Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Leslie Wolfgang - Director of External Reporting

Eric Bolton - CEO

Simon Wadsworth - CFO

Al Campbell - Treasurer

Tom Grimes - Director of Property Management

Drew Taylor - Director of Asset Management

Analysts

Michael Salinsky - RBC

Paula Poskon - Robert W. Baird

Nap Overton - Morgan Keegan

Craig Kucera - BB&T Capital Markets

Rich Anderson - BMO Capital Markets

Mid-America Apartment Communities Inc. (MAA) Q2 2008 Earnings Call August 1, 2008 10:15 AM ET

Operator

Good morning, ladies and gentlemen and thank you for participating in the Mid-America Apartment Communities second quarter earnings release conference call. The company will first share its prepared comments followed by a question-and-answer session. At this time, we would like to turn the call over to Leslie Wolfgang, Director of External Reporting. Ms. Wolfgang, you may begin.

Leslie Wolfgang

Thank you, Devon, and good morning, everyone. This is Leslie Wolfgang, Director of External Reporting for Mid-America Apartment Communities. With me are Eric Bolton, our CEO; Simon Wadsworth, our CFO; Al Campbell, Treasurer; 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

Thanks, Leslie. Mid-America's strong 13% growth in FFO during the second quarter was a result of solid operating performance and favorable financing costs. The quarter's FFO performance of $0.95 per share is the best result we have ever posted for a second quarter in our company's history. Mid-America's steady performance and growth in FFO is the result of several attributes that cause us to feel comfortable that performance will continue to hold up well despite pressure from a weak employment market.

Let me recap a few reasons why we remain comfortable with our positive outlook for 2008 and are optimistic about leasing fundamentals long-term. First, as the economy regains footing, the Sunbelt region is going to capture strong growth in new jobs and household formations.

Over the long haul, we believe the Sunbelt markets will outperform other new regions in creating demand for apartment housing. In addition, our strategy of allocating a portion of Mid-America's portfolio to more stable income markets within this high growth region provides a level of protection to broad economic slowdowns that will help insulate our NOI performance from severe strain during weak parts of the economic cycle.

And of course Mid-America's lack of portfolio concentration in markets most pressured by vacant condos and single-family housing, also, goes a long way in ensuring that portfolio will hold up better than most during the current cycle.

Secondly, the strength of our operating platform will help to ensure that Mid-America's portfolio continues to generate solid performance. We're confident that our yield management system implemented last year, recent changes in programs for collecting delinquent rent and upgrades made at the start of the year to our inventory management programs were all combined to deliver results that outperform market norms.

As an example you'll note that same-store physical occupancy at quarter end was down slightly by 30 basis points in the second quarter, as compared to the same point last year, but effective occupancy which is the more meaningful measurement of vacancy loss as it accounts for a vacancy from turnover that occurs during the month actually improved by 64 basis points in the second quarter.

As a result of this increase in the effective occupancy, same-store vacancy loss declined by nearly 9% in the second quarter as compared to last year. This is the direct result of lower resident turnover and our proactive inventory management system, which reduced the number of day's vacancy to 24 days as compared to 29 days in the second quarter of last year.

One of the other important attributes about Mid-America's performance that we have consistently worked to develop over the year is a revenue stream that is high quality and recurring in nature. Mid-America's funds from operations in 2008 is overwhelmingly driven by performance from recurring rental operation at 99% of FFO, as opposed to gains on sales of one-time up-front fees.

During weak parts of the economic cycle, this is a particularly important feature to have. Not only does this high-quality revenue profile generate a level of profitability in a year of moderating leasing fundamentals but it of course provides a solid foundation for the future.

The last important attribute that I will point out is strength of balance sheet enjoyed by Mid-America. We have one of the strongest dividends in fixed-charge coverage ratios in the sector in the sector.

This puts us in a solid position to be more opportunistic in our management of asset sales and as well as in our pursuit of new growth opportunities without having the pressure of liquidity concerns and the volatility that can come from balance sheets that are not as well capitalized or those facing significant financing commitments for new development or material refinancing exposures.

Given the solid portfolio and operating platform, Mid-America has emplace coupled with strength of balance sheet, we believe the company is in a very good position, and, of course, helping to offset some of the pressure from weaker job growth is lower turnover and the reduced pressure from residents leaving to buy a house. All indications are that the return to more disciplined practices for qualifying for single-family mortgage loans, such as a down payment and acceptable credit history are here to stay.

So on balance, we believe leasing fundamentals in our portfolio are going to hold up well and remain confident that we will have another year of solid growth in NOI and FFO. As noted in our earnings release, we did experience some moderation in leasing traffic late in the second quarter.

While isolated in nature and as you would expect associated with those markets facing the most moderation in job growth, we believe that the weaker traffic patterns will nevertheless impact our ability to achieve same-store pricing growth at a level that we had hoped for in the second half of this year.

Given this pressure along with the belief that property taxes are likely going to come in higher than we had originally expected we are pulling back a little our same-store NOI growth assumptions for the year to a range of 3% to 3.5%. However, largely offsetting this adjustment is better than expected performance in interest and administrative expenses as compared to our earlier forecast.

Simon is going to walk you through details of the moving pieces of our updated forecast, but the two key takeaway points in my opinion are these. Original expectations for pricing growth and same-store assumptions are now under some modest pressure as a result of continued weak job growth, but effective inventory management practices, lower interest rates, and lower administrative expenses are largely offsetting this pressure.

And secondly, overall FFO guidance is generally intact with the midpoint right where we began the year with and 3% below the midpoint where we were at the end of the first quarter as a result of raising more equity than we had originally forecasted as buying opportunities improved.

At the midpoint of guidance, our expectation for FFO growth this year represents a solid 6% growth over last year's strong performance. And this is being accomplished while at the same time taking actions that are dilutive to the current year to further strengthen the balance sheet and position the portfolio for more robust earnings in the future.

As a reminder, we expect $0.15 of FFO dilution this year in lease-up and new development initiatives, as we continue to increase the quality of the portfolio and lay a foundation for future FFO growth.

Frankly, we are excited about where the company is positioned and performance expectation for this year and the outlook for performance over the next couple of years is very encouraging. Our regional markets are poised to capture significant growth in demand over the next few years.

New supply pressures remain muted and will be so for a while. We have $113 million of projects that are in lease-up or under construction that will become fully productive over the next year to 18 months and our redevelopment and unit interior upgrade projects continue to position the existing portfolio for more robust pricing performance.

We remain very confident about the long-term prospects for solid internal performance and growth in FFO for Mid-America's shareholders. Of course, one of the benefits to the more challenging leasing and financing environment is that we're seeing an improved market for making acquisitions.

The best buying opportunities at the moment are associated with new lease-up development, properties in those markets facing pressure from excessive vacant condo and single-family inventory and those properties are facing near term refinancing requirements. We closed on another acquisition yesterday, and currently have two other acquisition opportunities under contract. Our pipeline is very active.

With additional capital raised today couple with the balance sheet capacity that we began the year with, Mid-America is in a terrific position to take advantage of the improving buyer's window.

From what we are seeing in the transaction market, we don't expect a significant shift in cap rates as there continues to be ample evidence of investment capital focused on the sector and of course financing remains available for stabilized properties through both Fannie and Freddie.

What makes us optimistic about the ability to secure more deals that meet our investment hurdles is that largely the capital that is now in the market on the both the equity and debt side is more disciplined than what we have been competing with over the last few years.

Given our regional focus, excellent record of performance for seller's strong relationships and existing financing agreements that are in place, we are confident of our ability to successfully compete in this transaction environment.

And I am going to turn the call over to Simon now. Simon?

Simon Wadsworth

Thanks, Eric. Second quarter FFO per share of $0.95 was at the midpoint of our guidance, 13% increase over the second quarter of last year. We reported a $0.01 per share gain of the sale of excess land in the second quarter last year. And without this the growth in FFO per share was 14%.

The strong growth was driven by solid operating results and the continuation of the favorable interest rate environment. As you remember, we anticipated at the beginning of the second quarter raising $50 million of new common equity for all of 2008.

We had already raised $15 million of this in the first quarter. And then in the second quarter, we not only raised the $35 million balance, but nearly another $30 million on top for year-to-date total of almost $80 million.

The FFO dilution from this additional equity was about $0.01 per share in the second quarter. We'll discuss our equity needs with the Board later this month, but our current plan is to raise an additional $20 million in the second half of the year. Assuming this occurs, we will have FFO dilution for the second half of the year from the $50 million of additional equity of just over $0.02 a share.

So while we were able to meet the midpoint of our second quarter guidance despite the $0.01 dilution from the incremental equity, we need to modify our full year guidance by $0.03 to take account of the incremental shares. The primary reason we sold equity this year, is that we believe we are entering a time when we will be able to make some attractive acquisitions such as the two properties under contract that Eric mentioned.

Our objective is to grow net present value per share and after a long spell and finding acquisitions that are accretive to MPV has been very difficult, we are beginning to see a few more opportunities. We also think that the uncertainties and volatility in the capital markets make it a time to have a strong balance sheet. And the equity we've raised takes a debt plus preferred as a percent of market cap into the lowest, that is the best one-third of the apartment sector.

Second quarter year-over-year same-store performance was reasonably solid, but not at the level we had anticipated. Some of our markets experienced softer demand. Walk-in traffic didn't seasonably build at the rate we'd regularly expect. By mid-June, we saw that May and June revenue growth was trending weaker than we had expected and walk-in traffic ended the quarter down 7% from the same quarter a year ago.

Given the strength we have seen in the first four months, we were surprised that the slowdown occurred and then it turned out to be more than a one-month phenomenon. This impacted our ability to push rents and fees to the extent we anticipated.

Expenses were also slightly above the level we projected, partly due to some personnel cost pressures and in late June, we increased our full year accrual rate for real estate taxes from 4.5% same-store increase to 5.5% as a result of continued aggressiveness from tax authorities.

We have been pleased at our bad debt continues to drop with net delinquency down from 0.5% in Q2 last year to 0.4% of net potential rent. The number of skips and evicts was down 3% from the second quarter of last year and the number of people paying after the 15th of the month dropped by 4%. The same-store concession rate dropped from 2.7% to 1.3% of net potential rent as we migrate toward net effective pricing at most of our properties.

We continue to see the number of our residents leaving us to buy a house drop from 31% of move-outs in the second quarter of '07 to 25% in the second quarter of this year, a 21% drop. The number of our residents left to rent a house continues to be insignificant, rising from 3% to 4% of move-outs.

Quarterly turnover on an annual basis dropped from 67% to 65%. We are also pleased. we've seen a recovery in walk-in traffic in July, which is up 13% over June and the best month of this year and just about July of last year.

The number of lease applications is up 38% over June, 16% over July of last year. Though we think it's prudent to moderate our same-store forecast growth rate for the rest of the year. Our new forecast with revenue growth of roughly 3% and NOI growth of 3% to 3.5% for the full year seems realistic and given everything that is going on in the economy pretty good performance. We had a very successful renewal of our property in casualty insurance on July 1st of this year with $1.3 million of annual savings, or 14% from the expiring policy.

Much of this reduction was already included in our forecast of same-store NOI and the balance is more than offset by the projected increase in real estate taxes. We have targeted four properties for disposition totaling 990 units. They represent a cross-section of small market and older properties that no longer fit our objectives. They are likely to be the only properties we sell this year.

We expect net proceeds of $40 million to $45 million from the sale and a sale cap rate in the 6.5% range. We executed the brokerage agreements in July and preliminary showings to prospective buyers have started. We completed the acquisition of one property in the second quarter, Providence of Brier Creek in Raleigh, Durham, which is one of the Top 10 fastest growing MSAs in the country. The property has numerous high-end features, is a great addition to our portfolio.

We closed on one additional property yesterday, The Edge at Lyon's Gate a 312-unit property built in 2007, and located in the Chandler/Gilbert submarket in the Southeast Valley of Metro Phoenix, which will own on our balance sheet. This is the second property we own in Phoenix.

We have two additional properties under contract and being evaluated. One in Atlanta, and one a busted condo deal in Tampa both of which we'd own 100%. Our redevelopment program continues to generate attractive returns with interior renovations on almost 2,000 apartments completed through the end of June. We plan to redevelop approximately 3,000 units this year at an average cost of $4,700 an apartment.

In addition, we have six exterior repositioning projects scheduled for this year totaling $2 million. We underwrite these exterior projects to generate the same kind of returns for additional rental rates as for our interior renovations. The two new development projects Copper Ridge in Dallas and St. Augustine Phase II in Jacksonville are on schedule.

Copper Ridge has started lease up and construction expected to be completed in October and St. Augustine is expected to start lease up this quarter with construction scheduled to be completed by the end of the year. NOI yields on the two projects are forecast to average 7.5%.

Turning to the balance sheet, because of the equity we have raised, our leverage defined as debt plus preferred to total gross asset dropped by 240 basis points from June of 2007 to 56%. As a percentage of total market capitalization our debt gross preferred is 46% among the best in the sector and our fixed charge coverage continue to improve rising to 2.52 from 2.2 in the second quarter of 2007.

At the end of the quarter, we had $309 million of unused pre-committed credit available under our agency and bank facilities of which $187 million is available under in place mortgages, and an additional $122 million is committed in our existing credit spreads. $265 million of this capacity is under long-term credit facility arrangements with Fannie Mae and Freddie Mac, which was committed spreads was set before the current credit crisis.

Looking forward to 2009 and 2010, the only debt maturities that we have are some of our swaps and the annual renewal of our bank credit line. In other words, we are not looking for new funding for any maturities. Without any significant development to fund, we think we are in a strong position.

Earlier in the quarter, we took care of some upcoming maturities and put in place $100 million of forward swaps locking an interest rates effective between May and December, all of them favorably priced. We benefit from the fact that 22% of our debt is floating rate, of which a quarter is capped mostly tied to very attractive Fannie Mae DMBS rates.

As mentioned in the press release, we put on hold any plans to redeem the $155 million of our preferred H. Debt cost for moderately leveraged apartment buyers without existing credit arrangements are not too far different from where they were a year ago. As increased agency spreads are close to being offset by the 80 to 100 basis point reduction in the five to ten year treasury in the swap rates.

While fundamentals for multifamily demand look very attractive over the next few years, it's pretty clear that new development will remain muted, this financing is tough to obtain since Fannie and Freddie don't finance developments and construction cost continue to rise, the latest data that I have seen suggests a 6% annual rate of increase.

As a result of our reduced leverage from the equity raise and recent trends, we have taken the midpoint of our FFO forecast for 2008 down by $0.03 from the guidance given at the end of the first quarter back to our original beginning of year guidance of $3.65 to $3.85 per share. We have raised common equity earlier in the year and now anticipate having $50 million more than we previously planned, causing $0.03 per share of FFO dilution on a full year basis.

We're now projecting same-store NOI growth in the range of 3% to 3.5%, with revenues growing about 3% and expense growth for the full year in a range of 2.5% to 3%. Remember in the second half of this year, we will have tougher comparisons because of the very favorable insurance renewal and real estate adjustments that contributed towards the negative expense growth in the back half of 2007.

We have a few additional pieces of the forecast that are moving around. We've increased our full year forecast for same-store real estate tax expense to just over 5.5%. As mentioned about the increase from our prior accrual rate is not quite offset by the savings from our July 1 insurance renewal.

Compared to our prior forecast, we have reduced the forecast to the midpoint of our full year NOI by $1.9 million. This reduction is more than offset by $1.2 million reduction in forecast interest expense resulting from lower rates. Together with $900,000 less G&A and property management cost.

We expect about $0.035 of FFO dilution this year from the recent acquisition of Providence at Brier Creek and the property we purchased yesterday, The Edge at Lyon's Gate because they are both in lease-up. This is an addition to the $11.5 of dilution we're expecting from the existing development and lease-up properties.

One final comment. In thinking about 2009, remember that all companies will be implementing SFAS 141R, a new accounting a standard which will require the certain costs that have been historically capitalized into the basis of acquisitions will be a current period expense and thus a deduction from FFO.

In the case of Mid-America, we estimate this will reduce our reported FFO in 2009 by $0.05 to $0.06 per share at current level of acquisitions. To emphasize this will impact all public companies is not anything unique to Mid-America.

Eric Bolton

Thanks, Simon. Our strategy for Mid-America is framed around a goal delivering high risk-adjusted return to shareholders. We believe that goal is best accomplished with a structure focused on deploying capital in the high growth Sunbelt region where demand-side variables tend to not only weather economic downturns better but a region that will capture more robust job growth during periods of economic expansion.

Long-term, the fundamentals that drive demand for apartment housing look very good. New development continues to be challenged in this environment and the threat of oversupply is not on the horizon as far as we can see.

We believe Mid-America is in a terrific position. Our portfolio of high-quality properties strategically diversified across a high growth region with a very strong operating platform and experienced team in place, a material level of lease-up and new development properties to come on line over the next couple of years and a balance sheet that is very well positioned to support additional growth and move forward opportunistically puts the company in a strong position.

Devon, that's all we have in the way of prepared comments and turn it over to you for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Michael Salinsky from RBC.

Michael Salinsky - RBC

Good morning, guys. Just given what you are seeing with the moderation right now and job growth across your markets and your experience in the Southeast markets, Eric, what is your gut feeling when conditions begin to improve? When do we start to pull out of this?

Eric Bolton

Mike, from our perspective, I think it is going to be late spring, summer of next year. I think mid-year next year, we start to see things pull out a little bit. We don't have the pressure from any sort of supply issues. I think it really is just the economy needs to get some traction and we need to get job growth back to where it was.

Interestingly, the variable that obviously we look at that really I think is the one that is concerning us right now is traffic. And, I am going to turn it over to Tom. I'll let Tom to give you a little perspective on where we are seeing the traffic issues and why we think that things are going to get back on track mid-year next year. Tom?

Tom Grimes

All right, thanks Eric, and Mike, good morning. 70% of our traffic drop is really just tied to three areas which are Florida, Columbus, Georgia and Atlanta. And just sort of picking them off one by one, Florida, in general, no new press there. I will tell you Jacksonville has weakened a little bit materially with weakness in the financial sector hitting a little bit. They have had some job layoffs that sort of picked up around the second quarter, and they have got a little bit of new supply, but when you drop 7,000 jobs, any new supply isn't that helpful.

In Columbus, we have seen a fallback on traffic, but that is sort of a pleasant story. Columbus has tightened up. We're advertising less, driving less traffic. It is holding up pretty well. And Atlanta is another place where job growth, if you just look at it, 70 basis point increases in job growth doesn't seem that bad, but it has moderated, its growth rate is cutting about in half.

So it is still significantly over the national average, but we have seen some slowdown there a bit. The July numbers are encouraging. They have bounced back a bit, but I don't think we want to rally behind July and say job growth is back. Just our traffic picked up a little bit more along the lines of what we would expect.

Michael Salinsky - RBC

Okay. As a follow-up to that, Houston was a little softer than what had anticipated on sequential revenue bases. Was there any driver behind that one?

Tom Grimes

No, Houston and Dallas and Austin have all been just incredibly strong. We're just really dealing with a trade-off as we adjust on some renovates a bit and shouldn't be any major problem there. We are ramping up our renovate that creates a little bit more vacancy loss for a short period and then it rolls. We are still feeling good about Houston.

Michael Salinsky - RBC

Okay. Secondly, just in looking at the acquisition environment, I think you mentioned some additional opportunities there. Are you seeing more distressed sellers in the market? Are you seeing portfolios? Can you kind of shed some light on this? What opportunities you are seeing out there and also where pricing is right now relative to maybe six to 12 months ago?

Eric Bolton

Mike, this is Eric. Where we are seeing the best opportunities right now are really in three areas. We continue to find struggling lease-up, new development projects that are facing construction financing takeout requirements that are creating some pressure for the developers and they are becoming increasingly motivated to talk to us about pricing that makes sense to us.

We are also seeing some pressure in some of these markets that are pretty soft from the overhanging of vacant condo and single-family homes such as Phoenix. We also are seeing some opportunities on some stabilized assets where they are facing some refinancing issues. Of course in a more stabilized asset area, the competition for buying those deals is still pretty fierce given that Fannie and Freddie will finance that whereas they won't finance the new development.

So, overall, we are seeing the fairly new properties where you have got less than a stabilized situation where Fannie and Fred won't provide financing. That's where we are seeing the best buying opportunities at the moment. And in reference to our portfolio transactions, frankly, we are not really seeing a whole lot that we saw some earlier this year and looked at a number of deals that were pretty good-sized.

And the kind of pricing that we were willing to talk to folks about, they weren't willing to talk to us about it at that point. I think that if fundamentals do continue to show some sluggishness and I think that if revenue growth does tend to moderate over the second half of this year, early next year as we think it will. I think some of these portfolios may start to come back around and pricing that makes sense to us.

And frankly, I think that it's kind of hard to opine what sort of cap rate change has taken place. I would say that kind of gaze that we are seeing most people refer to is about a 50 basis point sort of shift up in cap rates. That sounds as reasonable to us as anything else I can point to. It's really kind of almost a case-by-case situation.

Michael Salinsky - RBC

And then, finally, the 6.5 cap rate you are looking for on the dispositions here in the second half of the year that's a little bit better than you have been anticipating on the prior calls. Is that related to mix? What's the driver behind that essentially?

Simon Wadsworth

I think frankly Mike a couple of properties are older properties and we are sort of selling here on a per unit basis, which kind of acts sort of a bit of a floor up price really, and I would agree that sort of more generally you would expect the properties that we are selling to be we have a few of them in the sort of six and a half to seven range rather than the six and a half range.

Michael Salinsky - RBC

Thanks, guys.

Simon Wadsworth

Thanks, Mike.

Operator

Our next question comes from the line of Paula Poskon from Robert W. Baird.

Paula Poskon - Robert W. Baird

Thank you and good morning.

Eric Bolton

Good morning.

Paula Poskon - Robert W. Baird

Simon, can you just refresh my memory of what is the magnitude of the eclipse of the increase in the real estate tax over the insurance savings?

Simon Wadsworth

Al, do you want to talk about that?

Al Campbell

Yeah, I think the real estate tax as Simon mentioned was about 1% change, and I think that when you compare that to the change in insurance, I believe it's about $100,000 to $150,000 difference in that net offset if that is what you are asking.

Paula Poskon - Robert W. Baird

Yes. That is exactly what I am asking, thanks. And then in terms of your plans to raise additional equity, will that again be through the controlled equity offering, if I look at the prospectus correctly, it looks like you are almost at the limit of the share count that was provided for in the agreement.

Al Campbell

That is exactly right, Paula. We did reach the limit of that, and we filed a new one on around the beginning of July so that we do have another authorization about another 1.350 million shares. So we are good to go, and we would plan to use the controlled equity offering, if we go ahead with that additional $20 million, which is in our forecast.

Paula Poskon - Robert W. Baird

Okay. And then lastly, could you just talk a little bit about the appetite that you are seeing of Fannie, Freddie to in fact increase their financing sourcing?

Simon Wadsworth

Well, what we have been seeing and I will let Al chime in, because he has been dealing with them on a pretty daily basis on sort of price quotes and things. They still seem very active, and they have been very committed to the sector. We have had price quotes from them very recently. Al, what kind of pricing are you seeing for our sort of Fund 1 kind of.

Al Campbell

Well, we are seeing depending on specifics of the property and the terms of those deals, we are seeing anywhere from 200 to 230 spread and across the yield curve that means a different total end rate and that's what we are seeing.

All the facts that you are saying and we are seeing point to the factor they are definitely still committed to multifamily and have the capacity, they are certainly saying they are. And we are seeing the evidence to support that at this point.

Paula Poskon - Robert W. Baird

Great, thanks very much, guys.

Al Campbell

Thanks.

Operator

Our next question comes from Nap Overton from Morgan Keegan.

Nap Overton - Morgan Keegan

Good morning.

Simon Wadsworth

Hi, Nap.

Nap Overton - Morgan Keegan

Just a couple of things. Several of my questions have already been answered. You mentioned that you wouldn't want to call an improvement in leasing traffic in July and end to the weakness that you were thinking you were seeing in May and June. What would it take for you to be convinced that things were getting better?

Tom Grimes

Job growth to rebound I think, Nap. This is Tom. Nap, that's sort of the thing. It's been fairly isolated in terms of where the traffic is up, but we really just need to see job growth come back. Supplies and check, or six straight quarters of increased occupancy, either will make us feel better.

I think, Nap, we were sort of a little bit surprised when we saw the weakness in traffic at the end of May and in June. And say July has recovered. I would want to see personally another month or two of recovery, yeah, to be convinced that we are back to where we originally thought we would be.

Nap Overton - Morgan Keegan

You are certainly not the only business seeing weakness in May and June.

Tom Grimes

No.

Nap Overton - Morgan Keegan

And then secondly, Simon, you mentioned in the press release you are negotiating expansion and expansion to the Freddie Mac credit agreement to fund 2009 growth plans. Would you care to share with us kind of a range of the volume or the size of that expansion that you might be thinking about to fund your 2009 growth plans?

Al Campbell

Nap, I think, I can give you some color, and it's Al. I think we are probably talking something in the $200 million range at this point. But I tell you given the funding requirements for remainder of this year, and going into next year, we have plenty of capacity and really are talking about putting that place mid to late next year just to continue our growth strategies at that point in time.

We have plenty of capacity in our current facilities right, now certainly not this year's commitments and most if not all of next year's commitment.

Nap Overton - Morgan Keegan

I was just trying to back into how much acquisition volume you were planning.

Al Campbell

That's why I was being a little.

Drew Taylor

Yeah. We are still planning that. But I think in our general sense, sort of our base case, if you like, on our balance sheet is still kind of in the $150 million, $200 million range this year and our base case next year is about $150 million. But I think that could get stepped up if we see what we think is going to happen, happened.

And, of course, as Eric mentioned for our joint-venture, we call Fund 1, you know, we are finding it harder to make those deals happen just because there is a lot of investors who are attracted to this asset class and stabilized profits for the reasons that Eric mentioned.

So we think that's a little tougher, but roughly we think our continued guidance, $150 million on our own account, $150 million in Fund 1 in a kind of a steady state basis is roughly where we are trending. There maybe a few opportunities in late this year, early next year that we may jump on.

Nap Overton - Morgan Keegan

Okay. And then, would you care to comment on the character of the three additional acquisitions that you have under contract? Are those repositioning? Are they lease-ups? Are they stabilized? Would you care to comment on what the characteristics of those are?

Eric Bolton

The other two that we are looking at, they are under contract right now, one has a repositioning component to it. The other is a busted condominium project. And we are still not closed on those. Probably shouldn't talk a lot more about either one of them, but both are opportunities that we feel very excited about and hopefully will get them closed.

Nap Overton - Morgan Keegan

Okay.

Simon Wadsworth

The one we just closed on that The Edge at Lyon's Gate in Phoenix is pretty well brand-new property, on 85% leased.

Eric Bolton

That just finished last year. It's a terrific asset in a great area so we are really excited about what it is going to do. As we continue to look for ways to carefully expand in the Phoenix area.

Nap Overton - Morgan Keegan

And the dollar amount of that investment for that property was--?

Eric Bolton

$30,000 million roughly for that and the one we just first finished in the quarter.

Simon Wadsworth

So it's about $110 a unit, is that about right in Phoenix?

Eric Bolton

Yeah.

Nap Overton - Morgan Keegan

Okay. And then, just one last thing. How have you dealt we're talking about this six months ago and nine months ago? How have you dealt with qualifying credits for leasing for people coming into the renters market from having difficulties in the housing market? How have you determined to deal with that?

Drew Taylor

Hey, Matt, this is Drew. Really we haven't made any changes to the way we deal with mortgage defaults and our qualification process. What we have seen is really a very small percentage of our applicant pool have mortgage defaults on their credit records. So we really haven't done anything any differently. Our collection results continue to be good, and we really just haven't felt a need to make any change there.

Eric Bolton

Frankly, I think a lot of people that default on mortgages become renters of homes. I think a lot of it recycles within that sector.

Drew Taylor

And it's a thorny issue. Typically those folks have other problems with their credit and they are generally not going to qualify.

Nap Overton - Morgan Keegan

Okay. Thank you very much.

Eric Bolton

Thanks.

Simon Wadsworth

Thanks, Matt

Operator

Our next question comes from the line of Craig Kucera from BB&T Capital Markets.

Craig Kucera - BB&T Capital Markets

Yes. Hi, good morning.

Eric Bolton

Good morning.

Craig Kucera - BB&T Capital Markets

I just had a thought. You know on the legislation that passed this week that is going to effectively eliminate down payment assistance programs in October, I wanted to know if you had any opinion on how that impact your business, particularly as it relates to move outs and is any of that affecting your guidance maybe in regard to lower turnover assumptions or higher stickiness of your occupancy?

Eric Bolton

I do think that the single biggest issue for us and for turnover is you know people buying a house, the two things that we have been battling is the fact that people could do it without a down payment and they have to have good credit. That is not going to change. We do think it is likely that our turnover will continue to benefit from the tougher mortgage financing environment. You know, how much lower our turnover will go is really hard to predict.

Frankly, we think that kind of where we are right now in terms of the turnover is probably we are assuming more or less we are going to hang at this level. The thing that really caused us to feel, some need to moderate our expectation a little bit was really just the leasing traffic and the job market concerns. That is obviously offset a little bit by this tougher mortgage financing environment to some degree, but it is not enough.

Simon Wadsworth

I think it means, as we have made and accommodated in other conference calls and investor presentations, I think for the long haul when you look at '09, '10 and '11, I think it's going be very good particularly for us. The primary factor is for somebody who leaves us is being able to get a down payment and bypassing that is a huge detriment to us. We feel very good about the long-term impact of what's going on.

Craig Kucera - BB&T Capital Markets

Great. I just want to follow up. I know that the yield on the Series H is like an 8.3%. It is trading at $0.95 on the dollar, something like that. Are you willing to talk at all about sort of the acquisition cap rates or yields that you are looking at relative to that and sort of your thought process as it relates to capital structures?

Simon Wadsworth

Sure. What we look at really is, what we think our long-term costs of equity is, and when we look at it, we use a dividend discount model and we look at our current yield plus long-term growth rate which we pegged right now at about 5.5%. So we are looking at our cost of equity in the 10% range or so with a hurdle rate about 20% above that and then you couple that with a cost of debt which new debt would be sort of 5.5% and 5.75% range right now.

Put that together on a 50-50 basis to get a blended cost of what we think our cost of capital is and we compare that really to the preferred. So it is a little bit below our preferred cost. Now we are underwriting our new acquisitions to roughly today. This is a return, an IRR on equity in the sort of 12% to 12.5% range.

So all in all, we think that's if you like the right way for us to go. We do think we have probably got maybe a little bit too much preferred on the balance sheet right now, but we are kind of reluctant to take it out because we would be giving up a free call option which we have got effectively now on the preferred and these are uncertain times in the capital markets and we think we are going into a window where we could really accrete MPV per share by making some really good, attractive acquisitions. So we are kind of reluctant to lose any firepower at the present time. That is the way we look at it really, Craig.

Craig Kucera - BB&T Capital Markets

Okay. Thanks a lot.

Operator

Next, we have a follow-up from Michael Salinsky from RBC

Michael Salinsky - RBC

Good morning. Well, back on again actually. Just a couple of follow-up questions here. You revised your guidance assumptions for the investment funds here in the second half of the year from 150 previously to a range of 100 to 150. Is that related to asset mix what you are seeing in pricing or a pull back or any changes in the acquisition to manage your management joint venture partner. What was the driver behind that?

Eric Bolton

Mike, it's really just a function of the competitiveness of the market and trying to buy deals. Our JV partner remains every bit as committed as they were at the start. It really as just we think that the ability to get a couple more deals done this year is what we are hoping to. But it's a very competitive market out there, trying to buy these deals right now. That's what really caused us to pullback a little bit?

Michael Salinsky - RBC

Okay. And you also raised your real estate tax assumptions for the second of the year here. What were the regions that were responsible for that?

Simon Wadsworth

It is really, Mike, Texas has a lot to do with it. And then, Georgia is the other state that's been pretty tough, some counties in Georgia. But as is always, Texas is always a wildcard, and Texas and Georgia are the two areas giving us most problems.

Michael Salinsky - RBC

Are there any states coming in better than what you anticipated?

Eric Bolton

Yeah. As a matter of fact, Tennessee did, and that was very nice. And I think in Memphis, as a matter of fact. And we have had a little bit of pickup in North Carolina too that has helped us, but not enough to offset the current pressure in Texas and Georgia. Now, I will say that until we get through the third quarter, we are dealing with a kind of a really volatile sort of tax situation.

As we have said in the past, 1% of our real estate taxes is about a $0.01 a share. Just over $0.01 a share, so it's not just a killer issue, but until we get through the third quarter things will still stay a little murky. I am optimistic that we may do a little better than the 5.5 now, but I could change my view tomorrow what if we get more e-mails in from our various consultants out there that are fighting these reappraisals for us.

Michael Salinsky - RBC

And then finally just a theoretical question, you have acquired a lot of newer properties in the market over the last couple of years here. You also have a steady stream of properties you have owned for quite some time, maybe B or B+ in the market, and what are you seeing among the traffic trends at the As, the higher end properties versus maybe some of the lower end properties that you have across the portfolio?

Eric Bolton

Mike, it splits more by market. There is more correlation to market trends than they are to class trends at this point. So, not a huge difference between the two.

Michael Salinsky - RBC

So you haven't seen any trading down from the A to Bs as job growth slows or anything like that?

Eric Bolton

Not that the point, like I said it tends to be, if Jacksonville slow, it will slow across all classes. If Houston is strong, it is strong across all.

Michael Salinsky - RBC

Great, thanks.

Operator

And our final question comes from Rich Anderson from BMO Capital Markets.

Rich Anderson - BMO Capital Markets

Good morning, guys.

Eric Bolton

Hi, Rich.

Rich Anderson - BMO Capital Markets

Sorry, I am a little bit lagging, I got in a little bit late on the call, but I do have a big-picture question for you. You are seeing some slowdown in your internal growth prospects. But what do you think of your overall portfolio and your markets, what sort of the long-term average is in terms of your ability to grow from internal sources. Do you think you are there now or do you still think you are above that average?

Eric Bolton

Rich, I will tell that you I think what we think is going to happen as this economy starts to regain some footing that it's likely that our internal growth rate is better frankly than where it is right now, because we do believe that given a recovering economy and recovering job performance, without the supply side pressure because we are not seeing that right now and we are not going to see it for a while.

I think we are going to enjoy a couple of years or so, where just the macro dynamics are such that we are going to see some pretty good performance. And you throw on top of that all the renovation work that we have been executing on for the last couple of years and the higher rent growth prospects that we are going to get out of that.

I think on top of sort of these market dynamics, you have got that variable at play. So it kind of goes back to the point I made in my prepared comments. We feel pretty dam good about where the portfolio is right now. We think we are heading into starting really next year into 2010. We are going to be in a really good window. And we like the position of portfolio.

Rich Anderson - BMO Capital Markets

Yeah, and I can recall our conversation and you alluded to this also in the call already, but in terms of real estate taxes, do you think you now have now captured whatever increase you might see this year, or is there a possibility somehow that could still trend up on you during the second part of the year?

Drew Taylor

Rich, I think we have captured it. Nothing is for certain, but I am probably 80% sure that we have captured it at this point.

Rich Anderson - BMO Capital Markets

Isn't there like a July 1st sort of.

Drew Taylor

It really September 30th.

Rich Anderson - BMO Capital Markets

September 30th?

Drew Taylor

Yeah. And it's really a third quarter thing, but I am feeling pretty good about where that will be. We're failure crew, we're maybe just marginally over a crew, but it's going to be very module on that as it does change daily.

One other comment I will just make, Rich, and that is going back to your first point and this is something I have sort of harp on a bit, but during the last 10 years, we lost $5 million people out of rental pool, 5 million households out of the rental pool.

And with this what's going on in the economy. Those 5 million households I truly believe are going to come back to the rental pool over the next five years, or 10 years and I think that bodes very good for the business that we are in along with the eco boomers that people talk about. So I think we are very well-positioned and particularly in the markets that we are. So I think we've got a good two tore three years ahead of us.

Rich Anderson - BMO Capital Markets

Okay, sounds good. Thank you.

Operator

I would like to turn the conference over to our moderator for a wrap up.

Eric Bolton

Okay, we really don't have any other comments. We appreciate you being on the call this morning. And obviously if you got any other follow-up questions, give us a call. Thank you.

Simon Wadsworth

Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mid-America Apartment Communities Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts