Mid-America Apartment Communities Inc (MAA) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the MAA first quarter 2013 earnings conference call. The Company will first share its prepared comments followed by a question and answer session. At this time I'd like to turn the call over to Leslie Wolfgang, Director of Investor Relations. Ms. Wolfgang, you may begin.

Thank you, Jonathan, and good morning everyone. This is Leslie Wolfgang, Director of Investor Relations for MAA. With me this morning are Eric Bolton, our CEO, Al Campbell, our CFO, and Tom Grimes, our COO.

Before we begin with our prepared comments, I want to point out that, as part of the discussion, Company Management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the Safe Harbor language included in yesterday's press release and our '34 Act filings with the SEC which describe risk factors that may impact future results. These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, will be available on our website. I'll now turn the call over to Eric.

Thanks, Leslie. We appreciate everyone joining us this morning. FFO results for the first quarter of $1.25 per share were at the top end of our expectations and represented a record quarterly result. About half of the favorable performance was due to strong results in same-store operating expenses, with the balance of the variance due to lower than expected G&A costs partially resulting from some timing differences versus our forecast. As Al will recap for you in his comments, we've increased the midpoint of our FFO guidance for the year to $4.87 per share as a result of the favorable Q1 result, with some offset driven by earlier timing on balance sheet and financing plans.

Same-store revenues for the quarter were in line with our expectation as pricing performance drove the results with effective rents increasing in every market across the portfolio. Top performances were captured in Austin, Dallas, Houston and Nashville within our large market segment of the portfolio, with Fredericksburg, Lexington and Chattanooga delivering top results in our secondary markets.

Resident turnover in the first quarter increased 3% as compared to Q1 last year, and at 57% on a rolling 12-month basis, resident turnover continues to trend lower than our long-term average.

Moveouts associated with single-family home buying represented 20% of our moveouts in Q1, only a slight increase from 18% in Q1 of last year. Moveouts associated with single-family rental continue to not be a meaningful factor, driving only 6% of our turnover in the quarter, consistent with the results over the last several quarters.

We continue to believe that a recovering single-family market is a net positive factor for performance across our portfolio. It's interesting to note that the top three markets driving 63% of the increase in moveouts during the quarter due to home buying, which were Austin, Nashville and Dallas, also posted the strongest rent growth during the quarter.

Taking a look at permitting activity and new supply trends, we continue to believe that, as this part of the cycle matures, our secondary market segment of the portfolio will generate a more stable performance profile and serve to offset some of the moderation associated with higher levels of supply in the larger markets. Permitting activity within our large market segment has clearly moved up, but is still about 10% below the peak level during 2006 and, encouragingly, permitting within our secondary market segment is still only running at about 50% of where it was at the peak in 2006.

More importantly, when looking at the demand side of the equation, job growth prospects continue to show improving trends and, when compared to supply projections, suggest that leasing fundamentals should continue to support healthy rent growth. Looking at updated projections and the ratio forecast in new job growth and permitting activity, at a healthy 10-to-1 relationship, we continue to believe that, while leasing fundamentals and pricing trends will show some moderation from last year's record performance, net absorption across our markets should remain strong and pricing trends should continue to exceed historical averages.

We're actively under way with efforts to sell 11 properties in the portfolio, with four of those under contract and expected to close soon. We continue to forecast total dispositions for the year in the $150 million to $160 million range.

As noted in the earnings release, during the quarter we closed on the acquisition of Milstead Village in Atlanta from our Fund I joint venture and expect to close on the one remaining property within the Fund located in Houston during the second quarter.

We're currently working on several other acquisition opportunities and remain comfortable with our guidance range for the year of $250 million to $300 million in wholly-owned acquisitions.

The market environment remains extremely competitive for fully-stabilized properties with cap rates holding steady. We've clearly seen investment capital move increasingly into some of our secondary markets. We continue to believe that our long established record of performing for sellers and extensive deal flow will yield us additional acquisition opportunities this year, but the environment is clearly very competitive.

As we enter the peak leasing season we feel good about the outlook for the year. We don't see any evidence to suggest that the recovering single-family market is a meaningful threat to our ability to capture solid rent growth. And while new apartment deliveries are clearly accelerating, so long as the employment markets continue to show recovery, as we expect they will, we believe that absorption will remain strong.

That's all I have in the way of prepared comments and I'll now turn the call over to Al. Al?

Thank you, Eric, and good morning everyone. I'll provide a few comments on earnings performance and balance sheet activity during the quarter and then I'll highlight the key assumptions included in the updated guidance.

FFO for the fourth quarter was $55.2 million or $1.25 per share, which represents a 12% growth over the prior year and is $0.06 per share above the midpoint of previous guidance.

About half, as Eric said, or $0.03 per share of the favorable performance compared to the original forecast came from the same-store portfolio which produced 7.7% NOI growth compared to the prior year versus an expectation of about 6%.

Revenue performance for the first quarter was in line with expectations supported by 4.7% growth in effective rents and stable occupancy levels.

Operating expenses drove the favorability in the same-store, with personnel, repair and maintenance and real estate tax expenses combining to produce the majority of outperformance for the quarter.

Real estate tax expenses in the first quarter benefitted from favorable prior year appeals, which is expected to be offset over the remainder of the year by continued pressure on taxes in several of the key areas discussed before.

The majority of the remaining outperformance in earnings for the quarter was produced by G&A, as bonuses, health insurance and professional fees were all below projections for the first quarter, with a portion of the favorability related to timing differences.

During the first quarter we acquired one community from Mid-America Multifamily Fund I, a 310-unit property located in Atlanta, and entered an agreement to acquire the remaining community in the Fund, a 316-unit property located in Houston. And the gross combined purchase price is $59 million, including an $18.3 million loan to be assumed by the Company.

MAA owns a one-third interest in Fund I which will be closed following these transactions and the Company continues to hold and pursue joint venture investments through Mid-America Multifamily Funds II and III in the future.

We continued to make good progress on the development pipeline during the first quarter. MAA now has three communities under construction with two others recently completing in the lease-up phase.

Two lease-up communities both attained 82% occupancy during the quarter and are expected to be stabilized in the second half of the year. We funded an additional $12.4 million for the completion of the three communities remaining under construction during the quarter and we took delivery and leased the first half of 2025 South Church located in Charlotte. We expect delivery of the remaining units during the second quarter. We also expect initial unit deliveries at Riverswalk in Charleston during the second quarter with 31 of the units already leased. Initial deliveries for 220 Riverside located in Jacksonville are expected in the second half of 2014.

Our balance sheet ended the quarter in great position. During the first quarter, we issued around 325,000 common shares through the ATM program at an average price of $68.62 per share for total net proceeds of $22 million, which was primarily used to fund acquisition and development activity.

We also repaid $75 million of additional secured borrowings during the quarter, releasing the mortgages and increasing our unencumbered asset pool to over 57% of gross assets. The company is now in good position to approach the public bond markets for future financing needs.

At the end of the first quarter, the company leverage, defined as net debt to gross assets, was 43.7%, total debt was 6.3 times EBITDA, and MAA's fixed charge coverage ratio was 4.5 times. At the end of the quarter 90% of our outstanding debt was fixed or hedged against rising interest rates, supporting a total average interest rate of about 3.6% for the quarter.

We expect to increase our protection from rising interest rates with long-term fixed rate financings planned later this year. And just after quarter end, we executed $150 million in interest rate swaps, effectively locking a portion of the interest rate on expected future financing transactions.

Finally, given the first quarter performance and updated expectations, we are increasing our FFO guidance for the full year by $0.04 per share at the midpoint. We're maintaining our same-store guidance, which continues to project strong pricing performance and stable occupancy, producing 4% to 5% revenue growth for the full year. We expect operating expenses over the remainder of the year to increase in line with our original forecasts as turn costs begin to rise with growing leasing activity and real estate taxes reflect upward pressure in key areas we discussed previously.

We also expect timing of funding transactions for the year, primarily the planned bond financing and equity activity, to produce about $0.02 per share of dilution compared to the original forecast for the year as we move somewhat earlier than planned to lower execution risks.

We've outlined the major assumptions for our guidance in the press release. In summary, we now expect or project diluted FFO per share for the full year to be $4.77 to $4.97 or $4.87 at the midpoint. Quarterly FFO per share is expected to be $1.16 to $1.28 for the second quarter, $1.13 to $1.25 for the third quarter, and $1.15 to $1.27 for the fourth quarter. Our quarterly guidance ranges continue to reflect the seasonality in our business as well as the potential impact of timing on the significant acquisition, disposition and financing activity planned for the year. AFO for the full year is expected to $4.10 to $4.30 per share, which represents a 66% payout at the midpoint.

That's all we have in the way of prepared comments so, Jonathan, I'll turn the call over to you now for questions.

Certainly. (Operator Instructions). David Toti from Cantor Fitzgerald.

Hey, good morning guys.

Hey David.

Just a couple of kind of detaily questions. Did you disclose what the rent mix was in the first quarter in terms of growth for new versus renewals?

Sure, David, it's Tom. I'll rattle those off. On the first quarter on a year-over-year basis, new lease rates were 3.8%, renewals 4.9%, blended 4.3%.

Should we expect those kind of rates going forward through the rest of the year to be consistent with your total revenue expectation?

Total revenues are 4% to 5% for the year and it really is driven by pricing, so I would tell you that, generally, yes, it would be in that range, 4% to 5%.

Are you seeing any kind of convergence in those rates at this point or are they maintaining a relatively consistent spread?

Right now they're staying pretty balanced and consistent. We're not seeing anything close totally on them.

Okay, and I guess how do we think about that versus the performance gap that we're seeing between the -- if you group the large and the secondary markets together from a revenue perspective, that gap seems to be closing a little bit at the revenue line. Is that more of a function of occupancy then?

No, I mean I think what you will see is the large markets begin to moderate as new construction comes into play, and you will begin to see the secondary markets begin to pick up a little bit as their advantage in deliveries begins to show. The timing on that, I couldn't exactly predict for you, but we don't think that Texas is going to roll the way Texas has been rolling for the infinite future. It's just been great for us, but at some point it will begin to moderate.

And just one last question, so a year from now, maybe we expect that -- we could expect that the gap between the revenue performance for those two buckets to be a little bit closer than it is today, sounds like.

Yes, we would think that, but our crystal ball sometimes is foggy; but that's what we would anticipate at this point.

Okay. Thanks for the detail.

Sure.

Thank you. Rob Stevenson from Macquarie.

Good morning, guys. Could you talk a little bit about some of the markets that have been a bit of a surprise, operationally, to you to the upside and downside thus far in the year relative to expectations?

Sure, Rob. I mean, I have, probably historically, underestimated Texas's strength a little bit. I mean, it's encouraging to see what it has continued to do. And then I think Jacksonville is a real bright spot. I think a lot of folks have thought that it was not a great place to be and, you know, its performance, with 5% revenue, stable occupancy and growing rents is pretty encouraging.

You know, on the little bit slower side and not really surprising, seeing some of the things -- we would have expected, I think, the secondary markets to come in a little stronger in places like Columbus, Georgia. But that is a market that has the ability to do great things. It's just been a little slow lately.

Yes I would tell you, Rob, that probably the biggest worry bead in the portfolio now to me would be Raleigh. I think that's a market broadly that's getting a lot of supply. It's kind of all over the city and I think that's probably one of the weaker markets, I would expect, over the next six to eight quarters.

But as Tom says, Texas just continues to be quite strong. There's a lot of supply picking up in the Texas markets, but the job growth engine there is so robust that it just continues to handle it. But all in all, we do think the secondary markets will continue to show growing strength as we get into next year in particular.

All right, and then Al, you guys did only 60 basis points of expense increase. When you look out over the year, is it just a timing issue or are you -- sort of, at four months through the year now, are you guys running ahead of what your expectations were for expense growth for the full year?

Well, I think the first quarter was better than we expected. There's no question, Rob, and as we talked about, really that was a couple of things -- real estate taxes and really turn costs. And taxes are somewhat timing in that we got some favorable appeals in the first quarter and we continue to expect pressure the back half of the year, so it is somewhat timing.

And on the turn costs, we certainly have dialed in our forecast rising turn costs over this year, as we've talked about. We expect that will be the case in the second, third and fourth quarters, especially as we get into more leasing activity in the second and third quarters. So we saw some benefit in the first quarter that was some timing, some unexpected favorable surprise and, in terms of our guidance, we carried that through the back half of the year, that performance. But our same-store performance as it was is intact, so we expect it from the second quarter on to be about what we thought.

Okay, and then just the last question. Eric, when you take a look at the supply that's coming online as some of your bigger -- of the larger markets, what's going on with construction costs there? Are the numbers still working for people if they stick a shovel in the ground today or six months from now from a numbers standpoint, when you consider land costs and then plus what you've seen in terms of inflation, in terms of material and labor?

I think it's getting tougher, Rob. I was at a meeting last week with a number of developers talking about growing pressure surrounding lumber costs and labor costs in particular. And, if the single-family housing market continues to pick up and you continue to see building taking place there, the labor situation for the multi-family developers is only going to get tougher. And I think that this rising pressure on construction costs and development costs could begin to act as a bit of a moderator to the level of supply heading into '14, '15 kind of delivery. So from a perspective of not being a big developer, I'm kind of encouraged to see these trends picking up. I think it is starting to create pressure and these deals are not penciling out as well as they were a year ago.

Okay, and then I lied. One last question. Have you guys -- given the tier in the market with the properties for sale -- have you guys seen any sort of impact thus far from the presumed changes to Fannie and Freddie financing?

Not really at this point, Rob. We've certainly seen a lot of people bidding on projects. We've seen pricing be about what we thought and as we reflected in our continued guidance. So at this point we really haven't seen much impact in that.

And frankly, we're seeing some of the life companies coming in increasingly to some of these markets offering some incredibly attractive terms for seven -- five-, seven-year money. And so we're not seeing any financing issues that cause us to worry about our ability to continue to cycle capital out of these secondary markets.

Are the life guys going to smaller and regional guys, or is this basically available to you and the other, sort of, bigger players only?

They're certainly growing broader than they have in the past. I think because they see multi-family as a good industry and a pretty good yield given the risk. They're not going to go to some of the markets, but they go broader than they have in the past, which is supporting the market.

Okay, thanks guys.

Thank you. Michael Salinsky from RBC Capital Markets.

Good morning guys. Just following up on a disposition question. Can you give us a sense how dispositions are going to play out for the year just based upon what you're marketing -- maybe how much you expect to close in the quarter and kind of what you think is going to close in the back half of the year?

Yes, Mike. We've got, as Eric mentioned, I think, in his comments, we've got four assets under contract. I think we would expect those to close near the last part of the second quarter. Maybe one or two spill into very first part of the third quarter. And that's about half of the plan for the year. After that, they're fairly evenly spread with probably another group in the third quarter and another group in the fourth quarter of roughly equal sizes.

And you're still thinking late second quarter, early third quarter in terms of the unsecured debt issuance? And also just in terms of being a first time issuer, what kind of spread are you expecting at this point?

Yes, Mike, as we talked about, I think in our original guidance we had it occurring late July, early August. We've moved that up a little bit just because the market is in really good shape. Obviously, our balance sheet is in great shape. We're ready to go to the market and it's just timing of when we need the money at this point.

The market is red hot. You've seen a lot of deals come through at very good spreads and obviously treasuries remain low. So we believe, if we went to the market right now, we can get a spread over treasury somewhere in the 175 to 200 over treasuries for the applicable period which, if you do the math on that, at the high end of that, you're at 3.75% for a ten-year deal and that's pretty good. That's -- inside of Fannie Mae and Freddie Mac, that's a good pricing. We would hope to do that or even a little better assuming current conditions and so we're moving as quickly as we can, given the dilution and all the other factors in our plan, to execute on that strategy.

Okay. Switching gears here to operations, did you get April leasing trends? And I think you mentioned a 4.3% blended average increase in the first quarter. What was that versus the first quarter of 2012?

It was up versus 2012. Excuse me -- honestly, I don't have that. I think it's down. We're expecting -- there's some moderation there. First quarter it was down -- first quarter of '12 was a little -- around 7% blended.

(multiple speakers) we would definitely expect the rent growth trajectory to be a little lower this year than it was last year, so that's not unexpected. But blended 4.3%, I don't know off the top of my head what it was for Q1 last year, but it was, I'm sure, north of that number.

Okay. Fair enough. And finally, Eric, can you just touch upon, kind of, the acquisition pipeline. I know the first quarter is usually slow, but how is that firming and, kind of, what are you seeing in terms of pricing difference right now between your primary and secondary markets?

Well, we're looking at a lot of things right now, Mike. It's, as I said, pretty darn competitive. We still feel good about the $250 million to $300 million guidance that we have out there. We've got a couple of deals under contract currently that are going through due diligence. So I can't comment on the certainty that they'll close, but they're looking pretty good.

I would tell you that we're routinely seeing, for the quality of assets that we're after, that pricing in the large markets versus secondary markets, a gap of probably around 50 basis points. I mean, pricing running 5.5% to 6% in the secondary markets and 5% to 5.5% in the larger markets. And it's -- particularly for the stabilized deals, it's super competitive but pricing is holding up real strong.

Appreciate the color, guys. Thank you.

Thanks, Mike.

Paula Poskon from Robert W. Baird.

Eric, given your comments on construction costs, what is your appetite for continuing to do the one or two development deals a year? And are you still getting a healthy volume of inbound calls from those private or regional developers with attractive projects that you'd be interested in?

Well, we definitely are fielding a lot of those phone calls, Paula, and that continues to be our favored way of pursuing development opportunities. I would tell you I'm probably a tad bit more cautious about it today than I would have been a year ago just given the volume that we're seeing.

What we're seeing is increasingly more developers who are interested in a pre-sale and taking the risk off the table sooner rather than later. And so we went through a period, sort of, towards the end of last year where the conversations were more around with the developers wanting to have a continued interest of some type in the project so that, once we got stabilized, there was some sort of promote or some sort of back-in opportunity that they could continue to participate in.

Today, the conversation, at least from what we're seeing, is a little bit more urgent and they're not as aggressive about wanting to stay in and they're a little bit more interested in wanting to get a certainty of getting out, which I think says something about, sort of, what the developers -- I mean, there's obviously a lot of talk about supply. So I just think it's a time to be prudent and cautious and we don't have any other development opportunities under way right now. And if someone comes to us with a really compelling opportunity, we would certainly have an interest in it. But I think a lot of the supply that is going to get delivered in '14 and '15 is going to create some good buying opportunities and we're okay with being patient.

Thanks very much. That's all I have.

Thanks, Paula.

Thank you. Tayo Okusanya from Jefferies.

Yes, quick question. Just in regards to transaction markets. I mean, you guys are saying things are very competitive right now. Does that compel you to consider selling more assets and specifically selling more assets in primary rather than secondary markets?

Not really. I mean, our disposition strategy is really built around the idea of continuing to cycle capital out of investments that we feel like have margins that we can do better with. And that really is the process that we go through to decide which assets to sell. And it's not so much a market-driven decision as much as it's an after CapEx almost, if you will, an AFFO margin decision that drives our selection process.

And so we're selling in large markets and we're selling in secondary markets. But the idea that we need to monetize a bunch of investments because of some portfolio shift or strategic objective that we have, we don't really have that concern or that need. So that $150 million to $160 million, maybe $175 million, range is a level that we think is about what we're very comfortable with. We're comfortable with the ability to redeploy that capital and manage the earnings process through this. And so that's kind of the way we're approaching it and I think you'll continue to see that over the next couple of years.

Okay, that's helpful. And when I just kind of think about guidance, this quarter, your prior guidance, the midpoint was $1.19. You guys came in at $1.25, which is a $0.06 beat. But you raised overall guidance for 2013, the midpoint, by $0.04. So I was kind of curious why just a $0.04 raise versus at least a $0.06 just to account for the 1Q beat.

Tayo, this is Al. The $0.06, as you mentioned, $0.03 call it same-store performance, $0.03 G&A and other items, did carry through the year. But that's offset by a couple of cents of items that, as talked about earlier and mentioned to Mike's question, we're changing the timing of some of our transactions this year. The bond transaction is a little bit sooner and, if you saw, we raised -- if you put together our plans this year and we've talked about before, we think we'll need around $25 million in equity for the full year to maintain our leverage, given the dispositions and everything we have going on. So you can see we've done most of that in the first quarter. So that was a little bit earlier than we had originally planned. Those two things cost about $0.02 neg against the $0.06.

All right. Thank you very much. Great quarter.

Thanks.

Thank you. (Operator Instructions). Dave Bragg from Green Street Advisors.

Thank you. Good morning. In your press release you left the door open to more future joint venture purchases. Can you just talk about under what circumstances we should expect to see this from you and how the level of interest from partners compares to recent years?

Dave, we have -- we mentioned two funds, Fund II and Fund III. Actually, Fund II is funded -- is sort of capped off. We really only have one investor that we do business with, one private capital investor. And the only fund we're really active, if you will, in looking to add new assets is Fund III.

Having said that, that fund and our strategy for using the Fund is really geared towards value-add acquisitions, looking for properties that we define as being seven years of age or older that we can go in and rehab. Those particular types of transactions, particularly in today's market, are very, very hard to find on terms and pricing that we feel comfortable with. Fully stabilized assets at that level are very easily financed and so we really have not dialed into our forecast this year any expectation of doing any more JV acquisitions this year. Having said that, we're still looking at them and we're still being given opportunities to bid on them. But the pricing is just very, very frothy, particularly in that market given the financing availability.

Okay, thank you. And Eric, we've spoken about this many times in the past, but given the increased level of purchases from single-family rental investors, especially in Atlanta and Phoenix, it seems as though those two markets slowed disproportionately for you in the first quarter. Are you observing more competition from the single-family rental asset class than you were, say, a year ago?

Dave, it is Tom. That hasn't changed at all at this point in terms of moveouts. Atlanta, I think, has the ability to pick up steam here in the very near future. We had one property that was off which was really some people changes that we've made adjustments on that pulled the market down a little bit. And that group closed out at 95.7% and we've got a nice pop in occupancy which will help drive revenues in Atlanta.

Phoenix is an encouraging story all around. I'm optimistic about where it's going, particularly our asset to the north is surrounded by a great deal of infrastructure in business construction. So while the single-family rentals is the factor, it is not at this point the factor that's changed much.

I think, Dave, as you say, you know I've talked about this a lot. I do think that -- continue to believe that the single-family rental threat is not a meaningful threat for us. We've been at 6% of our turnover due to moveouts to home renting for now probably eight to ten quarters. If that number were to -- let's say it moves to 8%. It's never been that high, but I don't see it getting proportionately a lot worse than it is right now. I mean, going back several years ago, the lowest it's ever been is about 4%. So it's kind of hung at a very steady level and I continue to just believe that people make their decisions in terms of renting a home versus renting an apartment for a lot of lifestyle reasons, and the people we're catering to just really, I think, are going to continue to favor the apartment rental over the home rental.

Okay, fair enough. Thank you.

Thanks, Dave.

Thank you. Buck Horne from Raymond James.

Just wondering if you have any recent statistics on rent-to-income ratios for new leases signed?

Sure, the portfolio average for rent-to-income ratio is about 17%, which is still down from the 19% where it peaked at sort of the heart of the recession. And then March is -- or sort of today's incomes on today's rents is 16.7%.

That's great. Thank you. And any comment on foot traffic in the communities this leasing season? And one quick one for Al. I was just wondering if you could help quantify the magnitude of the property tax swing you're thinking you'll see later this year.

Sure, on first quarter foot traffic was right where we needed it to be to -- so essentially flat with last year. And then our early look at April is that it's picked up a little bit, in the 3% range, but still positive and exactly what we need it to be.

Buck, I'll answer you on the taxes. In first quarter, given the -- we have a projection for the full year of about 6% -- 5.5% to 6.5% guidance. Still believe that's correct. The first quarter was a little over 3% because of some of the credits we got because of the assessments and appeals that were favorable. So you can do some math on that. We would say that the second, the third and the fourth quarter are higher. Probably second quarter, 4% to 5% and a little higher in the third and fourth just because of comparisons from credits and things we had in the prior year.

All right, that's very helpful. Thank you guys.

Thank you.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Eric for any further remarks.

Thank you. Appreciate everyone joining us this morning and we'll look forward to seeing everyone at NAREIT in a few weeks. Thanks.

Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.