Colonial Properties Trust Q2 2008 Earnings Call Transcript

Colonial Properties Trust (CLP)

Q2 2008 Earnings Call

July 24, 2008 2:00 pm ET

Executives

Jerry A. Brewer – Executive Vice President – Finance

C. Reynolds Thompson III – Chief Executive Officer

Weston M. Andress – President & Chief Financial Officer

Paul F. Earle – Chief Operating Officer

Analysts

David Bragg – Merrill Lynch

Dustin Pizzo – Bank of America

Rich Anderson – BMO Capital Markets

Alexander Goldfarb – UBS

Michael Bilerman – Citigroup Smith Barney

Craig Kucera – BB&T Capital Markets

Napoleon H. Overton – Morgan Keegan

Haendel St. Juste – Green Street Advisors

Philip Martin – Cantor Fitzgerald

Steve Swett – Keefe, Bruyette, & Woods

Presentation

Operator

Welcome to the Colonial Properties Trust second quarter earnings conference call. (Operator Instructions) Mr. Brewer, you may begin your conference.

Jerry A. Brewer

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 and for your convenience a replay will be available on our website for one week after the call. Today’s call will be led by Reynolds Thompson, Chief Executive Officer, Weston Andress, President and Chief Financial Officer and Paul Earle, Chief Operating Officer.

On the call they will present an overview of our business developments and operating highlights for the second quarter of 2008, discuss our financial results and review our guidance for 2008. 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 of course 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 details and explanations of risk. Any non-GAAP financial measures that we discuss today are reconciled to the closest GAAP financial measure in filings that can be found on our website.

I will now turn the call over to Reynolds.

C. Reynolds Thompson III

I’ll begin with a recap of our second quarter highlights and review second quarter results. Paul will discuss core operations and provide an update on our markets. Weston will review the balance sheet and investment activity and I will conclude the call with an update of 2008 guidance.

Second quarter highlights are as follows: multifamily same property net operating income continued a solid track record with 3.2% growth compared to the second quarter 2007. We ended the quarter with multifamily same property occupancy at 96%. We completed the sale of five wholly owned apartment communities for gross proceeds of $81.8 million. We closed the sale of 14 condominium units at Metropolitan and Charlotte. We repurchased $31.8 million of unsecured bonds at an average 10% discount and we repurchased 577,000 shares of our Series D preferred stock at a 3% discount. We are all aware of the economic challenges in the market today and we’re monitoring job growth closely. To date, job growth trends in our Sunbelt markets have been better than the country overall. Our strategy of investing in these growth Sunbelt markets and the quality of our portfolio will allow us to compete effectively in this environment.

We’ve outlined a number of objectives for 2008 that continue to be our priority. First, we’re on schedule to reach our target of $4 million in annualized G&A savings. Second, our cautious stance on development remains. Total spending is expected to be $250 million to $300 million for the year. Third, we will continue to deliver the company through the sale of older multifamily assets and fourth, we’ll maintain a strong balance sheet that positions us to take advantage of opportunities as they arise.

For the second quarter of 2008 we recorded net income of $0.19 per share compared with $6.51 per share in the second quarter of 2007. The second quarter a year ago included net gains of $329 million from the office and retail joint venture transactions and the sale of certain non-core retail assets. FFO for the second quarter was $0.57 per share compared with $0.35 per share for the same period in 2007. Excluding the impact of transaction related and other charges that were recorded in the second quarter of 2007 related to the joint venture transactions, FFO would have been $0.67 one year ago.

Paul will now provide additional details on our second quarter performance.

Paul F. Earle

Another solid quarter for multifamily. A fantastic gain produced NOI growth of 3.2% for the second quarter as compared to 2007. Same property revenues increased 1.4% and expenses decreased 1.5% mainly due to lower property insurance and turnover cost. Physical occupancy for our same property portfolio closed at 96%, the sixth consecutive quarter our occupancy has been over 96%. Year-to-date our NOI growth is 3.4% with total revenues growing 2.3% and expenses are only up 0.5%. Yes, we are on track to achieve our same property NOI guidance of 3.5% to 4.5%, more likely within the lower half of this range.

Revenue growth will be 3% to 3.5% and expense growth will be 2% to 2.5%. We will achieve this range by maintaining our current same store occupancy and effective rental rate growth in combination with our other income efforts. In June our Colonial Vision Brand bulk cable program added an additional 7,000 apartment homes that will provide a significant contribution toward other income. We now have 83 properties participating in this program that should produce $2.5 million of additional revenue in the second half of the year as compared to the same period in 07.

NOI growth in several of our major markets are worth mentioning. Dallas was up 9.3%, Fort Worth 8.7%, Raleigh 7%, Birmingham 6.8% and Atlanta 5.5% but the overall U.S. economy has experienced negative job growth in the first half of the year. Our major Sunbelt markets continue experience slower but positive job growth. Orlando, where we generate 11% of our NOI, had year-over-year growth in the second quarter. Sequential NOI growth was up 3.6% in Orlando driven mainly by 1.5% revenue growth. We anticipate Orlando NOI ending in 2008 flat to slightly positive with improving trends going into 2009. Austin’s down 2.4% as a result of tax accrual adjustments. Revenue growth in Austin was up 3.4% and year-to-date NOI growth is up 4.6%. NOI growth in Charlotte was slightly negative due to lower occupancies mainly in our older properties; however, on our newer developments: Colonial Grand, Huntersville and Colonial Grand at Ayrsley, we have performed very well with traffic and leasing ahead of our plan.

Three other challenging markets are Phoenix, Tampa and Sarasota. We generate less than 4% of our same property NOI in these markets. We continue to maintain strong occupancy of 96% but we lack pricing power to drive revenue growth. We expect these markets to produce flat to slightly negative NOI growth in 2008. New supply our major market remains reasonable. Permits continue to turn down with new construction starts below the trend levels of the past four years. Considering the state of the financial markets and the difficulty in obtaining new construction financing, construction starts should remain in line with demand going forward.

Same property traffic was up for the quarter 8.3%. All is well out here in the Sunbelt. Traffic was up 8.3% and up 4.1% year-to-date. The success of our internet leasing efforts continues to expand with leads up 64% and new leases up 59% from the same period of 07 and 37% of our internet leads are now coming to us with a customer paying $10 to be prequalified to rent one of our apartments. Overall turnover continues to trend down for this quarter and is 320 basis points lower than the same period of 2007. Lower turnovers helped us control our year-to-date expenses. Turnover related to homebuyers is below 19% equal to last quarter and is at one of the lowest points of over the past several years. Our strategy of hiring great people investing in great properties in high gross Sunbelt cities continues to work for us.

Our commercial joint ventures performed on plan for the second quarter. Our office portfolio was 91% occupied and our retail portfolio was 93% occupied. Leasing our Metropolitan mixed use development in Charlotte is progressing extremely well. We are currently 91% leased on the office portion of this development and the merchant lineup on the retail portion is coming together nicely. Our key retail merchants include Trader Joe’s, Best Buy, Staples, and West Town. Our ability to develop mixed use developments such as Metropolitan, Colonial Town Park in Orlando and Colonial Center Brookwood in Birmingham gives us a competitive advantage in this current environment of rising consumer and fuel cost and a need to reduce commute times. We will continue to look for mixed use opportunities where we can capitalize on our expertise to create superior shareholder value.

Weston will now provide details on our investment and financing activities.

Weston M. Andress

First, our disposition activity. In June we completed the sale of five wholly owned apartment communities in two separate transactions totaling 1,250 units for gross proceeds of $81.8 million; three of the property in Fort Worth, one in Dallas, and one in Memphis which was our only multifamily asset in this market. The average age of the four Texas communities was 23 years and the one in Memphis was 7 years old. This is consistent with our strategy of disposing of older assets and those in single markets. The cap rate on the sales was very attractive with 6.5% on the Texas assets and 5.9% on the Memphis property. The gain recognized was $0.12 in net income and $0.03 in FFO which is related to the newly developed Shelby Farms Phase II, which was developed in our taxable REIT subsidiary.

We are ahead of our original schedule in our disposition efforts in the tenancy in common on the nine office assets in Huntsville, Alabama. As of June 30 we have successfully reduced our interest in this tenancy in common from 40% to 14%. Sales efforts remain strong and we continue to expect to reduce our ownership percentage down to 10% by year end.

Moving on to our development activity. As of June 30 we had seven multifamily developments totally 2,455 apartment homes underway with total costs of $215 million including unfunded commitments remaining of $80 million. The multifamily development activity remains focused in key target markets such as Austin and Charlotte. In commercial development at quarter end we have one Class A office property at our mixed use project, the Metropolitan, totaling 162,000 square feet and six retail projects totaling 1.6 million square feet of company owned space. The seven properties in total represent an investment of approximately $341 million of which $163 million is left to be spent. We are on track for two retail property openings in 2008. In addition to our second quarter opening of Colonial Promenade Smyrna at 93% occupancy, we are scheduled to open in the fourth quarter Colonial Promenade Fultondale Phase II which is currently 99% leased. The opening of these center will continue our strong track record of opening new retail developments with excellent leasing at 90% or better.

Additionally, during the quarter we began the construction of Colonial Pinnacle Nor du Lac. This project is located across Lake Pontchartrain from New Orleans in Covington, Louisiana. This area has enjoyed strong population growth and significant corporate relocations since Hurricane Katrina. The development will span 743,000 square feet. We have closed deals on 356,000 square feet with Dillard’s, Kohl’s, Barnes & Noble’s, Dick’s Sporting Goods and Ulta Cosmetics with an additional 115,000 square feet out for signature. As a result, 63% of this project is committed and the total investment will be approximately $147 million and stabilizations expected to occur in 2011. During the quarter we completed development of The Enclave, Colonial Center TownPark 400 and our Regis Park townhome development which have been placed in service. Consistent with our strategy we would expect to sell or joint venture the properties upon completion and recycle the capital.

With respect to our for sale projects. We closed on 24 condos in the second quarter, including 14 units at Metropolitan Midtown in Charlotte recognizing approximately $0.01 a share in gains in the quarter. We recently completed the first building at Metropolitan containing 60 of total 101 units. Since the end of the second quarter we have closed an additional 17 units for a total of 31 closes. While we have 26 more units in the first building under contract at this point, we anticipate there will be some fallout of the current contracts but we expect the majority of the units to close. We have 19 of the 41 units under contract at the Metropolitan Terrace condos which will be completed at the end of this year. The disposition of Shelby Farms and the sale of the units of the Metropolitan that occurred in second quarter were originally scheduled to occur in the third quarter, which will result in the third quarter results being lower than our original plan but still on target for the full year.

Lastly, we have eight active for sale residential projects comprised of five condo and townhome developments and there are three lot developments. There are a total of 223 condominium and townhome units remaining of which approximately 30% are committed. This represents a total book investment of $158 million which represents less than 5% of the company’s assets with $15 million remaining to be spent. Our second quarter interest coverage ratio was 2.4 times and our fixed charge coverage was 2.1 times. The ratio of net debt plus preferred to gross asset value was 58%. Reducing our leverage remains a top priority for 2008. We are actively in the market with older multifamily assets and single market assets as well as some retail developments that are nearing completion. The tight credit conditions present challenges but we are experiencing solid interest in these assets. We are confident we will be successful in disposing of the assets on favorable terms.

Our liquidity remains strong with $490 million of availability on our line of credit as of June 30 which will enable us to fund all of our current developments and operational plans. As we mentioned in our last call the Board authorized the repurchase of an additional $200 million in unsecured bonds. During the quarter we repurchased $31.8 million of unsecured bonds at an average discount of 10% to par which represents a 7.8% yield to maturity. Additionally, we repurchased 577,000 shares or 14 million of our 8-1/8% Series D perpetual preferred stock at a 3% discount. We recognized a net gain of $0.04 in earnings per share of FFO from our bond and preferred purchases in the second quarter. Through the first half we have repurchased $81.8 million of bonds at an average discount to par of 11% and recognized $0.14 of gains. The disruption in the unsecured bond market has presented an attractive opportunity to invest our capital. We will continue to monitor this market closely and anticipate further repurchases in the second half of the year if the market opportunities are present.

Some of you have written about our liquidity and I want to talk briefly about our disciplined approach to managing our balance sheet and the liquidity. We first look at our cash position and line of credit availability. As previously mentioned today we have $490 million available on the line of credit. We then look at unfunded vertical construction. Today that number stands at $240 million. Finally, the company’s board requires $150 million rainy day operating reserve. This leaves us today with approximately $100 million of liquidity available to repurchase bonds, preferred stock or look at other investment opportunities. The asset sales we are currently undertaking add to this liquidity. Again the company’s line of credit matures in June 2012 and we have one of the best bond maturity schedules in the second. Our corporate G&A was $5.8 million for the quarter which is in line with our expectations and is on track to achieve the $4 million of annualized additional savings we have targeted for the year.

Finally, the Board has approved a dividend of $0.50 per share for the second quarter to be paid in early August. The company has a strategy of continually recycling its older assets which results in substantial investment gains on an annual basis. Over the last three years we have recognized over $300 million in investment gains and expect to recognize over $30 million in 2008. These gains combined with our operating earnings provide more than sufficient coverage for our annual dividend run rate of $0.02 per share. Further, the company’s taxable income at year end is project to require a payout of this amount to meet the REIT distribution requirements.

Now we’ll turn the call back over to Reynolds to discuss our 2008 guidance.

C. Reynolds Thompson III

As details in our earnings released this morning we have affirmed our previously issued FFO guidance range for 2008. The guidance remains earnings per share of $1.85 to $2.15 and FFO of $2.15 to $2.25. While the range remains unchanged some of the underlying assumptions for this guidance have changed. Multifamily same property net operating income growth of 3.5% to 4.5% with revenue growth of 3% to 3.5% and expense growth of 2% to 2.5%. The revenue and expense projections have changed based on the year-to-date results and our expectations for the remainder of the year. Development spending is expected to be $250 million to $300 million which continues to reflect our desire to maintain liquidity for opportunities. Dispositions of $450 million to $500 million with $140 million completed to date. Development gains of $0.15 to $0.25. The majority of the remaining development gains are projected to come from the sale of retail developments. To date as $0.07 of gains from the development activities and we expect the majority of the remaining gains to be concentrated in the fourth quarter.

We have reduced the income from joint venture development and construction fees by approximately $0.04. Corporate G&A expense is expected to be $21 million to $23 million and finally, land and out parcel sales will contribute $0.04 to $0.06 which is down slightly from the $0.06 to $0.08 previously expected. As we discussed last quarter the redemption of the Series D preferred stock is not in our guidance. If we are able to execute the asset disposition planned as outlined our intention would be to redeem the remaining outstanding Series D preferred shares and there would be a non-cash charge of approximately $0.06 related to the write off of the issuance cost. With our full year guidance remains unchanged there are a number of factors which will create variances from quarter to quarter.

As Weston mentioned we recognized transaction income from Metropolitan condo sales and the Shelby Farm sale in the second quarter. We had originally expected these gains in the third quarter. The balance of the transaction gains are expected to be recognized in the fourth quarter. Market expectations indicate a relatively tight band from quarter to quarter but due to these factors there will be a wider band with third quarter being lower and fourth quarter being higher. In summary, full year FFO guidance remains the same and we have a cautious view on the remainder of the year. The economy and, in particular, job growth in our markets will be the key to operating performance. The experience of our management team and the quality of our portfolio have us well positioned for the environment. We’ll continue to be very disciplined with capital allocation and maintain financial flexibility.

Operator will now open up the call for questions.

Operator

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

David Bragg – Merrill Lynch

Paul, just a few questions on the multifamily portfolio. First on guidance, can you just help me understand your expectations for same store revenue growth of 3% to 3.5% for the full year? You’re at 2.3% growth in the first half. Occupancy looks pretty healthy in the second half of 07 so is it pricing power or is it the other income that you mentioned and specifically what markets do you expect to accelerate from here?

Paul F. Earle

The majority of our growth is going to come from other income and it is in fact from the cable program where we signed an additional 7,000 apartment homes in June but I don’t want to discount the strength that we have in markets such as Dallas-Fort Worth so, but the bulk will come in fact from the other income component.

David Bragg – Merrill Lynch

And can you talk about what you saw in the Atlanta market in the second quarter? There was quite a deceleration there from first quarter. Can you please talk about the Atlanta market? We thought it weakened in the second quarter versus the first quarter.

Paul F. Earle

We actually feel very good about our occupancy and the ability to maintain occupancy with a very limited amount of concession activity. There has been a little bit of movement on the expense side but from a revenue perspective Atlanta’s performing as we outlined late last year; good occupancy, good renewal growth and we also are rolling out a significant number of properties on the bulk cable program so other than some movement on expenses, based on timing, Atlanta’s performing very well.

David Bragg – Merrill Lynch

And then just finally on the expense side; what is changing there to allow you to take down those growth assumptions for the full year?

Paul F. Earle

It’s just movement on expenses, truing up tax adjustments, just normal seasonal things.

Weston M. Andress

I think he’s talking about the year-to-year, not quarter-to-quarter. Year-over-year.

Paul F. Earle

Or expenses?

Weston M. Andress

Yes.

Paul F. Earle

[Inaudible] the real estate taxes and does the timing of that over the same period last year.

Operator

Your next question comes from Dustin Pizzo – Bank of America.

Dustin Pizzo – Bank of America

Just a follow up on the same store guidance range from David’s question. What would that range be without the additional ancillary income, if you were just to factor in similar to our metrics from the prior quarters?

Paul F. Earle

1.5 to 2.

Dustin Pizzo – Bank of America

1.5 to 2? Okay and then as you look at the markets specifically, can you just touch a bit more on Dallas and Orlando? It looks like from our view that Dallas, while deliver pretty solid year-over-year results it’s continued to flatten out sequentially, pretty meaning say over the last few quarters just as what affects supply and maybe ticks up there, yet in Orlando it looks like it may finally be finding a bottom, then it sounds like you’re anticipating that turning around a bit in the back half of the year?

Paul F. Earle

Well, we have found a bottom in Orlando starting late last year and the first quarter of this year and we are seeing some acceleration of pricing power, which I think will lead to a very positive 2009 so we have weathered the worst of the storm in Orlando. Dallas-Fort Worth just continues to perform on all fronts, good job growth. All of Texas is really doing very well compared to the U.S. economy and the supply coming into Dallas-Fort Worth and our sub markets is not a factor at all and so the problems that we picked up from the Cornerstone purchase in 2005 that we improved with capital spending are performing exactly as we outlined on the first quarter of our acquisition of Cornerstone, so we anticipated multiple years of good, solid NOI growth and that’s exactly what we’re experiencing.

Dustin Pizzo – Bank of America

So then in Dallas, what over just the comps over the past few quarters that’s on a sequential basis caused growth to grow from 3.5 plus percent to 2.5 to flat this quarter?

Paul F. Earle

Yes, what we see over there, Dustin, is the fact that sequentially we’ve had this cable program in place there for a period of time so you’re coming upon the same comp period so you just don’t have that same volume of growth that you’re seeing in some of the other markets.

Dustin Pizzo – Bank of America

And then just switching over to the private markets. Weston, looking at the multifamily dispositions you did this quarter, would those have been able to close in your view without the seller financing that you provided?

Weston M. Andress

Yes, I don’t think there’s any question they would’ve been able to close. In fact the Texas assets, the four assets that we sold out in Texas, we did not provide seller financing. The only one that we provided seller financing for was our Shelby Farms asset in Memphis and no, that was really a timing issue that invariably was a 1031 buyer. They had the equity ready to go and it was a 70% loan undervalue or loan to purchase price loan. We felt very comfortable with it and feel very confident that will be taken out 90 days from now but I think that to have sat around and waited for Freddie Mac and Fannie Mae, they would eventually show up to close the loan but the buyer had equity ready to go.

Dustin Pizzo – Bank of America

And then just lastly, which Freddie in standing, given everything that’s going on have you seen any indications that the appetite there, whether by choice, which is less likely, or by force is waning at all to provide lending on the multifamily side?

Weston M. Andress

They’re still there. There’s no question about that. The line at their front door is very long as they essentially are the only permanent financial provider in the market today, or at least the only competitive one and so it just takes a lot longer to get things done.

Operator

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

Rich Anderson – BMO Capital Markets

I just want to go through guidance with you, just so I understand. Reynolds, did you say you’re going to get the full $0.25 of gains in 2008 now with the retail sale in the first quarter?

C. Reynolds Thompson III

Now our range is still $0.15 to $0.25.

Rich Anderson – BMO Capital Markets

Oh, it is $0.15 to $0.25. But with the $0.15 in the two retail sales, you’re looking at the top end of that range now, are you not?

C. Reynolds Thompson III

Rich, I didn’t say that we’re going to get the full $0.15. What I’d said is I expect that the majority of the gains that we’ll recognize through the balance of the year will come from the sale of retail assets and I think the range is still valid. We’re out in the market with those assets today but not far enough along to tie that down and we’ve still got some work to do to get those over the goal line, but the activity’s there and we’ve got people looking, not as many buyers as there have been in the past but we do have activity.

Rich Anderson – BMO Capital Markets

Now the two retail openings that, Weston, I think you referred to, are those the two for sale?

Weston M. Andress

Those are two of the assets for sale. There’s also another retail center down in Florida that is for sale.

Rich Anderson – BMO Capital Markets

Now the guidance didn’t expect the $0.09 upside from the bond repurchase program so I’m curious if same store growth is the same. You were expecting $0.04 shortfall from the development construction fees. Is it just that goal set staying conservative, like you could be able to raise the guidance but you just are inclined not to in this market? Is that a fair way to characterize it?

C. Reynolds Thompson III

That’s a fair way but I will say that in addition to the development construction fees, and I also mentioned that we have taken our land expectations down basically $0.02 on the high and the low end, so combined you’re looking at $0.06 or so? Both of those situations are driven by the economy today. We’re seeing a few less people are moving on taking down outparcels. We’ve also seen some of our prospects want to do ground leases as opposed to purchases which we’re happy to do as well but don’t get the transaction income, so the joint venture construction management fees are really a function of slowing down the development pipeline.

Rich Anderson – BMO Capital Markets

Hey, I wanted to go back a couple of quarters real quick. You mentioned in the first quarter that you no longer were assuming the redemption in your guidance? The impact of the redemption that was a $0.05 per share issue, do you recall that?

C. Reynolds Thompson III

Yes, that is correct.

Rich Anderson – BMO Capital Markets

So then I was looking at the fourth quarter footnote; it says, “The 2008 FFO guidance per share does not include the impact of such redemptions.” What is that referring to then? If you say in the first quarter that you weren’t including it.

C. Reynolds Thompson III

We went over this in the last call and I’ll reiterate where we were. We had included the redemption in terms of its impact on the earnings per share in our original guidance. We had not included the cost of the non-cash charge for writing off the issuance cost. We talked about that last quarter as well.

Rich Anderson – BMO Capital Markets

I remember that. I got them reversed. I’m sorry about that. In terms of the other income ramping up in the second half, you said I think, Paul, you said $2.5 million incremental versus the year prior? Is that right in the second half?

Paul F. Earle

Yes.

Rich Anderson – BMO Capital Markets

Was that always contemplated in your outlook as well or is that ramped up faster than you saw it coming?

Paul F. Earle

No, that was within our original plan.

Rich Anderson – BMO Capital Markets

And then the last question is on the seller financing? What’s the interest rate on that? Just out of curiosity.

Weston M. Andress

6%

Operator

Your next question comes from Alexander Goldfarb – UBS.

Alexander Goldfarb - UBS

If we just take a look at the sequential change from first to second quarter, this year versus last, it looks like you got similar rent rate increases but your occupancy, whereas last year you were able to pick it up a bit, this year it slipped. If you could just comment on what may have changed this year to last year. Are you seeing people less receptive to rent hikes? Are you seeing people move out to go rent homes or job transfers, or what’s driving this?

Paul F. Earle

Well, our turnover is down but we’re very sensitive to the fact that we are experiencing slower job growth and so we are managing through our renewals very cautiously so we don’t aggravate our turnover unnecessarily and then create a need to backfill, which will increase our advertising, increase our marketing, increase our turnover cost so we, as we go through this period of an economic slowdown, we turn our attention to managing renewals and being very sensitive to what a current resident will tolerate in a way of a rent increase so it’s a very important time in the cycle and we have a lot of very skilled professionals at the site level that work through this, and it’s showing up in our lower turnover and our lowered expenses and we’re working through this economic slowdown very nicely.

Alexander Goldfarb – UBS

And do you anticipate that, I think you said originally that you were anticipating flat occupancy for the balance of the year so you’re going to continue to dial back rent growth? Is that the understanding to maintain that occupancy or…? I’m just trying to understand that.

Paul F. Earle

We will go city by city and then submarket by submarket, and where there’s a pullback in economic growth, for example Charlotte is a big banking community. There’s a lot of pressure on the banks, there’s some job losses occurring in Charlotte so inside our portfolio we’ll be very careful in Charlotte, but then you may go to a Dallas-Fort Worth where there’s an economic expansion and we’ll treat renewals a little differently but we’re very sensitive to our renewal work during an economic slowdown. It becomes a tremendous focus of ours but we work daily on so it’s just, if you’ve managed through this economic slowdown properly you set yourself up for tremendous success on the other side of a slowdown when the expansion picks up again.

Alexander Goldfarb – UBS

And then what do you estimate the benefit of lower turnover expense to be, like on a same store expense? Would that, an extra, a point of savings? Two points of savings?

Paul F. Earle

Closer to 200 basis points I would say.

Alexander Goldfarb – UBS

So 2%? By having that lower turnover?

Paul F. Earle

Approximately.

Alexander Goldfarb – UBS

And then on the buyback of the bonds. Is this a window that you see continuously, like it’s still open or you seeing the market starting to recognize that a number of companies are doing this so that, that discount is closing?

C. Reynolds Thompson III

The market is clearly stabilizing to some extent but, for now, we still find the yields attractive but you could easily see a scenario where that moved away from us in short order here.

Alexander Goldfarb – UBS

And the balance of the year, the guidance, it includes or does not include more?

C. Reynolds Thompson III

We do intend to repurchase additional bonds through the balance of the year but we’ve taken a pretty conservative view with regard to the impact of that from gains. In other words, we’re assuming that the spreads tighten up a little bit and we’re not going to see the same numbers that we have seen in the first half of the year.

Operator

Your next question comes from Michael Bilerman – Citigroup Smith Barney.

Michael Bilerman – Citigroup Smith Barney

Just on the gains, you never had any of the gains when you bought back the securities in guidance before, right? The $0.14 that you’ve recorded year-to-date?

Weston M. Andress

We did not.

Michael Bilerman – Citigroup Smith Barney

And what level, on now this question, you have some level in now baked in to guidance for the back half of the year?

C. Reynolds Thompson III

Say, two to four.

Michael Bilerman – Citigroup Smith Barney

So that’s new? Saying that’s new? $0.02 to $0.04 cents of additional gain for the back half the year that previously was not in the numbers.

Weston M Andress

Correct.

Michael Bilerman – Citigroup Smith Barney

And then just truing down on this other income and cable, can you just talk about the gross amount that this cable program is giving you full year 07, year-to-date so far in 08, and how much increase there is into the back half of the year? Just trying to get a magnitude of what you’re actually recording.

Paul F. Earle

We’ll have [Brad Sandies] pull that number together while we go on to your next question.

Michael Bilerman – Citigroup Smith Barney

Could you talk a little bit about the lease up at the current end of development properties and how that’s been trending during the quarter and post-quarter in terms of whether rents are getting on target, concession activity?

Paul F. Earle

All in all, our traffic is up, our concessions are basically running fairly well to last year and our closing ratio still runs between 30% and 35% so there’s really a lot of enthusiasm and there’s a healthy market around brand new lease up assets. Where the pressure point really is coming in some of our cities is on the older properties, so our lease up properties have done very well and I think you’ll find that the case across all the markets and all the portfolios.

Michael Bilerman – Citigroup Smith Barney

In terms of the, I think you were talking about on the gains, the development gains dipping $0.25, most of that will occur, the balance of which will occur in the fourth quarter. Is that also for the land and the outparcel gains?

C. Reynolds Thompson III

Yes, we could have some land show up in both quarters. I don’t think you’re going to see a big variance from quarter to quarter on the land. We’ve only got a total of $0.03 to $0.04 left in the land number that we haven’t recognized year-to-date so it’s not a big impact.

Michael Bilerman – Citigroup Smith Barney

And then so looking at the balance of the merchant development gains, to generate the balance that you need to do, the hike in almost $0.20. What are you expecting to sell? What do you have on the market to be able to generate those gains?

C. Reynolds Thompson III

We had three different retail properties in the market today. We’ve got a newly developed property, Colonial Promenade Fultondale, another newly developed property, Colonial Promenade Smyrna, and then we’ve got a property in Florida, Winterhaven, all in the market today.

Michael Bilerman – Citigroup Smith Barney

And you expect to do seller financing on these transactions as well?

C. Reynolds Thompson III

At this point, no. Depending on the circumstances, that could be an option but at this point, we do not expect to do.

Weston M. Andress

That would not be our preference and the seller financing we provided in Memphis was a unique situation as I described earlier.

C. Reynolds Thompson III

And short term in nature.

Weston M. Andress

Yes.

Michael Bilerman – Citigroup Smith Barney

And do you have any condo gains expected?

C. Reynolds Thompson III

Yes, primarily coming from the Metropolitan project in Charlotte. We mentioned that we’d already closed a number of units since the beginning of the third quarter and we expect additional quarters in the third quarter, and then we’ve got another building that will deliver in the fourth quarter and we would expect to have some closings in that building before year end as well.

Michael Bilerman – Citigroup Smith Barney

And then just coming back to the other income?

Paul F. Earle

Yes, I think this answers your question. We collected about $6.5 million in cable income the first half of the year and we’ll collect $9 million in the second half of the year.

Michael Bilerman – Citigroup Smith Barney

And all that falls into other property related revenue?

Paul F. Earle

Yes.

Michael Bilerman – Citigroup Smith Barney

And so what makes up, is there any other growth in other income sources or that’s primarily the biggest piece of it?

Paul F. Earle

That’s primarily the biggest piece.

Michael Bilerman – Citigroup Smith Barney

And what would that have been…?

Paul F. Earle

Michael, let me give you two new numbers. There’s $3 million in the first half for just six months, $3 million, and then for the last six months will be $5.5 million; $8.5 million for the full year 2008.

Michael Bilerman – Citigroup Smith Barney

And that is over how much from 2007?

Weston M. Andress

Just a second.

C. Reynolds Thompson III

Can we call you back offline on that one, Michael?

Michael Bilerman – Citigroup Smith Barney

But I had it down to $3 million, that’s what, from a prior call. I don’t know if that’s the right number.

Paul F. Earle

That might be…

C. Reynolds Thompson III

We’ll shoot you an email or give you a call, Michael.

Michael Bilerman – Citigroup Smith Barney

And you’re citing revenues; you have some expenses for this program as well, right?

Paul F. Earle

There’s about 50% margin on the program.

Operator

Your next question comes from Craig Kucera – BB&T Capital Markets.

Craig Kucera – BB&T Capital Markets

Don’t want to feed to that horse but I have another question about the Colonial Vision program. I know you said you added quite a few more units in the quarter to this program. I just wanted to know where you were in the cycle, in the phase of adding more units and what the additional growth outlet was or if you’re done with that program.

C. Reynolds Thompson III

We have about 20 more properties that we can add to the program approximately so the number is now at 83 properties. We’ll probably go to just over 100 properties.

Craig Kucera – BB&T Capital Markets

So the reasonable assume that you might be able to see a 20% to 25% increase over time in your revenue growth from adding those on?

C. Reynolds Thompson III

Yes.

Craig Kucera – BB&T Capital Markets

From that program, of course. And the second question I had actually relates to, you made mention that the big decline in some of your operating expenses was related to not only turnover costs but also property insurance, and I wanted to know how long have you locked in those costs and when are they up for renewal and you think you can push them any further, or are they about as far as you think you can take them?

C. Reynolds Thompson III

On the insurance front, our program renews in the first quarter of each year so we are good through the end of February in 2009 with the program that we currently have in place today. The insurance markets turned very favorable last year and I haven’t seen much that’s going to change the way that that product is being priced. I can’t say we’re going to see the decrease that we saw this year but I certainly would not expect those costs to go up.

Craig Kucera – BB&T Capital Markets

And finally, I was just wanted to know if you have had any success fighting any of your appraisals as relates to real estate taxes. Some of your markets have seen some decent softening, certainly on the residential side such as Phoenix, and do you have any commentary there?

Paul F. Earle

Well, we think we’re going to have success. It’s early in the process; we filed the appeals during the first and second quarter and then we’ll get the results of those appeals in the third and fourth quarter but all looks very promising because of the economic climate we’re dealing in, but we’ll know more throughout the third quarter, early in the fourth quarter.

Operator

Your next question comes from Napoleon H. Overton – Morgan Keegan.

Napoleon H. Overton – Morgan Keegan

Just a couple of things. You may have answered this question so excuse me if I ask it again, but have you bought any bonds since the end of June so far in the third quarter?

Weston M. Andress

Yes, we have. We have, yes.

Napoleon H. Overton – Morgan Keegan

And then I think I heard you nudging the analyst community, if you will, to adjust third and fourth quarter to lower a third, and so the consensus that I see right now is $0.54 in the third quarter and $0.61 in the fourth. Do you care to quantify or add any more color to that? Is it purely the gains moving around or by how much are the consensus expectations off, and did I understand that right?

C. Reynolds Thompson III

Nap, the gist of that comment is correct. We don’t give quarterly guidance but we’re trying to telegraph to you, if you will, that there’s going to be a wider range than the market currently expects due to the, primarily, the transaction timing that we expect to happen in the balance of the year and the fact that we’ve recognized some of the transaction income in the second quarter that we originally thought we would have in the third quarter, so I’m just trying to paint that picture that that band is going to be a lot wider than the market currently has it pictured and as you can imagine, we’re $0.07 toward, call it the mid range of our guidance range. That’s a $0.13 swing just in the transaction income item and that gives you a feel for how wide that band could be.

Napoleon H. Overton – Morgan Keegan

So, say the last part of that again? I apologize if I’m deaf.

C. Reynolds Thompson III

In other words, yes, if we’re going to make the midpoint of our transaction income projection, which would be $0.20 a share, we recognized $0.07 year-to-date, $0.13 to go and we expect that to happen in the fourth quarter.

Napoleon H. Overton – Morgan Keegan

So you don’t need, you’ll have $0.02 or so of land sales, a penny or two in the third quarter and that’s probably all we…

C. Reynolds Thompson III

That’s probably about it.

Napoleon H. Overton – Morgan Keegan

That’s all we should expect to show up in the third quarter, okay. I was just giving you an opportunity to quantify if you wanted to.

C. Reynolds Thompson III

We’re talking annually.

Napoleon H. Overton – Morgan Keegan

And then any comments coming to you in the retail end multifamily assets in the market? I asked you the cap rate question, what color would you share with us on capitalization rates for retail and multifamily assets, prevailing capitalization rates in your markets?

Weston M. Andress

Well, Nap, I think that the multifamily sales that we closed are pretty, those were closed very recently. Pretty good indicator of where cap rates are. You had some 23 year old assets in Texas that sold at a 6.5 cap and a 7 year old asset with a brand new Phase II in Memphis that sold at a 5.9 cap rate. Clearly there’s pressure on those cap rates. There are less buyers in the market but there are on the margin 1031 buyers, some syndicators out there, the people that are making use of, investors that are making use of Fannie Mae and Freddie Mac debt and are willing to go through the cumbersome process of getting their hands on that debt, so there’s pressure but you can still make those transactions happen at an attractive rate.

On the retail side, there’s clearly a flood of retail centers in the market out there today and there’s probably, from where we were 12 months ago, maybe 100 plus basis points of pressure and we’ve said that we think our centers will trade in 7.5 or 8 or so, and these are brand new Target and Wal-Mart anchored centers that we’re talking about so that would be, there are buyers. It’s a much thinner market than it has been. There’s pressure on cap rates but you can still make these transactions happen.

Operator

Your next question comes from Haendel St. Juste – Green Street Advisors.

Haendel St. Juste – Green Street Advisors

I wanted to follow up on that latest question on cap rates, particularly for the multifamily. In the asset folder in 2Q, the Dow’s assets in particular seem to sell at cap rates which are fairly unchanged from prior valuations but seeing and hearing perhaps that cap rates elsewhere in the country have moved a bit over the past three months or so, could you share some insight as to what your thoughts are on where cap rates may have moved the last 90 days in other parts of your portfolio, most specifically maybe the South or some certain Southeast markets?

Weston M. Andress

Here, Haendel, in the market, not only with those assets in Texas and Tennessee but we’ve got assets in Georgia, North Carolina, Virginia that are generally our older assets and we’re seeing interest. Again, there’s a better buyer list than there has been in the past and maybe the cap rates have gone up 50 basis points from where they would have been this time last year, or maybe 90 to 120 days ago but you go out there in the investment community, you could still make these transactions happen. It’s not the core institutional money that’s running around buying these assets today. Maybe it’s a 1031 buyer or a syndicator or a tenant-in-common buyer or something like that but you can still get transactions done.

Haendel St. Juste – Green Street Advisors

And would you give us an update of where you are in terms of the assets that are you are anticipating to sell in second half 08? Any color on what the current stance in negotiations is and what’s under contract, letter of intent, and also I think we understand that you’re pursuing many portfolio transactions? Is that still the case or are you…?

Weston M. Andress

No, we’re not really pursuing big portfolio transactions. We’ve done some, we don’t think that’s where the buyer market is today. I mentioned this core institutional money is sitting on the sidelines. We’re getting these things done in small portfolios like the four assets in Texas that totaled $41 million in purchase price or the one asset that we sold in Memphis again, $40 million. That’s the transactions that are occurring out there today.

Haendel St. Juste – Green Street Advisors

And can you give us some color on where you are with the transactions’ negotiations?

Weston M. Andress

We’ve got active negotiations going on, on both the multifamily and retail side with a couple of assets that are currently under contract that you could see close in the next month or so.

Haendel St. Juste – Green Street Advisors

I had a question for Paul. Could you give us some color on the breakout of the rent increases? What your seeing in terms of new lease rent probe versus renewal lease rent probe?

Paul F. Earle

I think they both would track at about 1.5% to 2%.

Operator

Your next question comes from Philip Martin – Cantor Fitzgerald.

Philip Martin – Cantor Fitzgerald

A couple questions. First, for you, Paul, in terms of the turnover in the portfolio relative to the competition or other competing properties, is the Colonial multifamily portfolio trending better or at about the same level or worse? Can you give us some idea there?

Paul F. Earle

Well, you have to measure turnover geographically but I think if you look at the Sunbelt, most portfolios turn over between 65% and 70% annually. Our number through the second quarter of 08 is turning over at 62.5% which is down from a year ago, about 320 basis points so we’ll see how other portfolios report this month but we’re seeing a nice decline overall and we typically run just below the Sunbelt average because we have very few of our properties that are occupied by a student population.

Philip Martin – Cantor Fitzgerald

And immediate areas, down the street from properties etc., what are your people on the ground, when are pretty plugged in, what are they saying? Are you trending at average or above average? I’m just trying to get a sense of is your strategy working better than the average strategy in your markets.

Paul F. Earle

Well, I think when you hear the expense numbers that are going to be reported throughout this earnings cycle, you’re going to be surprised at how our expenses are trending flat for the first half of the year and our turnover’s going to be very competitive. We have been through many cycles like this in the past. We go to our customers, we renew early, we’re sensitive to the amount of increase that we will push through the system. Sometimes we renew leases that are a little bit longer than normal so we can get through the cycle and come out into a more clear economic growth period. We are good at managing through a downturn. What will start to show up is the quality of our people, the quality of our properties and the locations that we’ve invested in, in the Sun markets that we’ve invested in, and you’ll find that we have, in most cases, a very good diverse employment base that feeds our properties and so it’s a whole host of factors that will start to show up in a cycle like this, and so I think we’ll perform very well as it relates to our peers.

Philip Martin – Cantor Fitzgerald

And in terms of a same store NOI guidance going forward on the multifamily portfolio, is that based on stable or declining employment growth assumptions? What employment growth assumptions over the next 12 months are you assuming?

Paul F. Earle

We anticipate the Sunbelt markets that we’re operating in will be flat on the job growth front so just simply not a big decline in job growth in any one market, just basically a flat job picture.

Philip Martin – Cantor Fitzgerald

And anecdotally, I don’t know if you can share this or have this information, but what are your people hearing from the tenants when they go in to renew their leases in terms of their employment situation, is that I give a higher percentage of unemployed in your properties, etc.?

Paul F. Earle

Typically, here’s a good stat, typically we will turn over, about 25% of our move outs relate to employment or jobs. Last year through June it was at 26.9%. This year through June it’s at 25.2%, so it’s in a very tight dangerous, down slightly, but it’s in a very tight band so we’re not seeing any unusual activity because of job or job related move outs. A lot of people that are coming in to our rental office where we’re talking about the cost of the commute to work, they’re going out to dinner less, they’re staying home more, they’re using our [inaudible] package more, there’s a lot of conversation about their disposable income and there’s less talk about moving out to buy a home, not only because they’re financially stressed but also because of the fear that home prices may decline further, and so our home move outs are down below 19% and if you look way back in time our old run rate on home move outs was 15% and it’s below 19% now, so this current economic time is going to turn out to be favorable for apartments as long as we don’t see a huge job loss factor in our markets.

Philip Martin – Cantor Fitzgerald

My next question is for you, Weston. In terms of the asset sales that you’re thinking about over the next 12 months, what percentage of that will be debt? I’m just trying to get an idea, in terms of the liquidity situation, what’s equity and what’s debt, roughly. I know it’s probably property by property but…

Weston M. Andress

There is no debt on these assets that we’re selling. These are all funded through our corporate line of credit.

Operator

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

Steve Swett – Keefe, Bruyette, & Woods

All my questions have been answered.

Operator

Your next question comes from Dustin Pizzo – Bank of America.

Dustin Pizzo – Bank of America

I’ll try and make this quick. Weston, can you quantify the amount of bonds that you bought back thus far in the quarter?

Weston M. Andress

It’s roughly another, gross proceeds around $12 million.

Dustin Pizzo – Bank of America

And then just how tight would the spreads have to get before you decide it didn’t make sense to continue to take out that long term debt?

Weston M. Andress

We’ve been buying the 8 to 10 year maturities that 7.5% or north of there and we might look at some of the shorter dated maturities as low as a 7% yield but probably wouldn’t go much lower than that.

Dustin Pizzo – Bank of America

But on the longer term stuff, is it 160 basis points?

Weston M. Andress

Well, we’re probably not going to go much below 7.5% on the longer term maturities.

Operator

And at this time there are no further questions.

C. Reynolds Thompson III

Well thank you everyone for joining us today. We looked forward to talking to you at the end of the third quarter.

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