Mid-America Apartment Communities Inc (MAA) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in Mid-America Apartment Communities first-quarter earnings release conference call. The company will first share its prepared comments, followed by a question-and-answer session. At this time, I would like to turn the conference over to Mid-America.

Good morning, this is Leslie Wolfgang, Director of External Reporting for Mid-America Apartment Communities. With me are Eric Bolton, our CEO; Simon Wadsworth, our CFO; Al Campbell, Director of Financial Planning; and Tom Grimes, Director of Property Management. Before turning the call over to Eric, I want to remind you that as part of the discussion this morning, company management will make forward-looking statements. Please refer to the Safe Harbor language included in yesterday's press release and our 34-X (ph) 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 morning's call, on our website. Further details surrounding Mid-America's first-quarter results may be obtained from the 8-K that was filed with the SEC yesterday. You may also obtain a copy of our press release on our website. I'll now turn the call over to our CEO, Eric Bolton.

Thanks, Leslie. Good morning everyone. Thank you for participating in our call this morning. I'm going to start with a short recap of the quarter's performance and update on strategy before turning the call over to the guys for more detail. Mid-America had a great start to the year with a solid first quarter of operating performance. On a comparable reporting basis to last year, FFO per share grew 4.3 percent. This was the highest FFO we've ever recorded for the first quarter of a year. We achieved positive same-store NOI performance for the quarter, the first positive NOI results in 10 quarters, and I expect that we will continue to see leasing conditions improve throughout most of the portfolio over the rest of the year.

I attribute the good start this year to two factors. First, we're seeing early indications of an improving leasing environment for apartment real estate. While I support the notion that it will be likely 2005 before we see strong evidence of recovery in meaningful pricing improvement, I believe that in historically strong job growth regions and for portfolios like ours that have been properly protected and aggressively operated during the downturn, recovery will start sooner. I continue to believe that a resumption of job growth will take hold earlier in the Southeast region and that it will be stronger and sustain longer in this region of the country.

Secondly, I believe the solid start to the year is also attributable to the actions taken last fall to improve occupancy performance throughout the traditionally slower winter leasing months. Contrary to normal seasonal patterns we saw occupancy in the first-quarter improve slightly on a sequential basis from the fourth quarter. As Tom will detail for you, our property management folks have done a good job executing action plans and our proactively managing lease expiration and renewal efforts, generating more stability and performance and operating expenses and driving a better than anticipated first-quarter offering result.

The last couple of years have reflected a very challenging operating environment. W felt it vitally important to protect the earnings potential of the portfolio by maintaining maintenance and capital spending at normal levels which we have done. Equally important, during highly competitive leasing cycles it is also critical to not compromise the quality of the resident profile and creditworthiness of the resident base. A compromise in this area can likewise harm the earnings potential of the portfolio. As you will note, we've actually increased our resident qualifying standards through this weak market environment. I'm confident that we will capture higher levels of NOI from our existing portfolio as market conditions continue to improve over the next couple of years. I expect this to be the case across all three of our market segments, large, middle and small markets.

While clearly the large market segment has sustained more pressure over the last two years, our smaller markets have also underperformed through historic norms. We expect to improve revenue performance in a number of these markets as well. We expect higher FFO not only because of the improved quality of our portfolio, but also because of a number of retooling efforts to our operations that have been completed over the course of this year. Our new Web-based revenue and property management system, a number of revenue-enhancing CAPEX initiatives and a new regional marketing and pricing function are, we believe, all going to have additional positive impact on our same-store FFO performance moving forward.

Al will give you a little more insight on our acquisitions program. Let me just say that we remain very active in our efforts to locate and acquire attractive investment opportunities but importantly we also remain very disciplined. We are not going to chase growth and deploy shareholder capital in situations where we feel pricing is out of line with historic operating norms and replacement values. There's an important principle about investing in the competitive Southeastern markets. By remaining disciplined and only acquiring at prices that are competitive with new product replacement value and Southeast market operating and pricing norms is one truly in a position to protect and perform for capital over the long haul. We understand and follow this principle.

With that introduction, I would like to turn the call over to Tom to discuss property management operations. Tom?

Thanks Eric. It was good news on the revenue front. Same-store quarterly revenues improved on both a year-to-year and sequential basis. Total revenue was up 200 basis points from the same quarter a year ago and up 30 basis points from the fourth quarter of 2003. This is the second straight quarter we have seen revenues improve over the prior year.

Improvement in occupancy was a main driver for our revenue gain. Occupancy continues to run about 160 basis points higher than the prior year or 93.5 percent at the of the end first quarter versus 91.9 from the same quarter a year ago. As mentioned on our last call, this is a result of our continued focus on lease expiration management and inventory management initiatives. In addition, we are beginning to see the benefits of our new marketing and advertising program which benchmarks key leasing expense areas and allows us to focus our efforts and expenditures on the most productive channels for advertising.

The initiative also identifies and expands the best practices of our leasing professionals. The results of this focus were again evident; traffic levels or 6.1 percent higher and we generated 7.5 percent more applications than the same period last year. More importantly our application ratio was higher, 37.4 percent, up from 36.9 a year ago.

While occupancy has improved, we are not yet at a point where a full pricing leverage has returned. Concession levels remain higher than we would like but this supports the notion that our markets still have room for recovery and represent a good opportunity to continue our positive revenue trend.

As a percent of net potential rent, the concession level increased during the quarter to 2.99 percent from 2.35 percent a year ago, but was down 7.5 percent from the prior sequential quarter. The increase in concessions was more than offset by the occupancy improvement. We have intentionally used concessions as a preferred pricing tool to boost occupancy, which will allow revenues to continue to gain traction as markets recover, as well as protect our rent structure.

We feel that this tactic is a key to stable, long-term performance and value protection. Average rent print per unit was actually up slightly by .2 percent from the first quarter of 2003 and flat versus the prior sequential quarter.

Another area of opportunity for us is collections. Net delinquency for the quarter increased to 1.2 percent of net potential from .93 a year ago, but was down 1.37 when compared to the fourth quarter of 2003. Our credit scoring policy is more conservative than at any time in our history and we rejected a larger portion of applicants, 24.3 percent, in 2004 versus 19.8 at the end of December. While this rejection level inhibits maximum occupancy growth, we feel customer credit quality is vital -- is a vital component of long-term stability and value protection. We feel that collection levels will return to historic norms as the economic conditions improve.

Our resident retention program, community awareness programs and early renewal practices continue to show very good results. Resident turnover rate for the quarter on a same-store basis was down 2 points versus the same quarter a year ago. This marks the eighth straight quarter that we have seen a year-over-year turnover trend show a reduction.

A quick update on the progress of our new Web-based revenue and property management system which was outlined in the last call. Our rollout is on budget and on schedule with completion expected in August of this year. Four of our six operating regions have already converted to this system and it is working very well. This change will allow us to manage our inventory and pricing more effectively as well as streamline our accounts payable system, allowing our on-site personnel to be more productive. Al?

Our portfolio is well diversified across the Southeast and South Central region of the country in 41 markets, range from largest with those over 2 million in population; to the smaller tier market, those with populations just under three-quarters of one million. During the current quarter, this diversification continue to serve our shareholders well by providing overall favorable performance and producing the first signs of recovery.

The most notable points during the quarter were first the significant improvement of several large markets as Atlanta, Dallas and Tampa all showed strong occupancy gains over the prior year. Secondly, the continued strength of our smaller tier markets during the bottom part of the cycle, which provided solid support for our overall portfolio.

And thirdly, the early signs of widespread recovery as 66 percent of our markets posted positive revenue performance over the prior year. Our two percent overall increase in revenues from the prior year was produced by a 1.1 percent revenue growth from our large market group; .2 percent revenue growth from our midsize market group; and a solid 4.1 percent growth from our small tier market group.

Tampa produced our strongest performance in our large markets during the quarter as our same-store group in Tampa averaged 550 basis points better occupancy than the prior year which fueled a 6.8 percent revenue growth. Atlanta and Dallas also posted much improved occupancy compared to the prior year generating revenue growth of 1.3 percent in Atlanta and 1.6 percent in Dallas for the quarter. We were especially encouraged by the improved occupancy in Atlanta, partially offset by increased concessions. Our portfolio in Atlanta ended the quarter at 94 percent occupancy which positions it very well entering the second quarter.

The continued progress in Dallas is also encouraging but we expect a much shallower were recovery path for Dallas and continued slow progress over the remainder of this year.

Houston was our most challenging market during the quarter as revenues declined 6.4 percent compared with the prior year mainly due to a 5.5 percent decrease in occupancy. Because construction activity remained high and real job growth has yet to return to Houston, we expect is market to remain difficult over the balance of this year.

Notable performances from our mid tier market group were Greenville, which produced a 6.9 percent revenue growth; and Jacksonville which produced 1.6 percent revenue growth. Our softest markets in this group were Austin with a 10.3 percent revenue decline; Louisville, Kentucky, a 6.9 percent decline; and Greensboro, North Carolina, a 3.9 percent revenue decline.

As a whole, we expect to continue stable performance in our mid-tier markets over the remainder of this year with a few pockets of continuing weakness. As mentioned, our strongest performance as a whole during the quarter came from our small-tier market groups. The leaders in this group were Columbus, Georgia which posted a 5 percent revenue growth; Jackson, Mississippi, which generated over a 7 percent revenue growth. We expect to continue stable performance from this group throughout the remainder of the year.

In summary, our portfolio held up very well during an extremely difficult operating environment and we are seeing the first signs of recovery. In fact this is the first quarter in the last ten in which we posted positive same-store growth. We feel very good about our current position and we expect to realize significant improvement in all three segments of our portfolio as markets recover.

Moving to a more normalized level of operation, which we consider to be about 94 percent occupancy levels, and 4.5 percent concession levels and about 1 percent delinquency levels, would generate an additional $8.5 million of annual earnings from our portfolio which translates into about 36 cents per share.

As Eric mentioned, we remainder very active in acquisition environment as well. Cap rates continue to be depressed and markets are extremely competitive but we remain steadfast to our disciplined approach.

Our pipeline currently includes over $200 million of properties under some form of review. Of course, we don't know the outcome of these at this spot but we remain very confident in our proven ability to find selective opportunities for attractive investments in our target markets. Simon?

At 76 cents, our FFO per share for the quarter was a first quarter record and 4 cents above the midpoint of our forecast range of 71 to 73 cents and six cents or 8.5 percent above the same quarter a year ago. We beat our forecast for two primary reasons; property expenses were lower than we projected, reflecting continued efficiencies in repair and maintenance expense and marketing expenses. Interest expense was also below our forecast partly because of the timing of certain financings.

As we reported in our press release, we recorded a credit to interest expense of 3 cents per share of non-cash income to amortize the adjustments to the value of acquired debt. We expect this credit to be reduced by half to 1.5 cents per share in the second quarter and to half-a-cent per share in the third quarter. It will be almost totally eliminated in the fourth quarter. In order to maintain consistency with NAREIT's FFO definition, we include this non-cash amount in our calculation of FFO and also of AFFO.

Our AFFO for the quarter was 65 cents per share, a record for any quarter and up 12 percent from 58 cents per share a year ago. Recurring capital expenditures were 11 cents per share, 2.5 cents below our quarterly full year run rate of 13 cents. If we were to adjust the recurring CAPEX to our forecast run rate and deduct the 3-cent non-cash income mentioned above, our AFFO would have been 59 cents per share. And as a reminder, our dividend rate for the last quarter was 58.5 percent common share.

We benefited from just over two months of ownership of both 100 percent of Monthaven Park, a 456-unit apartment community and from our one-third ownership in our pro-joint venture of Verandas at Timberglen, a 522 unit apartment community.

You'll have noticed that our G&A expenses increased for the quarter. We incurred some one-time expenses and almost $100,000 of expense related primarily to the installation of our Web-based property management systems. We expect this to be for another two quarters when the installations should be complete. We spend a further $100,000 related to the implementation of Sarbanes-Oxley and internal audit requirements. We expect this to be the quarterly run rate for the year. This should moderate to about half this rate in 2005.

In summary, at the present time based on our current plans, we expect our combined property management in G&A expense to run at about 200,000 to $300,000 less than in subsequent quarters.

We finished an excellent quarter for debt refinancing. We refinanced $53 million of the $80 million of debt we assumed with the purchase of the Bremak (ph) joint venture. We also refinanced $17 million of tax-free bonds. We lowered our blended interest rate from 5.4 percent at the end of December to 5.03 percent at the end of March.

Also we completed very successful negotiations with Fannie Mae to extend the life of our credit facilities. We expanded our conventional credit facility to $850 million of which we had just under $600 million outstanding at the end of the quarter. We had available to use an unborrow just over $40 million. We will use about half of the remaining $200 million capacity this year for refinancings.

The maturity on the facility is spread from 2010 through 2014 and the credit and servicing spread has been reduced which will save us 1 to 2 cents per share beginning this November. We're also negotiating with Freddie Mac to put in place a $100 million credit facility which we will begin to use this year for scheduled refinancings.

The Fannie Mae and Freddie Mac credit facilities offer us an excellent combination of attractive interest rates and flexibility and will represent a very large majority of our borrowings by year end.

Both our fixed charge and debt service coverage improved during the quarter. Our fixed charge coverage was 2.58 compared to 2.48 for the same quarter a year ago. Our debt service coverage was 2.50 compared to 2.42 a year ago. Our balance sheet flexibility also improved as our FFO and AFFO grew.

We have the current capacity to add another 50 to $60 million of acquisitions to our balance sheet without raising additional equity. At the end of the quarter, $757 million of our debt was swapped, forward swapped or capped, which is 77 percent of our total.

Of our variable rate debt, $18 million of 2 percent are tax exempt low floaters. Our fixed and swapped debt has an average maturity of 5.5 years, and we've scheduled $125 million of refinancing for the balance of this year of which only 75 million represents maturities, the balance is an opportunity for interest expense reduction.

By the end of this year based on our current refinancing plans we are projecting that we will have reduced our floating-rate debt to 20 to 22 percent of the total outstanding with most new maturities falling into 2006 and 2011. We project that refinancing will generate an additional 3 million of interest savings once completed on an annualized basis, based on the current forward yield curve and excluding the impact of the non-cash amortization of the adjustment to the value of acquired debt.

Our current plan is to continue to ladder (ph) off fixed-rate maturities with about 100 million of our fixed-rate debt to reprice annually. We're adding 4 cents to the range of our projected FFO for the year, which is the amount we beat the midpoint of our original first-quarter forecast. The new range is $2.90 to $2.94 for the year. There are several reasons that we are maintaining our forecast for the remaining three-quarters of the year. We are continuing to focus same-store growth in the 2 to 2.5 percent range, about the same levels we forecast three months ago. While we beat our forecast last quarter, most of this was due to performance of communities not in the same-store portfolio along with lower interest rates.

We're clearly heading into a higher interest rate environment which we are reflecting in our interest expense projections. We've also moved back our anticipated additional joint venture investment from the second quarter to the fourth quarter which takes a penny out of our projections. We're forecasting second-quarter FFO in the range of 70 to 72 cents per share; the third quarter in a range of 69 to 71 cents per share and the fourth quarter in a range of 75 to 77 cents. The sharp increase in the fourth quarter forecast was mainly because we expect to receive 4 cents per share in income from refinancing some bonds.

Based in our projected return in capital expenditures, we forecast our AFFO to be greater than 58.5 cents in the fourth quarter. Eric?

Our strategy is built around a goal of delivering a steady and growing earnings stream to fund a secure and growing dividend and value for our shareholders. Mid-America's properties are in fine shape and we protected the full earnings potential during this downturn in the market.

We've outlined a number of operating system improvements that have either been completed or under way which will offer enhanced revenue growth opportunities as well as more efficient operation. The balance sheet has been significantly strengthened in terms of flexibility and our fixed charge coverage is at a first-quarter five-year high.

While difficult to forecast the amount and timing, I'm optimistic that we will continue to find attractive acquisition opportunities to capture new FFO growth later this year and into 2005. The strategy remains on track and is being well executed.

That's all we have in the way of prepared comments and Matt, I will turn the call back to you for any questions.

(OPERATOR INSTRUCTIONS) Rob Stevenson of Morgan Stanley.

Good morning guys. Can you remind me what the dollar value of each of the acquisitions that you made in the quarter was?

Sure. Rob, the one that we bought 100 percent of was 31 million and the one that went into our joint venture was just over 44 million.

And in the markets that you are looking at is that basically the size asset that makes sense for either a joint venture or wholly-owned or are you guys looking at smaller assets, bigger assets as well? Or sort of in that 20 to $50 million range is the sweet spot for you guys?

You nailed it right there Rob. Usually that 20 to 50 is kind of where we see most of the product that we look at is using that price range. We've looked at some smaller, we've looked at some larger and that's not to say we won't do any. But just the majority of the kind of product we are searching for right now and given the size and the replacement value that we tend to focus on, that's really the average.

You mentioned that turnover was down 2 percent year-over-year. What's the number for the quarter?

For the quarter, Tom, go-ahead.

On a twelve-month turn rate, 66 percent.

So it was 68 percent a year ago?

Yes.

Where do you sort of see that heading as you start moving into the second and third quarters here? Does that usually go up meaningfully from there in the sort of high turn seasons and the high occupancy seasons?

Certainly on a quarterly basis, yes, turnover will pick up a little bit in Q2 and Q3 just that that's the normal seasonal factor. The numbers that Tom just gave you were really annualized numbers and I don't know if you have -- what was the actual turnover number for Q1? The number of units that we actually turned in Q1 of '04 was just over 4000 units; and in Q3 -- or Q1 of last year was about 4400 units. So the turnover on a quarter-to-quarter basis was actually down about 6.3 percent on a same-store basis.

On an annualized basis, turnover usually is going to run anywhere between 60 to 65 percent, 66 percent is where we are right now based on the last 12 -- our last four quarters. I expect that what we will continue to see is on an annualized basis our turnover working down a little bit. I would like to see it somewhere between 60 and 65 percent.

What about the hard costs that is causing you these days to turn a unit?

It hasn't really changed a whole lot. Of course the big variable is the carpet replacement, if that's necessary. But on generally what you'll see is the cost between paint and turn get ready prep and so on and so forth. It's going to be and assuming carpet is part of the equation. You're going to be approaching something around 750 to 800 bucks. When we think about the cost of a turn, we also of course factor in the vacancy loss associated with it. Right now that historically over the last couple years -- that's been averaging close to about 24, 25 days and we think as market conditions improve, we will be able to get -- a lot of our focus right now in the inventory management is focused on getting units ready and trying to work that average day vacancy between turns down closer to 20 days. And the opportunity to lower vacancy losses as a result of that is huge.

On balance if you factor in the vacancy loss, hard costs about 750, real cost in terms of vacancy loss, probably just over 1000.

Where are you running these days in terms of -- you're moving from a 25 day -- you are trying to get down to 20 day, as you sit here in May, where is -- where has it been trending recently?

It usually been trending somewhere -- where right now we're actually on a comparative basis on an annualized basis actually looking March of last year -- the same point last year quarter end last year on an annualized basis, we averaged actually better than I thought -- it was 22.3 days. Right now, as of March of this year over the last four quarters, we actually averaged 20.6 days. So it's actually a little better than I thought. Tom just handed me the detail on this.

We probably can pick up a little bit more on that. Our goal is really to clip off two days this year on our average turn across our portfolio. One day adds about two cents of FFO per year on an annualized basis and we thank with some of our inventory management initiatives in this new system that we have an opportunity on balance -- and improving markets to probably pick up a couple more days.

When you take a look at that, how much of this gain is coming as a result of the better systems? How much of it in your mind is just a better operating market for you guys right now?

You know, I would say right now that the bulk of it is a function of improving market conditions. Our inventory management initiative really got itself off the ground in a big way late last year and our new management system is actually just rolling out as we speak. We think the efficiencies from those initiatives and our operations and retooling efforts will probably start to pay dividends late this year and really into 2005. The bulk of the improvement I think is an option of just market condition.

We are seeing some benefit already from the retooling in our repair and maintenance expense. Perhaps not as much in the turn time but certainly in repair and maintenance expense.

Have you guys looked on the repair and maintenance as to what the levels have been historically by sort of different tiers of your resident qualification? In other words, the guys you are kicking out now as you've improved your -- as you've raised your credit standards, were they basically causing significantly higher repairs and maintenance on an ongoing basis than the people in the other sort of tiers, the people you accept today?

No question about that Rob; that is very insightful. Absolutely we tend to have much more extensive turns on either properties that have lower profile quality or just lower credit quality residents tend to have -- generate higher turn costs. The efforts that we've made to improve in that regard as well as frankly just as you know the acquisitions that we've been focused on for the last couple years have tended to be in the higher end product level and I think that's part of the benefit as well.

Last question, before I yield the floor. Simon, it looks when I do the math on the second quarter, when you back out the non reoccurring part, you're getting to somewhere in the neighborhood of 68.5 to 70 cents of FFO? And then when you are looking forward to the fourth quarter, you're sort of in the 71 to 73 cent range? Backing up the reoccurring stuff?

Our range is a little different from that, Rob. We were -- I think we were saying in the region of 70 to 72 cents, I think for the for the second quarter.

But that has about 3 cents or so of --?

Well, that's gone about penny (multiple speakers)

A penny and a half or so of the non-cash sort of non-reoccurring type of stuff in it so backing out the penny and a half from the 70, is there anything else in that number?

No. You are exactly correct.

The 75 to 77 included none of that but 4 cents for this bond refinancing?

Exactly correct.

So if I take the 4 cents out of that, I am at 71 to 73?

Exactly.

Thanks guys.

At this time, I'm showing no further questions.

Thank you very much, Matt, and we appreciate everyone being on the call this morning. Call if you have any other questions. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.