Mid-America Apartment Communities Inc (MAA) 2003 Q2 法說會逐字稿

Good afternoon. Welcome to the Mid-America Apartment Communities second-quarter conference call. I will now turn the call over to your host, Mr. Eric Bolton.

Thank you. Good morning. This is Eric Bolton, CEO of Mid-America Apartment Communities. With me this morning are Simon Wadsworth, our CFO, Al Campbell, Director of Financial Planning, and Tom Grimes, Operations Director in our Property Management Group. Before we start I need to remind you that as part of our discussion this morning we will make forward-looking statements. Please refer to the Safe Harbor language included in our press release and our 34-F filings with the SEC which describe risk factors that may impact future results. We will post a copy of our prepared comments as well as an audio copy of this call on our web site after we wrap up this morning.

With that introduction, let's get started. Mid-America had another good quarter and continues to generate one of the stronger performances for the apartment sector. On a year-over-year basis funds from operations grew 4.7 percent. And adjusted funds from operations grew 5.1 percent. Mid-America shareholder returns exceed the May (ph) REIT apartment index on the year to date basis and also beat this performance index on a one-year, three-year, five-year comparison.

Mid-America's unique strategy focuses on apartment product appealing to the largest segment of the rental market diversified across large, middle and small tier cities over the stable demand region of the southeastern U.S. continues to deliver consistent FFO performance. Overall operating results were in-line with our forecast and continue to reflect a sluggish revenue environment.

Year-over-year comparisons highlight the demanding leasing conditions. For the second-quarter, same-store revenues were down 1.8 percent as compared to last year. However, on a sequential basis comparing to the first quarter of this year, same-store revenues were up slightly at .5 percent. We do feel that market conditions will hold steady over the remainder of the year and that we should begin to see strengthening and revenue performance early next year.

We believe it's critically important during this weak part of the leasing and revenue cycle to protect shareholder value and avoid the pressure to trade off long-term value for short-term performance. You'll note that spending on capital improvements at the properties has remained strong. And we've avoided the temptation to run out and artificially boost occupancy and short-term revenue performance by drastically reducing pricing, to reduce rents, or excessive concession practices.

We believe it's important to protect the quality of the properties and resident profiles during these weak periods, in order to be in a solid position for leasing and greater pricing leverage when market conditions improve.

As we've been reporting Atlanta and Dallas are currently the softest leasing markets in our portfolio. I expect that we'll see improvement in the Dallas market next year and it will be possibly early 2005 before we see the Atlanta market really recover. While the pressures in our large-tier markets will continue for several more quarters, our middle tier markets such as Memphis and Jacksonville and our smaller markets such as Jackson, Mississippi and Little Rock, Arkansas continue to produce positive year-over-year growth.

Through a combination of generating overall steady operating results, along with executing a number of opportunistic refinancings and successful deployment of some of our balance sheet capacity in new investments, we have continued to improve the balance sheet flexibility, fixed charge coverage, and importantly our dividend coverage. We expect to continue to make steady progress over the next year and feel very good about the position of our properties and our balance sheet as we look towards economic and market recovery in 2004.

With that introduction, I'm going to turn over to Tom, who is going to review property operations. Tom?

Thank you Eric. Property operating results are clearly reflective of the tough leasing environment. However, the new initiatives we outlined in our last call continue to have an impact. Our revised revenue retention program, community awareness programs, and early renewal practices continue to show results. Resident turnover for the quarter on a same-store basis was down 2.7 percent versus the same quarter a year ago. This marks the fifth straight quarter that we have seen year-over-year turnover trends show a reduction.

We feel this improvement is important in our competitive markets and is particularly significant, given the robust home-buying environment. We have tracked our leasing patterns over the years and have specific guidelines in place for each property on lease expiration targets. This inventory management process matches availability with demand and, therefore, minimizes downtime between turns.

Traffic volume was down this year as compared to last but showed the seasonality we anticipate and plan for. Same-store leasing traffic during the quarter was down 4.2 percent compared to the second quarter last year. But, up 13 percent versus the first quarter of 2003. Same-store occupancy was 92.6 percent at the end of the quarter as compared to 94.8 percent at the end of the same quarter last year. On a sequential quarter basis, this is up from 91.9 percent.

For the portfolio, average rent per unit has remained relatively constant, down just .4 percent from the same quarter last year and unchanged on a sequential basis from the first quarter of this year. Overall, we expect that rent growth will be flat for the year. We're pleased to see same-store concession levels decrease for the quarter on a year-over-year basis by 26 percent. This is the third consecutive quarter we've seen improvement in concessional loss over the prior year.

We anticipate concessions will remain high in Dallas, Atlanta, and several other markets throughout the balance of this year. But we expect year-end concession levels for 2003 to be lower than the prior year. In highly competitive markets we'll aggressively compete on product quality, presentation, and with pricing or concessions when necessary. However, we feel it is the wrong long-term trade off to lower customer credit quality to try and capture short-term occupancy boosts. Substantiation of this practice is evident in our net delinquencymeasure which remained constant for the quarter as compared to the same quarter a year ago.

The new on-site maintenance efficiency program we've implemented continues to post strong positive results. This program benchmarks per-unit expenses on key repair and maintenance activities. We retooled a number of aspects of our on-site staffing and work processes surrounding turn activities. In addition, we've modified a portion of our on-site incentive program to target performance in reaching these benchmarks.

One of the significant benefits realized thus far has been an improvement in labor utilization and contract maintenance services. As a result, same-store repair and maintenance expenses were down 12 percent in the second-quarter versus the same period last year. And overall property-controlled expenses for the quarter were down versus the prior year by .1 percent. Al?

Thank you Tom. On a portfolio level, our middle and small tier markets continue to help us weather the difficult conditions in our larger metropolitan areas. And our portfolio produced one of the more stable performances overall during the quarter. Compared to the previous year, our middle and small tier market revenues were essentially flat, while revenues for our large metropolitan markets declined almost 8 percent.

More importantly, on a sequential basis our middle and small tier markets continue to improve, producing revenue growth of .4 percent and 1.2 percent respectively, driving our overall sequential growth of .5 percent in revenues during the quarter. Our most challenging markets continue to be Atlanta and Dallas, where weakest in the employment sectors and oversupply issues have produced very competitive leasing environments. There is certainly no pricing leverage in these markets. And we expect conditions to remain difficult well into next year.

Our portfolios in Atlanta and Dallas both ended the quarter at around and 87 percent occupancy and we expect occupancy levels to improve slightly over the remainder of the year, but likely through increased concessions. Memphis, our largest single market, continues to produce solid results with revenues increasing 1.9 percent over the prior year and occupancy averaging about 93 percent for the quarter. We expect to continue progress in Memphis. And we believe our portfolio is positioned well to respond to economic recovery.

We also continue to see solid performance out of our Jacksonville portfolio, our second-largest market holding. Revenue growth of 4 percent and occupancy levels above 95 percent for the quarter in Jacksonville represented our single best performance. We expect continued solid performance in Jacksonville through the remainder of the year as fundamentals remain fairly strong.

As mentioned, our small tier markets of the whole produced stable performance for the quarter, led by Augusta, Georgia; Columbus, Georgia; Huntsville; Jackson, Mississippi; and Little Rock -- all producing revenue growth over the prior year and ending the quarter with occupancy well above 93 percent. We see our small tier markets remaining on-track to perform relatively well in aggregate over the remainder of the year continuing to provide stability to our overall performance.

Our portfolio began the third quarter well positioned to continue weathering the current economic softness and poised to take advantage of the expected recovery next year. Our focus on lease-expiration management has effectively spread our expiration exposure for the third quarter in the remainder of the year. Currently, less than 4 percent of our leases are on a month-to-month basis. And no more than 1/12th expiring in any one month.

Early July results bear this out, showing occupancy levels slightly up from June. We believe our same-store NOI will basically remain at the current level through the remainder of the year but will begin to improve in early 2004 and gain momentum over the back half of next year.

Our assets are in excellent condition, as we remain committed to taking care of our properties even in these difficult times. Our capital plan for the year is on track as we spent about $200 per unit on recurring capital projects during the first half of this year. With an additional $92 per unit spent on revenue enhancing projects. This appropriately represents about one-half of our capital plan for the year.

Also during the quarter we entered the testing phase of the new property management software which represents a continued focus on operating efficiency, as well as the first step in a revenue optimization program aimed at improving performance through more effective pricing. Assuming testing goes well, we plan to implement the first phase of this system early next year providing some additional support for growth in revenues as the markets recover and private pricing leverage returns.

Simon?

Thanks Al. Good morning everybody. 73 cents our FFO per share for the quarter was 3 cents above the same quarter a year ago, 2 cents above the midpoint of our product forecast, and 2 cents above first call estimates. Compared to our forecast the improvement resulted from lower interest rates than we anticipated and lower G&A costs than we had planned, primarily due to property bonuses resulting from the weak market conditions.

We sold 6.2 million of our new Series-H preferred shares, a total of $155 million at 8.3 percent. And the issuance is scheduled to close on Monday. Proceeds will be used to redeem all of our $148.5 million of Series-A, B, and C preferred stock the following day. The total preferred dividend savings will be 4 cents per share on an annualized basis. Including the refinancing of our Series-E preferred, that we completed last fall, our total annual preferred dividend cost will be reduced by 6.5 cents per share consequently reinforcing the safety of the common dividend.

We have also significantly strengthened and increased the flexibility of our balance sheet in the process. We have concluded negotiations with our bank group to reduce the cost and size of our line of credit. The completion of our development activity has enabled us to switch our financing to less expensive agency financing. And thus, we've reduced our bank credit facility from 70 million to 40 million. Beginning in July, we anticipate expense savings at an annual rate of 3 cents per share. We also brought the bank loan covenants in-line with our Fannie Mae credit facility and this provide us with simpler administration and greater balance sheet flexibility.

At the end of the quarter, we had unused capacity within our various credit facilities of almost $60 million, although we have no plans to utilize anything close to this amount. Some comments on the quarter. We recorded a $205,000 charge, 1 cent per share of FFO during the quarter, for prepayment penalties associated with refinancing debt.

We had anticipated taking the charge in the third quarter. But we were required to diffuse the debt and remit the penalty in June, a month ahead of the prepayment. The decline in same-store revenues and NOI compared to last year, was partially offset by our ownership of Green Oaks in Dallas and Jefferson Pines in Houston this year and continued progress with the lease off properties. Our fee income and our FFO from joint ventures continues to grow as a result of our joint venture with Crow Holdings.

The relatively stable performance of our portfolio and the low interest rate environment has helped us continue to improve on our five-year high for our fixed-charge coverage ratio, which increased to 2.65 compared to 2.37 a year ago. While debt service coverage improved again to 2.63 from 2.34 a year ago. These ratios will stay strong but were unusually high in the last two quarters, as we carried a greater amount of variable-rate debt than usual, associated with refinancing completed in March. We fixed the rates on these during the second quarter.

At June 30th, 81 percent of our debt was fixed, swapped or forward swapped. And with less than 10 percent of our debt maturing in the next 18 months, we're well-placed to withstand a rising interest rate environment. Our average interest rate at the end of June was 5.3 percent. We do not anticipate a significant change in our average interest rate between now and the end of the year, except resulting from our assumption of the debt with the Blackstone joint venture properties.

The $50 million of forward swaps mentioned in our press release are effective September 1st and December 1st in which $25 million replaces an expiring swap and $25 million is incremental. However, the movement in the yield curve over the past month has caused us to project higher interest rates for next year, which we have rolled into our forecast impacting us by 1 cent per share.

We've signed a letter of intent with Blackstone to acquire their two-thirds interest in our 10 property joint venture. These are good quality apartment communities in some solid locations and we're excited about the chance to get full ownership of these properties. We negotiated a price on an (indiscernible) basis and the deal of fully met our exacting underwriting standards. The acquisition is straightforward for us, since we know the properties well and, of course, have staff in place. The total value of the properties is pegged at $117 million. There is $79.8 million of Fannie Mae mortgages on the properties, which we plan to assume. And total equity, including our share, is $33 million.

We'll thus buy Blackstone's interest for 22 million. And we anticipate a rapid close. We have anticipated a September 2nd closing date in our forecast, although the purchase is subject to negotiation of a definitive contract. The price of the property represents an 8.3 percent cap rate of a normalized cash flow, although, only a 7.5 percent cap rate of this year's projected cash flow, as a result of the difficult market conditions we are experiencing.

We are exploring various financing alternatives and expect the transaction to add a minimum of 4 cents per share to FFO in the second half of next year, after the debt on the properties is refinanced, and a minimum of 8 to 10 cents per share in 2005. We have incorporated these into our forecast. The actual amount of the accretion depends on how we finance the equity part of the transaction. We have the capacity to fund this purchase using our credit line, but we're also exploring other options to fund part of the $22 million of equity including the sale of stock or of assets. We're pleased that the acquisition will further enhance our dividend coverage next year and in 2005.

We adjusted our forecast for the balance of this year to take account of the following significant changes. The favorable impact of the preferred stock refinancing -- we assumed three additional acquisitions in our joint venture with Crow over the next nine months. Same-store net operating income is projected to be down by 3 percent for the year. We previously forecasted a negative 2.5 percent, turning to a positive 2.8 percent in 2004. Interest rates reflect the latest forward yield curve as I mentioned in the new terms of our bank credit line. We've also assumed $90,000 of additional prepayment penalties associated with refinancing scheduled for the third quarter. With these adjustments, we increased the midpoint of our 2003 forecast of FFO by 3.5 cents to a range of $2.79 to $2.82 per share.

Last week, the SEC issued a staff announcement, which may cause a revision in the treatment of original issuance costs of redeemed preferred shares. This raises the question of whether we will need to reduce our third-quarter FFO per share by the amount of the original issuance costs of the $149 million of preferred shares that were redeemed in August. There seems to be a disagreement in the (indiscernible) as to the appropriateness of including these charges within FFO. This is being handled in different ways by different companies. And we're awaiting further guidance.

At this point, like some of our peers, we don't believe that it is appropriate to include these charges within FFO per share. The original -- the amount of the original issuance cost is approximately 28 cents per share. This of course, is a non-cash item and has no impact on our capacity to fund our dividend. Once the issue is resolved, we'll issue further clarification.

For the third quarter, were projecting a range of FFO of 67 to 69 cents per share, down from the second quarter due to the higher fixed interest rates and slightly higher G&A. For the fourth quarter, we're projecting FFO per share to be in the range of 69 to 71 cents per share on improving revenue. That higher interest expense before the swaps become effective. On July 1st, insurance renewal resulted in lower rates that we dared to expect. On a per-unit basis our costs were down by 5.6 percent for equivalent coverage.

With the increase in number of units, this translates into a reduction of our policy costs by 3.9 percent. Annual savings are over a penny a share effective in the third quarter, which we've rolled into our forecast. Real estate taxes continue to be a pressure point. Despite reduced property profitability real estate tax valuations and rates continue to rise. We've been very busy attempting to keep the lid on increases and pushing for assessment reductions and are presently forecasting a 1.7 percent same-store increase in real estate taxes, $300,000 better than we had forecasted at the beginning of the year. Eric?

Thanks. To recap, we continue to make progress on improving dividend coverage and grow our FFO and AFFO in a prudent manner. Our FFO performance continues to generate positive results as a function of relatively steady operating performance, opportunistic refinancing of our capital structure, and greater balance sheet flexibility and capacity. We're very mindful of protecting property and resident profile during these current weak leasing conditions and to protect long-term shareholder value.

Mid-America's portfolio is well positioned to capitalize on an improving economy and a stronger leasing environment. We look forward to continuing improvement in dividend coverage and positioning for steady growth in shareholder value. And with that, that's all we have in the way of prepared comments.

Tammy, I'll turn it back over to you and see if we have any questions.

If you would like to ask a question at this time, you may do so by pressing star and one on your telephone keypad. If you no longer wish to ask a question, or your question has been answered, you can press the pound sign to take yourself out of the question queue. Once again, if you would like to ask a question, you can do so by pressing star and one on your telephone keypad. Our first question is from Mr. Rob Stevenson.

Good morning guys. Simon, did you say if you had to include the preferred original issuance in the FFO -- it would be 28 cents a share?

It would, Rob, that is correct. The total amount of the original issuance costs were around 3.4 percent or so of the $150 million or close to about $5.8 million or so.

Okay, when do you guys expect some sort of clarification on that?

That's a very good question. This is kind of a late-breaking item. I would anticipate within the next two weeks.

Okay. Could you guys talk a little bit about the Blackstone joint venture -- how this came about? Was it them looking to sell-out? Or was it you guys just on the continual prowl for acquisitions and they agreed, type of thing?

Let me take a stab at that, Rob. We had always really anticipated this being a five-year arrangement with these guys. And I don't know if you know much about sort of what they've got going on. They've gotten involved with the Berkshire portfolio sometime back. But they've been a pretty aggressive seller of multi-family real estate for some time now. And we were coming in with sort of the five-year window. Plus, we have the ability early next year -- with the refinancing window -- to pay off that debt without prepayment penalties. So, they really came to us.

Some time back, we started having some conversations. And we've been involved with these properties for some time. We're very familiar with them. We have the ability to move forward quickly with the close. As well as, we've got the balance sheet capacity to handle it. Given that, we were able to reach a point of agreement with them on pricing. We can be a portfolio -- acquire these 10. So bottom-line, they came to us back and forth for a while. And we reached a point where we struck a deal.

Did you guys wind up picking up any promote or other sort of fee on a disposition here?

No.

And, of these assets -- I mean are these ones -- are any of these likely candidates to be sold?

Well, we don't have any disposition plans built into our forecast at this point. But I would tell you that there's probably a couple of them that we will look at moving out of by sometime late next year, as we let the year unfold a little bit and see where we are. But, no plans right now.

Can you geographically remind me where these assets are?

We have one in Austin, a couple in Dallas, Atlanta, Aiken, South Carolina, Jackson, Mississippi, Chattanooga, and Greensboro, North Carolina. So a pretty diverse group.

Okay, thanks guys.

Our next question is from Bill Crow with Raymond James.

Good morning guys. Paul is here, as well. I appreciate the call and your -- the guts of actually issuing 2004 guidance is very hopeful at this point. My question really has to do with the markets and your outlook for next year. You noted that it would probably be 2005 before Atlanta started to really show some momentum, but 2004 for Dallas? Is that a difference in supply or your job growth expectations? What is driving that?

I think it's really more of a supply issue. And think that we are seeing job growth beginning to pick up a little bit in Atlanta. But I think Atlanta has just been so beat up with the over-supply issue that I think that that market is just going to be a little bit further out in terms of recovery -- at least from our perspective it will be. I think next year will be better. But I think before we really get to a point where we are looking at pushing rents as we have in a sort of a more normalized environment -- I think it's late next year, early 2005. I think Dallas is probably six months ahead of that.

Okay, then. Sorry if I missed it. But did you talk at all about trends you have seen through July? And the fact that you had the sequential growth in the second quarter was that kind of in-line with your expectations? Seasonally, you should have seen some sort of pickup. It seems like it wasn't perhaps as big as what we have seen with some of the other companies.

I think that the pickup that we saw in Q2 from Q1 was really more of a seasonal impact, more than anything. I know that there have been some that have begun to suggest that recovery is well under way. And I think that is wrong. I think that's a little bit premature. I think, from our perspective, we're going to continue to see -- I believe, overall, in the apartment sector, pretty flat conditions for the balance at this year. I don't think it's going to get worse. But I don't think it's really going to start to pick up until next year.

Looking at July's performance, we actually saw occupancy pick up slightly -- about 50 basis points. And we saw rents pickup about 4/10ths of a percent. So, you know, continue to see very modest -- very small amounts of positive traction starting to come into play here on the revenue side. But really flat. We are really looking at on the same-store performance -- to kind of put in perspective for you -- Q3 to Q2 we're looking for NOI to be down about 100,000 and then in Q4 to Q3, back up 100,000. So on balance, kind of flat from this point forward. Until we get to 2004.

Great. That's it. Thank you guys.

There are no more questions.

All right. We appreciate everyone being on the call. (Call Concluded)