Mid-America Apartment Communities Inc (MAA) 2002 Q3 法說會逐字稿

Good day and welcome to the Mid-America third quarter earnings release call. At this time we'll turn the call over to Eric Bolten CEO of Mid-America Apts.

Good morning this is Eric Bolten. With me this America is Simon Wadsworth and Chief Financial Officer and Al Campbell Vice President of Financial Planning.

Before we proceed as well as instructions on how you can obtain additional information on our results. This morning we will make forward looking statements please refer to the safe harbor language. Which describe risk factors that may impact future results. This call is being recorded. To obtain tape a copy of yesterday's press release we direct you to website at www.MAAlCampbell.net a replay of this morning's call will be available through November 11th by dialing 800-938-1595.

Thank you in our prepared comments this morning we will provide additional insights on third quarter results. I'll start with over view on operating results for the quarter, Al will then recap portfolio performance by market segment and provide insight into what we expect from major markets going forward. Simon will discuss balance sheet and forecast for the rest of the year and then we will open the phone lines for questions you they have. Our prepared comment the last about 15 minutes.

Leases and occupancy results for third quarter continue to reflect tough market conditions 94.7 percent which is down from 94.8 the proceeding second quarter. Lease traffic declined 14 percent as compared to same period of last year and concessions continue to remain high. Al will provide more information on that. In addition to the slight eye occupancy revenues up 9.7 percent over the third quarter of last year the job loss and the weak economy take their toll. Off setting these trends was the slight decline in unit turn over as same store resident move outs were down slightly by .7 percent.

While demand levels continue to be soft we're encouraged by the steady decline in construction starts in most of our markets and we remain comfortable that market conditions have bottomed out throughout the majority of our portfolio and we continue to believe we will not see meaningful deterioration from our portfolio from this point forward. Various initiatives and programs associated with on sight operations productive continue to post solid results as operating expenses posted only a 1.8 percent increase on a same store basis over the comparable quarter a year ago. Total property levels expenses increased by 3.3 percent as higher cost incurred and the renewal of property insurance. I'll turn the call over to Al now who is going to talk a little more about our market.

I'll begin by providing over view markets contributing most of our performance over the quarter. Strongest revenue growth compared to the prior year were Memphis 2.7 and Houston with 2.5. Our smaller markets as a whole also provided solid performance growing revenues 3.2 percent over the prior year. Our Florida markets of Jacksonville and Tampa continued steady flat performance as compared to last year. Most challenging markets for revenue growth were Dallas with 9.3 percent decline. Austin 9.1 percent, and Atlanta 2.4 percent -- we were encouraged by the continuing improvement of our Memphis portfolio, occupancy over the quarter increased 2.5 percent over the prior year while concession levels slightly improved the. The Memphis market is continuing to improve while a number of jobs in the market has increased 1.3 percent from its low point in January of that year.

We expect continued stable perform from our Memphis portfolio throughout the remainder of this year and into 2003. Dallas was our most challenging market as market as average occupancy slipped 2.4 percent from the prior quarter. It Continues to expand negative absorption and substantial new supply deliveries occur amidst continued job losses. In contrast to our many other markets concessions in our Dallas portfolio are significantly increasing currently at 4.7 percent of net potential rent We expect Dallas to remain weak for the next several quarters .We also saw continued softness in our Atlanta portfolio as sequential progress achieved over the last few quarters essentially stalled producing revenues flat with the prior quarter and 2.4 percent below the prior year. Multi-family permating has begun to slow with a 10 percent reduction over the 12 months, the job levels continue to be well below the prior year. We expect to see the Atlanta market to be difficult throughout the first half of 2003 with recovery beginning as the national economy improves. As mentioned our Florida markets of Jacksonville and Tampa remain relatively stable during the quarter producing revenues essentially flat with the prior year and sequential quarter and ending the quarter with stable occupancy. Jacksonville with 94.9 percent and Tampa with 92.9 percent we expect continued stable performance from our portfolios in these markets as we see no significant imbalance between supply and demand in the near term. Also as mentioned we were pleased with the stability of our portfolio and properties in smaller tiered markets during the quarter which produced solid revenue growth of the prior year led by jackson, TN with revenue growth of 5.4 percent, Jackson, MS with growth of 4.2 percent, Little Rock 4.4, and Columbus Georgia 3.3 percent this performance reflects the strength of our diversification across large, middle, and small tier markets throughout the southeast.

Over all we expect a tough market environment to continue with only slight general recovery beginning in the third quarter. We are projecting little rent growth with improving concessions during the second half of the year. We continue to pursue numerous acquisition opportunities in our venture in large area and growth areas of southeast and Texas with current activity in Houston, Dallas, Atlanta, Jacksonville and Nashville. Acquisition markets continue to be very competitive and we remain very disciplined in our underwriting approach. Simon...

This is Simon. We completed the purchase of Preston Hill in Atlanta for 33.5 million at the beginning of the quarter and we expect to contribute it as our first investment into our joint venture with Crow Holdings. We'll apply the proceeds of the sales 2/3 share that Crow will be buying to reduce our lines of credit. We completed the negotiation for 130 million for the joint venture and will be using this to finance the additional investments over the 3 to 6 months. As a reminder we will have a 1/3 joint ownership and total equity investment from Crow and Mid-America of 50 million dollars. Our average interest rate continues to drop at the end of the quarter with 6.0 percent. We completed only $15 million but did execute 100 million dollars of forward swap bringing the total of answered swamp commencing next year in 2003 to 175 million at a blended all end rate of 5.95 percent. This compares to 179 million of fix the rate securities in 2003 at a blended rate of 7.09 percent. So we locked the interest rates of 1.14 percent or $2 million a year which has been included in our forecast for next year. We have successfully completed negotiations with (inaudible) increasing our credit facility with them for 550 million dollars as of September 1st. This will provide us with the major refinancing we have scheduled for next year, these include 142 million-dollar maturity on March 3rd on which the refinancing activity is well under way.

In October we completed significant refinancing. First was to refinance $30 million tax free bonds. Despite increasing the amount of these bonds at a fixed rate by 5 million dollars we will generate 2 cents per share on this refinancing and using a window in the market for perked stock in October we also completed the refinancing of our nine and-a-half percent series E preferred? We repurchased the series at a premium of 7 percent which recognized the fact that this contained a prixy (ph) term was not callable we financed it through a combination of $12 million that we issued nine quarter percent yield, a direct placement of $10 million over series G preferred at eight and five eighths percent yield and $5 million from our credit facilities. The 10 million series G priva directly to private investment group. It contains provisions whereby after three years with one years notice we can call ESU (ph) or the owner can put it to us stock or cash, our choice. As a result of this refinancing we realized savings of half a cent to one cent per year in capital cost on our preferred stock and we reduced the foot liability that we were facing from $25 million to $10,000,000 dollars 3 years out and we obtained one year notice to address potential liability and most importantly we don't have to reserve Idle balance sheet capacity to fund future growth. We improve our debt service and fixed charge coverage our debt service coverage improved from 2.7 a year ago to 2.31 and our fixed charge coverage improved from 2.29 to 2.36. with (inaudible) approaching stabilization we have only (inaudible) which Grand View Nashville is only is 93 percent occupied, reserve (inaudible) phase 2 is at 84 percent occupancy and reserve (inaudible) phase 3 is at 64 percent occupancy. These three properties should reach full stabilization during first part next year increasing our financial flexible.

We're planning a $30 million of refinances when we will prepay 60 million of existing fixed rate mortgages and switch additional line of bank line of credit to our expanded Fannie Mae credit line facility further reducing our interest expense. We'll fix the rate on additional $25 million of our doubt there awe swap either during this quarter or our next. After crest on hill on the joint venture the interest rate on approximately 86 percent of our debt will be fixed or caps and while we cannot eliminate all interest rates we substantiality reduced for the next year. We made slight a adjustment to our forecast and to be the forth quarter F F O to a range. 69 to 70-cents with a forecast for the year in a range of $2.75 to $2.76 cents. We're now projecting same store N O I to drop by 2.6 percent on a full year basis. On a three -- .3 percent decrease in revenue compared to slight increase that we previously anticipated for next year. In our press release we think we're taking a conservative approach to forecasts in the years F. F O, which two and-a-half percent reduction in femstore (ph) NOI we think that a range of $2.76-2.82 cents per share is realistic and included not only projections of a tough economic environment but also a 15% increase in our insurance rate and a 2% same store increase in state taxes. We project the variable interest rate off the forward yield code, one factor impacting our projections for next year is the rate of investment with Crow Holdings if the investment proceeds as anticipated we should achieve result necessary upper range. If the investment is delayed our results should be at lower end. You'll notice our distribution is on 12 cents per share on a 3 million reduction. This reduction is a timing issue. On a full year basis we're still forecasting returning CAPEX of 11.85 million or $385 a unit very close to last years. Forecasting fad for there year of $2.19 per share identical to that the 2001. For 2003 we're forecasting fad in the range of $2.18 cents a share to $2.28 a share based on recurring capital of 400 a unit. If our occurring cap expenditures stay at the same level we may cover our dividends in the later half of next year-partially on our ability to find acquisition for the joint venture. We're forecasting $3.8 million of non-cash charges on a fuel year basis equal to 19 cents a share. This is important because it takes our plan to free cash flow for this year to $2 and 38 cents 4 cents greater than our dividend.

Despite the very challenging operating environment we continue to post fairly stable operating results and importantly continue to improve the balance sheet and cover ratios. Our investment focus on products catering to the largest segment of the Reynold market located some of the countries most stable job growth markets will continue to provide a platform for long term steady predictable and growing revenue performance in addition by diversifying investments in source that is market tiers across the Southeast region and timing our exit from new development at the right time, we have further positioned the balance sheet to deliver stable and predicable results during this down part. Our properties are in excellent shape and well position for stronger revenue growth as market conditions improvement as a result of intense focus on property management operations and careful execution we believe Mid-America is very well positioned for steady and increasing earnings growth. Our current dividend remains level within out the current range ever forecast and further strengthening this coverage is a major priority for us. That's all we have in the way of prepared comment. We will answer questions you have.

At this time if you would like to ask a question press the one on your phone. To with draw your phone press the pound key. Our first question from Rob Stevenson of Morgan Stanley.

Good morning. Simon, can you go through the -- maybe I missed it but the basically your same store NOI and occupancy assumptions underlining the guidance for next year.

Sure with forecasting the NOI to be negative 2.5 percent for next year, which we think is conservative. Underlying that revenues with forecasts to increase .2 percent and our expenses will be up 4.6 percent and a lot that was expense increase is driven by insurance cost for the full you're for the increase we had this year and 15 percent forecast mid year and next year and I mention two percent increase in real estate taxes.

What about occupation. What you looking at this flat, down, up.

We really basically forecast next year a 50 basis point drop on occupation for next year average basis.

And I think Eric you mention said something about the collection losses and bad debt expenses. What was that as a percent of revenues during the third quarter.

As a percent of revenues about 1.1 percent, which is up a bit. It usually runs a little below 1 percent in the range ever .8 to 9 percent and so it has jumped up little bit.

And that was similar move in from second quarter on a sequential basis or was that just a year over year.

The same -- what I gave you is year over year. In two Q 24 and Q 3 is of 1.1. It's holding steady but its over last year.

Okay and in terms of people coming through the door when you look at their -- run credit checks on them are you seeing any different in the credit quality nature of these people? Are you seeing more bankruptcy or delinquency necessary their credit cord.

Maybe on the a lot but a little bit. We see more of it in the portfolio but you know really the issue is just not as many team coming in the door at all.

Okay. What was the occupation trend during the quarter? Did you basically hold the same level through the quarter or increase at the end.

It decreased a little bit as the quarter proceeded. We were running just around 95 percent for the first part of the quarter and it trended down to 94 percent by quarters end.

And what of the gap between economic and fiscal occupancy

It's about 8 percent. Economic occupancy is running in the 86 percent range after you factor in concession, delinquencies and everything. Which is just slightly down about 30 or 40 basis points from last year.

And lastly, turn over. You said the turn over was down 5.7 percent. What of nine aggregate number.

The actual turnover rate for the nine months we turned over on the same store biz 15,282 units which compares to 15,300 which compares to 15,387 units through 9 months of last year so we turned out about 105 less this year so it's down slightly. It works out to about .7 percent over all.

Okay and given that you have 30 -- how many units are in the same store portfolio what's the aggregate percentage 60, 70 percent.

It's returning around 68, 69 percent we think we still got some room to go, we would like to see that number around 65 of a little less than that.

Thanks.

Our next question from Bill Crow of Raymond James.

Good morning it's Bill and Paul here. Good morning. A couple of questions. Going back to the economic occupancy just a minute, was it your comment it was 86 percent versus 94 fiscal.

Well actually yeah, at the end of the quarter it was -- yeah, I think those numbers are basically right 86-94. Somewhere in that range and it's been driven by the -- the spread is a little worse this year than last year slightly and it's a function of the concessions.

Can you comment on those concessions in the trends.

Well, you know as we reported I they were down in this quarter that just ended. And those numbers I gave you there are year to date. On an overall basis concessions last year in Q...last quarter sequentially concessions were running about 3.3 percent of our net rentable income so 3.3 percent in Q two is down to about 3.1 and largely that's Memphis getting better, we think it's going to remain high in this range going forward next two or three quarters as we expect concession to pick up and hope pretty high in Dallas for a while. We continue to believe by the time we get on Q three and Q four next year that will come back.

The difference between the two numbers.

Okay I think it's concessions is -- I'm going to give you a rough range here, but I suspect that the concession system 75 to 80 percent of that number with the jump in delinquencies being the balance of it and vacancy is up a little bit too. The other things in play here too is on the comparative basis to last year, we're seeing that the average on that vacancy point that the average down time between turns is slightly higher where last year we were averaging around 17 and-a-half days vacancy between turns. Now we're averaging 18.1 days vacancy between turns. So you got pressure between on economic occupancy as a result of vacancy, delinquency is 10 percent of it but big percentage is concessions.

And over the quarter what happened with the trend in concession.

Well their trending down and that's primarily because of Memphis. We think that concession are trending up in Dallas, we think they are holding pretty steady in Atlanta. We think they are trending down which obviously is the largest segment of our portfolio is in Memphis and they are trending down in Memphis. Pretty much holding flat to not that high in most of our other markets particularly the smaller markets so on balance we feel that concessions are going to continue to sort of hover in this range and if Memphis continues to improve we may see some surprises on positive side.

But during the quarter your occupancy declined toward the end of the quarter so special a mistake to lower concession -- is that what cost you the occupancy is lower concessions? It seems they should go hand in hand.

Not really. I have do look at it on market to market basis. What happened is the occupancy fall off and the slight trend down was a function of Dallas where as the trend down in concessions kind of going the other way of a function of Memphis. So we have seen concessions rise appreciably in Dallas which mirrors it is occupancy issues this so it's two different market factors in play here and I think you have to be careful about extrapolating that over the whole portfolio.

As far as the guidance is concerned, as you look on into the next year and the quarter could you give us some idea of what you see -- how the occupancy will unfold next year down early and then coming up toward the end of the year.

We focused quite a bit on the concession environment and as Eric mentioned we are -- we have projected a fairly significant improvement in the concession second half of last year.

Next year.

Next year, and that is pretty key to next year...do you want to address the occupancy...

And we expect to head in the beginning of next year about where we are now and carry that to the first couple quarters. See a slight improvement in the back half but essentially flat where we are now.

And on the net basis what's important to keep in mind if you look the total 2003 occupancy compared to average 2002 occupancy next year is actually 50 basis point it is lower than 2002 for the year.

Translate to I think is a .3 percent increase in our projected same store revenue for the portfolio, but we think that is pretty conservative giving that we are starting from a pretty low base this year.

One more question. Regarding acquisition any activity next year at least as far as your comments on the guidance is considered to be in the venture.

No, we're at this point the only acquisition contribution we factored into our numbers is the Preston Hills deal that we bought in Atlanta back in first part of this quarter, third quarter and we we're going to get the freddy (ph) (inaudible) closed now in another week roll that into our joint venture but at that point given the uncertainty we have not factored any into our forecast any assumptions of any new acquisitions. We have several we are looking at and as you know the market is competitive on that front right now and hopefully we're going to be patient and get some though.

But those would be in the ventures as opposed to in the company.

That's correct.

One question. Looks like the fad is set to cut interest rates next week. Could you tell me if you see any trends change necessary trends in the number of renters leaving to purchase homes and do you anticipate and change in that trend in your model going forward.

Not really. People leaving us to go buy home has always been our number one reason for move out. It's been higher this past year than in the past but I don't think so bill. We -- in terms of any further deterioration from this point forward it's hard to predict. On balance, I think that the majority of the population is going to go out and buy's home. The trends of balance are going to hold firm if there is another 25 or 50 basis point reduction in rates I don't think it's material negative impact from where we are now.

Thanks.

Next question Malcolm Clisold (ph) of JR Investments.

Actually my questions were answered and I couldn't remember which button to push to cancel them. Related to economic occupancy and just to clarify the 50 basis-point drop in occupancy, is that economic occupancy or physical occupancy or both.

I'd say it's really both. They been sort of -- the spread has been trending consistently. Now it's worse earlier in the year as a function of growth and concession and a little more pressure as resulted to delinquencies but it's been holding consistent spread. Hold know consistent for about six months.

Talking about the projections for next year at 50 basis point system reduce in physical occupancy and then we'll see a slight improvement in economic because of the concession environment ism prove being particularly towards the back end of the year.

Now there's an eight percentage point difference between physical and economic occupancy. But concessions are only effecting -- is it 3.3 percent.

3.1 percent.

But that doesn't seem to make mathematical sense 75 percent of an eight-point difference would be 6 percent.

Well I think you actually come out in a couple different numbers.

Economic number system we take out vacancies concession and delinquency, and vacancy includes a dollar vacancy not really the physical its the dollars lost during the month which includes the number of days a unit is down during the month so that has an impact on it as well so once you add together the vacancy dollar loss the concession dollar loss and delinquency dollar loss which we can help work with you offline but that's how you get to that number.

The concession environment -- I'm going to guess about 60 percent of spread between vacancies, between physical and economic occupancy, you know concessions is probably 60 or more percent of that number. vacancy is another part of it, the dollar vacancy that Al is referring to and delinquencies is the smallest part of it. of it.

Thanks very much.

Again if you would like to ask a question, press the one on your phone. It appears we have no further questions.

Thank you very much. We appreciate you being on the call.

That concludes today's teleconference. You may now disconnect your line.