly is good as it did for hope knock in and out of the park in 2010 but that's a hope item.

Operator

Your next question comes from Michael Salinsky - RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

Couple of quick questions here, first on your assumptions of 2010, what's the employment forecast you guys kind of build those on, and also just curious is to what's your assumptions were for LIBOR or relative rate have you bet - have you assumed any kind of increase as the year goes on there?

Thomas L. Grimes, Jr.

Michael, I'll take the first one and let Al take the second one. As far as sort of broad economic assumptions, we generally think that there's not going to be much in a way of employment recovery broadly speaking across the country in 2010 we think that sort of this 10ish type unemployment rate will persist through really most of 2010.

As I mentioned, at least according to the Bureau of Labor Statistics, we are expect to see net job add of roughly 127,000 across our market new jobs in 2010, but broadly speaking we think that kind of this 10% unemployment rate will persist for a while and will see what really drives.

I believe that we are if you were bottoming out and potentially start to get some pricing attraction in the last half of the year is not so much function of recovering economy in employment as much as it is, the supply line is absolutely turned off and we got a few projects here and there that are continuing to come online this year that are pressing us.

But broadly speaking, it is the lack of new supply in a stabilizing employment market that suggests to us that we are reaching a point of sort of equilibrium as far as absorption goes and thus should be able to stabilize pricing as we stated last part of the year.

I do think that hopefully we begin to see the economy really pick up steam in 2011 and the jobs follow next year would be my guess. Al you want to?

Albert Campbell III

I will take the LIBOR question. We did have an increased bill from their forecast and just basically we used the U curve and you know right now it is very steep that the short-term rates remain to be very low.

But over the course of the year, they are projecting a sort of rate rise, 50 to 75 basis points or something like that, the last I looked at it. So we basically have bagged that in and I think deeper part of the question maybe we are continuing to hold our interest rate at a very low 4.2% next year like we did in 2009 and that’s really a function of the refinancing.

So rate maturity that we have going on. We had the 65 million at the end of last year, where it was 7.7% refinanced at a very low rate and then we will have the 148 that I talked about this year and so a combination of all those things combined with the current U curve rising somewhat over this year hold our rates at a very low 4.2.

Michael Salinsky - RBC Capital Markets

That’s helpful there. The second question, the three purchases during the quarter, I think you disclosed in the one in Tampa before, what were the purchase prices for the one in San Antonio as well as the one in Austin, cap rates on those and what kind of IRRs are underwritten on those?

Eric Bolton Jr.

One in San Antonio, I don’t have the IRR in front of me I will get that for you Mike, but it’s going to be somewhere around 13 to 13.5 kind of range for both of these deals based on the way we underwrote them.

As far as the San Antonio deal, we paid $29.8 million for it, so roughly about 75,000 a unit for a brand new property in San Antonio, Texas that I would put replacement value somewhere in the $105,000, maybe $110,000 range.

As far as the Legacy at Western Oaks and Austin, Texas we paid $46.5 million for that property putting per unit price at roughly around 97,000 a unit. This has been a terrific location in Austin.

The property has done extremely well from a holding up, in terms of this current environment around 95% occupancy at the time we bought that property, but they’ve had back up on pricing a little bit as we all have. And I would put replacement value for this location in Austin probably somewhere around $120,000 range for the quality asset that we bought.

Cap rates on these, I’m going to, I don’t know, because frankly we didn’t spend our time on it, but…

Albert Campbell III

They average about 7% for the three deals Mike.

Michael Salinsky - RBC Capital Markets

Okay and that’s on for 012

Albert Campbell III

It is for '12

Michael Salinsky - RBC Capital Markets

Just curious I mean if you are looking at your portfolio versus the market rate now, is there a gain of lease or loss of lease at this point and if so I mean how would you quantify that?

Eric Bolton Jr.

Well, I think that this is going to be a year of transition. I think that what we've going on to and you almost have to sort of, when you look at the in-place leases that we have right now, I think that for the leases that were written in say the last 6 months of 2009 that mature was in next months of 2010 or maybe actually written in early 2009, first three quarters of 2009.

I always say there is probably sort of loss to lease if you will that is yet to be recognized and that’s why we forecast that we were going to continue to see some downward pressure on rental rates over the first, call it six to eight months of the year.

But I think that, as conditions flat now and by sort of Q3, Q4 of 2010 as we begin to reprise the leases that were written in the last half of 2009, we really think that the gain to lease relationship starts to comeback into the equation.

And of course the challenge with all this and way the math works is, it takes a little time and several months and depending on the time of the year where you are leasing and reprising the summer being the busier time where we reprised the bulk of our portfolio, it takes a while for all these trends to really manifest themselves in terms of overall revenue results.

But I think, broadly speaking is why we think on the net basis we'll probably see more of lost lease over the first six to eight months, we'll start to see gain to lease building over the last, call it several months of the year and that momentum really carries into 2011 in a pretty strong way.

Interesting point though to keep in mind is that in 2009, I think as you think about 2010 versus 2009 and then 2011 beyond that, let me think about the upside inheriting in different portfolios you have to really begin to look at the different pricing or the different revenue variables, and you have to also look how various companies battle through the recession period, if you will, in 2009 and 2010.

In our particular case, of course we really only conceded, if you will, on one variable and that was price. And what we did not concede on is, we did not concede on occupancy, we did not concede on resident quality as evidenced by the very strong collections performance that we had. And we didn't concede on some of these waves that frankly other do, not necessarily in the REIT sector but I have seen it in some cases where in my opinion it makes recovery very difficult.

In our case, with the revenue variable being really the only variable that, if you will, we conceded on in a recovering market particularly one that kind of strained the recovery that we’re anticipating where there is really no supply and issue, and we think going to be some of the best job growth prospects in the country.

It sets up for a scenario where that particular variable of pricing can be pushed very aggressively and that’s why we believe that Mid-America will actually do very well in this recovery cycle.

Operator

Your next question comes from Sheila McGrath - KBW.

Sheila McGrath - KBW

On the financing front, have you noticed any change in attitude on new financing from Fannie and Freddie or an increase in interest from other sources of financing?

Albert Campbell III

Good question Sheila, we have not seen any changes really from the agencies, they’re still there, still very active, still wanting business and are the best option right now in general. We’re seeing a little bit of picked up interest maybe commercial banks, and some other sources but still small compared to the agencies impact right now.

Sheila McGrath - KBW

Okay, and then Al on the real estate tax increase you did mention 4%, I was just wondering is this from early indications of increases that you're having or is it just your best guess at this point.

Albert Campbell III

We meet with our consultants earlier on and here and really try to the best we can, figure out what we are going to see. You got two things going on there, you got the valuations and the rate increases to consider. And so, we have met with our consultants, we really won't know until the middle of the year on both of those items, but we have made our best projection on those and I think the context is, if you look at 2009, we had very good valuations that came down in a couple of areas with Texas and Florida and the millage rates didn’t - they weren’t increased as one as strong as we had originally thought because the environment just didn’t allow it.

And so, moving into 2010, I think the thought process is valuations will probably be pretty stable, but you will begin to see some millage rate increases as some of these local governments begin to deal with these budget issues and so that is sort of the consensus of our consultants that we have right now and we will give you more clarity in the middle of the year I think.

Sheila McGrath - KBW

On the acquisitions, should we assume that it is going to be balanced in terms of what goes into the JV and what goes on your own account.

Albert Campbell III

Yes, Sheila that is our assumptions for our forecast are $150 million for each in 2010. So, in general the answer to your question is yes, it will be generally balanced.

Operator

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

Richard Anderson - BMO Capital Markets Corp.

It is strange not to hear a British voice emanating from them. Anyway, a couple of things that I just need to get some clarification on your prepared remarks. You said you should be able to hold occupancy at current pricing levels and you also said that you will re-price the bulk of your portfolio at flat to slightly higher rents and yet, it is easily understood that rents are still rolling down, which you also said. So, can you kind of reconcile those comments and explain what you meant by those?

Eric Bolton Jr.

I think it really depends on whether you're talking about new leases for new residents or renewal leases for renewing residents. And, I think that that may be part of where the confusion came in.

I think on new leases for new residents, what we believe is that we are in a scenario where we are approaching a flattening of the curve and would expect, as I mentioned over the last three months, the rate of decline is 1%, which is significantly down from what we had seen earlier in 2009.

And, I would expect that what we’ll see on new leases is generally, maybe slightly down for the first few months of this year and then it flattens out over the bulk of the summer, where you tend to get a little bit more active leasing season going on. And then hopefully, we’ll begin to see slightly positive movement towards the last half of the year.

Renewal transactions tends to lag new resident pricing and unbalance that scenario I’ve just described for you for new resident pricing. You can put a two or three lag on that as relates to renewal resident pricing and I think that that’s what you come up with.

And then depending on the percent of your portfolio that’s for new resident versus renewing resident, you kind of roll all of it together and we think on balance, what that tends to generate is probably a slightly overall net down year in terms of pricing.

But, we think we’re going to be able to offset some of this with some of these initiatives and other things that we talked about. But, I don’t know if that -

Richard Anderson - BMO Capital Markets Corp.

So, you said new leases are down 3.2%?

Eric Bolton Jr.

In the comments, I said on a year-over-year - if you look at just the course of 2009, and you look at just the course of 2009 and you look at January versus December they fell about 3.2%.

Richard Anderson - BMO Capital Markets Corp.

And renewals fell by 1.8% in 2009?

Eric Bolton Jr.

2.8%

Richard Anderson - BMO Capital Markets Corp.

It fell by 2.8%?

Eric Bolton Jr.

Correct.

Richard Anderson - BMO Capital Markets Corp.

So that’s just kind of unique relative to your peers and I wonder if it's just a market thing, southeastern kind of market thing because a lot of your peers are seeing renewals up and new leases down much more significantly. Do you have any idea why that would be differing renewals?

Eric Bolton Jr.

I'm going to let Drew articulate the way you have to think about this, Rich. Of course it depends on whether you are talking about year, actual calendar year over calendar year or whether you are talking about more of a trending kind of over the course of the year. So Drew why don't you?

James Andrew Taylor

Rich, there is really two ways to look at it. The first is sort of a lease-over-lease method, which I think is probably how the peers are looking at it. And that’s comparing a new rental rate versus the expiring rate, if you will. The other method, which Eric mentioned in the 2.8%, is if you look at renewal pricing over a period of time and look at a specific time and compare to another specific time, and so if you look at pricing in the lease-over-lease method, if you will, our leases were actually up 90 basis points.

We aggressively managed that process. We are always looking to push through an increase if we can. So from that perspective, they were up. But if you look at it over time, which Eric mentioned from January through December, in a declining rate environment, the result is down 2.8%.

Eric Bolton Jr.

And it's that period over period Rich; I think you really have to think about as it relates to your guidance in terms of your earnings forecast.

Richard Anderson - BMO Capital Markets Corp.

Okay, that make sense and I didn’t get that exactly, so thanks for that. So on a lease-over-lease basis what would be your renewals as of the fourth quarter kind of point in time and what would be the new leases percentage assuming that would be a decline?

Albert Campbell III

Yes, the new leases were down 72, the renewals were up 90 basis points as I mentioned in the aggregate we were down 37.

Richard Anderson - BMO Capital Markets Corp.

Now, turning to acquisitions, you mentioned in the release that you would fund or finance them with the line in Fannie and Freddie, but you’re kind of eluded to the ATM program in your remarks as well, would you suggest that your $150 million on balance sheet and $150 million to be funded through fund II will be balance sheet neutral, come this time next year or do you think you'll be levering up a little bit?

Albert Campbell III

Our goal is to keep the activity of balance sheet neutral.

Richard Anderson - BMO Capital Markets Corp.

Okay, and say you just, that we could maybe assume some ATM draws as you go thorough out the year, is that it?

Albert Campbell III

Correct Richard.

Richard Anderson - BMO Capital Markets Corp.

Okay and then actually I just e-mailed you just and I just want to make sure I got clarity, you call loss-to-lease, I call it gain-to-lease I don't know if, I think loss-to-lease is an opportunity to roll-up to market, a role-up to market is that just to (inaudible)?

Eric Bolton Jr.

Yes, it is if you go back to the years ago the way you're defining is the right way and I would agree with that.

Richard Anderson - BMO Capital Markets Corp.

Okay, I just want to make sure I had -- on the same page. And then finally on your guidance what you guys did in 2009 was kind of regularly do better than expectations that were set by you and I do have a theory about guidance and will take this with me to my grave if I have to, but the guidance is set by the same companies that seek the guidance. And so I'm not saying your sandbagging, but what I am - and this is true I would say for all reads to some degree that there is an element of conservatism that has to be imparted to make sure you don’t over promise particularly in this environment. So assuming there was a conservative sort of hair cuts for going into 2009, would you say your conservative approach is equally apparent for 2010 or do you feel a little bit more, it’s kind of a less of a necessary component to your guidance?

Eric Bolton Jr.

What I would say is this Rich, is that I think the ability to forecast the various variables at the macro level and the micro level are much better this year than they were in 2009. I think in early 2009, the world was very uncertain and I think that it was necessary and imprudent to be putting guidance out with that recognition in mind. I think 2010, we have a lot more clarity on things and so I will leave it at that.

Operator

Your next question comes from Paula Poskon - Robert W. Baird.

Paula Poskon - Robert W. Baird

I have a couple of just prospective antidotal questions for you. First just thinking about this, hopefully a period of stabilization, what are you hearing from your tenants. Are they still nervous about losing their jobs, do they have more of a sense of security. What are you hearing from them?

Albert Campbell III

Paula, I mean the way to kind of listen other than just being out onsite is to sort of go through the reasons, what the stability is and those things related to job loss are better now and I think we are sensing just, that’s what Eric said, there was a, I think everybody was scared to death in the beginning of last year and I think we saw that in our residence.

They were in our office, we were back and forth with them, they just seems to have stabilized a good bit. Now is that, I don’t know what that holds, that’s but there just seems to be less anxiety onsite with our associates and with our residents and I’d love to tell is that’s our anxiety index and measure it, take down 10 points but we don’t have one, so you are getting a gut feel.

But, there are just a little more comfort there on both our side onsite, which are good indicators as well as our residence.

Paula Poskon - Robert W. Baird

Returning to the acquisition environment, can you just give a little color on what kinds of opportunities that you are seeing in terms of, are you seeing a plethora of what would call attractive opportunities for you or is it more of a needle in the haystack environment?

Albert Campbell III

It’s going to be, honestly more of a needle in the haystack environment from what we are seeing thus far Paula. I think it’s going to be a lot of rifle shot kind of opportunities and I think that we are not seeing anything at this point that would suggest just a lot of product coming to market. I think it’s going to buyer or sellers institutional investors that have various reasons that they need to cycle out of an asset perhaps they've got issues elsewhere in their portfolio and they view the opportunity to sell a multi-family stabilized asset is the better way to monetize value than trying to sell a retail shopping center.

So I think that and what they tend to do in those cases they may get, they may or may not get a broker involved, they generally do with that kind of seller and hopefully we can come in and provide based on our relationship we have with the broker and potentially even in some cases the institutional seller and offer them some advantage in terms of timing and certainty of close.

We think that in 2010 probably half of the deals we'll get will be off market deals based on relationships and based on track record. The other area of opportunity of course I alluded to is with some of the banks, some of the regional banks that I think reduced it's, that there is some momentum building to begin to address some of those troubled loans in their portfolio.

And whereas throughout most of 2009 we were really just seeing the most distress situations which are probably leased-up deals that are just way behind in terms of debt service and way past due on the loan.

I think that we're seeing now potentially some of the banks beginning to address deals that are clearly distressed but not perhaps quite the level of distress that we saw in 2009 but more interestingly some of these regional lenders will come to us, we hope and we are trying to see some evidence of it and say, look I've got this deal in Dallas, I've got this deal in Nashville, I've got this deal in Tampa, and I'd like to kind of knock off (inaudible) at one time, which you guys have an interest and I think that that’s the kind of a transaction, where we would be in somewhat of an advantage position relative to some of the other buyers out there.

Paula Poskon - Robert W. Baird

That’s helpful, thanks. And conversely, given the capital that’s on the sidelines that’s out looking for opportunities, and we keep hearing that is very much the buyers outnumbering sellers these days, would it not make sense to think about recycling some capital out of your older assets and put those on the market?

Albert Campbell III

Well, we continue to look at it and I think that from our perspective if - of course we have no real need to cycle capital for purposes of fixing a balance sheet or raising liquidity issues or anything of that nature. And it would strictly just an opportunistic play where we think we can - and we don't really want to change our portfolio market allocation, if you will. We like where we are and we don't really feel that we've got to cycle out certain market to regions from a strategic perspective.

So having said that I think that we'll just continue to look at it and if we feel that an opportunity to sell an asset -- of course you have to think about - look at where your current NOI performance is and evaluate whether or not this is the best time to maximize value, given depressed NOI levels are and even though there’s lot of buyer interest out there.

So there’s no clear answer on it but I will tell you this, that we continue to look at some of the assets that we think over the next 2 or 3 years that we likely are going to, want to sell and whether, if an opportunity presents itself this year to sell one or two of them, despite we haven’t dialed in any of this into our guidance because we just can't really predict it, but there is nothing, whether it is sold this year or next year, recognizing that we may have a slightly higher NOI level, I think the capital will still be there and the opportunity caps are higher value maybe actually a little bit stronger in some respects depending on the situation next year. So, we will continue to monitor it.

Paula Poskon - Robert W. Baird

And then just finally to come back to the agencies, what are you hearing from your friends there in terms of any concerns that they have around the saber rattling that is going on the hill right now.

Albert Campbell III

Good question Paula. We really not hearing anything that different from the recent past and I think the consensus still is in the short-term, a lot of that is politics, politicians are going to do what they do. Nothing in the short term really is going to change because of the impact it would have would just be too great, I think, but the question is, coming forth more is what is going to happen in long term? And I think the truth is no one really knows long term what is going to happen, there is probably going to be some restructuring I think in terms of Mid-America, the important think to remember is, we are watching that very closely and we have long-term contracts that if we needed to make a transition, we can do that in an orderly process. And so, I think what we are hearing from them, nothing really that concerning at this point.

Operator

Your next question comes from Michael Levy - Macquarie.

Michael Levy - Macquarie

I was on and off, can you please remind me whether there was any share issuance embedded in the guidance?

Albert Campbell III

Michael, the answer was given there that basically, we are going to maintain our balance sheet leverage at where it is right now by 50%. And so, you can back into that if we are going to acquire $150 million for our own balance sheet and $150 million for our joint venture that is about 65% leverage and we take a third of that. You can dial in and figure out what that would be. But we - there would be shared interests to maintain and sport that program and maintain our balance sheets straight.

Michael Levy - Macquarie

And the higher fourth quarter number for this year relative to the third quarter, did you give any commentary as to what’s driving that?

Eric Bolton Jr.

Fourth quarter, you mean in earnings? Or share --? You mean the earnings?

Michael Levy - Macquarie

Earnings, yes. Is that related to the acquisitions?

Eric Bolton Jr.

I can share - I think it’s really two things. It’s really - the good news is, it was essentially operating performance. About (inaudible).

Michael Levy - Macquarie

I’m sorry. The 2010, if I just look at the range that you expect for 2010.

Eric Bolton Jr.

Okay, I think there, what you got Mike, is a combination of a lot of factors. You’ve got the downward trend in revenues that we’ve talked about as we re-price our portfolio in the first couple of quarters, is impacting the first couple of quarters and by the late part of the year, what we’re seeing is, as a small amount of jobs and stability continues in the market pace, there will be a slight bit of improvement in the fourth quarter.

So, that’s probably what you’re seeing. That plus, the fourth quarter is typically a very low expense period compare to the third quarter, which you’re coming off of. So, I think it’s those factors coming together.

Operator

Our final question comes from Steve Smith - Morgan Stanley.

Steve Smith - Morgan Stanley

When you look at the expectations for markets to begin to improve later this year, is it the markets that you would characterize as better today, beginning to improve first, is it markets that are weaker coming back, or is it just across your whole portfolio.

Eric Bolton Jr.

I think its markets that have been weak for a longer period of time that are - or they’re just further along in the cycle broadly speaking, I think it’s - with Dallas and Houston as an example, we’re kind of late to the party. Last year and so they are not quite as far along. But they are starting to - so there's some sort of this cycle timing on this. But honestly it also gets to be very much a market specific sort of issue as it relatives to just whether that market happened to get some supply in late 2009. And Tom you want to -?

Thomas Grimes Jr.

That was the point I was going to make really. It's cycle but some those like the larger markets, the Texas markets, they dipped later but they didn’t dip as far. But really what we are sorting through in Houston, in Austin, really has to do more with the supply coming online and the jobs totally imploding as I did in a place like Atlanta.

And so as we work through that, we just have the supply issue, the supply in those markets drops off sharply in 2010 and beyond. So there is a little bit of base there. But it is, as Eric said, it's sort of market by market, you've got to balance all those characteristic.

Steve Smith - Morgan Stanley

And then Albert, just one question for you, I'm just trying to reconcile the guidance where you’ve got expected interest cost that are up a little bit from where things are at the start of the year. You expect to I think roll the swaps over at or below the cost you're at today. So just what's the assumption driving up the interest cost? Is it higher variable rate, interest cost, is it the rate on the incremental debt or is it the line rolling over this year?

Albert Campbell III

I think it's going to be the yield curve, the variable rate debt that we projected on the yield curve is expected to increase 50 basis points to 75 basis points from the current level as we move into the year. I think as you look at the refinancing that we've talked about, I mean, you do math on that and all those will contribute savings. But the yield curves rise will bring it up a little bit in total. So 4.2 for the year is combined and really the rising curve impact.

Operator

Your next question comes from Buck Horne - Raymond James Financial Inc.

Buck Horne - Raymond James Financial Inc.

I just wondering what your thoughts are in terms of the single family market and the spring selling season here given the push to use tax credits and low mortgage rates and FHA loans. Is that a factor and how you're thinking about the quarterly progression of your resident move outs or new lease pricing? And I guess secondly have you seen any ambitious homebuilders out there putting flyers out your community just trying to push renters out there?

Albert Campbell III

I haven't seen any ambitious homebuilder in sometime, to be honest with you. And as we think about looking forward we expect the turn overall go up a bit based on home-buying gaming ground overtime but not much, and we really look at that as a sort of a long-term healthy component to the economy, we'd like to see home-buying comeback a little bit.

The anomaly in home-buying press this year speaking to the credit and incentives, we saw -- although overall turnover still drop, we saw a home-buying, which had been under 20% of our move out in Q4 bump up to 25% which is moreover we would expect to be the long-term normal rate, we attribute that almost completely to the incentives and the uncertainty that they would be carried forward to the spring season, January home-buying and employment hit back down to 17% of our move out.

So I think in our markets, we saw a good bit of the home-buying capable money move out in January, I mean in December with that - or with the fourth quarter with that jump it's 25% but it seems to go right back down to 17 in January. So we will be monitoring and like I said would like to see it pick up modestly over time. We think we will also see decreases and things like job loss as the economy picks up a little that won’t cause turnover to go up massively.

Operator

I’m not showing any further questions at this time gentlemen.

Eric Bolton Jr.

Okay, well, thank you Sean. Thanks everyone for joining us this morning and let us know if you have any questions, thank you.

Operator

Thank you. Ladies and gentlemen thank you for your participation in today's conference. This does conclude the conference. You may now disconnect, good day.

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Source: Mid-America Apartment Communities Q4 2009 Earnings Call Transcript
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