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 1, 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)
2nd Quarter 2002 Earnings Release Conference Call Transcript
August 1, 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
August 8th, by dialing 888-839-3444 with the passcode "Mid-America".
Eric Bolton: Thanks Al. In our prepared comments this morning we will provide
additional insights on second quarter results. First, I will provide an overview
on operating results for the quarter. Al will then recap portfolio performance
by market segment and provide insights on what we expect from our major markets
for the remainder of this year. Simon will discuss our balance sheet and
forecast for the second half of the year. We will then open the phone lines for
any questions that you may have. Our prepared comments will last approximately
18 minutes.
Let me start by summarizing that on balance, I'm pleased with the progress that
we continue to make in strengthening the balance sheet and positioning for
future growth. Despite the challenging operating environment, we continue to
strengthen our debt service and fixed charge coverages. Our properties are
outperforming the very competitive markets and while the interest rate
environment is temporarily creating some operating pressure, we are taking full
advantage of this interest rate window on the corporate debt side. During the
second quarter, revenue performance was weaker than we'd like as the strong home
buying market and anemic job growth combined to create some very competitive
leasing markets. While our property management folks have continued to do a very
good job in maintaining occupancy, which is running slightly higher than last
year, we are buying more of this occupancy through leasing concessions than we
would like. Leasing concessions during the second quarter are running 45% higher
across the entire portfolio as compared to the same period of last year; on a
same-store basis this represents 3 1/2 cents of FFO per share in the second
quarter. We were encouraged to see traffic levels pick up in June and July and
believe that this trend, along with the slow down in new construction delivery
throughout most of our markets, will cause conditions to begin to slowly
stabilize over the next few quarters. An increase in mortgage rates would be
required to create a more immediate recovery in revenue performance.
Resident turnover across the portfolio is running 69% for the last twelve
months, which is up 2% as compared to the same period last year. We attribute
this slight increase in turnover to the very strong home buying market and are,
frankly, pleased that we haven't experienced a higher jump than we've seen.
A combination of the slight increase in unit turnover and resulting vacancy
loss, coupled with the very high leasing concessions being incurred, continue to
pressure revenue performance as same store revenues were down 1.2% for the
second quarter. However, we do expect that we will see same store revenues
return to positive year over year growth during this current third quarter.
Operating expenses continue to be well managed with same store property
controlled expenses up 2.3%, off of a solid 2.1% performance in the comparative
quarter of last year. Total same store operating expenses were up 3.4% with the
additional pressure coming from an increase in property and casualty insurance
pricing. Later Simon will discuss the recent renewal of our insurance program.
Al Campbell: As Eric mentioned, our toughest competitor continues to be single
family housing due to historically low interest rates. The availability of low
cost mortgages combined with weak job growth has created very competitive
leasing environments in many of our markets, requiring heavy concessions to
maintain or improve occupancy levels. However, in the aggregate we did see
sequential quarterly improvement as revenues from our same store portfolio grew
1.2% from the 1st quarter and net operating income grew by .7%.
On a sequential quarterly basis, markets contributing most to NOI improvement
during the quarter were Atlanta (3%), Greenville,(2.9%), Memphis (2.6%), and
Jacksonville (1%).
Also on a sequential quarterly basis, markets reporting the largest NOI declines
during the quarter were Austin (8.7%), Augusta (3.6%), and Dallas (2.6%).
Looking ahead, we expect our other major markets of Houston, Jacksonville,
Nashville, and Tampa to remain relatively stable.
The Memphis market continues to be difficult due to the oversupply of units
placed on the market in mid-to-late 2001; however, as mentioned we saw solid
improvement during the quarter, as average occupancy increased 3% from the prior
quarter, ending at over 95%. We expect continued stable occupancy over the
remainder of the year, but with continuing high concession levels (4-5% of Net
Potential Rent).
We made progress during the quarter in Atlanta with NOI increasing by 3% over
last quarter. Frankly, we were a little surprised by this as the market in
Atlanta is clearly very soft. Our property management team moved to shore up and
intensify operations in the market late last year and are clearly outperforming
at this point. However, we expect a continued difficult environment through this
year and into 2003 for our Atlanta properties. Occupancy for our Atlanta
portfolio should remain fairly flat (around 95%), but continued high levels of
concessions are expected. Over the long-term we continue to expect Atlanta to
rebound as the economy recovers and we remain enthusiastic about long term
investment prospects in this market.
We continue to see heavy leasing competition in both Dallas and Austin. Average
occupancy for our portfolios slightly decreased to 91% (Dallas) and 95% (Austin)
as supply pressures and job loss continue to stifle rent growth and require
aggressive concessions. We expect this environment to continue throughout the
remainder of the year with occupancy levels again remaining relatively flat but
requiring continued concessions during the 3rd and 4th quarters.
In the aggregate, we expect to see challenging market conditions over the
remainder of the year and into the 1st quarter of 2003, but we expect gradual
improvement in our portfolio during 2003 supported by an improving national
economy and an increasing interest rate environment. We are projecting occupancy
levels for the entire portfolio to remain flat to slightly improving over the
second half of this year combined with the use of concessions at the current
high levels for the remaining two quarters (3.5% of Net Potential Rent). Early
July results that we are seeing support this outlook with occupancy coming in
essentially flat with June and continued high concession levels.
As previously announced, we established a joint venture with Crow Holdings
during the quarter to acquire $150 million of assets focusing on repositioning
opportunities, in which we'll own a 1/3rd interest. In July Mid-America acquired
Preston Hills, a 464 unit new property located in a northeast suburb of the
Atlanta metro area, for $33.7 million or about $73,000/unit. Once the JV's
financing is complete, this property will become its first investment,
transferred at our cost. Preston Hills is an excellent example of the type of
opportunity we're looking for with our Joint Venture partner. We acquired the
property during its lease-up phase at a cost well below replacement value.
Although the initial yield is low due to the properties current performance
level, we expect to achieve over a 9% NOI yield after the the second year.
Preston Hill's location in Gwinnett County, a high growth corridor of the
Atlanta metro area which is very near the new Mall of Georgia, positions it well
for recovery and future growth as the economy begins to rebound.
We continue to pursue a number of investment opportunities in the higher growth
markets of the Southeast, including Atlanta, Austin, Dallas, Houston, and major
Florida and Virginia markets. We remain diligent in finding the deals that meet
our disciplined investment standards and provide an opportunity to increase
value through management intensity and repositioning.
Simon Wadsworth: Our interest expense for the quarter was $1.5 million below the
level of the same period last year, and clearly this was a major contributor to
our ability to meet our forecast for the quarter. Our average interest rate is
now 6.2% (compared to 6.8% a year ago), and our floating rate debt is only $100
million or 13% of total debt outstanding, of which $23 million, or 3%, are low
floater tax-free bonds.
We made significant progress in improving our balance sheet on several fronts:
- - Our debt service and fixed charge coverage has continued to improve. For
instance, our debt service coverage improved to 2.34 from 2.15 a year ago.
- - Our four lease-up properties are currently at 81% physical occupancy, with
Grande Reserve Lexington reaching 95%, and Grande View Nashville at 86%. We
expect further progress in leasing at the two phases of Reserve at Dexter
Lake in Memphis that are still in lease-up; these are at 67% physical
occupancy. We have a total of 112 apartments to rent to reach 90% occupancy
at all four properties, so all four properties will soon be stabilized, the
last one being Dexter Phase 3 in the first quarter of next year.
Construction is complete at all properties. The increasing productivity of
these assets have contributed significantly to our improving financial
position.
- - We've negotiated an additional credit facility with Fannie Mae, increasing
the combined total to $550 million (from $300 million). We still have to
finalize the credit agreement, but we have most of the business issues
resolved, and we anticipate executing the agreement by September 1st. We
plan to use this facility to refinance our $180 million of debt maturities
that occur over the next 18 months. The terms are generally similar to the
current facility, and include a five-year base term floating at
approximately 65 bp over Libor, with an option to extend for five more
years at then-current pricing. As you know, we typically swap or fix the
rate on a major part of this debt.
- - We've executed $100 million of forward swaps, pre-locking interest rates on
over half of next year's refinancings. The average rate we've locked so far
for next year's financing is 5.9%, compared to an average rate of 6.4% on
the maturities, so our interest rate risk next year has been much reduced.
- - We are also working to execute a further $50 million of forward swaps to be
effective during next year, which we anticipate executing if the interest
rate environment continues to be favorable.
- - We're now in a position where significant rate risk on our fixed rate or
swapped debt in any one year is limited to about 10% of our total debt.
We've laddered the interest rate maturities at around $70 million to $85
million a year for the next seven years. We also have maturities beyond
this point (mainly tax free bonds) that total $135 million.
In the earnings announcement we took our point-forecast for this year's
FFO/share to the low end of the range that we discussed last quarter, to $2.77.
This doesn't make a significant difference to our cash flow planning, and we
anticipate that free cash flow, which is Funds Available for Distribution plus
our non-real estate depreciation and amortization of deferred finance costs,
will still cover our distributions in 2002 and 2003. FAD may be in balance as
soon as the third quarter of next year if the Joint Venture proceeds as planned.
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. As we've mentioned
previously, we forecast this year that our recurring capex will be $386/unit, up
slightly from $376/unit last year.
Let me give you some details on our forecasts for the rest of this year and for
2003. In 2002, same-store NOI is projected to be down 0.9% for the whole year,
but the trend is improving as we project off weak third and fourth quarters of
2001. In the third quarter of this year, same-store NOI is forecast to increase
0.4%, and in the fourth quarter to increase 2.5% off the very weak 4th quarter
of last year. We're forecasting FFO of 0.69 cents/share in the third quarter and
70 cents/share in the fourth quarter, for a full year estimate of $2.77/share.
Our concessions are forecast to lessen slightly in the 3rd and 4th quarters,
settling out to more normal levels in 2003.
For next year we think our forecasts are realistic, especially when we remember
that we will be coming off a weak year in 2002. We're forecasting same-store NOI
to be up 1.5%, with solid gains of just over 2% for the first half of the year
(compared to the weak first half of this year), and then just over 1% for the
second half of the year. Taking into account the conservative outlook for our
portfolio, we forecast for 2003 a range of FFO of between $2.82 to $2.85, with
our current best estimate of $2.83. Our forecast includes the impact of our
share of the acquisition of Preston Hills, which we bought on July 2nd, but
doesn't include any additional acquisitions by the Joint Venture. We are
assuming that the slow but steady recovery in the economy continues, and of
course relative performance will improve compared to the weak markets we've
experienced since the second half of 2001. As I mentioned previously, we've
taken a lot of the interest rate risk out of next year's refinancings already.
We put in place our new insurance program beginning July 1st. The program is
substantially the same as last year, but includes greater retention levels for
liability and workers' compensation insurance; we forecast that overall the
insurance program, including the impact of the increased liability and workers
compensation retention, will cost us $2.4 million more than last year on a full
year basis, representing an increase of 42% or 12 cents/share on a full year
basis, and which is approximately in line with our forecast. At present we've
not put in place terrorism coverage, but we will continue to explore this as the
market changes.
One additional item of information to point out is that we disclosed in last
year's 10-K the impact of expensing all of our stock options, which last year
was just under 1 cent/share, and we forecast a similar amount for this year.
Obviously we, like a lot of companies, are evaluating how to handle these, while
being upfront about disclosing the full impact of expensing them.
Eric Bolton: We are making progress towards improving our coverage ratios
despite the tough operating environment. And as Simon mentioned, should our new
acquisition JV continue to show promise and the economy improve sooner than we
anticipate, we believe that we will be in a position to have FAD covering our
current dividend pay-out by the second half of next year. We remain very
committed to the current dividend pay-out and are focused on top line growth and
debt refinancings to continue to strengthen our balance sheet and improve this
important coverage ratio.
We believe the market continues to price our shares below their net asset value
which we place at roughly $26.50 per share with a range up to $28.50 per share
based on what we believe to be more normalized operating performance in a
stronger part of the apartment cycle. Our current valuation is based on an 8.7%
blended cap rate for the portfolio. As a point of comparison, it is worth noting
that we have sold $112 million of assets over the last 3 years at an average cap
rate of 8.6%, with most all of these sold properties being significantly older
than the properties that we currently have in our portfolio.
We continue to evaluate a range of opportunities to deploy the increasing
capital capacity on our balance sheet, including the repurchase of common
shares. We have ample room remaining under our existing share repurchase program
to enter the market. You may recall that to date we have repurchased over 1.8
million of our shares at an average price of just over $22.50 per share, with
the last purchase occurring in the spring of last year. Our capital deployment
decisions have consistently been governed by a strict discipline centered on a
20% accretion to value test. Our current strategy is focused on increasing top
line growth and strengthening coverage of the existing dividend commitment to
our owners. We will continue to monitor the market's pricing of the common and
should the opportunity to capture value become significantly compelling, we will
move to repurchase shares within the context of the current strategy and
existing commitments to our owners and lenders.
Before we wrap up I want to also take this opportunity to say something about
the recent wave of headlines and focus on corporate accounting practices and
governance issues. At Mid-America we have always taken a great deal of pride in
the very strong board of directors that we have in place. Our board has always
been comprised of a majority of independent directors who take their duties very
seriously. I have total confidence in the numbers we have historically presented
and we will of course continue to be very diligent in our responsibilities for
comprehensive and accurate reporting that is in full compliance with all
applicable guidelines and standards.
In conclusion, while leasing continues to be a challenge, we believe that most
of the markets have bottomed out and that we will soon see a return to a more
robust revenue growth environment. We believe that our properties, which meet
the housing needs for a wide range of apartment renters in the more stable and
long term stronger growth markets of the southeast, are well positioned to both
endure a slower economy as well as quickly rebound from improving economic
conditions. We are delighted to have our new acquisition initiative underway
with Crow Holdings and look forward to moving forward with our strategy aimed at
increasing value for our owners.
That is all we have in the way of prepared comments and will now be glad to
answer any questions that you may have.
(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 1, 2002 /s/Simon R.C. Wadsworth
Simon R.C. Wadsworth
Executive Vice President
(Principal Financial and Accounting Officer)