Mid-America Apartment Communities Inc (MAA) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the Mid-America Apartment Communities second 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 call over to your host, Leslie Wolfgang. You may begin.

Thanks Matt, good morning.

This is Leslie Wolfgang, Director of [inaudible] Reporting for Mid-America Apartment Community. 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 34X filing 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 second 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 and thanks for participating in our call this morning.

I'm going to start our prepared comments this morning with an over view on the quarters performance, as well a brief update on our business plan, I'll then turn the call over to Tom. who is going to discuss property management operations, Al will recap portfolio performance, and Simon will discuss the balance sheet and our FFO forecast.

Following our solid first quarter performance, Mid-America posted another good operating performance for the second quarter, with FFO results ahead of our expectations. We're encouraged by the continued improvement in property operating performance. Second quarter results reflect both the steady recovery under way in our southeastern markets, as well as the strength of our management operation. The second quarter performance was the highest year-over-year same store result that we've posted for the 12 preceding quarters. With the same store revenues growing during the second quarter on both a year-over-year and a sequential basis, we're clearly in the early stages of a recovering environment for multifamily housing. However, given the higher than warranted levels of new construction over the last couple of years, I continue to believe that in most markets, it will be 2005 before we see revenue recovery reflected through pricing leverage with concessions declining and rents rising.

Complementing the improving revenue performance, same store operating expenses remain under tight control with year-over-year expense growth at 2%, and only 0.7% on a sequential basis.

Solid expense control and a focus on property management productivity have characterized our operation for years. Mid-America's portfolio has much more revenue performance and earnings upside to capture as leasing conditions continue to strengthen. We believe this to be the case for several reasons. First, our focus on the strong job growth Southeast region of the country will deliver significant revenue recovery opportunity. I expect the recovery will be quicker and stronger in this region. As a result of out disciplined approach to operating in the higher competitive leasing environment of the last two years, and avoiding the tendency to drive for higher occupancy through compromising resident credit quality, our properties are in great shape to recapture higher levels of earnings as market conditions improve.

Second, the portfolio is poised to capture higher earnings as a result of our program of steadily investing revenue enhancing capital improvements at a number of our properties. Over just the last two years, we've invested close to 5 million in various unit interior upgrades including kitchen and bath remodeling that will further solidify our ability to capture higher rent and revenue levels. We've identified a number of additional repositioning upgrade opportunities within our existing portfolio that we plan to initiate as market conditions improve to support the higher rent levels necessary to capture the targeted returns for these upgrades.

And thirdly, we expect to capture strengthening revenue performance from our properties as a result of the successful implementation of our new web based revenue and property management system. Our improved capability in the area of inventory and pricing management will enable the property management operation to drive higher levels of rent growth and operating profits at each of our properties. This new technology in operating platform, coupled with the roll out of our new regional marketing and pricing support staff will help to strengthen pricing performance headed into 2005. We believe that a combination of each of these factors will deliver a steady improvement in earnings performance from our existing portfolio over the next couple of years as market conditions strengthen.

On the external growth front, we also remain very active. Our acquisition pipeline is busier than we've seen in a while with a lot of properties brought to market. We continue to execute a disciplined growth strategy also aimed at improving both the value and year-over-year earnings capability of our portfolio.

It's important to note that in the last two years we've added 260 million of high quality assets in large tier markets that we believe will post some of the strongest job growth and year-over-year recovery opportunities for the next several years. Our large tier market portfolio segment has increased over the last two years from just over 17% of the portfolio to now over 24%. As a consequence, our small tier portfolio has averaged down from roughly 41% to just over 35% of the portfolio.

In addition to this portfolio allocation shift, I encourage you to take note of the fact that the average age of the acquisitions over the last two years is just four years of age, and the average price of 72,000 per unit, which by the way we believe is below the replacement cost for this 260 million of new property has meaningfulfully improved both the quality and earnings potential of our portfolio as job growth improves and leasing conditions strength. At an average age of just over 13 years, Mid-America's portfolio properties is one of the newer portfolios in the REIT sector.

Despite the tough operating environment over the past couple of the years we've been successful in improving dividend coverage for our owners and protecting shareholder value which, as we've described in the past, is our primary focus. As the operating environment continues to improve, and same store earnings growth accelerates, we believe Mid-America is poised to further strengthen dividend coverage. Our balance sheet is well positioned for rising rate environment, and we're optimistic in our ability to create additional value for our owners through a disciplined growth program. While we expect to retain a healthy concentration of capital in mid-sized and select tertiary markets and we do plan to remain committed to our three tier market diversification strategy and the stability it provides. Our growth of late in some of the larger and more dynamic southeastern part had as will we believe position the portfolio for stronger year-over-year performance over the next few years as the Southeast job growth engine takes off.

I'll now turn the call over to Tom to discuss property management operations. Tom?

Thanks, Eric.

Good revenue growth and solid expense control generated 2% same store NOI growth this quarter. One of the leading performances in the sector. Same store total revenue for the quarter was up 210 basis points from the quarter a year ago, and up 60 basis points from the first quarter of this year. The main driver of this increase was occupancy, which continues to run ahead of last year's levels. It is up 70 basis points from a year ago, as most of our markets are showing improvements. Dallas occupancy is still sluggish, up 120 basis points from the prior year, but still a weak point. Houston weakened in in the second quarter, down 150 basis points from the prior year.

In addition to improving markets, our inventory management process also contributed to our solid revenue performance. Year-to-date, we reduced the number of days our average units sits vacant by 16.4%, down to just 17.3 days, as compared to the same time frame last year. The number of units vacant over 60 days also dropped, down 69% from the same time a year ago.

Our marketing and advertising focus was again evident, traffic levels were 3.7% higher, and we generated 2% more applications than the same period last year. Our closing ratio was a solid 40.1%.

Concessions remain our preferred method of price competition, and given the still early stage of recovery, are used at a higher level than we would desire. On a per move in basis, concessions were up from $346 per move in in the first quarter of this year to $392 per move-in in the second quarter. We feel that concessions will still be necessary through 2004, but believe their usage will decrease. We have held strong to our rental structure.

A key variable in the long term value in earnings potential. In fact our average rent per unit was 30 basis points higher than the prior year, and flat versus the prior sequential quarter. Looking forward, we believe that we can capture significant value by, one, continuing gains in occupancy, two, through a decreasing concessions as markets continue to stabilize; three, pushing more -- pushing rents more aggressively as normality returns in 2005.

Collections improved sequentially down 280 basis points from the prior quarter. We are pleased to see this improvement, but expect collection performance to continue to be under pressure until the job market gains more momentum.

Our 8 quarter streak of reducing turnover came to an end this quarter, while we would prefer to see this trend -- this continue to trend indefinitely, we are pleased with the progress over the last two years and do not feel this quarter's results warrant concerns. Turnover increased from 5,360 units in the second quarter of 2003, to 5,637 this quarter. Over half of this increase was due to troop relocations at one of our few communities with a high concentration of military personnel. While the turnover at this thousand-unit community jumped, occupancy remained steady they closed the quarter at 94.6%.

It was a good quarter from expense control, total same store expenses were in check, up just 2% from the second quarter of last year and up just 0.7% sequentially. We've seen year to year up improvements in marketing and repair and maintenance, and would expect some advertising relief as market conditions improve.

Al?

Our portfolio diversification across three market segments continue to serve us well during the quarter providing solid revenue growth. The most notable points during the second quarter were first the continued signs of recovery throughout our portfolio, as all three market tiers contribute to this positive growth, and second the continued out performance of our smaller tier markets during this early part of the recovery period. Although market conditions remain very competitive in many of our markets, there is growing evidence of near term recovery as job growth numbers are improving in most markets and interest rates are expected to rise. Just over 70% of our markets produced positive revenue growth during this quarter which provided evidence of this trend and supported the overall 2% growth of our portfolio.

As in the last several quarters, our smaller tier markets led our performance with 3.8% revenue growth followed by our large tier markets with 0.9% revenue growth, and our mid-size markets with 07% growth. Performance in our large market group was led by Tampa, which produced a 6.9% revenue growth and Atlanta with 30.3% growing as both of these markets benefited from the stronger job growth numbers. Although we expect conditions to remain competitive in both Tampa and Atlanta in the near team we do see continued improvement this year with growth becoming more robust in 2005. Dallas remained very competitive during this quarter, average occupancy improved 2.4% compared to the prior year, but offsetting concessions and pricing concessions were necessary producing a .8% decline in revenues. We expect Dallas to remain difficult throughout this year with a shallow recovery path going into 2005. Houston remained our most challenging market during the quarter as revenues declined 7.2% from the prior year. Although some job growth has returned to Houston, we expect it to take several quarters to work through the recent flurry of construction activity. However, our Houston portfolio represents only about 3% of our total same store revenues, so it will minimize the impact of our total performance over the remainder of the year. For our mid-sized market group Green was our strongest performer compared to the prior year, which produced 6.5% revenue growth, following by Nashville with 1.7% growth. Our two largest portfolios, Memphis and Jacksonville continued to produce stable performance during the quarter with both producing 1.1% growth over the prior year. We expect conditions in both Memphis and Jacksonville to remain essentially in balance in the near term producing continued growing performance. Our softest market in this mid-tier group continues to be Austin with 7.4% decline in revenues, as with Dallas we expect Austin to remain difficult throughout this year, improving slowly in 2005.

The strong year-over-year performance posted by our smaller tier markets was led by Columbia, South Carolina with 11.2% revenue growth; Columbus, Georgia with 8.8% growth; and Jackson, Mississippi with 4.4% growth. We continue to expect solid performance from this group with additional upside expected as overall recovery gains traction.

Our portfolio remains in excellent condition. We spent just over $6.5 million, or $188 per unit in recurring capital during the first half of this year, which is about half of our full year projection and we spent an additional 2.4 million, or $70 per unit on selected projects designed to enhance the performance of our properties. We expect to spend an additional $3 million on revenue enhancing projects over the remainder of this year. Our continued commitment to the quality of our properties puts our portfolio in excellent position as we enter these recovery markets.

Our acquisition pipe line remains very active. We currently have one property under contract for $28.5 million, and four other properties totaling just over $100 million in due diligence. All are high quality properties located in our target markets throughout the southeast and south central region of the country. Due to the unknown outcome of these potential transactions we've included only the one property under contract our FFO guidance. But although market and pricing levels remain very competitive, we are confident in our ability to continue finding these selected opportunities meeting our disciplined requirements.

Simon?

Thanks Al.

At 74 cents, FFO per share was a second quarter record, three cents above the mid-point of our forecast range, and one cent above the same quarter a year ago. We are very pleased with the results of our property operations which were in line with our projections.

We beat our forecast for two primary reasons, interest expense was 4 cents per share below our forecast mainly because of the timing of certain financings. We were able to look lock in a favorable 90-day rate on some variable rate debt early in the quarter and we carried more variable rate debt than we planned due to some closing delays and fixed rate financing, which are now completed. We also recorded a 1 cent per share credit against our expiring property and casualty insurance program that renewed July 1st. Partially offsetting this, we expensed 2.5 cents in G&A to accrue the vesting of a restricted stock plan for the senior management group which was put in place by the board in 2002. This is the last year of a three-year performance based program. Our strong performance in the to second quarter now makes it probable that the program will partially vest this year. We're also now planning to expense a further 2.5 cents during the remainder of the year. There's a like amount of restricted stock that will probably not vest this year, but will vest in 2007 to 2011 in these managers continue to be employed at the company.

Our AFFO for the quarter was 50 cents per share, compared to 55 cents per share a year ago. For the first half year, our AFFO was $1.22 per share. As a reminder, our dividend rate for the quarter was 58.5 cents per common share, or $1.17 per share for the first six months.

As we previously announced on June 15th, we acquired 100% of the Watermark Apartments, a 240 unit community in suburban Dallas that is just completing lease up. We paid just over $65,000 per unit, we should generate a 6.4% going in Cap Rate.

We completed another excellent quarter for debt financing we are pleased to have arranged our new $100 million [inaudible] credit facility, of which we had only collateralized $34 million at quarter end. We plan to use the balance to finance future acquisitions.

We lowered our blended interest rate from 5% at the end of March to 4 .8% at the end of June. Since the end of the second quarter, we have swapped a total of $76 million of debt at an average interest rate of 5.37% over a 7-year term. This reduces our variable rate debt to 21% of the total now outstanding. We continue to work to lever our fixed interest repricing at approximately $100 million a year.

Our cash balance was just over $20 million greater than we would normally expect at quarter end. This is due to the timing of [inaudible] financing right at month end and this added 120 basis points of term free leverage. Our cash returned to normal levels at the end of July. Our leverage is at comfortable levels and we have the debt capacity to add one more acquisition without raising additional equity. As future acquisition opportunities present themselves just as we did last fall, we're prepared to use limited amounts of equity to fund acquisitions if the transaction will be accretive to value and to AFFO.

We renewed our property casualty and workers' compensation insurance programs effective July 1st. In addition to the 1 cent per share savings related to last years policy, our cost of risk is projected now to drop 3% for the next 12 months, with substantially the same coverage which compares to our prior projection of a 5% increase. We expect the renewal to lower our cost by about 1 cent per share per quarter compared to prior projections.

We have completed on schedule the installation and rollout of our new web based general ledger, accounts payable, and property management system to all of our properties at a total cost of $1.3 million, of which $300,000 is expense. We'll install additional related functions and test further automation of our accounts payable system this fall. We're already beginning to see the benefit of having instant access to our property data, and will begin to see the full benefit during 2005.

We're also on track with our Sarbanes-Oxley 404 compliance, which is proceeding well. We expect the total cost of the Sarbanes-Oxley program to be close to 3 cents per share in 2004, which of course we've been expensing monthly.

We're again increasing our forecast of FFO for 2004. Adding three cents to the mid-point of the range of our projected FFO. We are raising our projected range of FFO per share for the year to 294 to 296, compared to a previous range of 290 to 294. We are forecasting third quarter FFO per share in a range of 69 to 70 cents, and the fourth quarter in a range of 75 to 76 cents. Included in our forecast for the fourth is four cents per share in income from refinancing some bonds that we're projecting we will receive.

Based on our anticipated recurring capital expenditures we've forecast our AFFO for the year to be in the range of 238 to 241. We're assuming in our forecast same store NOI growth of 2.6% for the full year, with 4.2% in the third quarter, and 3.3% in the fourth quarter compared to the same quarters a year ago. Much of this is due to improvement in expenses driven by the initiative we've talked about in repair maintenance efficiency as well reduced insurance expense. We projecting same store to increase 1.5% for the full year over 2003. Other assumptions include an additional acquisition, and couple of small dispossessions, although we have no definite knowledge at this point.

Eric?

Thank, Simon.

Mid-America's portfolio and operation has delivered one of the best and most stable performances in the apartment REIT sector over the last couple of years. As market conditions continue to improve and full recovery takes hold we are well positioned to execute a continuation of our business strategy aimed at establishing a platform to support further improvement in dividend coverage and growing value per share for our owners. Our properties are in fine shape, and the portfolio is better positioned for a recovering economy. We believe the overall value of our portfolio has been appreciably improved over the last couple of years with over a quarter billion in new high quality properties added. Our property management operation has been strengthened, and we have a strong platform for capturing improving pricing opportunities. That's all we have in the way of prepared comments and Matt I will turn the call back to you for any questions.

Thank you, sir. [Operator Instructions]

Our first question is from Rob Stevenson of Morgan Stanley. Your question, please?

Can you talk about where the $28.5 million acquisition that you you have under contract is, and whether or not that's going to be be wholly owned or done the JV?

Its in the northeast sector of Atlanta metro, in Graunet [ph] county and it will be 100% owned by Mid-America.

Okay. And when you're looking out, you know, as Simon was talking about, the fact that you could do the one acquisition without having to issue equity, where is your thought on joint ventures you know as it pertains to either the $100 million that you're doing diligence on now, and then looking forward?

Well, you know, we continue to have, obviously, our relationship with [inaudible] Holdings, and will continue to look at some opportunities with them, but honestly, Rob, you know, we will perhaps do another deal or two via the joint venture platform, but we feel that it's prudent to be mindful of how much capital we tie up at any one point in a joint venture relationship with an external party. What often sometimes happens is the two capital groups, if you will,, have different agendas at various points along the way, and the flexibility that we feel is important to maintain, as we try to achieve what we're trying to achieve for our owners, we lose some of that flexibility if you tie up too much capital with any one of the other capital source. You just may find your self in a position where the two capital sources wants to do different things at different times. So we like the opportunity to leverage our capital with private capital, and pickup some additional fee opportunity on the management side, but there's a risk associated with it and we're mindful of that and I think we have to be careful about it.

Is part of the issue, also, the difficulty in finding the acquisitions that you want to make these days, and just if you're going to do the work as to own it yourself?

Yeah, I mean that's clearly part of it. You're right. It's very difficult to find the deals these days. Well, there's a lot of deals to find, but finding them at a price that makes sense is where the rub is, and you're right, that's part of the challenge.

And then what are you guys seeing these days in terms of pressure on the property tax side?

Simon, have it at.

Rob, we're having a pretty good year in property taxes. You know the battle of course is where you've got some markets, as Al was detailing, like Houston and Dallas where you have property NOIs that may actually be declining, and in a very hot resale market to persuade the taxing authorities to reduce property taxes. We're forecasting same store property tax increase of 1.4%. Interesting, in one of the toughest markets, Texas, we've been very fortunate and very aggressive in tax program, and we're forecasting a 4.5% same store property tax reduction, led particularly in the Dallas market and in the Austin market, where we've been having quite a lot of the success through our -- through our program. So it's a very tough environment. We battle it every day. But I think, you know, we've been pretty successful so far.

Okay. And then last question, and I missed part of it, you gave turnover numbers earlier in the call, but it sounded like you were giving numbers. Do you have the percentages as to where on an annualized basis turnover percentage was?

It's running about 68%.

And that's the year to date number or that's the second quarter number.

That's kind of a rolling 12-month.

And how does that compare to the 12 months -- the previous 12 -- the 12 months comparable? comparable?

Rob, this is Tom. Its about 69.6% the 12 months prior.

So it's down. It's down slightly.

Excuse me. It is 69.6. It was 68.3. I just read those numbers backwards.

So its currently 69.6 and was 68.3 in the 12 months prior?

Thats correct

All right. Thanks, guys.

You bet.

Our next question comes from Bill Crowe of Raymond James. Your question, please?

Another solid quarter. I guess the only question I really have is you did the acquisition in Dallas, and its kind of far out suburban Dallas. You said the cap rate was 6/4, and I'm just trying to figure out how that pencils out on an IR basis, you know, operations that's depressed, or what the opportunity there?

Well, it's a fairly new property that hasn't fully stabilized, and, so, yes, we do feel that there is some -- some significant operating upside to capture as one we just stabilize the property, but two as the market conditions do recover in the Dallas area. I will also tell you that they are breaking ground on a new regional mall about two miles from this property this fall, and we think over the next two to three years that this area will see some pretty strong growth.

Where is the occupancy on that property today?

It's hovering around 90%, 91%.

That's in line with the market? Is that about right?

Yeah, yeah.

And rates are in line with the market, or are they below market?

I think, you know, market in Dallas is kind of hard to define sometimes. I think that really the issue here is that they pushed hard to get at least up pretty quickly, and left something on the table in terms of rents that we think we can call back.

I think based on economic occupancy, we have a pretty low cap rate, but I'll tell you what I will get you some more information on that, Bill.

Great, thanks, guys. Again, another solid quarter.

Thank you.

[Operator Instructions]. Our next question is from Napoleon Overton of Morgan Keegan. Your question, please.

Yeah, good morning. Could you talk a little bit about the -- you said the acquisition pipeline is considerably more active than it has been, seeing a lot more things. What's going on there causing that?

Well, I think in general terms, it's just that sellers and other owners are expecting the rising rate environment to start to drive pricing up -- or down, I should say, and so resultingly, I think that to the extent that there's been anybody sitting on the sidelines thinking that the opportunity to sell at an attractive price is going be there forever, I think they're moving more into the market to try to, you know, sell it before rates move back up too quickly, so I think it's a combination of that and more than anything is -- and it's still very competitive pricing. It's still outrageous, generally, but I think it's just people fearing the rising rate environment is going to start to hurt the pricing a little bit, and so they want to go ahead and try to sell it.

And does the 6.4% cap rate on the Dallas acquisition that was just asked about, that's -- I believe thats below your target. What do you target on your two or three, once you've had a chance to do what you can do with the property what's your target return?

Well, we don't really target a cap rate. Particularly this environment and these low operating numbers, trying to buy on just a cap is not really the right way to think about it. We have always looked at deploying money based on an internal rate of return hurdle definition, which is based on our cost to capital, and so, you know, this deal pencils out quite nicely in terms of achieving our investment return over the assumed 7-year hold period.

And we also have a very solid gut check on a replacement cost per unit, because the properties are hard to underwrite in a weak operating environment, so when we think we can get into a property like this at $65,000 a unit, and replacement is probably 75/unit, and it's a brand-new asset, that makes us feel pretty good, provided we've got the market underwritten okay, and obviously we know that market very well.

Okay. And Simon, can you talk about -- I believe you said that you had reduced your average interest rate from 5% to 4.8 in the first quarter to end the second quarter, and then you fixed an amount of debt at the end of the second quarter, and you had a lot of maturities this year. Just where are you on refinancing those maturities that you had this year, or expirations of swaps and did that fixing of debt following the end of the quarter significantly change that average rate?

That's a very good question. Now, we're projecting that our average rate for the third quarter will grow from 4.8% to 5.3% based on two things. One is Mr. Greenspan moving next Tuesday, and the second thing is these $76 million of fixed rate financing that we've put in place. We do have an additional $60 million of financing to do in the -- in -- primarily in the fourth quarter. We're -- in fact, we have been talking, over the last week, about possibly forward-swapping some of that, because we think the interest rate environment is pretty favorable right now. But that will be all of the refinancing that we have to do. In terms of fixed rate maturities, you know, we have about 100 million next year, and we do have a variable rate debt down in the region of where we like to have it right now, but I think that you will expect us to see -- begin to push some of our maturities out a little bit, just as we did with this 7-year financing we just did. We anticipate doing a little bit more of that over the balance of this year, and as we -- if rates still stay favorable, next year.

Okay. Thanks. And then one final thing. I was a little -- I was a little surprised to see that increase in concessions quarter to quarter. I've kind of been under -- of the opinion that we are at a point in the cycle where concessions were kind of wiggling their way down not up, is there anything in particular that happened there can you comment or give a little more color about that?

Well, we -- Matt, at this time of the year, we tend to be pretty aggressive in trying to build occupancy as we begin to think about getting to the fall of the year, when our leasing traffic really begins to fall off, and so, you know, in general terms, I will tell you that we'll be aggressive in our use of concessions this time of the year, more so than any other time of the year, just because we want to if you will build up a little capacity and occupancy before we hit the winter. Having said that, also what is at play here is we see market conditions in some of our bigger markets, Dallas and Houston in particular still pretty weak, and it's just a very, very -- its still a very competitive situation out there, and we see Atlanta getting a little better, and Jacksonville is holding pretty steady, and most of the rest of the portfolio is holding pretty steady, but particularly Dallas and Houston is where we're seeing concessions running at a pretty high level right now, and expect it to be that way for the balance of the year.

Okay. Thanks very much.

Mr. Bolton, at this time, I'm showing no further questions, would you like to proceed with any closing comments?

No, thanks, Matt. That's really all we have, and if you have any other questions or concerns or thoughts, feel free to give us a call, and thanks for being on the call this morning. Thanks.

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