Mid-America Apartment Communities Inc (MAA) 2004 Q3 法說會逐字稿

(OPERATOR INSTRUCTIONS)

Good morning and welcome to the Cornerstone Realty third quarter conference call and we cast. Members of Cornerstone management participating on the conference call this morning are Glade Knight, Chairman and CEO, Jay Olander, President, David Carneal, Chief Operating Officer. Other company officers in attendance are Carol Desala(ph) and Mark Murphy.

Please note that during this conference call and webcast, Cornerstone management may make forward-looking statements which are subject to risks and uncertainties. The company refers to yesterday's earnings news release and its SEC filings for additional discussions of risks and uncertainties.

I'll turn it over to Cornerstone's Chairman and CEO, Glade Knight. Please go ahead.

Thank you and good morning. Welcome to Cornerstone's third quarter earnings conference call and web cast. We welcome each one of you with us today. We released our third quarter results early this morning. Earnings press release and supplemental financial information are posted on our web site. We encourage you to check that site out.

Third quarter FFO, 19 cents per common share. That was down by one penny over 20 cents last year. We're a little bit shy on the FFO this quarter. We had some very, very positive revenue trends that we'll talk about a little bit later. We also were impacted negatively with some higher expenses, which Jay Olander will take us through.

We also announced -- I might just mention also, as we'll go through each one of the markets, we have seen significant recovery in our markets. We're still anticipating the Dallas/Fort Worth and Raleigh, and David will go through those markets a little bit more with you.

On October 25th, we announced a definitive merger agreement with Colonial. We are extremely excited for shareholders in the prospects of this business combination. Just at little bit of a repeat of things that have been published.

This will make the combined company over a $5 billion company. The 25th largest REIT in the nation. The sixth largest multifamily REIT with incredible coverage of the southwest markets. The overlay of the two companies is exceptional. The strength of the markets in the future, I think are extremely promising for the Cornerstone shareholders. And we will talk more about that.

We have published the information, which is available to you. And we have spent last week on the road with our people in the field. Very positive response. And we're looking forward really to a very strong fourth quarter.

Our leasing activity and move-ins were significantly higher in our property portfolio this quarter. We actually had 557 more move-ins than we had the previous quarter. That's significant in the income -- is significant if we can maintain that and maintain those trends, we should have a very good fourth quarter. And really put us in a position for what we have been talking about for a long time now, and that is the '05. We feel very good, very comfortable with where we are and look forward to a very good fourth quarter as well as a good trend going into '05.

To give you more details on our market areas and our property performance, I'd like to turn the time over to David.

Thank you, Glade. I'll give a brief overview of third quarter results for occupancy, rental rates, and same-store results.

For the portfolio as a whole, we had an average physical occupancy rate of 93.8 percent in the third quarter, as compared with 93 percent a year ago. The average rent per unit in the third quarter was $667, compared with $674 last year. The first nine months of 2004, our average physical occupancy was 93.1 percent, as compared with 92 percent last year. And our average rent per unit the first nine months, was $672 versus $675 last year.

Moving on to same community portfolio, our same-store properties consist of 77 stabilized properties, 20,542 apartment homes, that were owned at the beginning of 2003. For the third quarter -- in the third quarter rental income increased 1.3 percent, and operating expenses increased 4.9 percent compared to third quarter of 2003. Thus our same-community, net operating income decreased 1.6 percent compared with last year.

Our same community physical occupancy in the third quarter increased to 93.8 percent from 92.9 percent last year, and the same-community average rent per unit for the third quarter was $651 compared with $663 a year ago.

Breaking down the same community NOI by our major markets for the quarter, Dallas/Ft. Worth posted a negative 4.7 percent. Atlanta positive 11.8. Charlotte, positive 3.8. Raleigh-Durham was down 10.7. Richmond, up 0.4 percent. And Norfolk/Virginia Beach was up 8.8 percent for the quarter. In the first nine months of 2004, rental income increased 0.5 percent, compared with last year. And operating expenses increased 2 percent, thus our same community net NOI decreased 0.6 percent compared with last year.

Our same community physical occupancy rate was 93.2 percent the first nine months of this, compared with 91.9 percent a year ago. Same community average rent per unit for the first nine months of 2004 was $651compared with $671a year-ago.

By major market for the first nine months, 2004, Dallas/Ft. Worth down 7.6 percent. Atlanta is up 10.3 percent. Charlotte is up 6.7 percent. Raleigh-Durham, down 8 percent. Richmond is up 3.4 percent. Norfolk/Virginia Beach is up 10.5 percent.

Now I'll turn the discussion over to Jay.

Thanks, David. First I'd like to thank our entire staff. Despite an enormous amount of turmoil and pressure during the quarter, our associates have worked diligently to deliver their best effort. As we said previously, our best asset is our people. We appreciate the work that they do. We're very proud of them for keeping focused on their individual goals during these changing times.

As a brief recap of the quarter, for third quarter total revenues, we had 35.1 million, versus 45 million last year. Third quarter revenues were down about $700,000 from the second quarter of '04. And I'm going to hit that in a few minutes as we review our markets and give a better overview of the quarter.

And also for the second, or for the first half of the quarter, we operated with too fewer properties. I guess the second half of the quarter, we operated with too fewer properties. As a result of a joint venture we entered into in July that involved the sale of 90 percent of two of our assets in South Carolina, which we'll cover in a few minutes.

Property and net operating income 23.2 million versus 24 million last year. And 24.8 reported in the second quarter. Again, bear in mind, we had less property during the third quarter.

Property and maintenance expenses rose 2.5 percent over last year, mostly due to an increase in turn cost we're going to discuss. And taxes and insurance rose 5 percent primarily as a result of the increases in real estate taxes, with some effect for increases in health insurance and property insurance premiums.

Property management exempt, approximately 3 percent of total revenues for the quarter, and that's up slightly from 2.8 percent in the second quarter. And it's mainly due to second quarter NOI bonuses that were paid during the third quarter.

Our G&A expenses were approximately 2.2 percent of total revenues, down from 2.4 percent in the second quarter and in line with budget. Interest expense, 11.5 million, down from 11.9 million last year, and down slightly from the second quarter of this year. The net result, we generated 10.8 million in FFO, or 19 cents per share for the third quarter versus 11.1 million, or 20 cents per share last year. And versus 12 million, or 21 cents per share in the second quarter.

As we look at the nine months, total revenues for the nine months were 135.2 million, versus 130 million last year. Our property net operating income was 72.4 million, versus 69.1 million last year. These increases are in both revenue and NOI, are due to our Merry Land acquisition that we had some effect in last year, with the full effect in this year.

In terms of property management expenses for the nine months, they 2.9 percent of total revenues. And that was up from 2.5 percent last year, with the increase due mostly to the addition of two regional property management positions, which have helped our overall operations. Our G&A expenses, approximately 2.3 percent of total revenues, up slightly from 2.2 percent last year. Interest expense, 34.8 million, versus 34.3 million last year. The net result, we generated 34.7 million, or 60 cents per share in FFO for the first nine months this year. And that's excluding first quarter charge for severance and other organizational costs. Including these costs, FFO was 33.9 million, or 59 cents per share, versus 32.2 million, or 60 cents per share last year.

We had a joint venture that we entered into on July 22nd, with the Sterling American Group, of Great Neck, New York. The joint venture has acquired Cornerstone's two apartment communities in Columbia, South Carolina, for approximately $16.9 million. The Columbia properties, Stoneridge Apartments, and the Arbors and Windsor Lake, have a total of 419 units. Cornerstone retained 10 percent interest in the joint venture, and the company will continue to manage the two properties. In the third quarter, we recognized a gain of 3.4 million from the sale of our 90 percent interest in the two properties.

With regard to financing activities, although there was no significant financing activity during the quarter as a result of the Sterling American joint venture, we reduced our total debt from about 818 million, to 811 million.

On the development front, we've updated development investment information and posted it on our separate section in our supplemental data, which can be found on our web site. Basically we've just continued to move forward with the operations we discussed in the last quarter.

In terms of capital expenditures, at the end of the third quarter our total CapEx was 13.8 million. Of that amount, 7.1 million was dedicated to recurring maintenance CapEx., 2.5 million to revenue enhancing CapEx, and 2 million for software implementation for the new internet-based, corporate accounting system, and 2.2 million for redevelopment CapEx. Merger and dividends hack(ph) issues, that we've discussed earlier last Friday, we and Colonial jointly filed with the SEC, a Q&A on tax and dividend matter that we are currently resolving. We'll provide additional information on tax matter as new development occur, but for now the SEC-filed Q&A is the most current information we can provide. The question and answers can be accessed through that filing, or on both the Colonial's website and our website.

I'm going to take a few minutes to give some commentary for the quarter and on our markets. For the quarter, management worked hard to fill vacant units and approve occupancy. Historically, we lease more apartments in the third quarter than any other during the year. This third quarter was no exception and in fact, we turned greater than anticipated units, but it came late during the quarter. With 4,975 move-ins, we moved in 557 more residents than we did during second quarter. Very positive trend. Also, with 4,781 move-outs, we turned 583 more apartments in the third quarter, than in the second quarter.

The positive news is for the quarter we had net increase of occupancy 192 units. Because it happened late in the third quarter, from a timing perspective, we bore the full impact of expenses and a much smaller effect(ph) in the end of the quarter. However, we feel that we're very poised coming into the fourth quarter.

Our down turn in FFOs is a direct result of two factors. First, the increase in cost necessary to turn the units I just described. And second, not investing the sales proceeds from the joint venture that we did with Sterling. And that Sterling effect alone, caused a negative decrease in earnings of about $150,000 for the quarter. I want to assure everybody that colonial had access to operating numbers for the quarter and their projections for the combined operations was based on our actual operations that they reviewed prior to the announcement of the merger.

With regard to our operations, we're pleased that despite turning an enormous number of units, our overall occupancy was 93.8 percent, the highest in the past 12 months. In addition, we're pleased that our rent, bad debt also was the lowest it's been in the last 12 months, at 1.12 percent. We think these are healthy signs and a good window for looking at our fourth quarter operations and into next year.

Going to give a brief rundown on same-store markets. Our Virginia markets continue to be great performers. We had positive same-store results in Richmond. And while NOI performance may have slightly lagged our competitors, we have consistently posted above market performance in the market. And our operating margins remain competitive with the market place.

Thus, as we look at our overall performance, we're very pleased. In Virginia Beach, we remain the peer market leader in same-store performance with NOI increase of 8.8 percent. Again, very solid operations.

As we mentioned last quarter, performance in Raleigh has not been where we would like for it to be this year. But it's probably in line with where the market has been, which has been a little soft. With the same-store NOI of negative 10.7 percent and operating margin of 54.4 percent, our performance was in the middle of peer group. Several of our property in this market are student-oriented, and we had a positive leasing season relative to those properties during the quarter.

Currently our properties in the market are slightly less than 93 percent physically occupied. And again, I think this is a good indicator of a much improved fourth quarter in this market. In Charlotte, we continue with positive momentum of 3.8 percent increase in same-store NOI. Current physical occupancy is slightly over 93 percent. And again, we're well-poised for another increase in operation for the fourth quarter.

In Atlanta, we've posted a healthy 11.8 percent increase in same-store NOI, and that's well ahead of our peers. Now, while we're pleased with this, we recognize that same-store increases are only relative to the less than stellar performance we had in the market in 2003. This market in our management have performed well for the entire year and we're very proud of the work that they've done. We made it clear last year that our expenses were too high, and this is one of the reasons we posted a negative same-store of 21 percent for the third quarter of last year. We've made a concerted effort, from a management perspective, to increase income and reduce our expenses, and that's what's resulted in the positive 11.8 percent for the quarter.

As we stated, management improvement trends in the fourth quarter of last year. As we started the management improvement in the fourth quarter of last year, we would expect performance to remain solid in the market during the fourth quarter. But NOI increases will start to fall more in line with the market place in the fourth quarter and through next year.

With our large concentration units in Dallas, this market continues to be intense management focus. For the quarter, we posted negative 4.7 percent NOI, and this is improving trend on the nine-month, same-store negative of 8 percent.

Current physical occupancy, is approximately 92 percent. And we continue to offer both one-time and life of lease concessions. Despite this, overall gross potential is continuing to increase as a result of our increased occupancy. We're optimistic about the fourth quarter and optimistic about next year.

I want to turn the time back over to Glade now for a wrap-up.

Thank you, David and Jay. I think that gives you a pretty good run-down as to our company. We really believe we're in a strong position going into the fourth quarter. We've spent a lot of time positioning ourselves to prepare for the return and the recovery in our market places. And we think that we're really in a great position now.

We believe that our assets are in a very, very good position. They're well-maintained. And we really look forward to capitalizing on the recovery coming into '05, as well as the combined strength of our merger with Colonial. We think this is an excellent opportunity for our shareholders. And we are working very diligently, all our staff, to take care of the work that is before us. We appreciate all of you being on the call with us today. We will now turn the call over to Questions and Answers.

(OPERATOR INSTRUCTIONS) Thank you, sir. I'm showing no questions at this time, sir.

Okay. I would, again, like to thank all those tuned in with us. We have published a lot of information and we are available in our corporate services, the department, myself and Jay, as well to answer any questions you might have. We greatly appreciate your support, and we look forward to a very exciting fourth quarter in '05. Thank you very much for your time.