Mid-America Apartment Communities Inc (MAA) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the Mid-America Apartment Communities, Third Quarter Earnings Release Conference Call. The company will first share its prepared comments followed by question and answer session. At this time we would like to turn the call over to Director of External Reporting for Mid-America, Ms. Leslie Wolfgang. Ms. Wolfgang, you may begin

Thanks, Ramón. 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, Treasurer; Tom Grimes, Director of Property Management and Drew Taylor, Director of Asset 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 34F 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 third quarter results may be obtained from the 8-K that was filed with SEC, yesterday. You may also obtain a copy of our press release on our website. I'll now turn the call over to Eric.

Thanks Leslie. Good morning and thank you for participating in our call this morning. Yesterday we reported strong operating performance for the third quarter and as a result, achieved FFO of $0.75 per share for the quarter, which was near the upper hand of our FFO guidance. Same-store occupancy, rate growth and NOI performance were significantly better than results achieved over the past few years.

In fact, year-over-year same-store NOI growth of 6.3% for the third quarter before the adjustment for straight lining concessions is the best operating performance the company has achieved, since the first quarter of 1996. What I find particularly, encouraging about the performance for the quarter, is that these strong results are being captured in what is arguably the very early stage of recovery in our Southeast region market.

A number of our large tier markets, where we've expanded our presence over the last three years are just now beginning to show recovery in occupancy. As conditions continue to improve, we expect the year-over-year revenue growth in these markets will increase. Also, it's important to note that while month-end physical occupancy was helped somewhat roughly 60 basis points by Hurricane Katrina leasing traffic, this event actually had minimal impact on our same-store and FFO performance for the overall third quarter results.

We do believe that we will see some longer term effects associated with the displacement of so many renters and homeowners along the Gulf Coast. While not only do we expect the short-term boost in occupancy over the next couple of quarters, more importantly, we believe this relocation of renters will drive an accelerating recovery to a number of markets that have been somewhat sluggish.

I'm also encouraged about the quarter's performance for a second reason. As many of you know, we have a number of enhancements underway to our operating platform that are just now beginning to roll out and are now yet fully operational. As marketing conditions continue to improve and the new initiatives we have underway to boost performance in pricing management, inventory management, utility billing and interior upgrades are fully implemented, we believe that internal growth from our portfolio will exceed historical performance levels and drive performance beyond what the improving market conditions should deliver.

Our property teams had excellent leasing performance over the quarter and as a result, generated portfolio occupancy at a level that should enable us to remain well ahead of prior year occupancy over the next two winter quarters. As market and leasing conditions recover, we believe that we have a material amount of revenue upside to recapture the reduced leasing concessions. Tom will give you more detail on property operating performance in his comments.

As Al will outline for you, the balance sheet remains in good condition and is very well positioned for a rising rate environment. Our coverage ratios are in good shape, in line with sector averages and with continued recovery in market conditions, we expect the balance sheet to show continued strength.

During the quarter, we closed on the purchase of two properties. Our acquisition pipeline remains very active and we have a number of deals currently under review. As we've been saying for some time, pricing remains aggressive and deploying capital on a basis that makes sense to us has been challenging. I continue to believe that we perform best for our shareholders by sticking to our investment disciplines.

We will not dilute existing value by deploying capital based on future unrealistic assumptions or investment returns that are not in line with shareholder expectations. I'm convinced that we will deliver a competitive amount of new growth as our relative size within the sector at this point does not require execution of nearly as much new investment activity. Said another way, we can remain disciplined about capital deployment, protect and grow existing equity value and still capture a competitive amount of new growth. With that, I'm going to turn over to Tom to talk about property operations. Tom?

Thanks, Eric. Good morning everyone. It's been a good quarter. Before the adjustment of straight lining concessions, same-store revenues for the quarter are up 360 basis points versus the prior year and expenses were flat generating same-store NOI growth 630 basis points. This is the best quarter-over-quarter revenue performance we've seen in years and the best same-store NOI performance in nine years.

Revenues were boosted by improved occupancy, steady rent growth and better collection performance. Same-store physical occupancy for the end of third quarter was up 110 basis points from a year ago and we ended the quarter 96.2%, the best third quarter occupancy we've seen since 1996.

The positive occupancy trend for the same-store group is carried beyond third quarter. At the end of October, our occupancy was 95.2% up a 100 basis points from a year ago. Our lease expirations for the fourth quarter are just 15%, which combined with our historically high occupancy will give us a strong revenue base through the slower, winter months.

As you will note from the supplemental data included in our earnings release, this improvement was evident across all three market tiers. As we've often mentioned, we feel that all three of these market tiers have upside potential. This potential has just begun to show in our large market groups where we saw a 90 basis point NOI increase. But it's well underway in our middle markets group, which showed 8.3% NOI improvement and in our small markets group, which improved by 6.5% NOI. Overall, 76% of our market saw NOI gains versus the prior year.

We believe that comparing third quarter with second quarter is really an apples-to-oranges comparison because the third quarter is our last plan period of high turnover for the year. During this time, we generated 6.5% more units to lease, punch and return to earnings status in the prior sequential quarter.

We are pleased that despite the added pressure of higher relative turnover that both revenues and occupancy showed improvement over the prior sequential quarter. Same-store expenses were essentially flat from last year, up just 0.3%. Much of the benefit came from thankfully lower hurricane-related expenses this year.

Utility costs are pressured by current oil pricing. And while we passed most of this through to the end user, the increase is felt in house accounts. We had 220 leases related to Hurricane Katrina at quarter end, this gave us 60 basis points of occupancy primarily affecting Houston, Dallas and Jackson, Mississippi. Had this not occurred, we would have still posted our best results in years.

This trend has continued into the fourth quarter. We've begun to see a pickup in Katrina leases in Memphis, giving us a total of 277. These leases are signed in accordance with our lease expiration guideline and have been rented, and are above average rental criteria.

In addition to the effects of Katrina, the improvement in occupancy was relative higher traffic levels and lower turnover versus the prior year. Our marketing processes continue to drive improvement. Both traffic and applications to lease were up verses the prior year. Our traffic levels increased by 4% and our applications also increased by 1.7%.

Closing ratio was a solid 45%. Our inventory management and resident retention programs continue to aid revenue and expense. Resident turnover improved by 1.3% as we turned 90 fewer units in the third quarter in 2005, than in the prior year. One market ran counter to this trend was Atlanta, where our communities in this market saw an increase of 90 more units than in the third quarter. While we absorbed this increase and ended the quarter at 95.3, which is above average for the market, the higher turn volume created more days' vacant, pressured concession and increased expenses.

The implementation of our web based property management program 12 months ago has improved our pricing information and our ability to forecast availability. On a real-time basis, we now know daily in multiple levels what pricing decisions were made, and how they affect our pricing goals. We have new tools and people in place that aid in pricing each unit in an optimal manner. And we can identify quickly when decisions are made that do not maximize our opportunity. As our occupancy stabilizes, markets improve, and concessions burn off, we feel the additional information and personnel will allow us to achieve performance beyond historic levels.

Early results of this focus are encouraging. Portfolio-wide rents have improved by 150 basis points versus the prior year and 60 basis points versus the prior sequential quarter. This is the best pricing traction we've seen since early 2002. Concessions remain our preferred method for price competition leaving our rent level intact, and thus, preserving the value of our communities. Concessions were most heavily used in Houston, Dallas and Austin. On a per move-in basis, same-store concessions were $447 per move-in, or slightly more than a half month's rent.

Because of the recent changes in the Houston market, we have ceased concession use in Houston, and expect to see concessions decrease in this market in the fourth quarter. Our process geared towards preserving resident quality and credit standards are showing good results. On a dollar basis as compared to last year, collection performance improved by 4.2%. Net delinquency as a percent of net rental potential improved by 9 basis points from the prior year to 1.44% for the quarter. This focus preserves a long-term value of our communities and is now also producing positive revenue growth.

And finally, our two acquisition communities from earlier in the quarter, Waterford Forest in Raleigh and Boulder Ridge in Dallas have been integrated into our portfolio and are running in line with pro forma expectations. Al?

Good morning, everyone. Our balance sheet is in good condition and continues to be in-line with our plan matching our conservative business strategy very well. Our leverage remains well within our expected range as our total leverage, which we define as debt plus preferred equity has remained essentially constant for the last five years.

At the end of the quarter our total debt was $1.14 billion, which was about 46% of our total market capitalization while preferred equity made up another 7%. Our fixed charge coverage ratio was a solid 2.0 for the quarter, which is very comparable to the sector median of 2.1. You may remember that we put in place $150 million of forward interest rate swaps in June, of which $125 million become effected December 1 and remaining $25 million, February 1.

As the yield curve flattened, we took the opportunity to reduce the risk of our debt by taking our fixed rate debt, slightly above our historical average, which is normally between 75 to 85% of our debt. We're very pleased that we made this call when we did as we're now in a position of having only $60 million of fixed rate maturities between now and September of next year, which represents only about 5% of our outstanding debt.

At the end the quarter 89% of our debt was fixed or hedged, while our rate maturities are well laddered through 2014 at an average life of 5.4 years. You may note from our balance sheet our that our $700 million portfolio of interest rate swaps and forward-swaps had a positive fair market value of about $1.3 million on September 30.

Also at the end of the quarter, we had over $80 million of unused bar capacity with room for another $98 million in cost effective expansion. Our blended average borrowing costs was 5.4%, up about 16 basis points from the previous quarter. We expect this cost to rise a little more during the fourth quarter ending the year at around 5.5%.

As Simon will discuss more later, we quickly put the $14 million in proceeds from the recent sales joint venture properties to work with the acquisition of two properties during this quarter costing over $56 million. We also issued $8 million in equity through our direct stock purchase program during the quarter at a 1.5% discount to fund these acquisitions. The debt portion of both transactions was funded with aided (ph) financing through our Fannie Mae and Freddie Mac credit facilities.

Also as discussed last quarter, we're currently in the process of refinancing $22 million in tax-free bonds, which will be reissued under our Fannie Mae tax-free facility. The first $8.5 million is on track to close during the first quarter -- fourth quarter, excuse me -- with the remaining portion closing during the first quarter of next year. We continue to expect to incur debt extinguishment costs of about $0.02 per share during the fourth quarter related to this refinancing but we also expect to pick up annual interest savings of more than $140,000 from this fourth quarter transaction.

We did begin preliminary negotiations during the quarter to expand our agency credit facilities to support our growth strategy. We expect to complete our negotiations and expand our platform in the first quarter of next year. Simon?

Thanks, Al. FFO for the quarter was $0.75 per share, a record for a third quarter. It represents a $0.02 increase over the same period in 2004 and compares to our indicated range of FFO for the quarter of $0.70 cents to $0.76 and was $0.01 above First Call. For the first nine months our FFO is $2.38 per share, up $0.14 from $2.24 last year. After deducting our year-to-date recurring capital expenditures of $0.51, our AFFO is $1.87 per share compared to $1.77 last year.

For the full year, we expect recurring capital expenditures to be about $0.53. So based on our forecast of FFO of $3.10 to $3.15 per share for the full year, which I'll discuss in a minute, our AFFO should approximate $2.47 to $2.52 this year. As you know, we just raised our annual dividend rate from $2.34 to $2.38 per share.

For the third quarter of last year we reported three unusual items that served on a net basis to increase FFO by $0.05 from $0.68 to $0.73 per share, including $0.05 from straight lining incremental leasing concessions. In comparison, this year the impact only increased FFO by $0.02 per share. So we're pleased with the results this quarter on a comparative basis.

In September, the board voted to increase our October 31 dividend from $2.34 to $2.38 per share on an annualized basis, the first increase in five years. Three years ago, we set out to strengthen our dividend coverage. And we've now made significant progress such that our dividend coverage is now in the top one third of the sector. The successful conclusion of our first joint venture with Crow Holdings in which we reported $0.20 of combined promote fee and net gain with a first capitalist. In the third quarter strengthening market fundamentals helped, which we expect to continue into 2006.

During first 10 days of the quarter, we completed the acquisition of Waterford Forest in the Raleigh-Durham Research Triangle and Boulder Ridge in Metro Dallas for a total investment of $56 million at a blended average cap rate of 5.9% and average investment of $65,000 a unit. FFO from these investments is projected to more than offset the loss of FFO on a per share basis from the closeout of the joint venture. These properties have both been bought on weak operating numbers and offer a lot of upside potential.

We've taken a detailed looking at our forecast for the fourth quarter. Our markets and our operating performance have improved significantly faster than we anticipated even before we felt the full impact of the additional apartments rented as a result of Hurricane Katrina.

In forecasting the fourth quarter, we think the 220 apartments we have rented to Hurricane evacuees at an average monthly rent of $756 will have a significant impact since the average lease term was eight months. We have also completed a conversion of all of our properties onto the new water billing system and the initial improvement in collections and expedited cash flow are promising. We think that our same-store NOI growth for the fourth quarter should be in the range of 4% to 5% after the impact of straight lining concessions.

While our Carl Square (ph) property in Fort Lauderdale incurred some damage from Hurricane Wilma, mainly to landscape, the fourth quarter impact on FFO is likely to be less than $150,000. Other fourth quarter events include the charge for debt extinguishment, which Al mentioned of around $0.02 per share. The acquisition environment continues to be challenging. And while it's possible that we'll complete an additional acquisition this year if we do so it will be end of the year with minimal impact on this year's results. Taking all of this into accounts, we're raising our range for FFO forecast to $0.72 to $0.77 per share compared to our prior $0.70 to $0.76.

We're in the process of evaluating our forecast for next year. We think our markets will continue to recover. And particularly our large markets where job recovery is just taking hold. We're evaluating the impact of Hurricane Katrina. We also believe that we have significant benefit yet to realize from improved processes and initiatives, which have been facilitated by our Web-based property management system. We expect to be looking at these along with our external growth program during the balance of this year.

Our balance sheet continues to be flexible, helped by a growing dividend coverage and our debt capacity and its aligned with our strategy. As Al has indicated with $150 million of forward swaps in place, we have significant protection against interest rate increases.

Our business strategy has proven to be less risky than most in the sector, this despite carrying a little more leverage than some on fixed-charge coverage within 10 basis points of the sector median. We've shown them we can effectively and inexpensively access the debt and equity markets as needed to continue to execute a conservative growth for our plans.

Thanks, Simon. We hope that you take away from our call this morning several key points. First, Mid-America turned in another good quarter of operating performance. For the reasons outlined, we believe that internal growth is poised to continue to improve recovering markets throughout the Southeast, an enhanced operating platform and a more robust market allocation will enable Mid-America to continue to capture higher levels of internal growth.

Second, we will remain disciplined in our decisions pertaining to capital deployment and acquisitions. Our deal flow is high. Our ability to execute is strong. And we expect to capture an amount of new growth that will be competitive within the sector.

Third, our balance sheet is in very good shape. We are well positioned for a rising rate environment. Our coverage ratios are in line and we have the capacity to meet our steady and disciplined growth plan.

And finally, we believe that Mid-America continues to offer a terrific buying opportunity. Mid-America's operating performance, our track record of performance per shareholders, our repositioned portfolio, our balance sheet strength and solid FFO growth prospects all support pricing that is in line with sector FFO and AFFO multiples.

We're excited about the direction of the Company. The change is underway and we look forward to getting back with you for our year-end report. That's all we have in the way of prepared comments. And right now, I'll turn the call back to you for any questions that we may have.

(Operator Instructions). Our first question comes from Bill Crow from Raymond James. Your question, sir.

Good morning guys. Congratulations. Terrific quarter.

Thanks, Bill. How are you doing?

I'm fine. Thank you. Eric, everything sounds great. I mean, Atlanta was weak, little pockets here and there. But what can go wrong as we look toward next year? I mean, what do we have to watch out for? Is it rising costs? Is it a weakening consumer? You know, where do you -- is it development in your markets? Where do we -- where should we look out?

I don't know. I -- we worry about a lot of things all the time. I guess, you know, if there's some sort of fundamental change that takes place with the economy other than what we expect, you know, for some reason if, heaven forbid we slip back into some sort of recession due to some sort of external event that that could be worrisome. If we don't get the recovery in job growth and market fundamentals that we expect that would be worrisome.

You know, I think that beyond that in terms of supply issues, we're always battling supplies in the Southeast. And frankly, we just don't see that as being out of the norm from what we typically deal with. And just by being careful about pulling money and being very careful about how we operate, I think we can deal with that pressure. So I think it's you know, assuming the economy continues to purr along, I think what you're left with is really just inflation pressures. And I think that to the extent that we see some pressure on the expense side of the P&L, whether it be in personnel costs or utility costs, hopefully will more than offset that with growth on the revenue side is to remain firm and we're able to really start push pricing.

You know, we've left a ton of money on table over the last few years in leasing concessions. And when we start to think about pulling that money back our way in cash, back to our P&L, it's quite a bit of upside. And so I think other than that we've shown the portfolio has a fair amount of recession resistance to it. And so to the extent that the economy does slow down for some reason or heaven forbid we do go back into a recession, I can tell you this portfolio will be better than most.

I know you haven't provided detailed guidance or thoughts for '06 yet, but if you were to look at the industry overall that you operate in, where do you think same-store expenses would go based on those inflationary pressures we've discussed?

Yes. I'd say 3 to maybe 4% depending on how dependent you are or how exposed you are to rising utility costs. I think that for portfolios that maybe are not as aggressive in sub-metering and billing back, they could have a lot more exposure of the top end of that range, but if you're passing most of that cost onto your residents already and they're accustomed to it, you've sort of built it into your platform, I think something close to 3%, maybe 3.5%.

All right. Thanks, guys.

Yes.

Again, ladies and gentlemen, if you would like to ask a question, please press the "one" key at this time. Our next question comes from Nap Overton. Your question, please.

Good morning. Two things. One, would you care to provide any more color on what you're saying with -- You said your deal flow was strong and yet your challenged to make acquisitions that meet your criteria that you think make sense, any additional color on that.

And then, secondly, G&A expenses appear to have increased by about 19% or so year-over-year and just, Eric, could you comment on that rather large increase?

I'll take the acquisition question. I'll let Simon handle G&A. On the acquisition front, we've got a couple of deals in the works right now. We -- honestly, our ability to put money out right now is strictly based on finding deals that have gotten in trouble or deals that have failed to close once or twice before and the seller becomes highly motivated needing certainty of close. We absolutely will not engage, and it's a waste of our time to engage in a bidding war.

We just -- we never win those. We -- I think as we do get towards year-end, what we do see is some of the sellers that have been sort of holding out for top dollar become a little bit more motivated to do some things. And so we're hopeful between now and year-end, we may get a little more flurry of activity. And so -- we had a deal -- well, I am sorry, all I can tell you we had a deal on a contract in Austin, a great opportunity we were interested in.

Last -- we had a contract up to about two weeks ago and through due diligence found some capital issues and we decided to walk away from it. So I think -- I'm confident that we're going to be able to get some deals done. But I'm also confident that if I have to sit here a year from now and tell you we didn't do any, I'm comfortable with that. We're just not going to put money out on the basis it's going to dilute value. But I think as the market continues to mature and perhaps as rates do eventually begin to move back up, I think that we'll see the fundamentals move back our way where we can justify or we will be a little bit more successful in some of the deals we are able to get. Simon, you want to...

Yes, sure.

...talk about G&A.

Nap, this is Simon. Well, first of all, last year -- in the same quarter last year, we reversed a call we made for a management Phoenix plan, which was about $500,000 or about $2.50 a share. And we reversed that in the third quarter. It was an accrual we made in the first two quarters. But by the third quarter, it became evident we were not going to make that plan. We would not vest into it. So, we needed to reverse that accrual.

The second thing is pertaining to this year. We looked at our health plan and felt we had about $230,000 to the accruals for expense for that. And so that went in through the G&A element. So those who were really, if you like, relatively the two items that caused that rather exceptional aberration (ph). For the full-year net, both combined property management expense and G&A expenses, we're looking at probably about $20.5 million to $21 million, total expense in that kind of range.

Okay. And just to follow-up with Eric, one more thing on the acquisitions. Presuming these transactions that have missed closing a couple of times or have had some kind of trouble, what kind of premium return do you get from doing those verse where's you're seeing properties trade and the competitive bidding situation?

Well, based on what we believe to be realistic underwriting assumptions in terms of NOI growth and realistic assumptions about where cap rates are liable to be seven to eight years from now, the deals that we are seeing take place at the pricing that we don't feel comfortable with would generate internal rates of return over kind of a seven to eight-year horizon that are high single-digit returns. And we're not willing to go that low. And so, our return hurdles are higher than that. And so that's one way to look at it. I mean, we're conceding probably -- we probably have to see our internal-rates return drop, you know, 200, maybe 300 basis points to be right in line with how some capital apparently is willing to deploy money right now.

Okay. Thanks.

Our next question comes from Thayne Needles from R Baird. Your question, please.

Good morning, guys.

Hi, Thayne. Good morning.

Actually, just a question just for Tom. Tom you had mentioned the concessions for moving for the quarter. Do you have numbers you can remind us, and so for the prior quarter and prior year period?

Yes, I do. The prior year period for concession for move in was -- we were -- I think 447, it was 418 and 402

What are those? The market...

Those are concession per move-in on a dollar basis concessions were about flat. On a per move-in basis they were slightly higher this quarter.

Thanks. That was all.

Again, ladies and gentlemen, if you have a question, at this time press the "one" key. And our final question from Dave Rogers from KeyBanc Capital Markets.

First question for Eric. Since you're one only the public players that really kind a play in some of the -- just called it middle market of the southeast. Do the hurricanes present any opportunities to maybe look at unique projects, either redevelopments or acquisitions along some of the coastal markets and are you spending any additional time there?

Not really, to be honest, Dave. There may somebody opportunities and we haven't really seen any brought market where properties, for example, have been severely damaged and the owners for whatever reason just not interesting in putting a back. I've seen that just a personal note with some of the condominium developments that have been so beat up along the Gulf coast.

But in terms of rental properties that we be interested in, we haven't seen a lot of that come into the market. And honestly, for the reasons associated with what caused them to get in the shape they're in we're not going to aggressively pursue that. We don't have very much at all in the way of direct coastal exposure. Most of our properties are all well inland. And our insurance company likes it that way. And honestly, we do, too. So, I don't really see that as much of an area of opportunity at this point.

And last question for Simon. In terms of some of the utility reimbursement plans, I think in your comments you mentioned water utility reimbursements to that plan, but fully rolled out. Can you address kind of the full program that you've talked about previously in your progress?

Sure thing, David. We rolled out the final region in September. And preliminary, to looking October the results look to be quite encouraging. And as you remember the -- there were two aspects of the program. The first part was really affected, the water reimbursement. And we think there's probably $0.4 to $0.05 of full-year benefit from that of which so far we've not had any benefits so far. So that would be, if you like, effective in the fourth quarter.

And as I say based on just a real, real quick topline overview of how October seems to be that looks to be encouraging. And I think, maybe, just as an aside, there some possible -- it's possible that we could see a result better than that next year. But I wouldn't want to commit to that but I think we feel fairly good about the $0.4 to $0.05 from what we've seen so far.

Now, the next part of the program, the other part of the program which is final rollout in the fourth quarter is our vacant electric program where we have people moving in but not timely turning over -- turning on the utilities for the utility company so we continue to pick-up half the cost. That's probably a penny a share. And that may be a little more than that. And that would be next year.

All right. Nice project.

Thanks, Dave.

I'm not showing any more questions in the queue. And I'd like to turn the conference back over to you.

Okay. Thank you very much. We appreciate your being on the call this morning. Let us know, if you have any questions. Thank you.

Ladies and gentlemen that concludes our call for today. Thank you for dialing in. You may now disconnect your lines.