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
May 2, 2002
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 300
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
ITEM 9. Regulation FD
Mid America Apartment Communities, Inc. (MAA)
1st Quarter 2002 Earnings Release Conference Call Transcript
May 2, 2002
Eric Bolton: Good morning. This is Eric Bolton, CEO of Mid-America Apartment
Communities. With me are Simon Wadsworth, our Chief Financial Officer, and Al
Campbell, Vice President of Financial Planning. Before we proceed, Al will
provide required statutory disclosure as well as instructions on how you can
obtain additional information on our results.
Al Campbell: This morning we will make forward-looking statements. Please refer
to the safe-harbor language included in our press 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.
To obtain a copy of yesterday's earnings release as well as a copy of the
transcript of our prepared comments this morning, we direct you to our web site
at www.maac.net. A replay of this morning's call will be available through May
9th by dialing 888-568-0544 with the passcode "Mid-America".
Eric Bolton: Thanks, Al. In our prepared comments this morning we will provide
additional insights on first quarter results. I will review the operating
results for the quarter. Al will recap portfolio performance by market segment
and provide insights on expectations for our major markets. Simon will discuss
balance sheet items and our 2002 forecast. We'll then open the phone line for
any questions that you may have. Our prepared comments will last approximately
20 minutes.
As reported in yesterday's earnings release, FFO for the quarter was slightly
ahead of what we forecasted. Property level operating expense and interest
expense were both slightly lower than we had projected. Our property management
operation continues to do a good job in controlling expenses. The expansion of
our utility submetering and resident billing program continues to have a
positive impact. Interest expense was lower than forecast due to the continuance
of low interest rates and the success of our programs to reduce cash balances.
Although FFO earnings were slightly ahead of where we projected, earnings were
down by $0.01 of FFO per share from the first quarter of 2001. Absent the 1 cent
non-recurring gain on sale of land included in last year's results, which was
noted in yesterday's release, earnings were flat as compared to last year
despite a more difficult operating environment.
Revenue performance for the first quarter was on plan and continues to be
pressured by concession pricing in these highly competitive markets. Traffic
levels improved significantly during the quarter, increasing by 39% above the
levels of the 4th quarter, and thus approaching more normal levels for the time
of year. On a comparative basis to the same period in 2001, same store leasing
traffic increased by 5%. Our property management group did a good job converting
this traffic as the leases obtained per traffic count grew by close to 7% during
the quarter. As a result, physical occupancy improved from 92.7% at year-end to
94.1% at quarter end. However, the competitive leasing market required
aggressive concession practices in several markets to achieve this occupancy. In
our two most competitive markets of Memphis and Atlanta, concessions are running
as much as two months. Compared to the same quarter of last year, increased
concessions cost us 3 cents per share in FFO. As compared to the immediately
proceeding fourth quarter of 2001, same store concession costs grew by $200
thousand or 12%. However, based on the improved leasing and occupancy trends
that we saw in the first quarter, we continue to forecast a return to more
normal occupancy and concession practices by the end of the second quarter.
Delinquency, which is always a concern when the economy weakens, remained steady
during the quarter. Collection loss for the quarter was only 0.8% of net
potential rent, identical to the result posted for the first quarter of last
year. We did see a 2.6% increase in unit turnover during the quarter as compared
to the same quarter of last year.
We commented last quarter about the oversupply of new construction in the
Memphis market. We have close to 14% of our apartments in Memphis, and as a
result of the oversupply, the Memphis market drove most of the decline in
same-store NOI on a year-to-year basis. Fortunately, construction permitting is
down a significant 62% over the last 12 months, and with job growth and demand
trends holding up, we believe the Memphis market is set for recovery late this
year and into 2003.
Overall, we enter the second quarter in good shape with lease expiration
exposure for the quarter at a very acceptable level and month to month leases
below our 5% threshold.
Property operating expense control remains strong. On a same-store basis
property controlled operating expenses, which excludes taxes and insurance, were
up only 1.0% from last year. Our utility billing initiative continues to
generate very strong year over year results with same store utility expense down
21% in the quarter as compared to the first quarter of last year. Total same
store property operating expenses including taxes and insurance grew by 2.5% for
the quarter. Our property and casualty insurance program expires effective the
end of the second quarter. We are aggressively evaluating alternatives, and like
most, are of course concerned about the pricing of insurance at renewal on July
1st. We believe that we have provided an adequate allowance for the anticipated
pricing increase in our forecasts, but we will of course not know for sure until
later this quarter.
Al will now spend a few minutes talking about market conditions.
Al Campbell: As Eric mentioned we are facing very competitive conditions in many
of our markets.
Memphis has been our toughest markets over the last few quarters, however, we
saw significant improvement during this quarter. The Memphis market continues to
work through an oversupply position, however, our management team did a good job
in this very competitive environment by increasing occupancy rates and
simultaneously lowering concession costs. We saw a 3.3% improvement in occupancy
from the 4th quarter, ending the current quarter at 92.1%, combined with a 1.3%
decrease in concession costs, as a percent of net potential rent. This
improvement generated an 8.6% NOI increase from the 4th quarter. While this
performance is still below prior year levels, we expect continued improvement
over the remainder of this year and moving into 2003, as the Memphis market
regains balance. As Eric mentioned, new construction in Memphis is expected to
be minimal over next year, while the job market is expected to remain stable and
resume growth. We are projecting occupancy levels in our Memphis portfolio to
average around 92% from the remainder of the year with concession costs
continuing to improve over the second half, averaging between 2-3% of net
potential rent for the third and fourth quarters, as compared to 3.8% for the
first quarter.
Jacksonville, our second largest market, performed fairly well during the
quarter with occupancy of 94.9% at quarter end, 1.2% above the 4th quarter level
and essentially flat with the prior year. Revenues for our portfolio of ten
properties increased 2.4% over the prior year, driving a 1.7% increase in NOI
compared to a year ago. We expect this market to remain relatively stable over
the remainder of the year, as multifamily permitting decreased 29% over the last
twelve months and job growth continued at a slower but steady pace during the
quarter.
The Atlanta market continues to suffer as deliveries of new multifamily units
remain well ahead of absorption levels. However, our portfolio of six properties
showed improvement during the quarter with occupancy levels increasing 4.7% and
ending the quarter at 95.5%. Concession levels did increase to 1.3% of net
potential rent, offsetting some of this improvement, but NOI grew 4% over the
4th quarter performance. We do expect continued softness in Atlanta for the
remainder of the year, with occupancies projected to continue dropping 1-1.5%,
and concessions averaging 3-3.5% of net potential rent for the remainder of the
year. Over the long term we continue to believe this market will provide solid
investment returns, as job growth is expected to improve in 2003.
As expected, we saw increased competition in Austin and Dallas during the
quarter. Occupancy levels for our portfolios held up fairly well during the
quarter, at 96.2% (Austin) and 92.1% (Dallas), but supply pressures and job
losses slowed rent growth and increased concession costs causing NOI to fall
6.6% and 1.7%, respectively, as compared to the 4th quarter. We project
occupancy levels for our Austin portfolio for the remainder of the year to
continue slipping as over-supply works through the market, leveling off at
92-93%. We expect occupancy for our Dallas portfolio to remain around 92% for
the remainder of the year. We project concession levels for both markets to
remain at the current high level for the next quarter, improving to more normal
levels over the second half of the year.
Our smaller markets have historically demonstrated lower growth, but have proven
to be more recession resistant over the last few months. Our portfolio in
smaller markets produced 2.5% same store NOI growth in the first quarter, lead
by Columbus, GA, Chattanooga, Valdosta, GA and Jackson, MS.
In summary, we have faced challenging market conditions in several of our
markets over the last few quarters. However, we believe that most of our markets
are bottoming out, and we will see a gradual improvement late this year and into
2003. Early indications are that our portfolio occupancy and concession levels
for April are on track with expectations.
Simon Wadsworth: Given the tough operating environment, we were pleased to
exceed our projected earnings' goal for the quarter, and we were helped in this
by reduced interest expense. Our weighted average debt cost is 6.3%, down from
7.1% a year ago and only $89 million, or 11% of our debt is variable rate. On a
comparative basis with last year, we also are benefiting from an $11 million
reduction in our cash and restricted cash balances. This was the result of debt
refinancing, negotiations with lenders, and a concentrated management effort.
Consequently our debt is down by $8 million and interest expense was reduced by
$1.1 million, or 5 1/2 cents a share, from the same quarter a year ago.
After completing over $200 million of refinancing last year, we had a quiet
first quarter. We still anticipate up to $50 million of refinancing this year,
including about $10 million in the second quarter, but we do not expect this to
have a significant impact on our interest expense. Our forecast for the year
assumes an increase in short-term interest rates of 150 bp in the second half of
the year, projected based upon the current forward yield curve.
The first quarter showed an improvement in our debt and fixed charge coverage
compared to the same period a year ago. Our debt service coverage improved from
2.15 to 2.31, and our total debt as a percent of gross real estate assets
dropped from 55% to 53%. The improved coverage was as a result of the steady
improvement in occupancy at our lease-up properties, lower interest rates and
refinancings, and reduced amount of debt.
As you know, our properties are in excellent condition. We anticipate that
recurring capital expenditures for the year will be up very slightly from last
year to $380/unit, equal to 57 cents/share. Although Funds Available for
Distribution is forecast to be about $2.24, slightly short of our dividend
payout, our free cash flow, which includes non-real estate depreciation and
loan-cost amortization, is forecast to be $2.41 for 2002, about 7 cents ahead of
our dividend. In the second quarter of 2003, assuming that anticipated
acquisitions take place and based on our current forecast, our free cash flow
and our FAD should cover our dividend. Moreover, dividend coverage improved
slightly over the level of a year ago, and the increased balance sheet capacity
should help us improve our coverage further as we find attractive acquisitions.
We re-emphasize that our dividend level is not a question in the Board's mind
even at the low end of our internal FFO estimates.
At quarter-end we had virtually completed construction on our four remaining
development properties, located in Nashville, Lexington KY, and Memphis. Of the
1,291 total planned apartment units, 75% were leased and 70% were occupied, and
we have 250 apartments to lease to reach 95% occupancy at all four properties.
In April, the occupancy of these four properties increased by a total of 64
apartments, and concessions, which were running at 18% of revenues at these four
properties last December are down by 6% to 15% of revenues, and this downward
trend will continue as their occupancy steadily builds during the spring and
summer. We expect the just-completed development properties located in the
highly competitive Memphis market to take the balance of this year to stabilize,
while the Lexington and Nashville properties should stabilize by mid-year.
Our forecast for this coming year assumes a 0.3% increase in NOI in our
same-store portfolio. Our concessions are forecast to improve slightly in Q2 and
Q3, and settling out to more normal levels in Q4. For the second quarter we're
forecasting same-store occupancy and NOI to be below the level of last year, but
the trend continues to improve with favorable results compared with the first
quarter of this year. Same store numbers on a year over year basis are forecast
to turn positive by the third and fourth quarters, helped on a relative basis by
the weaker markets of the latter part of last year. In projecting this year
there is still a lot of uncertainty associated with insurance (the policy renews
in July) and real estate taxes; these two categories total over $26 million of
expense and are particularly subject to cost pressures and difficult to forecast
at this time. With these assumptions and excluding any acquisitions or
dispositions, our base case forecast for FFO continues to be $2.80 per share,
with a range of $2.77 to $2.82. We expect in the second and third quarter to
report 70 cents/share, and 72 cents of FFO in the fourth quarter.
As mentioned above, our forecasts do not include the use of our $25 million to
$50 million of dry powder to make acquisitions. This would be very accretive to
our FFO if we can find the right transactions, and we are actively working on
several deals, both independently and as part of a possible joint venture.
Eric Bolton: We are making solid progress to position the Company to grow FFO
over the long term. The last two quarters have certainly presented some tough
operating conditions, but we think that the signs are there for a slow and a
steady recovery beginning later this year. Our balance sheet continues to
strengthen and our debt financing is in sound shape. Our dividend is secure and
currently paying an 8.8% yield based on pricing as of the market close
yesterday. Our capacity and flexibility to pursue attractive acquisitions and
add additional earning assets is growing. We believe our current stock price
continues to offer a discount opportunity to the stabilized operating value of
our properties when operating at their historic norms. We look forward to 2002
and continuing to grow value for our owners.
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: May 2, 2002 /s/Simon R.C. Wadsworth
Simon R.C. Wadsworth
Executive Vice President
(Principal Financial and Accounting Officer)