Mid-America Apartment Communities Inc (MAA) 2003 Q4 法說會逐字稿

Good morning and welcome to the Cornerstone Realty fourth quarter earnings conference call and Web cast.

Members of the Cornerstone's management participating in the conference call this morning are Glade Knight, Chairman and CEO, Olander, President, and David Carneal, Co-Chief Operating Officer.

Other company officers in attendance are Debra Jones, Laurie Dunham, Carol DeSoi, Mark Murphy and Skip Nash.

Please note that during this conference call and Web Cast, Cornerstone management may make some forward-looking statements, which are subject to risks and uncertainties.

The company refers you to yesterday's earnings news release and to its SEC filings for additional discussion of these risks and uncertainties. Now, I will turn the call over to Cornerstone's Chairman and CEO, Glade Knight.

Thank you, and thank you very much for joining us today. We welcome you to Cornerstone's fourth quarter earnings conference call and Web cast.

We released our fourth quarter results yesterday, earnings press release, supplemental financial information are posted on our Web site and we invite all of you to visit that site for further information.

Fourth quarter, FFO, 20 cents. Third quarter, in comparison, 20 cents. Fourth quarter, a year ago, 20 cents. We hope that that's 20/20/20 hindsight. We have a number of improving conditions in our market area.

As all of you know, we've been in a three-year decline in our economic conditions within the country, we're optimistic and we're seeing signs of recovery. Our job growth is beginning to occur. In fact, we can say that job growth exists in all of our major markets.

Now, those of you that are looking very closely at Cornerstone, recognize that we need that growth in Atlanta, Charlotte and Dallas-Fort Worth. We're seeing that.

We need stronger indications and we still need a stronger economy and these conditions will be addressed by both David and J. Olander a little bit later.

But the growth is there now in all of our markets. We are having new construction in the apartment, has been and continue to be on a decline in most of our markets. Mortgage rates are trending slightly higher.

Over the period of several years, we've seen the matching up of average rent payments and average mortgage payments, and of course that has spurred the tremendous boom in the housing industry. We used to have much more of a difference between choosing to rent or choosing to own a home.

Hence, a lot of our marketing is referred to is rental-by-choice, and I want for you to know that we see a lot of that. Many people choose to live in the apartment community and we talk about lifestyle, which is extremely important as well.

You're going to get some really good detail on our market areas today, and I think you'll find that it will complement the progress that we've been making overall corporately.

Just as a little bit of an update, we were pleased with our performance coming back to our stock. We posted a 21.1% total return for the year 2000. That's price appreciation plus our dividend. Already this year, we're looking strong. In less than two months, we have posted 9.4% return, so we're pleased with that information as well.

Just as a highlight, as we complete the year, as we bring that to you in the fourth quarter, as you know, we did a merger with Merry Land. I just want to report that, that has been very successful. It is accretive to us.

We picked up about 2,000 apartment communities. The overall transaction has gone extremely smooth.

We're pleased with the product, with the people, and the performance. And they look very, very good. We also on a small scale but again working all phases of the real estate market that we sold Signature Place in Greensboro, North Carolina, one of our apartment communities there, and also Polo Run in Dallas. Those were successful sales for us, and we're pleased that we did that.

Our financial highlights, one of the things that we're proud of is, we did a complete refinancing of $150 million. Olander will talk to you a little bit more about that, very favorable interest rates.

Our overall management operations, sometimes when you're in a little tougher economy, you begin to focus more -- we've focused on every aspect of our business. I would summarize that up into two areas.

Our training has been superior. We have one of the best training programs, I believe, in the industry, and that covers all employees, both our general managers, our regional people, our maintenance people.

We have an extensive training program for two purposes. For employee performance, which improves property performance, and also for employee retention, which cuts our cost and further improves our performance.

Management highlights, J. Olander was promoted to President of Cornerstone, David Carneal, Executive Vice President and Chief Operating Officer and Gus Remppies promoted to Executive Vice President and Chief Investment Officer.

We also were very pleased to add to our Board during the year, Tennent Houston, former CEO of Maryland and also Ted Gary, who is added to the Cornerstone Board.

In summary, we had significant achievements, all of them positive, during the year. We are well positioned. We do look for a strong growth and recovery. It's beginning. The demographics are beginning to improve and look better and better for us, and we'll give you a little bit more detail on that.

So at this time, I would like to turn the time over to David Carneal. He'll talk to you about the marketplace and some of our performance on our property side of it, David.

Thank you, Glade. I'll give a brief overview of our fourth quarter and yearly results for occupancy, rental rates, and same-store results along with some operational highlights from the fourth quarter, as well as goals and strategies for 2004.

On a quarter-over-quarter basis, our fourth quarter physical occupancies were 93% versus 92% last year. The average rent per unit in the fourth quarter was $671 as compared with $681, the prior year. For the year 2003 and 2002, our physical occupancies for the year was 92%. Our average rent per unit in 2003 was $674 versus $688 a year ago.

Our same-community portfolio consists of 74 stabilized properties containing 20,127 apartment homes that were owned at the beginning of 2002, and this represents approximately 87% of the current portfolio of our 23,189 total apartments.

On a quarter-over-quarter basis, fourth quarter 2003 same community net operating income declined 4% as a result of a 3% decrease in revenues from rental and other income, and a 1% decrease in operating expenses.

Our same-community average rent per unit for the fourth quarter was $654 compared with $680 in 2002. For the year ending 2003, same-community net operating income decreased 7% from the prior year as a result of a 3% decline in revenues and a 4% increase in operating expenses.

Our same-community average rent per unit was $661 in 2003 versus $685 for the prior year.

Moving on to some operational highlights and goals for 2004, we continued our commitment this year to invest in our associates by delivering topnotch training as Glade alluded to.

In 2003, our training department developed a three and a half day curriculum entitled leadership training for managers, and we successfully completed training of all the general managers and many of our assistant managers within the system. This monthly LTM training or Leadership Training for Managers walked our GM's and Assistant Managers through the many facets of our business including financial management, marketing and sales, hiring, coaching and development, as well as training for effective leadership.

In addition to our continued training and development of our front line office associates, we focused our efforts this year on delivering additional training programs for our many maintenance and service personnel.

And in 2003, we delivered to our maintenance supervisors and maintenance tech, broad training in such areas as plumbing, electrical, HVAC and appliance repair.

Operations believe that by offering quality training and professional development, we not only invest in our top assets that being our employees, but we also improve shareholder return.

In addition to training, we look to move our top line revenues through increased marketing initiatives in 2003.

Several marketing efforts were launched to target the middle market venture, our focus for 2004 is to continue our aggressive marketing campaigns to increase traffic to our properties and generate brand recognition within our core markets.

We have set goals to increase traffic 25% in 2004 through our many initiatives including grass roots marketing efforts, corporate outreach, preferred profession and employer programs, and through our in-house call center set up to handle after-hour calls and Internet leads.

A 25% increase in traffic translates into approximately 350 to 400 additional monthly leases, pushing revenues an additional $3 million annually.

We also continue to push our graduated lease program. This is a lease structured to minimize the impact of large one-time up-front concession, but to also not have a concession fully amortized over the life of the lease term. The graduated lease program is tailored to gradually increase rental payments made by a resident in the second half of their lease, thereby moving residents closer to market at the time of renewal. Another area of focus and success this year has been our in-house billings and collections.

And in 2003, we realized a $1.2 million increase from the previous year in our water/sewer reimbursable alone. And we attribute much of the success to collecting the fees in-house rather than relying on third party collection. These increases in water and sewer collections were instrumental in helping offset the large expense increases throughout our portfolio in natural gas and water/sewer rates.

We estimate an increase in water/sewer pass-through in 2004 of an additional 25 to 30%, and this increase equates to an additional $800,000.

And in addition to our continued water/sewer reimbursable program, operations have successfully tested and are launching new reimbursable programs to bill back for trash and natural gas. These initiatives are projected to add an additional $1.1 million in 2004.

Looking ahead to our markets for 2004, we project that of our eight major markets, we expect physical occupancies to be above 95% in the four markets Richmond, Norfolk/Virginia Beach, Charleston and Savannah. This is very much in line with 2003 results, and in line with our January and February trend for this year. These strong physical occupancies provide opportunities to execute pricing power within these markets.

We are targeting occupancies to be above 92% in our Raleigh and Atlanta portfolios for 2004. Atlanta is expected to create 75 to 80,000 new jobs in 2004 with deliveries have to what they have been in the past two years. These improving market fundamentals should help move overall market occupancies upward a couple of points throughout the year.

Our major markets, Charlotte and Dallas, continue to present the most challenged market conditions with market vacancies hovering around 10 to 11%. While we do see improvement starting in 2004, significant job growth is needed to help spur occupancies back to a more normalized range of 93 to 95%.

And in summary, operations generally (inaudible) 2004 as a year with improvement and market fundamental while pricing power will likely remain a challenge throughout the year in the Charlotte, Dallas and Atlanta markets, we see opportunity ahead for occupancy improvement within these markets.

Now I'll turn the time over to our President, Olander, who will review fourth quarter financial results.

Thank you, David. Your property management staff has never worked harder and we really do appreciate their efforts. It's a hard effort out there every day, and they've done a terrific job of hitting it and keeping positive in a market that has its challenges.

I'm going to first review the fourth quarter and yearly financial results, and then we're going to talk a little bit about our major market operations.

For the fourth quarter, total revenues were $44.7 million versus $39.4 million last year, and most of this increase is primarily due to the Merry Land merger earlier in the year this year.

Our property management net operating income was 24 million versus 21.4 million last year for the fourth quarter and 24 million recorded in the third quarter of this year, so we were flat quarter to quarter from third quarter to fourth quarter.

Property management expenses were approximately 2.2% of total revenues for the quarter, that's down slightly from last year and from the third quarter of this year and below budget.

G&A expenses approximately 2.4% of revenues, down from the 2.9 recorded a year ago but up slightly from third quarter and in line with our budget. Interest expense $11.6 million in line with our projections.

Net result, we generated $11.3 million in FFO for the quarter, 20 cents per common share, as opposed to $10 million last year or 20 cents a common share also.

For the year 2003, total revenues were 171.6 million versus 160 last year. Again, primarily due to the Merry Land merger. Property net operating income $93.1 million this year versus $90.4 million last year.

Property management expenses for the year were approximately 2.4%, same as the fourth quarter, in line with our projection and in line with last year. G&A expenses approximately 2.2% of total revenues, down slightly from the 2.4% reported a year ago and less than projection.

Interest expense $45.9 million, in line with projections. Net result for the year, we generated $43.5 million in FFO, 80 cents per common share.

With regard to financing activity, in the fourth quarter, there were no acquisition, disposition or financing activities.

For the year, we repositioned our balance sheet and placed $150 million in secured variable rate financing. This included a $50 million placement with Fannie Mae, $50 million through conduit financing with Wachovia, and a restructure of our previously unsecured line of credit.

The average interest rate on the new debt is currently about 2%, and it is variable rate. The new line of credit is for $50 million. It bears a rate of LIBOR plus 157 basis points, and we currently have approximately $40 million in unused credit on that line. At the beginning of the fourth quarter, our debt totaled $802 million, all of it secured.

The average effective interest rate on our debt was 5.9%.

Our fixed rate debt was 77% of our total debt with an average effective interest rate of 6.8%, and our variable rate debt had an average rate of 2.95%.

With regard to our major market operations, as one might expect, some of our markets we're very pleased with, and some we've identified some areas of concern.

Overall, we remained very pleased with that, our management staff has been able to meet or exceed the performance of our peers in most of our markets where we have fallen behind, I think we have a solid plan in place to gain a dominant position over the next few quarters, and I'm going to take a couple of minutes to review our performance in most of those markets.

In Virginia, our property has done a great job on all fronts. Rental rates have increased, occupancy stayed in the mid 90s; margins have met or exceeded our peers. In Raleigh, despite having to slightly decrease rents, occupancies have exceeded our competitors and our operating margins are inline with our competitors.

With a same store NOI decrease of 4%, we posted the best results in the market amongst our public competitors.

Operations in Charlotte, quite frankly, were a disappointment to us. While expenses were kept in line and our operating margin was good inline or exceeding our peers, our rental income decreased more that of our competitors.

We've identified some problems there and we're working on those and we do believe that we'll see some fairly quick improvements in the Charlotte area as quickly as the first quarter of this year.

In Atlanta, Atlanta continues to be a challenge from a market perspective, but we do see signs of improvement.

We reported in the third quarter that we had faced some management challenges in this market during 2003.

We believe de-staffing issues have been resolved and we see improvement in fourth quarter. Specifically, expenses were greater than they should be.

I'm pleased to report that our changes were successful in the fourth quarter. We raised our profit margin by over 4% over the third quarter to approximately 53%.

On an annualized basis, expenses were reduced by some $300 per unit. We also increased income.

With these changes, we let our public competitors in same-store sales comparisons and feel we'll see similar results in 2004.

Dallas continues to be a challenging market for us. Management has done a good job at keeping expenses inline at acceptable levels.

During the quarter, we experienced increases in marketing expenses. That's a natural in a soft market and the other big pop was in natural gas expenses.

For the future in the fourth quarter, we also began to sub-meter our gas expenses in a number of our communities in an effort to offset this exposure for the future.

Income remains our primary challenge. On the good side, we're starting to see less rental rate of erosion than we experienced during most of 2003. The bad news is that we had higher than anticipated vacancy and bad debt.

As a direct result, our operating margins were below where we'd like for them to be. As reported in Atlanta during the third quarter and Dallas, we've had some similar site management changes that have contributed to our performance in the market.

Management has done a good job at identifying the problems, has taken steps to correct them.

Management has also reassessed our marketing efforts, and we believe we'll see more positive results coming in 2004.

All that said, we still anticipate that rental rates will decrease through the first half of the year, but we do believe we'll have a solid performance during the year. On the Capital expenditure front, at the end of the fourth quarter, our Capex had totaled $17.7 million.

Of that amount, $12.2 million or approximately $543 per unit was dedicated to recurring maintenance Capex. 2.7 million or $120 per unit was related to revenue enhancing Capex and $2.7 million was spent for redevelopment of our newly acquired or renovated communities. Now I'm going to turn the time back over to Glade.

Thank you for the report. We hope that brings all of you up to date, gives you the highlights of our markets. I think when we summarize that we're extremely pleased with our management.

We're pleased with the efforts that are being put forward. We have been fighting a tough market, and I think we're down to a couple of issues, and that is revenue, revenue management, recovery, and the recovery in the Dallas -- when you focus on Cornerstone, the recovery in the Dallas-Fort Worth market, and the recovery in the Charlotte market. Atlanta also, but Atlanta is showing more job growth and we have a smaller percentage of our holdings in those areas.

The quarter ahead, we will continue to implement all of our strategies, focus on our marketing, focus on our cost reductions, focus on our revenue management, and look forward to improving conditions in each one of our market areas.

With that, we thank each one of you, thank our staff, and open it up at this time for Q&A

[Operator Instructions]

Your first question comes from the line of Azad Kazim (ph). Please go ahead.

Hey guys, just wondering, you said your Capex per unit is about $543 a unit at times number of units. I get to you about 19 cents a share of recurring Capex. Your FFO is about 20 cents a share, so roughly all of that dividend is being paid out from borrowed capital, and it's been going on for the last couple of years. Just wondering what's the plan? I mean, your leverage keeps on increasing. You've increased the size of the portfolio but you also increased the leverage.

So I'm just wondering, how do you think about that strategically going forward?

I'm going to have J respond to that.

The Capex per share is substantially less than our FFO. That Capex number was for the year. That's not for the quarter.

So it's about a fourth of our -- about a quarter of our total FFO for the year. But to respond to that, during the soft markets, we absolutely believe that we need to maintain our properties and have a commitment to do that.

The last thing we want to do is to rebound from a market and find that we have properties that are in need of substantial Capex, and we are unable to hit the market when we need to. We have taken a cautious approach to spend prudently on Capex, but to maintain the properties for the future, and we will continue to do that.

I understand, but I'm just wondering, I guess, what's the plan, how do you plan on growing into the dividend?

Revenue primarily.

Great. Thanks.

I mean, we're down to the 2R's, and that's revenue and recovery.

Thank you for your time.

Thank you.

[Operator Instructions]

There do not appear to be any further questions.

OK. We thank each one of you. We look forward to an improved quarter and we appreciate all of the support of our shareholders, employees, and all of those that work so hard to bring about the results of our company.

Thank you once again, and we'll chat with you next quarter.