Mid-America Apartment Communities Inc (MAA) 2002 Q1 法說會逐字稿

This is an unedited realtime transcript. An edited version with proper case and full speaker names will be available shortly.

Good morning and welcome to mid-america apartment communities first quarter earnings release conference call. All lines will be in listen-only until the question and answer session. This call is being recorded at the request of mid-america apartment communities. If you have any objections, you may disconnect at this time. I would like to introduce your speaker for today's call, Mr. Eric bolton, chief executive officer. You may begin.

Thanks, paula. Good morning. With me this original are simon wadsworth our chief financial officer and al campbell, vice president financial planning. Before we proceed, I will require required statutory disclosure as well as how to obtain additional information on our results.

This morning we will make forward-looking statements, please refer to the safe harbor language included in our press release and our filing with the fcc, which describes risk farkters that may impact future results. The call is being recorded and the press may participate. To obtain a cuppy of the press release and a tran script, we direct you to our web site at www.Maa.Net. You may dial 888-568, 0544 with the pass code mid-america.

In our prepared comments this morning, we will provide additional insights on first quarter results. I will review the operating results for the quarter. Al will recap portfolio performance by quarter and provide insight for the major markets. Simon will discuss balance sheet items. We'll then open the phone lines for any questions you may have and our prepared comments will last approximately 20 minutes. As reported in yesterday's earnings release, ffo for the quarter was slightly ahead of what we forecasted. Property level operating expense and interest expense were both slightly lower than we had projected. Our property management operation continues to do a good job in controlling expenses. The expansion of our utilities submetering and residence building program continues to have a positive impact. Interest expense is lower than forecast due to the continuance of low interest rates and the success of our programs to reduce cash balances. Although ffo earnings were slightly ahead of where we projected, earnings were down by one cent of ffo per share for the -- from the first quarter of 2001. Ab except the one cent nonrecurring gain on sale of land included in last year's results, which was noted in the release yesterday, earnings were flat as compared to last year this despite a much more difficult operating environment. Revenue revenue performance was on plan and continues to be pressured in these competitive remarks. Traffic levels improved significantly during the quarter increasing by 39% above the levels of the fourth quarter and approaching normal levelses for the time of she year. On a comparative basis for the same period of 2001. Same store leasing traffic increased by 5%. Our property management group did a good job converting the traffic as the leases obtained per traffic count grew close to 7% during the quarter. As a result of physical occupancy improved from 92.7% at year-end to 91.4% at quarter end. The competitive leasing market required aggressive concession practices to achieve this occupancy. In our two most competitive markets of memphis and atlanta, concession are running as much as two months. Compared to the same quarter of last year, increased concessions cost us 3 cents per share in ffo. As compared to the immediately preceding fourth quarter 2001 same store concessions grew by 200,000 or 12%. However, based on the improved leasing and occupancy trends that we saw in the first quarter, we continue to forecast a return to more normal occupancy and concession practices by the end of the second quarter. The latency, which is always a concern, when the economy weakens, remains steady during the arrest. It was only 8/10th of 1% of net identical rent why which is identical to the first quarter of last year. We did see a 6 post office 2 unit increase in turn over. We commented last quarter the oversupply of new construction in the memphis mark. We have posted 14% of our markets in memphis. As a result the memphis market drove most of the decline on a year to year basis. Construction permitting is down a significant 62% over the last 12 months and the job growth and demand trend is holding up, we believe the memphis market will have recovery late this year and 20022003. Overall we enter the second quarter in good shape. Month to month leases below our 5% threshold. Property expense control remains strong. On a same store basis, property controlled operating expenses which excludes taxes and insurance were up only 1% from last year. Our utility building initiative continues to generate very strong year-over-year results with it down 21% per quarter as compared to the first quarter of last year. Same store property operating expenses including taxes and insurance grew by 2 1/2% for the quarter. Our property and casualty insurance program expires effective the end of the second quarter. We are aggressively evaluating our alternatives and are concerned about the pricing of insurance. We believe that we provide an adequate allowance for the anticipated pricing increase in our forecast, but we will of course not know for sure until later this quarter. I will now take a few minutes and talk about market conditions. Al?

Thank you. As eric mentioned we are facing very competive conditions in many markets. Memphis has been one of the our toughest markets over the past few quarters but we saw significant improvement during this quarter. It continues to work through an oversupply position, but our management team did a good job by increasing occupancy rates. We saw 3.3% improvement in occupancy from the fourth quarter ending the current quarter at 91.2% combined with a 1.3% decrease in can session costs. This improvement generated an 8.6% increase in the fourth quarter. While this performance is still below prior levels, we expect continued improvement over the remainder of this year and moving into 2003 as the memphis market regains balance. As eric mentioned, new construction in memphis is expected to be minimal over the next year while the job market is expected to remain stable and resume growth. We are projecting occupancy levels in memphis to average 92% the remainder of the year. Averaging between 2 -- o jacksonville, our second largest market performed fairly well during the quarter with occupancy of 94.9% at quarter ed. Above the fourth quarter level and exceptionally flat with the prior years. Revenues for our portfolio increased 2.4% over the prior year, driving a 1.7 nkt in noi compared to a year ago. We expect this market to remain relatively stable over the repain der of the year. Job growth continued at a slower but steady pace growing pace during the quarter. The atlanta market continues to suffer as it delivers new multi-family units remain ahead of absorption levels. Our portfolio of six properties showed improvement over the quarter with property levels increasing 4.7% in the quarter and 95 1/2%. Concession levels did increase to 1.3% of net potential rent offsetting some of this improvement. We do expect continued softness in atlanta for the remainder of the year with occupancy expected to continue dropping 1 o to 1 1/2% and concessions averaging 3 to 3 1/2% of net potential rent of the remainder of the year. We continue to believe this market will provide solid investment returns and job growth is expected to improve in 2003. As expected we saw increased competition in austin and dallas during the quarter. Occupancy levels held up fairly well during the quarter at 96.2% for austin and 92.1% for dallas. Supply pressures and job losses slewed rent growth and increases concession costs causing it to fall as compared to fourth quarter. We project occupancy levels for austin portfolio for the remainder of the year to continue slipping as oversupply works through the market leveling off between 92 and 93%. We expect occupancy for our dallas portfolio to remain around 92% for the remainder of the year. We project concession levels for both markets to remain at the current high levels for the next quarter, improving to more normal levels the second half of the year. Our smaller markets have historically demonstrated lower growth but have proven to be more recession resistant over the last few months. It produced 2.5% noi in the first quarter led by columbus, georgia, and jackson, mississippi. In summary, we face challenging market conditions in several of our markets over the last few quarters. We believe most of our marks are bottoming out and we will see a gradual improvement later this year and tweer. We believe our occupancy and concession are on track for april. Given the tough operating environment operating we are helped in this by reduced interest expense. Our weighted average debt cost is now 6.3% down from 7.1% a year ago. And only 89 pllz or 11% of our debt is variable rate. On a comparative basis with last year, we are also benefiting from an $11 million reduction in cash and reflected cash balances. This is a result of debt reduction and a concentrated management effort. Conse qeptly our debt is down by $8 million and our interest expense was reduced by 1 pi$1 million or 5 1/2 cents a share from the same quarter a year ago. After comfleeting over $200 million of refinancing last year, we had a quiet first quarter. We still anticipate up to $50 million of refinancing this year, including about $10 million in the second quarter. We do not expect this to have a significant impact on interest expense. Our forecast for the year assumes an increase in short-term interest rates of 150 basis points in the second half of the year, projected based upon the current forward yield. The fourth quarter showed an improvement in debt and fixed charge coverage compared to the same period a year ago. Our debt service coverage includes from 2.15 to 2.31 and our total debt as a percent of growth real estate assets dropped. The improved coverage was as a result of the steady improvement in oak paeps at our properties, lower interest rates and refinancings and reduced amount of debt. As you know, our properties are in excellent shape. We anticipate that recurring capital expenditures for the year will be up very slightly from last year to $380 per unit equal to 57 cents per share. Variable for distribution is forecast to be about 2.24, slightly short of the dividend payout. Our free cash flow, which includes nonreal estate depreciation and loan cost aamortization is forecast to be 2.41 for 2002. In the second quarter of 2003, assuming that anticipated acquisitions take place, our free cash flow and fad should cover our dividend. Moreover, difdebd coverage improved slightly over the level of a year ago and the increased balance sheet capacity should help us improve our cover further as we find attractive acquisitions. We reemphasize our dividend level is not a question in the board's mind even at the low ed of our internal ffo estimate. At quarter end, we virtually completed construction on our four remaining development properties located in nashville, lexington, kentucky and memphis. Of the 1291 total planned apartments, 75% were leased and 70% were occupied. We have 250 apartments to lease to reach 95% occupancy at all four properties. In april, the occupancy of these four properties increased by a total of 64 apartments. And concessions which were running at 18% last december are down by 6% to 15% of revenues and this downward trend will continue as the occupancy steadily builds during the spring and summer. We expect the just completed development properties located in the highly competitive memphis markets to take the balance of this year to stabilize while the lexington and nashville properties should stabilize by mid year. Our forecast for this coming year assumes a .3% increase in noi in our same store portfolio. Our concessions are forecast to improve slightly in q 2 and q with 23 and settling out to more normal levels by fourth quarter. Second quarter we are forecasting same store occupancy and noi to be low the level of last year. With the trend continues to improve with favorable results compared with the first quarter of this year. Same store numbers on a year-over-year basis are forecasted to urn positive by the third quarter and fourth quarter. In projecting this year, there is a still a lot of uncertainty associated with insurance as eric mentioned, this policy renews in july and real estate taxes. These two categories total over $26 million expense and are particularly subject to cost pressures and difficult to forecast at this time. With these assumptions, and excluding any acquisitions or dispositions our base case forecast for ffo continues to be $2.80 per share with a range of 2.77 to 2.82. We expect in the second quarter and fourth quarter to report 70 cents ffo per share and 72 cents of ffo per share in the fourth quarter. As we mentioned, our forecasts do not include the use of our $25 million to $50 million to make acquisitions. This will be -- if we can find the right transactions. We are actively working on several deals both independently and as part of a possible joint venture.

Thanks, simon. We are making progress to position the company to grow ffo over the long term. Last two quarters have certainly presented some tough operating conditions, but we think the signs are there for a slow and steady recovery beginning later this year. Our balance sheet continues to strengthen and our debt financing is in sound shape. Our difdependent is secure and currently paying an 8.8% yield based on pricing as of the market close yesterday. Our capacity and flexibility to pursue acquisitions and add additional earnings is growing. We believe our current stock price continues to offer a discount opportunity to the stabilized operating value of our properties when operating at historic norms. We look forward to the rest of this year and continuing to grow value for our owners. That clues our prepared comments. And we will be glad to answer any questions we have. Paula, back over to you.

At this time we are ready to begin the question and answer session. If you would like to ask a question, please press star one. You will be announced prior to asking your question. Once again to ask a yes, please press star one. Our first question comes from rob stevenson of morgan stanley. Sir, you may ask your question.

Good morning, guys. What was the unit turnover rate in the first quarter and what is that compared to the fourth quarter and the year ago?

Let's see. The first quarter, we turned over just over 5,000, same store portfolio, we turned over right at 4400 unit just, about 2% ahead of the same quarter last year, so it's up slightly year-over-year which is really the valid comparison. I will say if you compare q1 of this year to the fourth quarter, the one ended just last year, it was actually down a little bit. Turnover is such a seasonableal thing, you have to compare it season to season to get a good because recall ter of what is happening. It was up slightly at 2%. Early indications are that april it is trending down a little bit. We are comfortable where it is right now.

And it seems like the comments that you guys made before was that april you guys are seeing was pretty decent, you didn't see a sort of slippage back into sort of poor operating territory, unlike some of the other multi-family operators. Is that accurate?

That's accurate. It's honestly being helped to a large degree by memphis continuing to show some recovery. We do think that atlanta and dallas will be a little bit weaker than what they have been, but we think memphis is on the uptake and we are seeing some improvement there. Some of our other smaller markets continue to be steady. And then in terms of the markets which you would potentially acquire, have you seen any weakening of pricing in assets or still just too high at this point?

We have been out there looking for quite some time, and honestly we are starting to finally see, if you will, some seeds of change take place and really -- cap rates are continuing to hold fairly firm. The markets that we're looking at. What you're seeing is thefec of the of the -- the effect of the weaker operating market number. And then this projections for noi performance over the next year to two years is -- it's hard to get real aggressive in that regard as well. So we are starting to see slowly but surely some pricing starting to come our way, particularly some of these new lease-up developments are some of those that have some financial -- financing on them. They are starting to fill out in the operating environment. We remain encouraged.

What is the current thinking now on dispositions given the sort of continued decent environment and robust market for the assets, hoff you guys thought seriously about selling?

We have. We have a history of doing just that as we sold some properties last year and continued to repurchase shares the early part of last year. At present we really believe the best strategy to pursue for the moment, for our shareholders centers on improving earnings growth. Remain focused on finding attractive opportunities to deploy the balance sheet opportunities we have generated and adding earning assets to the ball an sheet. As cap rates are strong, we are seeing pressure on pricing as the noi performances are weaker than they have been. Honestly somewhat in our own portfolio. So the interest rates are favorable, we think that the market is really turning more towards a favorable acquisition environment for those that have the strength to do so and have the capacity to do so. Long term we do remain very focused on initiating a more active disposition program with a focus on a number of our tertiary market properties and remain confident we'll be able to capture full market value.

One last question, simon, what's the sort of delta you're looking at in terms of renewing the insurance. How big could the gap be between what you guys are expecting and what you could actually wiped up signing at?

We have a lot of discussion going on about that right now. Of course it's very uncertain. We have built into our model 40% increase, which is up from the 25% increase that we had earlier this year. We think that that's fairly realistic.

What we are also having to look at, divorce, is more creative approaches to the way we manage our retention levels and captives and things like that. It's just a hugely moving target right now. With the market being what it is and expected to be for some time, we'll have to get a little bit more aggressive and extensive in our risk control and retention efforts. We are hopeful the net result of that will be to keep pricing on the premiums at a reasonable level. We hope we have it covered. We think we do, but it's not certain.

What type of magnitude are we talking here? What's the insurance cost for the last 12 months or expiring in july?

It's about -- we are looking at about 4 to $5 million nut.

Okay. So you see a 40% increase on top of that?

Yeah.

Thanks, guys.

Thanks.

Paul pierre of raymond james and associates. You may ask a question.

Good morning, guys. The numbers you quoted earlier, I guess it was al talking about an noi metric in the smaller markets of 2 1/2% jrgs was that a same store q1 02 to q1 02 number. So they are doing better, is that correct?

They are having a more stable performance than some of the others. Columbus, georgia, where we have 1,00000 unit property has been a huge component of the performance for that sector. It's been aided quite a bit by its proximity to fort benning and the military call-up and so some of these smaller markets in this environment have -- and so near another military base. They have really done well in the last couple of quarters. It may be, paul, say we have actually a couple of properties, probably 1400, 1500 units which are fairly close to fort benning and say warner robins in norfolk, virginia, some of the smaller ones. These properties have done very well.

And then as far as concessions are concerned, are you really talking about free rent when you talk about concessions?

Yes, je.

How does that vary from site -- one of your better performing markets to one of your weakest? I don't know, maybe austin in terms of what's being offered right now?

It's -- we control it pretty aggressively in how we use concession practices and really limit it to define units and for certain time frame and things like that. In places like austin, frankly, in memphis, over the last couple of -- last couple of quarters, it's been as much as two months. In some of the markets that have done better for us, jacksonville and some of the other steadier markets, it's either been no concession to maybe you weigh the pro-rate for the current month of move-in. Kind of zero to two months.

Fair enough. And now you're seeing some pressure come off that?

Well, we are seeing -- it depends. We are seeing it come off in memphis, but we are seeing it still maintaining a pretty healthy level in austin and in dallas.

And in aggregate, paul, we did see the pressure come off in the month of april.

April is better than march.

Okay. Bill has a question.

Hey, guys. Could you discuss any trends that you're seeing or changes in trends for tenants who leave for home ownership and whether there's a difference between the big markets and small markets as far as the pace of that goes.

We haven't really seen a whole lot of change. The home-buying market has been very, very strong for a couple of years now. It's always been the number one reason for move-out within our portfolio. I do think that the --

Sorry about that.

But we have haven't really seen a lot of change over the last couple of years. It's been real heavy and real strong. It accounts for well over half of our move-out. And it's been that way for some time.

Any difference between big markets and small markets for that percentage?

Not really. I mean it varies somewhat between really more of the -- sort of the product level -- if you're in some of what we'll call the more moderate priced product where you ten to get a higher percent of rent are by necessity type profile, why you tend to have less move-out as associated with home buying. Higher priced product in the southeast, you -- that's the way it always is, move out for home buying. And so whether it's dallas or whether it's jackson, mississippi, those characteristicks, at least in our region of the country have always remained pretty much the same market to market. It's really more the product pricing points that drive the difference.

Thank you.

Thanks, guys.

Richard perly of apb investments.

Good morning. I'm wondering, you gave a lot of good detail on the -- i guess your quarter by quarter breakdown of where you think the noi trend will go. Could you wrap that all up into one. What do you think the same store number will look like for the year combined for all the markets?

Our forecast, richard, is .3% increase for same store noi.

.3 positive?

Yes.

Okay. And then -- forgive me if some of these are kind of background-type questions. Regarding the definitional difference between what you're calling your fad and what i think you termed cash flow, if you could just entertain me on that and kind of walk through what the material differences are?

Sure. The ream differences that are pre-cash flow adds back are depreciation and nonaamortization of real estate assets and also adds back amortization of our financing costs.

Just noncash items?

Right.

And in relation to that question, what are your overall kind of big picture sources and uses for this year. You have your development projects that are kind of in process. How much more do you have to spend on those and then where do you think you're getting, you have your free cash flow and acquisitions and developments. If you could lay out some broad strokes for me on that, I'd appreciate it?

Sure. Richard, first of all, in our base forecast we have been discussing today, we have not forecast any acquisitions or dispositions. We do have another scenario built around acquisitions and addition positions, but those are very hard to project. We don't with an to build the forecast based on that. We don't want to --

Understood. In broad strokes, first of all, our development capital expenditures are complete, so we should have no more capital expenditures after that. Very broadly, that completes. We have about $18 million or so of total capital expenditures associated with the current portfolio of what we have for this year. And that would be recurring and also will be called revenue enhancing. That is projects that are evaluated on additional cash flow. That would also include our corporate expenditures.

Right. And so in -- very broadly, we see ourselves -- probably about, if you're like me, about $6 million or so of capital expenditures ahead of our ffo -- excuse me ahead of our fad or something like that.

Okay. Last question is, in terms of your financial flexibility, where is your line at this point in time. Looks like your debt to asset ratios are essentially in line with many of the other apartment guys. Where are you on your line, how much is drawn and what's the total capacity?

We have -- at quarter end we had zero drawn on the line, but we were using about $23 million to support some of our tax-free bonds. That was of a $70 million line of which -- so in broad terms we had $45 million or so available to draw -- which was available to draw on that line. We probably have an additional 10 or $15 million of capacity over and above that. That would not be included. That's really a snapshot of where we were quarter end.

Fantastic. Thank you very much. I appreciate the time.

At this time there are no further questions.

Thank you, paul. We appreciate -- appreciate everyone joining us on the call this morning. Let us know if you have any questions.