FOR IMMEDIATE RELEASE
GABLES REPORTS FOURTH QUARTER EARNINGS
BOCA RATON, FLORIDA – February 3, 2004 – Gables Residential (NYSE:GBP) (the “Company”) today reported earnings for the fourth quarter. Net income available to common shareholders was $0.73 per diluted share and funds from operations (“FFO”) available to common shareholders achieved the mid-point of the Company’s guidance at $0.53 per diluted share. Both earnings measurements include a charge of $1.3 million, or $0.04 per diluted share, that was recorded in connection with the redemption of the Company’s 8.625% Series B Preferred Units in November 2003.
Net income available to common shareholders for the quarter was $20.9 million, or $0.73 per diluted share, compared to $11.4 million, or $0.47 per diluted share, for the comparable period of 2002. The fourth quarter 2003 results included gains from asset sales of $20.3 million, or $0.61 per diluted share, compared to $7.7 million, or $0.25 per diluted share, for the fourth quarter 2002. In addition, the fourth quarter 2003 results included a charge of $1.3 million, or $0.04 per diluted share, that was recorded in connection with the Company’s redemption of its 8.625% Series B Preferred Units in November 2003. This charge is discussed in more detail on page 4.
For the year ended December 31, 2003, net income available to common shareholders was $49.1 million, or $1.87 per diluted share, compared to $45.7 million, or $1.85 per diluted share, for the comparable period of 2002. The 2003 results included gains from asset sales of $37.7 million, or $1.20 per diluted share, compared to $32.4 million, or $1.06 per diluted share, for the comparable period in 2002. In addition, the 2003 results included the fourth quarter 2003 charge of $1.3 million, or $0.04 per diluted share, related to the redemption of the 8.625% Series B Preferred Units. The year ended December 31, 2002 results included (i) the third quarter 2002 charge of $4.0 million, or $0.13 per diluted share, related to the redemption of the 8.3% Series A Preferred Shares and (ii) the second quarter 2002 unusual items charge of $1.7 million,
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or $0.05 per diluted share, that was recorded in connection with an early extinguishment of debt in May 2002. These charges are discussed in more detail on page 5.
FFO available to common shareholders for the quarter was $17.7 million, or $0.53 per diluted share, compared to $19.9 million, or $0.66 per diluted share, for the comparable period of 2002. FFO available to common shareholders for the year ended December 31, 2003 was $75.0 million, or $2.39 per diluted share, compared to $75.8 million, or $2.47 per diluted share, for the comparable period of 2002. The FFO metric excludes gain on sale of previously depreciated operating real estate assets and real estate asset depreciation and amortization. A reconciliation of net income to FFO is included on page 14.
This earnings release is available on Gables Residential’s website at www.gables.com. Please click on “Investor Relations” then “Financial Information/Earnings Releases” or go directly to this web address: www.gables.com/q403earningsrelease.
The Company produces Earnings Release Supplements (“the Supplements”) that provide detailed information regarding the financial position and operating results of the Company. These Supplements are available via the Company’s website and through e-mail distribution. Access to the Supplements through the Company’s website is available at www.gables.com/financialreports. If you would like to receive future press releases via e-mail, please register through the Company’s website at www.gables.com/mailalerts. Some items referenced in the earnings release may require the Adobe Acrobat 6.0 Reader. If you do not have Adobe Acrobat 6.0 Reader, you may download it at the following website: www.adobe.com/products/acrobat/readstep2.html.
The Company will host a conference call on Wednesday, February 4, 2004 at 12:00 p.m. Eastern Time. Gables executives will discuss fourth-quarter earnings, current activity and the local multifamily markets. The conference call will be open to the public and will also be broadcast live on the Internet via Gables Residential's website at www.gables.com. Please click on “Investor Relations” then “Calendar of Events/Conference Calls” or go directly to this web address: www.gables.com/conferencecalls. Those listening by phone should call in 5-10 minutes
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before conference time to (800) 884-5695 and use the passcode 65836712. International callers or those in the 617 area code should call (617) 786-2960.
A playback of the conference call will be available from 4:00 p.m. Eastern Time on Wednesday, February 4, 2004 until midnight on Friday, February 13, 2004. US/Canada participants should call (888) 286-8010. International callers or those in the 617 area code should call (617) 801-6888. The Gables playback code is 84743750. The playback can also be accessed for 12 months following the conference call via Gables Residential’s website at www.gables.com/webcasts.
Operating Results for the Fourth Quarter 2003 Compared to the Fourth Quarter 2002
The Company’s markets and portfolio continue to feel the residual impact of the national economy’s job-growth contraction and related decline in renter demand. On a same-store basis, total revenues declined 3.1% and property operating and maintenance expenses increased 2.2%, resulting in a 5.9% reduction in property net operating income (“NOI”). A detail of the same-store results by market is presented on page 15. Expense comparisons in certain markets are skewed as a result of the recordation of property tax true-up adjustments and appeal settlements in both the fourth quarters of 2003 and 2002. A ratable recordation of property taxes throughout both 2003 and 2002 would result in an increase in expenses of 1.4%, and a decline in NOI of 5.5%, from the fourth quarter 2002 to the fourth quarter 2003. Property operating and maintenance expenses increased 1.0% from the full year 2002 to the full year 2003.
Investment and Disposition Activity
During the quarter, the Company sold Bradford Place and Bradford Pointe, a total of 732 apartment homes, in suburban Houston for $42.5 million, resulting in a gain of $20.3 million. “We have been very successful with portfolio allocation objectives in Houston during the past two years with over $225 million in asset sales. This represents over 3,400 apartment homes and has reduced our Houston allocation as the market was peaking. Today, more than 95% of our revenues in Houston are generated from our desired EPN ™ locations,” noted Chris Wheeler, CEO.
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Development commenced for 450 apartment homes located in Palm Beach County in South Florida adjacent to the recently announced location of the Scripps Research Institute, which is expected to employ up to 50,000 people over the next 15 years. Gables Montecito is expected to cost approximately $56 million and deliver apartments for occupancy beginning in the second quarter of 2005. Development also commenced for 76 townhomes in the third phase of Gables West Park Village in Tampa. This development is owned in a joint venture and costs are expected to approximate $10 million.
“We were much more active on the new investment front in 2003 as the signs of the economic recovery took hold, “ stated Mr. Wheeler. During 2003, the Company completed construction of 832 apartment homes for $120 million, acquired 820 apartment homes for $122 million, sold 1,673 apartment homes for $113 million and commenced construction of 1,323 apartment homes expected to cost approximately $160 million. “Our research indicated that the national economic recovery would begin to manifest itself in a number of our resilient markets first. Our decision to deliver new income streams in late 2004 and 2005 into rising demand from job growth continues to be validated and will allow us to generate outsized returns relative to acquisitions and slow growth markets that are not resilient,” noted Mr. Wheeler.
Capital Transactions
On November 17, 2003, the Company redeemed its 2.0 million outstanding 8.625% Series B Preferred Units for $50 million plus accrued and unpaid distributions. In connection with the issuance of the Series B Preferred Units in November 1998, the Company incurred $1.3 million in issuance costs and recorded such costs as a reduction of shareholders’ equity. As a result, the redemption price of the Series B Preferred Units exceeded the related carrying value by the amount of the issuance costs. Upon redemption in the fourth quarter of 2003, the Company recorded the $1.3 million excess as a reduction of earnings in arriving at both net income available to common shareholders and funds from operations available to common shareholders. This accounting treatment is in accordance with a clarification by the SEC staff in July 2003 of EITF Abstracts, Topic No. D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock.”
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Also during the quarter, the Company expanded its unsecured line of credit from $252 million to $300 million. In addition to these items, in 2003, the Company issued $75 million of 7.5% Series D Preferred Shares and received $79 million of net proceeds from a common share offering at a gross price of $32.81 per share. "We were able to lower our cost of capital during the year and provide additional financial flexibility as we started to increase our investment volume in conjunction with the economic recovery occurring in the markets we have selected for investments," stated Mr. Wheeler.
Unusual Items
In May 2002, the Company expensed approximately $1.7 million of early debt extinguishment costs. Under accounting rules in effect at that time, these costs were classified as an extraordinary item and, as such, did not reduce FFO. In April 2002, SFAS No. 145 was issued. The Company adopted this standard on its January 1, 2003 effective date and pursuant to the new rules, reclassified the $1.7 million of early debt extinguishment costs from extraordinary items to unusual items. In the computation of FFO pursuant to the NAREIT definition outlined on page 7, net income is adjusted for extraordinary items but is not adjusted for unusual items. As such, previously reported FFO for the year ended December 31, 2002 has been reduced by $1.7 million. The adoption of this standard had no impact on previously reported net income.
Original Issuance Costs Associated with the Redemption of Preferred Shares in 2002
In August 2002, the Company redeemed its 4.6 million outstanding 8.3% Series A Cumulative Redeemable Preferred Shares for $115 million plus accrued and unpaid dividends. In connection with the issuance of the Series A Preferred Shares in July 1997, the Company incurred $4.0 million in issuance costs and recorded such costs as a reduction of shareholders’ equity. As a result, the redemption price of the Series A Preferred Shares exceeded the related carrying value by the amount of the issuance costs. The July 2003 clarification of Topic No. D-42 discussed above became effective for the third quarter 2003 and was required to be reflected retroactively in the financial statements of prior periods. Therefore, the Company has reduced its previously reported net income available to common shareholders and funds from operations available to common shareholders for the year ended December 31, 2002 by the $4.0 million excess.
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Earnings Guidance
The Company’s guidance for the first quarter of 2004 and the full year 2004 for net income and FFO available to common shareholders on a diluted per share basis is disclosed and reconciled below:
| | Range |
| Low-End | | | | High-End |
Expected net income available to common shareholders | $0.44 | | | | $1.10 |
Add: Expected real estate asset depreciation and amortization | 0.46 | | | | 0.46 |
Less: Expected gain on sale of operating real estate assets | -0.38 | | | | -1.02 |
Expected FFO available to common shareholders | $0.52 | | | | $0.54 |
| | | | | |
Same-Store Operating Assumptions to the Company’s Guidance (1): | | | | |
Total property revenues | -3.50% | | | | -2.50% |
Property operating and maintenance expenses | 4.25% | | | | 3.25% |
Property net operating income (NOI) | -7.50% | | | | -5.50% |
| | | | | |
(1) Represents the projected change from the first quarter 2003 to the first quarter 2004. |
| | Range |
| Low-End | | | | High-End |
Expected net income available to common shareholders | $1.98 | | | | $3.04 |
Add: Expected real estate asset depreciation and amortization | 1.85 | | | | 1.90 |
Less: Expected gain on sale of operating real estate assets | -1.50 | | | | -2.50 |
Expected FFO available to common shareholders | $2.33 | | | | $2.44 |
| | | | | |
Same-Store Operating Assumptions to the Company’s Guidance (3): | | | | |
Total property revenues | 0.50% | | | | 2.00% |
Property operating and maintenance expenses | 3.00% | | | | 2.00% |
Property net operating income (NOI) (4) | -1.00% | | | | 2.00% |
| | | | | |
(3) Represents the projected change from 2003 to 2004.
(4) A 1.0% increase or decrease in same-store property NOI has an approximate
$0.03 impact on FFO per diluted share. |
The mid-point for FFO guidance for the full year 2004 is $2.39 per diluted share, which compares to the current First Call Consensus Earnings Estimates of $2.41 per diluted share. The reduction in guidance is attributable to slight revisions in projected same-store NOI and revised expectations of higher costs for acquisitions as the market begins to acknowledge NOI growth potential in acquisition underwriting. The Company reiterated that its overall projections for same-store performance are predicated on a substantial improvement in the second half of the year as apartment demand increases from expected job growth in its markets.
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Discontinued Operations
The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective January 1, 2002. This standard requires, among other things, that operating results of certain real estate assets sold subsequent to January 1, 2002, be reflected as discontinued operations in the statements of operations for all periods presented. The Company evaluates, in the ordinary course of its business, the continued ownership of its assets relative to available opportunities to acquire and develop new assets and relative to available equity and debt capital financing. The Company sells assets if it determines that such sales are the most attractive sources of capital for redeployment in its business, for repayment of debt, for repurchases of stock, and for other uses. The Company expects to reclassify historical operating results whenever necessary in order to comply with the requirements of SFAS No. 144.
Non-GAAP Financial Measures and Other Terms
This release, including the Supplements, contains certain non-GAAP financial measures and other terms. The Company’s definition and calculation of these non-GAAP financial measures and other terms may differ from the definitions and methodologies used by other REITs and, accordingly, may not be comparable. The non-GAAP financial measures referred to below should not be considered as alternatives to net income or other GAAP measures as indicators of our performance. Additional information regarding these items and other non-GAAP financial measures and terms used in this release, including the Supplements, can be found elsewhere herein.
Funds from Operations (FFO) is used by industry analysts and investors as a supplemental operating performance measure of an equity real estate investment trust ("REIT"). The Company calculates FFO in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"). FFO, as defined by NAREIT, represents net income (loss) determined in accordance with generally accepted accounting principles ("GAAP"), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items, such
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as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. The use of FFO, combined with the required primary GAAP presentations, has improved the understanding of operating results of REITs among the investing public and made comparisons of REIT operating results more meaningful. Management generally considers FFO to be a useful measure for reviewing the comparative operating and financial performance of the Company (although it should be reviewed in conjunction with net income which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO can help users compare the operating performance of a company’s real estate between periods or as compared to different companies.
Adjusted Funds From Operations (AFFO) represents FFO less recurring value retention capital expenditures. Because FFO excludes real estate asset depreciation and amortization, AFFO represents a useful supplemental operating performance measure because it takes into consideration recurring value retention capital expenditures.
Recurring Value Retention Capital Expenditures represent costs typically incurred every year during the life of a community, such as expenditures for carpet, vinyl flooring, appliances, mechanical equipment and fixtures. To the extent such costs are incurred in connection with a major renovation of a community they are excluded from this category.
Non-recurring Capital Expenditures represent costs that are generally incurred in connection with a major project impacting an entire community, such as roof replacement, parking lot resurfacing, exterior painting and siding replacement. These
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costs are not incurred on a regular basis and may not occur or reoccur during the anticipated hold period of an asset. To the extent such costs are incurred in connection with a major renovation of a community they are excluded from this category.
Value Enhancing Capital Expenditures represent costs for which an incremental value is expected to be achieved from increasing the NOI potential for a community or recharacterizing the quality of the income stream with an anticipated reduction in potential sales cap rate for items such as replacement of wood siding with a masonry-based Hardi-Board product, amenity upgrades and additions, installation of security gates and additions of covered parking. To the extent such costs are incurred in connection with a major renovation of a community they are excluded from this category.
Property Net Operating Income (NOI) is used by industry analysts, investors and Company management to measure operating performance of the Company’s properties. NOI represents total property revenues less property operating and maintenance expenses (as reflected in the accompanying statements of operations). Accordingly, NOI excludes certain expenses included in the determination of net income such as property management and other indirect operating expenses, interest expense and depreciation and amortization expense. These items are excluded from NOI in order to provide results that are more closely related to a property’s results of operations. Certain items, such as interest expense, while included in FFO and net income, do not affect the operating performance of a real estate asset and are often incurred at the corporate level as opposed to the property level. As a result, management uses only those income and expense items that are incurred at the property level to evaluate a property’s performance. Real estate asset depreciation and amortization is excluded from NOI for the same reasons that it is excluded from FFO pursuant to NAREIT’s definition.
Stabilized Occupancy is defined as the earlier to occur of (i) 93% physical occupancy or (ii) one year after completion of construction. For purposes of evaluating comparative operating performance, the Company categorizes its operating communities based on the period each community reaches stabilized occupancy. For purposes of the period-end community charts, once a community has reached a stabilized occupancy level it is reclassified from the Development/Lease-up Communities chart to the Stabilized Communities chart.
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Physical Occupancy represents gross potential rent less physical vacancy loss as a percentage of gross potential rent.
Economic Occupancy represents actual rent revenue collected divided by gross potential rent. Thus, economic occupancy differs from physical occupancy in that it takes into account concessions, non-revenue producing apartment homes and delinquencies.
Gross Potential Rent is determined by valuing occupied apartment homes at contract rates and vacant units at market rates.
Income Available for Debt Service and Preferred Dividends represents net income available to common shareholders before interest expense and credit enhancement fees, preferred dividends, original issuance costs associated with redemption of preferred shares, income taxes, depreciation, amortization, minority interest, gain on sale of real estate assets, long-term compensation expense, extraordinary items and unusual items, all from both continuing and discontinued operations, as applicable. Management generally considers income available for debt service and preferred dividends to be an appropriate supplemental measure to net income of the operating performance of the Company because it helps investors to understand the ability of the Company to incur and service its debt and preferred stock obligations.
Forward-Looking Statements
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This release, including the supplements, contains forward-looking statements within the meaning of federal securities laws. These forward-looking statements reflect the Company's current views with respect to the future events or financial performance discussed in this release, based on management's beliefs and assumptions and information currently available. When used, the words "believe", "anticipate", "estimate", "project", "should", "expect", "plan", "assume" and similar expressions that do not relate solely to historical matters identify forward-looking statements. Forward-looking statements in this release include, without limitation, statements relating to the Company's ability to produce total returns through monthly dividends and share price
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changes that exceed the NAREIT apartment sector index and the Company's ability to achieve its expectations for first quarter 2004 and full year 2004 earnings. Forward-looking statements are subject to risks, uncertainties and assumptions and are not guarantees of future events or performance, which may be affected by known and unknown risks, trends and uncertainties. Should one or more of these risks or uncertainties materialize, or should our assumptions prove incorrect, actual results may vary materially from those anticipated, projected or implied. Factors that may cause such a variance include, among others: local and national economic and market conditions, including changes in occupancy rates, rental rates, and job growth; the demand for apartment homes in the Company's current and proposed markets; the uncertainties associated with the Company's current real estate development, including actual costs exceeding the Company's budgets; changes in construction costs; construction delays due to the unavailability of materials or weather conditions; the failure to sell communities on favorable terms, in a timely manner or at all; the failure of acquisitions to yield anticipated results; the cost and availability of financing; changes in interest rates; competition; the effects of the Company's accounting and other policies; and additional factors discussed from time to time in the Company's filings with the Securities and Exchange Commission. The Company expressly disclaims any responsibility to update forward-looking statements.
About Gables
With a mission of Taking Care of the Way People Live ® , Gables Residential has received national recognition for excellence in the management, development, acquisition and construction of luxury multifamily communities in high job growth markets. The Company's strategic objective is to produce total returns through monthly dividends and share price changes that exceed the NAREIT apartment sector index.
The Company has a research-driven strategy focused on markets characterized by high job growth and resiliency to national economic downturns. Within these markets, the Company targets Established Premium Neighborhoods ™ (“EPN’s”), generally defined as areas with high per square foot prices for single-family homes. By investing in resilient, demand-driven markets and EPN ™ locations with barriers to entry, the Company expects to achieve its strategic objective.
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The Company is one of the largest apartment operators in the nation and currently manages 51,310 apartment homes in 182 communities, owns 84 communities with 22,887 stabilized apartment homes primarily in Atlanta, Houston, South Florida, Austin, Dallas, Tampa and Washington, DC and has an additional 9 communities with 2,593 apartment homes under development or lease-up. For further information, please contact Gables Investor Relations at (800) 371-2819 or access Gables Residential’s website at www.gables.com.
The Company adopted SFAS No. 144, " Accounting for the Impairment or Disposal of Long-Lived Assets," effective January 1, 2002. This standard requires, among other things, that operating results of certain real estate assets which have been sold subsequent to January 1, 2002, or otherwise qualify as held for disposition (as defined by SFAS No. 144), be reflected as discontinued operations in the statements of operations for all periods presented. The Company has sold the following wholly-owned operating real estate assets: three during the first quarter of 2002, one during the fourth quarter of 2002, one during the first quarter of 2003, two during the third quarter of 2003 and two during the fourth quarter of 2003. The Company retained management of two of the assets sold during the first quarter of 2002. Due to the Company's continuing involvement with the operations of the two assets sold for which the Company retained management, the operating results of these assets are included in continuing operations. The operating results for the seven remaining wholly-owned assets sold for which the Company did not retain management are reflected as discontinued operations in the statements of operations for all periods presented. Interest expense has been allocated to the results of the discontinued operations in accordance with EITF No. 87-24.
The above table presents the results as reported pursuant to SFAS No. 144, the results of the seven assets included in discontinued operations, and the results before the impact of SFAS No. 144 for the three months ended December 31, 2003 and 2002, respectively. The results before the impact of SFAS No. 144 are presented and reconciled here to facilitate reconciliation to items included elsewhere within the release that include results attributable to both continuing and discontinued operations.
