Associated Estates Realty Corporation (AEC)

Q2 2010 Earnings Call Transcript

July 27, 2010 2:00 pm ET

Executives

Jeremy Goldberg – Senior Director of Corporate Finance & IR

Jeff Friedman – Chairman, President & CEO

Lou Fatica – VP, CFO & Treasurer

John Shannon – SVP, Operations

Patrick Duffy – VP of Strategic Marketing

Analysts

David Toti – FBR Capital Markets

Buck Horne – Raymond James

Eric Wolfe – Citigroup

Lindsey Yao – Robert W. Baird

Andrew DiZio – Janney Montgomery Scott

William Acheson – Benchmark

Haendel St. Juste – KBW

Andrew McCulloch – Green Street Advisors

Presentation

Operator

Welcome to the Associated Estates second quarter 2010 earnings conference call. My name is Linnaea and I will be the operator on your call today. At this time, all participants are in a listen-only mode. Following prepared remarks by the company, we will conduct a question-and-answer session. (Operator instructions)

Now, I would like to turn the call over to Jeremy Goldberg, Senior Director of Corporate Finance and Investor Relations, for opening remarks and introductions. Please go ahead.

Jeremy Goldberg

Thank you, Linnaea. Good afternoon, everyone and thank you for joining the Associated Estates second quarter 2010 conference call. I’d like to remind everyone that our call today is being webcast and will be archived on the Associated Estates website through August 10th.

On the call today, prepared remarks will be presented by Jeff Friedman, our President and Chief Executive Officer; Lou Fatica, our Chief Financial Officer; and John Shannon, our Senior Vice President of Operations. Additionally, Patrick Duffy, our Vice President of Strategic Marketing, and I will be available for the Q&A.

Before we begin our prepared comments, we would like to note that certain statements made during this call will be forward-looking statements that are based on current expectations and beliefs of management. These forward-looking statements are subject to certain risks and trends that could cause actual results to differ materially from projection.

Further information about these risks and trends can be found in our filings with the SEC and we encourage everyone to review them. As a reminder, Associated Estates' second quarter earnings release and the supplemental financial booklet are available on the Investor Relations section of our website at www.associatedestates.com and they include reconciliations to non-GAAP financial measures, which maybe discussed on this call.

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

Jeff Friedman

Thanks, Jeremy and thanks to everyone for joining us. The participation on our quarterly calls has increased significantly. We hope you continue to find them helpful and we always appreciate feedback.

As we prepared for 2010, we expected that operating fundamentals would improve for our portfolio. With the dust from 2009 not quite settled and I might say we were all still a little shell-shocked, we expected improving conditions, although we weren't sure how long it would take for a sense of normalcy to return.

We did establish several priorities for 2010, all of which took these optimistic expectations into account. Our focus on continuing to improve our balance sheet is at the top of the list. We also wanted to demonstrate our ability to continue to cover our dividend from FAD. And we wanted to grow. We've been able to do all of these.

We used the proceeds from our follow-on offering in January to pay down debt. As fundamentals and our stock price improved, we went back to the equity market in May with the largest follow-on offering in the company's history and used the proceeds to pay down high-coupon debt and preferred and to buy an irreplaceable asset 20 miles south of the District of Columbia.

These steps can be viewed two ways. First, to position the company to growth. As we will touch on today, there are many factors that indicate that the drivers of the apartment business are improving. However, the actions we took can also be looked upon as defensive measures in the event there is a double-dip or we are wrong about what's in store for our domestic economy and how that impacts the apartment business.

Certain facts and trends indisputably support improved apartment fundamentals. New households continued to grow at about 1% per year. Of these 1 million plus new households, we know that based on historical numbers, at least 35% or 350,000 will new renters.

According to a recent report published by John Burns Real Estate Consulting, 8 million homeowners are currently not paying their mortgage. Burns thinks 6 million of them will lose their home to the bank in the next two years. This will reduce the homeownership rate from 67% to 62%.

Burns continues that a recent study indicates another 5% of all households, which equals roughly 5 million additional homeowners, have no equity in their homes. This suggests that only 57% of U.S. households own a home with equity value. If you believe that many will strategically default, this will push the homeownership rate even lower. These households that were once homeowners will also be incremental additional renters.

There are other factors driving apartment demand; immigration trends, as more immigrants rent first before buying; financial flexibility, as even those who can afford to buy are waiting longer to pull the trigger; more stringent lending standards, making it more difficult to qualify for a loan.

And yes, there are a few factors helping homeownership such as the aging population, as older households tend to own versus rent; housing affordability, as home prices have fallen, the spread between the cost to own and the cost to rent is less.

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