UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
August 3, 2001
Date of Report (Date of earliest event reported)
MID-AMERICA APARTMENT COMMUNITIES, INC.
(Exact Name of Registrant as Specified in Charter)
TENNESSEE 1-12762 62-1543819
(State of Incorporation) (Commission File Number) (I.R.S. Employer
Identification Number)
6584 POPLAR AVENUE, SUITE 340
MEMPHIS, TENNEESSEE 38138
(Address of principal executive offices)
(901) 682-6600
(Registrant's telephone number, including area code)
(Former name or address, if changed since last report)
ITEM 7. Financial Statements and Exhibits
c. Exhibits
Exhibit 99.1 Press Release
Exhibit 99.2 Supplemental Data
ITEM 9. Regulation FD
Mid America Apartment Communities, Inc. (MAA)
2nd Quarter 2001 Earnings Release Conference Call Transcript
August 3, 2001
George Cates: Welcome to this commentary on Mid-America's second quarter
earnings. This is George Cates, CEO. With me are Eric Bolton, President and COO
and Simon Wadsworth, CFO. We'll restate only a few highlights from yesterday.
For a copy of the release, please contact us or check our web site
This morning, we will make some forward-looking statements. Refer to the
safe-harbor language included in our release and our 34-Act filings with the SEC
which describe risk factors that may impact future results. This call is being
recorded and the press may be participating.
Highlights of yesterday's release:
o Second quarter FFO 71 cents per share; in line with expectations
o New development properties continue to perform well
o 94.3% occupancy, versus 95.4% a year ago
o Significant loan refinancings completed, reducing overall debt cost to 6.7%
o Sold a $15 million asset at an 8.5% cap rate, reflective of high portfolio
quality
Eric Bolton: Occupancy pressure grew during the quarter as a result of new
construction in a couple of our markets. The most significant challenge came
from the Memphis market where occupancy declined from 94.7% at the end of the
second quarter last year to 91.8% for the quarter just ended. Softness in
Memphis is solely attributable to an excess of new construction. New unit
delivery is expected to be almost 4,000 units this year, following delivery of
only 1,500 units last year. The encouraging news is that job growth in Memphis
appears to be holding strong, even after a 25% increase posted in 2000 over
1999. Absorption in the first quarter alone exceeded 1,000 units. Assuming that
job growth and absorption holds steady, I expect the Memphis market to improve
by the second quarter of next year. Long term, we continue to feel very
comfortable with our investments in Memphis, which has been a consistent growth
market for many years.
As compared to last year's second quarter, we also experienced slight occupancy
declines in Jackson, TN and Chattanooga. The impact from these two markets was
not material.
Occupancy in our other markets continues to be strong with new supply and
absorption in balance. We've been especially pleased with the continued solid
performance from our Dallas, Austin, Houston, Jacksonville and Atlanta area
properties. Our Jackson, MS properties also continue to show signs of occupancy
improvement from their sluggish performance of the two prior quarters.
Rental concessions across the overall portfolio were down slightly from the
first quarter. On a same store basis, year over year concession cost was flat
for the second quarter. I anticipate that we will see concession cost increase
as we work through the busy leasing season of the third quarter and battle
excess supply pressures in a few markets.
Overall, we continue to feel that our southeast and south central markets are
holding up well. The broad diversification of our portfolio continues to
generate steady results.
We were pleased with resident turnover which declined again this quarter, down
2.8% on a same store basis from last year. 5,500 units were turned during the
quarter within our same store portfolio. Our property management team is very
focused on resident retention and proactive lease expiration management; key
aspects of minimizing vacancy loss.
Property operating expense performance was also good during the quarter. Same
store operating expenses grew by only 1.3% (before real estate taxes and
insurance); this off of a prior year benchmark performance for the quarter of -
0.1%. As a result of lower unit turnover, repair and maintenance costs grew only
2.1%. In addition, personnel costs increased by only 0.8%. Marketing and
advertising costs (up 12%) continue as the largest area of expense pressure as
we battle for leasing traffic in our highly competitive markets.
Utility management initiatives continue to generate fine results with same store
utility expense posting an overall 2.3% increase. Resident billing for water
usage generated a net reduction in overall same store water costs of 13% for the
quarter. Our new initiative of billing for trash removal continues to make solid
progress with the program now in place for 7,500 of our units.
Our property and liability insurance was renewed effective July 1st. The
continued pressures on pricing within the insurance markets generated a 15%
increase in our program costs for the coming year. After several years of under
pricing for actual claims experience and underwriting losses, the insurance
industry is now playing catch up with their pricing. We believe that we have
adequately provided for these pressures in our earnings forecast.
We are making good progress with our initiative to implement high speed internet
access to all units throughout the portfolio. We are now 70% complete with the
installation part of the program and we will begin to see fee income from this
initiative in the third quarter. We also started implementation of a new program
during the quarter designed to provide our residents with a number of move-in
and on-going consumer services. An internet based sales program developed by
Qcorps, Inc., this new program provides a very efficient platform for assisting
residents with move-in services such as utility and telephone hook-up, as well
as discounted purchase opportunities for various consumer services and products.
The program is to be rolled out over the next four quarters.
Simon Wadsworth:
Results for the quarter were in line with expectations. FFO was comparable to
last year, and we see the comparisons getting stronger as the year, and the
lease up of the development properties, progress.
In the third quarter we recorded the $15.6 million sale of Canyon Creek in St
Louis, Missouri, for a gain of $6.6 million. We anticipate the sale of
Advantages (in Jackson, MS) during the third quarter and an additional possible
later property sale, for a total possible capital gain on $26 million of asset
sales this year of almost $12 million or 60 cents per share. We anticipate the
blended cap rate on these sales, should they all be completed, of 8.4%. We
should note that these properties are each at the lower end of our portfolio
quality, but are being sold at a cap rates well below (that is, much higher
prices) than those generally attributed to our portfolio when assessing
Mid-America's value. For instance, applying this cap rate to the way we value
the Company would take our NAV to well over $30/share, based on our projections.
Because of the market pressures mentioned by Eric, we have narrowed our forecast
same-store NOI growth range to between 2.0% to 2 1/4% for the year. The impact
on earnings for the balance of this year is slight. In the last conference call
we had already reduced our projected same-store NOI growth rate to 2 1/4%. The
lease-up of our development properties proceeds on plan, with particularly
strong performance at Grande View Nashville, which is 73% leased, while the
Grande Reserve Lexington (which is 82% leased) is somewhat weaker. In aggregate
we are comfortable with our existing projections for our lease-up.
We anticipate same-store real estate tax expense to increase 3.3% this year,
with significant projected increases in Tennessee (tax rates and appraised
values are not yet final for many jurisdictions). Franchise and excise taxes
will be up 35% this year, and health insurance costs are also increasing well
above inflation. Overall, we expect some moderation in our G & A and property
management expenses for the balance of the year.
As we announced in various press releases we have completed several
refinancings:
o We renegotiated our $70 million bank credit facility, reducing our letter
of credit costs and extending its maturity out to May 2003.
o On June 2nd we refinanced $24 million of mortgages at a fixed rate of 6.9%
for seven years, again using our Fannie Mae credit facility.
o In mid-June, we refinanced $17 million of tax-free bonds using a new
Fannnie Mae tax-free bond credit facility and fixed the rate through swaps
at 5.2% for 7 years.
o On July 2nd, using our Fannie Mae credit facility, we refinanced the $39.5
million loan that ballooned at that time and an individual $8 million
mortgage. We executed a $25 million swap agreement to set the rate on part
of the refinancing at 6.4% for six years
o On July 31st we refinanced a $6 million individual mortgage.
Our latest variable rate borrowing costs with Fannie Mae are at 4.28%. We have
only $90 million of our $785 million of debt at variable rates, but with the
refinancings discussed above we have reduced our borrowing costs from an average
of 7.2% at year-end 2000 to 6.6% today. The savings, already reflected in our
forecasts, will increasingly be felt throughout the balance of this year and
next, and help to offset slightly weaker than anticipated operating earnings.
The asset sales mentioned above have a significant impact on FFO by creating
"dry powder" but diluting our earnings. Each $10 million of non-replaced asset
sales cost us 2 1/2 cents/share on a full year basis. Our anticipated asset
sales, unless replaced with acquisitions, will dilute FFO on a full-year basis
by 6 cents/share, with the impact on 2001's FFO of about 2 cents.
Despite this, helped by our intense operating focus, our diverse markets, and
reduced interest rates, we believe First Call's projections of FFO of $2.83 for
this year and $2.95 for next look realistic. The biggest risks are the lease-up
of our development properties and market conditions, but we believe we have
taken all of the factors into consideration in making our forecast.
Our dividend coverage and financial strength and flexibility are building, and
we anticipate steady improvement through the balance of this year and next.
We've made some early rough projections of the composition of our dividend for
2001. Assuming that all the asset sales are completed, we believe that the
return of capital component of our dividend this year will be about 25%; the
capital gain should be about 14%, and ordinary income somewhat over 60%.
Cates: We are pleased, naturally, at the improved recognition of our underlying
intrinsic value and true return by the stock market. Our overall return for the
year to date, 23%, places us #2 among our peer group - the eleven largest
apartment REITs, those owning 25,000 or more units. That 23% is more than double
the average 10% return of the group and also above that of every other apartment
REIT who, like ourselves, has a significant development component. Even so, MAA
still trades well below its intrinsic value.
And speaking of intrinsic value: our outstanding portfolio regularly wins more
independent recognition for excellence than does any other. Such is still the
case, as noted from the steady drum beat of awards in recent weeks. For those
preferring a more tangible focus, we gladly point to the cap rates at which our
properties have sold and are selling, in the mid-8%'s. Those weren't even near
our best. Our award-winning, 12-years-old portfolio, when valued above 9% cap
rates by some, leads to serious understatement of our real value.
Another, related item: return on assets. Some assessments exclude work in
progress. Only by including all capital, whether or not it is productive, can
the effectiveness of development be shown. Developers should be held accountable
for how we use all of our capital. Our 8.8% return on assets is rising, and is
above every other apartment REIT with a significant development component, like
ourselves.
Times are getting tougher. You heard an early indication of our conviction that
such was to come when we sold our construction company and development arm two
years ago, shedding $5 million of annual overhead in the process. Whether we're
in a recession is beyond our scope - but we do know that, if there is one, we
can't think of a better business to be in, or a better area of the country in
which to weather it in good shape.
We invite your questions
(Q&A followed)
SIGNATURES
Pursuant to the requirements of the Securities Exchnage Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID-AMERICA APARTMENT COMMUNITIES, INC.
Date: August 3, 2001 /s/Simon R.C. Wadsworth
Simon R.C. Wadsworth
Executive Vice President
(Principal Financial and Accounting Officer)