FOR IMMEDIATE RELEASE
GABLES REPORTS FIRST QUARTER EARNINGS
BOCA RATON, FLORIDA - May 3, 2005 - Gables Residential (NYSE:GBP) (the "Company") today reported earnings for the first quarter. Net income available to common shareholders was $1.35 per diluted share. Funds from operations ("FFO") available to common shareholders was $0.73 per diluted share. Adjusted funds from operations ("AFFO") available to common shareholders was $0.39 per diluted share. Each of these metrics includes the net benefit of approximately $0.27 per diluted share of non-recurring items as noted herein. Excluding the impact of these non-recurring items, the Company's FFO was in line with the mid-point of its previous earnings guidance for the quarter.
"We continue to see portfolio-wide fundamentals strengthening. Same store revenue growth continued this quarter and we have essentially completed the transformation of our portfolio to Established Premium Neighborhood locations with better growth potential. Our development pipeline is progressing and we expect to see a meaningful increase in lease-up revenues as we move through this year and into 2006," noted David Fitch, CEO.
Net income available to common shareholders for the quarter was $39.8 million, or $1.35 per diluted share, compared to $5.0 million, or $0.17 per diluted share, for the comparable period of 2004. The first quarter 2005 results included gains from real estate asset sales of $34.7 million, or $30.5 million, net of $4.2 million of minority interest, or $1.04 per diluted share. The first quarter 2004 results included gains from real estate asset sales of $2.8 million, or $2.5 million, net of $0.3 million of minority interest, or $0.08 per diluted share.
The results for the first quarter of 2005 also included (1) a gain on sale of the Company's investment in Rent.com of $5.8 million and (2) net proceeds from an insurance settlement of $5.1 million associated with the Company's Gables State Thomas Ravello community, offset by $1.8 million of estimated costs associated with a preliminary agreement to settle the class action lawsuit filed in Florida in which the Company has been named a party. These items aggregated $9.1 million and had a positive net impact of $0.27 per diluted share to each of the performance measures reported by the Company for the first quarter of 2005. See "Other Significant Items" on page 5 of this press release for further information with respect to these matters.
FFO available to common shareholders for the quarter was $24.5 million, or $0.73 per diluted share, after a supplemental adjustment of $0.2 million to exclude debt extinguishment costs associated with the sale of real estate assets, or $24.3 million, or $0.73 per diluted share, including such costs. FFO available to common shareholders for the first quarter of 2004 was $17.6 million, or $0.53 per diluted share.
AFFO available to common shareholders, which treats recurring value retention capital expenditures as period costs and includes economic gains and losses on asset sales, was $13.2 million, or $0.39 per diluted share, for the quarter, compared to $13.5 million, or $0.40 per diluted share, for the comparable period of 2004. Economic gains and losses represent the gains and losses on sale in accordance with GAAP, less accumulated depreciation through the date of sale. A reconciliation of net income to FFO and to AFFO is included on page 16.
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/q105earningsrelease.
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 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, May 4, 2005 at 11:00 a.m. Eastern Time. Gables executives will discuss first-quarter earnings, earnings outlook for 2005, 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. To access the live broadcast, or to hear a playback which will be available for 12 months following the conference call, 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 before the scheduled conference time. US/Canada participants should call (888) 396-2384. International callers or those in the 617 area code should call (617) 847-8711. The passcode to participate in the call is 85287408. A playback will be available from 1:00 p.m. Eastern Time on Wednesday, May 4, 2005 until 5:00 p.m. Eastern Time on Wednesday, May 11, 2005. US/Canada participants should call (888) 286-8010. International callers or those in the 617 area code should call (617) 801-6888. The passcode for the playback is 11318591.
Same-Store Operating Results for the First Quarter 2005
On a year-over-year basis, total property revenues increased 1.8% and property operating and maintenance expenses increased 2.8%, resulting in a 1.1% increase in property net operating income ("NOI") for the first quarter. On a sequential-quarter basis, total property revenues increased 0.7% and property operating and maintenance expenses increased 3.7%, resulting in a 1.2% decrease in property NOI. The number of apartment homes included in both the year-over-year and sequential same-store results represents approximately 71% of the Company's total stabilized portfolio at March 31, 2005. The Company does not include its proportionate share of joint venture results in its same-store pool of assets. A detail of the year-over-year and sequential-quarter same-store results by market is presented on pages 18 and 19, respectively.
Investment and Disposition Activity
During the quarter, the Company acquired the following two EPN operating real estate assets for approximately $92 million: Gables Lenox Hills, comprised of 480 apartment homes in Atlanta, and the nine-story high-rise Gables Camino Real, comprised of 235 apartment homes in Boca Raton.
The Company has $323 million of assets in various stages of development with approximately $206 million of costs remaining to be incurred at March 31, 2005. In addition, the Company has development rights for the future development of an estimated 2,558 apartment homes in 11 communities for total budgeted costs estimated to be approximately $425 million as outlined on page 30 in the press release including the Supplements.
During the quarter, the Company sold six assets (four in suburban Atlanta, one in Memphis and one in Orlando) comprised of 1,879 apartment homes for a total of $127.3 million. The related gain on sale of real estate assets in accordance with GAAP was approximately $34.7 million, or $1.04 per diluted share, and debt extinguishment costs were approximately $0.2 million. The economic loss for these sale transactions was approximately $9.5 million, or $0.28 per diluted share, after taking into account $0.2 million of associated debt extinguishment costs and $44.0 million of accumulated depreciation. The buyers of the four Atlanta assets and the Memphis asset assumed a total of $67.1 million of variable-rate tax-exempt debt in connection with such transactions.
Subsequent to quarter end, the Company acquired two EPN operating communities comprised of 354 apartment homes and 14,351 square feet of retail space in Dallas for approximately $34 million. In addition, the Company sold Gables Beach Park in Tampa, comprised of 166 apartment homes, to a condominium converter for $41.2 million. The Company expects to record a gain on sale of real estate assets in accordance with GAAP of approximately $18.7 million, or $0.56 per diluted share, in the second quarter of 2005 associated with this transaction. This transaction is expected to result in an economic gain of approximately $17.8 million, or $0.54 per diluted share, after taking into account $0.9 million of accumulated depreciation.
Other Significant Items
During the quarter, the Company recorded a gain of approximately $5.8 million, or $0.17 per diluted share, from the sale of its investment in Rent.com via eBay Inc.'s acquisition of Rent.com. During the quarter, the Company also recorded a net reduction to expenses of $3.3 million, or $0.10 per diluted share, in connection with (1) $5.1 million of net proceeds pertaining to its settlement of insurance claims associated with previous water-infiltration issues at its Gables State Thomas Ravello community in Dallas, offset by (2) $1.8 million of estimated costs associated with a preliminary agreement to settle the class action lawsuit in Florida in which the Company has been named a party.
The class action lawsuit alleges that fees charged when residents terminate their leases prior to the end of term or terminate without sufficient notice are not in compliance with state law. The preliminary agreement to settle the lawsuit is subject to court approval once finalized between the parties and published to the class. The charge of $1.8 million represents an estimate and is comprised of two components: (1) expected plaintiffs' attorneys fees and other costs of the settlement of approximately $1.2 million, payable upon court approval of the settlement, and (2) an estimate of $0.6 million for the amount of contested fees the Company expects to be substantiated by eligible class members who elect to make a claim, payable if and when proven according to procedures included in the settlement. The proposed settlement caps the Company's liability for contested fees at $3.0 million, with no minimum and requires that $350,000 be initially placed into an escrow account controlled by the Company to pre-fund the payment of expected claims. There can be no assurance that the settlement of the class action lawsuit will be finalized as currently proposed or that actual contested fees paid will not ultimately exceed the Company's current estimate.
Capital and Financing Activity
During the quarter, the Company acquired approximately $19.7 million of common shares and Operating Partnership units presented for redemption pursuant to its common share repurchase program at an average price per share of $34.81. The Company also issued $150 million of 5.00% senior unsecured notes for a term of five years. Proceeds of the offering were used to repay $100 million of 6.80% senior unsecured notes that matured March 15, 2005 and to reduce outstanding borrowings under the Company's credit facilities. In addition, the Company replaced its $300 million unsecured revolving credit facility with a $400
million unsecured revolving credit facility that has an initial maturity date of June 2008. The credit facility includes a pricing grid based on the Company's investment grade ratings that is currently set at LIBOR plus 70 basis points for syndicated borrowings. The facility includes a competitive bid option for up to 50% of the $400 million commitment amount, or $200 million. This option allows participating banks to bid to provide loans to the Company at rates that are lower than the stated rate for syndicated borrowings.
Management Promotion
During the last ninety days, the Company announced the promotions of Mr. David Fitch to Chief Executive Officer, Mr. Joe Wilber to Senior Vice President - Investments East and Ms. Sue Ansel to Chief Operating Officer. Mr. Chris Wheeler has transitioned from CEO to Executive Chairman. Mr. Fitch has also been appointed to the Company's Board of Trustees.
Earnings Guidance
The Company's guidance for the second quarter of 2005 and the full year 2005 for net income, FFO and AFFO available to common shareholders on a diluted per share basis is disclosed and reconciled below:
Second Quarter 2005: | Range |
| Low-End | High-End |
Expected net income available to common shareholders | $0.59 | $0.61 |
Add: Expected real estate asset depreciation and amortization | 0.44 | 0.44 |
Less: Expected gain on sale of operating real estate assets | -0.56 | -0.56 |
Expected FFO available to common shareholders | $0.47 | $0.49 |
Less: Expected recurring value retention capital expenditures | -0.08 | -0.07 |
Add: Expected economic gain on sale of operating real estate | 0.54 | 0.54 |
Expected AFFO available to common shareholders | $0.93 | $0.96 |
| | |
Same-Store Operating Assumptions to the Company's Guidance (1): | |
Total property revenues | +2.00% | +2.75% |
Property operating and maintenance expenses | +6.75% | +4.75% |
Property net operating income (NOI) | -0.75% | +1.50% |
| | |
(1) Represents the projected change from the second quarter 2004 to the second quarter 2005. |
Full Year 2005: | Range |
| Low-End | High-End |
Expected net income available to common shareholders | $3.71 | $4.09 |
Add: Expected real estate asset depreciation and amortization | 1.82 | 1.82 |
Less: Expected gain on sale of operating real estate assets | -3.25 | -3.43 |
Expected FFO available to common shareholders | $2.28 | $2.48 |
Less: Expected recurring value retention capital expenditures | -0.27 | -0.23 |
Add: Expected economic gain on sale of operating real estate | 0.86 | 1.04 |
Expected AFFO available to common shareholders | $2.87 | $3.29 |
| | |
Same-Store Operating Assumptions to the Company's Guidance (2): | |
Total property revenues | +2.00% | +2.50% |
Property operating and maintenance expenses | +3.25% | +2.00% |
Property net operating income (NOI) (3) | +1.25% | +3.00% |
| | |
(2) Represents the projected change from 2004 to 2005.
(3) A 1.0% increase or decrease in same-store property NOI for the year has an approximate
$0.03 impact on FFO per diluted share.
|
The Company's guidance estimates for net income, FFO and AFFO for the full year 2005 include $0.12 per diluted share on the high-end of the range associated with the potential sale of a parcel of undeveloped land. The low-end of the range assumes that the transaction does not occur.
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 or held for sale 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 the Company's 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 as defined under GAAP, plus certain non-cash items, such 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.
The Company presents FFO with a supplemental adjustment to exclude debt extinguishment costs associated with the sale of real estate assets. These debt extinguishment costs are incurred when the sale of an asset encumbered by debt requires the Company to pay the extinguishment costs prior to the debt's stated maturity and to write-off unamortized loan costs at the date of the extinguishment. Such costs are excluded from the gain on sale of real estate assets reported in accordance with GAAP. However, the Company views the debt extinguishment costs associated with the sale of real estate assets as an incremental cost of the sale transaction because the Company extinguished the debt in connection with the consummation of the sale transaction and the Company had no intent to extinguish the debt absent such transaction. The Company believes that this supplemental adjustment more appropriately reflects the results of its operations exclusive of the impact of its sale transactions.
Adjusted Funds From Operations (AFFO) represents FFO less recurring value retention capital expenditures, plus economic gains and losses from sales of previously depreciated operating real estate assets. The Company believes AFFO is a useful supplemental operating performance metric because AFFO results in a more comprehensive evaluation of the way the Company operates its business. The Company modified its definition of AFFO for reporting purposes in the second quarter of 2004 to include economic gains and losses from sales of previously depreciated operating real estate assets because the Company believes inclusion of economic gains and losses on asset sales reflects the results of its investment activities which are a fundamental component of its business strategy. Prior period presentation of AFFO has been conformed accordingly. Management generally considers AFFO 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 including gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, AFFO can help users understand the financial performance of a company's operating and investment results over time.
Economic Gains and Losses on Sale of Real Estate Assets represent the gains or losses on sale in accordance with GAAP, less accumulated depreciation through the date of sale. As such, economic gains and losses reflect the cash proceeds from a sale less the cash invested in the sold community. The Company treats debt extinguishment costs associated with the sale as a reduction to the economic gains and losses because it believes such costs represent an incremental cost of the sale transaction.
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 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 a stabilized occupancy and operating expense level. For purposes of the period-end community charts, once a development community has reached a stabilized occupancy level, it is reclassified from the Development/Lease-up Communities chart to the Stabilized Communities chart.
Physical Occupancy represents gross potential rent less physical vacancy loss as a percentage of gross potential rent.
Economic Occupancy represents actual rent revenue earned 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, debt extinguishment costs associated with the 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 changes that exceed the NAREIT apartment sector index and the Company's ability to achieve its expectations for second quarter 2005 and full year 2005 earnings (which include assumptions with respect to: property revenues, property operating and maintenance expenses, property net operating income, corporate general and administrative expense, and interest rates; the timing, volume and pricing of dispositions of assets and realized economic gains therefrom; the timing, terms and volume of redeployment of capital in the Company's business, which is affected by continued pressure on initial investment yields on acquisitions and the relative returns from development versus acquisitions; the timing of completion and lease-up of communities under construction; projected acquisition and financing activities through joint ventures; and estimated costs associated with the Company's preliminary agreement to settle the class action lawsuit filed in Florida in which the Company has been named a party). 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 the Company's assumptions prove incorrect, actual results may vary materially from those anticipated, projected or implied in the forward-looking statements. 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 assets 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 to reflect changes in underlying assumptions or factors, new information, future events or otherwise.
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) 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.
The Company is one of the largest apartment operators in the nation and currently manages 41,241 apartment homes in 160 communities, including the 79 communities it owns with 20,572 stabilized apartment homes primarily in Atlanta, Houston, South Florida, Austin, Dallas, Washington, D.C. and San Diego/Inland Empire and has an additional 11 communities with 2,673 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.
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