Colonial Properties Trust CEO Discusses Q4 2010 Results - Earnings Call Transcript

Jan.27.11 | About: Colonial Properties (CLP)

Colonial Properties Trust. (NYSE:CLP)

Q4 2010 Earnings Call

January 27, 2011 14:00 am ET

Executives

Jerry A. Brewer, Executive Vice President, Finance

Thomas H. Lowder, Chairman and Chief Executive Officer

C. Reynolds Thompson, President and Chief Financial Officer

Paul F. Earle - Chief Operating Officer

Analysts

Eric Wolfe - Citigroup

Alexander Goldfarb - Sandler O’Neill

Dustin Pizzo - UBS

Michael Salinsky - RBC Capital Markets

Andrew McCulloch - Green Street Advisors

Haendel St. Juste - KBW

Operator

Ladies and gentlemen, thank you standing by. Welcome to the Colonial Properties Trust Fourth Quarter 2010 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions)As a reminder this conference is being recorded Thursday, January 27, 2011.

I’d now like to turn the conference over to Jerry Brewer, Executive Vice President of Finance. Please go ahead sir.

Jerry Brewer

Thank you and welcome to everyone joining us today. We released our earnings this morning via Business Wire. Copy of this earnings release maybe found on our website at colonialprop.com. We’re also webcasting this call for your convenience. A replay will be available for your convenience at our website after the call.

Tom Lowder, our Chairman and Chief Executive Officer and Reynolds Thompson, President and Chief Financial Officer will lead today’s call. On the call, they will discuss our business developments, financial results for the fourth quarter and our guidance for 2011. After their comments, we’ll open up the call to take your questions. Paul Earle, our Chief Operating Officer, is also here to field the questions.

Let me remind you that much of the information we discuss on this call, including answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters.

These forward-looking statements are intended to fall under the Safe Harbor provisions of the Securities Law. These estimates are also based on a number of assumptions, any of which, unrealized, could adversely affect our accuracy. Please see our latest SEC filings for the detail and explanation of risk. Any non-GAAP financial measures we discuss are reconciled to the closest GAAP measures and filings that can be found on our website.

I’ll now turn the call over to Tom.

Tom Lowder

Thanks, Jerry and welcome to everyone joining us. On the call today we’ll discuss our fourth quarter results and review our outlook for 2011. Throughout 2010, my CEO directives were to simplify the business, improve operating margins, strengthen the balance sheet and grow the company, we made good progress on each of these initiatives by exiting three joint ventures and selling non-core assets totaling 67 million, issuing a 158 million in common equity, repurchasing the majority of our outstanding preferred stock and acquiring two properties for $60 million in the year of 2010.

As discussed previously, business cycles can be characterized in three phases, reduction, restruction and restructure and renewal. We made the tough decisions in reduction phase to reduce corporate overhead, reduce development spending and lower the dividend. During our restructure phase, we raised over 300 million in common equity to improve our balance sheet, repurchased a 150 million of high yield in preferred stock, repurchased unsecured bonds at a discount, extended our debt maturities with three Fannie Mae loans, exited 10 joint ventures and sold over $150 million of non-core assets.

While we still have some work to do in the restructuring phase, we are close to our restructuring targets. As we progress into the renewal phase, we will focus on three CEO directives for 2011, grow the company, improve operations, and achieve balance sheet targets.

Internally growing our core revenue back to at least the peak rents we experienced in mid 2008 represents over $0.30 of revenue per share. Externally, we’ll grow our asset base through the development of multifamily apartment communities on the land that we have an inventory and by selectively acquiring young well located multifamily assets in our core Sunbelt markets. The improvement in fundamentals that we and other multifamily companies have been experiencing over the past couple of quarters as well as the new supply that is constrained from the lack of funding has given us higher rents and improved margins. We are close to achieving our balance sheet targets. We continue to use after market equity programs, the latest of which was announced in the fourth quarter. For 2010, we’ve raised over a 158 million through these three ATM programs.

Now, I’d like to turn it over to Reynolds to provide more details on our operating performance in these capital markets activities. I will conclude the call with our 2011 guidance. Reynolds?

C. Reynolds Thompson

Thank you, Tom. FFO for the fourth quarter was $0.28 per share, compared with $0.25 a year ago. The increase is primarily related to an improvement in same property net operating income and a two penny gain from the repurchase of $50 million of our Series B preferred units. Operating FFO which we defined as FFO before transaction income was $0.27 per share, compared with $0.25 per share for the prior year. Multifamily same property NOI increased 3.5%, compared to the fourth quarter of 2009 and 6.9% sequentially. Revenue growth was up 2.2% in the fourth quarter of 2010, compared to the fourth quarter of 2009, continuing the favorable trends we’ve experienced since the second quarter of this year.

Our strongest fourth quarter revenue markets were Phoenix, Raleigh, Charlotte only markets with negative growth were Birmingham, Huntsville and Savannah. Multifamily same property physical occupancy was 96% at the end of the fourth quarter, a 130 basis points higher than the fourth quarter of 2009.

The average rental rate per unit reached $718 per unit during the fourth quarter. While this rate is still 1.9% below prior year, it reflects a 0 8% increase over the third quarter and a 1% increase over the bottom of $711 per unit earned in the second quarter. The rental rate improvement led to our sequential revenue increase of 1.1% which is unusual for the fourth quarter given the typical seasonality of apartment demand. For the year, NOI declined 3.5% based on a revenue decrease of 0.5% and an expense increase of 3.9%.

As discussed in prior quarters, the expense increase is primarily due to higher occupancy expenses in utilities as well as repair and maintenance expense. Our recent rental rate growth continues to be achieved primarily through steady renewal increases which averaged 5% for the fourth quarter and hit 5.4% in December. This trend is continuing into January as renewal rates increased 6% for the month.

Turnover was 59.4% an improvement of 490 basis points, compared to the prior year and 130 basis points compared to the third quarter. Turnover improvement is most significant in two categories. Home buyer move-outs and transfers within our properties. Move outs from home buyers were down 590 basis points from the prior year to 13.4%. Transfers within the Colonial portfolio are down 420 basis points to 9.9%, reflecting the improvement in the economy and employment.

Our fourth quarter new lease rates were down 0.1%, however December’s new lease rate was up 0.5% and January’s new lease growth rate is trending above 3%. We define our new lease rate growth based on the difference in the new lease rate, compared to the expiring lease rate on the same unit. This is not a comparison of the average lease rate for two different periods it is specific to each unit.

With limited supply coming online during 2011, and continued reduction in the home ownership rate, we expect revenue growth of 3.25% to 5% this coming year. This assumes only modest employment growth in keeping with today’s trends.

As we announced on the third quarter call on October, we completed the acquisition of Colonial Grand at Brier Creek, a 364 unit Class A apartment community located in Raleigh, North Carolina for 37.9 million or 104,000 per unit. The property was 94% occupied at year end. We’ve been active on the development front as well, with the opening of the first phase of Colonial Promenade Nord du Lac in Covington, Louisiana in October. Kohl’s and Hobby Lobby have now been joined by Academy Sports, Kirkland’s and Texas Roadhouse. The first phase of the resale [ph] owner [09:18] is currently 97% lease.

We also commenced construction 486 unit Colonial Grand at Hampton Preserve in Tampa with delivery of units beginning in the fourth quarter of this year. The development site is located near one of our existing properties in the New Tampa submarket, which has performed well and has shown signs of improving fundamentals.

In December, we sold the single-family homeland in our Randal Park mixed-use development for 12.8 million. During the quarter, we closed four condominium units bringing the total book value of our remaining condominium projects to 12.1 million at year end. We sold our last unit at South Gate leaving us with only 24 units at our metropolitan mixed-use development in Charlotte.

Our work on the balance sheet has positioned us to pursue the acquisition and development opportunities we have been discussing. Leverage has been reduced to 49.5% of net debt plus preferred to gross assets as of December 31, compared to 58.9% two years ago. The fix charge coverage has likewise improved to two times at year end. Our debt maturities are very manageable with only $57 million of consolidated debt maturing in 2011.

The balance sheet improvement as the result of a $158 million of common equity, raised through our ATM programs, $67 million of dispositions completed during the year, redemption of Series B preferred shares and the repurchase of $50 million of our Series B preferred units.

The repurchase of our Series B preferred units resulted in a net gain of 1.7 million or $0.02 per share in the quarter. Additionally, we have raised 8.4 million of common equity in the fourth quarter through our ATM program at an average price of 18.06.

Our 2011 capital plan will continue to strengthen the balance sheet, when combined with the improved multifamily fundamentals, our credit metrics will continue to improve as well.

Finally, consistent with last quarter, our Board declared a quarterly cash dividend of $0.15 per share. Tom?

Tom Lowder

Thanks, Reynolds. For the full year of 2011 we have initiated the following guidance. FFO, and operating FFO of $1.08 to $1.14 per share. These estimates are based on a full year multifamily same property NOI increase of 4% to 6%, with same property revenues expected to increase in the range of 3.25% to 5%. Quarter-over-quarter same property growth will improve throughout the year. With the second half of the year providing the largest increases allowing us to overlap within our guidance range.

Same property expenses are expected to be up 2.25 to 3 and 3.25, primarily driven by an increase in utilities and property taxes. The majority of the utility expenses are recoverable. Consistent with my earlier comments about a focus on selective and disciplined growth opportunities, we are projecting development spending of 50 to $100 million. We commenced one multifamily development of 486 units in Tampa in the fourth quarter and we’ll start a second, in March of 296 units in Austin. This assumption also includes one potential additional multifamily and one commercial development later in the year.

The acquisitions we are estimating a 100 to 150 million to be completed during 2011. The Brier Creek acquisition in Raleigh in the fourth quarter is a good example of the type of opportunities we are reviewing. We estimate our dispositions to be 50 to 100 million in 2011. The completion of the 100 million ATM program we initiated in the fourth quarter is also factored into our guidance to be completed in the first half of the year. The corporate G&A range is 19 to 21 million. The majority of the increase from 2011 is due to the amortization of restricted stock on our 2011 incentive plan that is aligned with the returns we produce for our shareholders. Again, our focus will be on three directives and we will report to you as progress is made during the year to grow the company, improve operations and achieve our balance sheet targets.

Operator we’ll now open our call up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)And our first question comes from the line of Eric Wolfe with Citigroup. Please proceed with your question.

Eric Wolfe - Citigroup

Thanks. Good afternoon. In terms of your same-store revenue guidance, could you just help us understand how much of the revenue growth is due to your current loss-to-lease versus how much is due to the additional rent growth you are getting on top of today’s market rates?

Paul Earle

Well, this is Paul. I think we can answer the question like this. We anticipate about a 5% plus number for renewals flowing through the system throughout the year. And then about a 3% plus number on new leases as compared to the prior lease in that very same unit flowing through the system throughout the year, and then maintaining just slightly above 95% occupancy throughout the year.

Eric Wolfe - Citigroup

Okay. So, as it stands today in your portfolio you would have just quick math, would that call it 1.5 to 2% loss lease?

Paul Earle

No, it would be I don’t have that number, so we’ll have to get off-line and answer the question, but it’ll be much greater than that.

Eric Wolfe - Citigroup

It will be greater than that, okay, all right. And how did you come up with your forecast for this rental rate growth especially that latter on, is it based on employment numbers, is it based on just what sort of analysis did you do to come up with the rental rate growth assumptions?

Paul Earle

Well there are five factors that are guiding our decisions for developing our 2011 budget. Number one, we’re coming out of this recession with strong occupancy and so that gives us confidence on pricing for new leases and renewals. Number two, there is a limit on our supplies, so if you look at this recession ending in the economic recovery and compare that back to 2003 and 2004. We just have a lot less supply to burn off. Number three, we anticipate a decline, a continuation of the decline in the homeownership rate, because of credit, just because of homeownership sentiment. We think that number will drift down. Number four, just a general demographics in the country with the explosion of the echo boomers coming into the system, that’s going to create demand. And then number five job growth, now job growth is modest. We anticipate in 2011 the same level of job growth that we are experiencing -- we did experience through 2010, but those five factors have driven how we’ve developed our budget.

Eric Wolfe - Citigroup

Got you. Thank you.

Tom Lowder

Thank you.

Operator

Our next question comes from the line of Alexander Goldfarb with Sandler O’Neill. Please proceed with your question.

Alexander Goldfarb - Sandler O’Neill

Yes, hi. Good afternoon.

Tom Lowder

Good afternoon.

Alexander Goldfarb - Sandler O’Neill

Just a question on the dispositions and acquisitions first, what’s, well I guess actually let me ask for disposition first. Is there a planned split like it’s going to be more commercial than multifamily or it’s basically you know whatever seems to be the most opportunistic. So you are targeting a set amount and if you seem to get better pricing on one product versus the other. So just trying to get an understanding of that?

Tom Lowder

The dispositions were all commercial in 2011, we probably will do some recycle of older multifamily in 2012.

Alexander Goldfarb - Sandler O’Neill

Okay. And then acquisitions on apartments versus the disposition cap rate, what do you think the spread will be? Or what should we be thinking about as far as our models?

Paul Earle

Yeah Alex, most of these deals we’re looking at are in the high fives and low sixes on an acquisition basis and I think these commercial assets that we’re looking at selling are somewhere in the 7.5% to 8.5% range.

Alexander Goldfarb - Sandler O’Neill

7.5 to 8.5, okay. And then, the next question is are you guys seeing any yield hunters entering your markets are you seeing folks who don’t look like they belong they’re suddenly showing up buying deals because they can’t make their money work elsewhere?

C. Reynolds Thompson

No not, not really, I mean we see the same cast of buyers out there today, that we’re involved all through 2010. So we aren’t seeing any exciting new sources of money, but there is the same aggressive packer 12 that we seem to compete with on every opportunity we look at.

Alexander Goldfarb - Sandler O’Neill

Okay, thank you.

Operator

Our next question comes from the line of Dustin Pizzo with UBS. Please proceed with your question.

Dustin Pizzo - UBS

Hi thanks, good afternoon guys.

Tom Lowder

Hi Dustin.

Dustin Pizzo - UBS

Paul, hi, as you look at your renewals that are coming up over the next few months, can you just talk about the increases you’re currently asking for? And has there been any change to that 5% minimum which was previously going up there?

Paul Earle

Well if you look at where we are so far in January, our renewals are running at about 6% across the whole portfolio. So, our company minimum is 5%, we’re actually running above 6% in January. So, our renewal program seems to be gaining momentum and as we enter March in the spring that maybe -- that just might accelerate from there. So that does look promising.

Dustin Pizzo - UBS

And can you remind us how much, I know you may have been sincerely but how much the market rents increased for the portfolio last year I guess from January through December?

Paul Earle

Long pause because we’re going through our books. We are, Dustin we are on LRO so we don’t really have a baseline market rent, but we should be able to get you our growth number before the end of the call.

Dustin Pizzo - UBS

Okay, I guess as you guys are looking for that, just on the expense guidance you mentioned the property tax increases, were there any markets that are driving that more than others?

Paul Earle

Well, it’s general. We’re anticipating a general and broad reassessment just because of the pressure that all of the municipalities are under financially, but in North Carolina there is a re-eval that goes on every 11 years and we happen to be up for that in 2011. So that’s one state that might take on a special level of importance for us, but across the board we are anticipating pressure from the municipalities to increase either the mill rate or evaluations. So we’re prepared for that inside our budget.

Dustin Pizzo - UBS

Okay, and what’s the timing of the year for North Carolina evaluation?

Paul Earle

Right.

Dustin Pizzo - UBS

I mean, is there a specific point during the year that that occurs?

Paul Earle

Pardon?

Tom Lowder

A specific point in the year Paul that occurs.

Paul Earle

Well it unfolds, it’s unfolding now. I mean the way the process works we will work with the tax assessor’s office and we will start sharing information and educating the assessors on our position and it will actually evolve throughout the year in a give and take dialogue.

Dustin Pizzo - UBS

Okay. So it sounds like if there is a change in the tax rate or the evaluation of being more of a second half event for North Carolina?

Paul Earle

More than likely, yes.

Dustin Pizzo - UBS

Okay. And then just finally on the office portfolio, can you talk about what drove the increase in GIs this quarter and if we should expect that to run at a higher level in near term?

C. Reynolds Thompson

We have the big access insurance lease in our Ravinia property in Atlanta.

Dustin Pizzo - UBS

Okay. So going forward it should be back down towards more than normalized levels?

C. Reynolds Thompson

Yes.

Dustin Pizzo - UBS

Okay great, I’ll follow up some question.

Tom Lowder

And -- yeah on just a follow up on the new deals and the change in rates at the beginning of the year at the end of the year, the rates are up about 7.5%.

Dustin Pizzo - UBS

Great.

Operator

Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Michael Salinsky - RBC Capital Markets

Hi, good afternoon guys. First question Colonial Promenade Smyrna I know you guys have talked about that one being marketed at the end of last year, where is that stand and when –do you do you still expect to close on that one anytime soon?

Paul Earle

Mike we did market that property towards the end of the year, we did not get the interest that we had hoped in the property, and it is no longer on the market and we expect to hold that asset at this point.

Michael Salinsky - RBC Capital Markets

Okay. Second of all you mentioned the one development and obviously you are going to start here in the first half of the year I think there was a second one, where are the yields penciling right now on the pipeline? And also can you give us just kind of what you’re seeing with construction cost as we are seeing the commodity prices rise pretty heavily over the last few months here?

Paul Earle

Sure. First with regard to the yields, the yields we’ve originally talked about are still holding true, but they have trended better as rents have gotten a little better over the second half of the year, and we are still on that 6.5 to 7% range with most of these deals trending towards the high end of that range.

Michael Salinsky - RBC Capital Markets

Okay.

Paul Earle

And in regard to construction cost, we are -- the project that we are building in Tampa it’s coming in and this includes land and it includes land at our original basis in the land a non-mark down land number of about $120,000 a unit.

Michael Salinsky - RBC Capital Markets

Okay. And you haven’t seen any pressure on that?

Paul Earle

That’s the latest number from going through the bid process and really getting detailed bids back from all the subs, that’s a real number.

Michael Salinsky - RBC Capital Markets

Okay. That’s helpful. Third just curious as to what you are hearing from the rating agencies obviously in the fourth quarter there you are able to take out the units and do some additional recycling so, just curious as to what you are hearing on that front?

Tom Lowder

No official updates from the rating agencies. We did visits with all of the agencies in March and we’ll be happy to take our latest balance sheet up there and combined with operating fundamentals and the better operating picture that’s out there we’re excited to talk to them about where we are headed.

Michael Salinsky - RBC Capital Markets

And finally, just curious to get your thoughts on the dividend for 2011 in terms of potentially raising it?

C. Reynolds Thompson

It’s not in our projections to raise the dividend of while we’re still, we would feel it’s appropriate to payout additional capital while we are still raising equity. So, no plans to raise the dividend.

Michael Salinsky - RBC Capital Markets

Okay, thanks.

C. Reynolds Thompson

I think if, we certainly will have the coverage to do so, but we’d like to get positive word from the rating agencies. So we’d like to get through this ATM program with so that could be later in the year you know the Board makes that decision, but that could be later in the year or next year before we have that discussion.

Michael Salinsky - RBC Capital Markets

Okay. That’s all for me guys, thanks.

Jerry Brewer

Thank you.

Operator

Our next question comes from the line of Andrew McCulloch with Green Street Advisors. Please proceed.

Andrew McCulloch - Green Street Advisors

Hi good afternoon. On the fee condo sales at Metropolitan Midtown, the average price of those units was well above the previous average at that community, is that a mix issue or is pricing improving in that market?

Paul Earle

That’s just a unit mix issue, it -- throughout the year we experienced on a per square foot basis a flat number.

Andrew McCulloch - Green Street Advisors

Okay. And then can you give us a status of the three Ravinia sales process?

C. Reynolds Thompson

Sure, we are in the process of marketing the asset, we’re in the latter stages and we’re in the process of refining, asking people to refine offers and we’ll be going through those over the next couple of weeks. And strategically, we are still very excited about, what that does to our strategy, but we want to make sure we did a financial transaction that makes sense for us as well.

Andrew McCulloch - Green Street Advisors

Could you give us any kind of pricing range, the cap rate or price per foot?

C. Reynolds Thompson

I cannot.

Andrew McCulloch - Green Street Advisors

Okay. And just one last question, is there anyway to give us divisional guidance for your option retail components either in terms of NOI or FFO contribution for 2011?

C. Reynolds Thompson

We can pull that out for you, we don’t have it in front of us, but we’d be happy to get back with you and give that to you off line.

Andrew McCulloch - Green Street Advisors

Okay. Great, thanks guys.

Operator

(Operator Instructions) Our next question comes from the line of Haendel St. Juste with KBW. Please proceed.

Haendel St. Juste - KBW

Good afternoon, guys. Hello, hello, yeah.

Tom Lowder

Hey, Haendel.

Haendel St. Juste - KBW

Hey, quick, couple of quick ones and most might have been asked. But even quite a bit about expected development starts pressure in DC and Austin, curious about some of the other core markets, are you seeing or hearing any thoughts there on imminent starts ramping up in any of your core markets?

Paul Earle

You know we’re really not. There is some good sites out there that are owned by companies like Colonial. But we don’t really feel like we’re going to experience a measurable amount of supply until late 2012 and going into 2013. So, we think we have really all of ‘011 and ‘012 with a very limited supply, historic low supply numbers coming in bumming up against some really good fundamentals. And so on our projection, it looks like more late ‘12 going into ‘13 where we might see some pressure.

Haendel St. Juste - KBW

Okay. Tom in your opening remarks, you mentioned that there are couple development projects you guys are contemplating starting this year, can you give us a sense which markets that they are?

Tom Lowder

Well, the multifamily as we pointed out as Tampa and Austin own sites that we already own, plus we have we are going through the rezoning process on a site in Orlando from an office. Again, this is on the balance sheet, it hasn’t been listed in the past as an apartment site. But we have now put that into supplemental, where we have rezoned that site to an apartment site and we are hopeful we can start that one in the end of the second, beginning of the third quarter depending on the approval process there in the County.

Haendel St. Juste - KBW

Okay. One last one maybe for you Reynolds. Given you guys are active in the marketplace today, wonder if you’ve seen a meaningful move in the spread between A and B cap rates here in the last quarter, so given these spike in treasuries?

C. Reynolds Thompson

Yeah, really there was a lot of movement down in cap rates January through about June or July and then after the summer they can’t be stabilized. There is still a lot of money chasing the Class A properties and the primary markets and we don’t expect that to change any time soon, but the real downdraft was in the first part of 2010 and now they’ve generally speaking stabilized.

Tom Lowder

And I’ll also add that we haven’t been looking at anything but new products, and we have been out in the market. So, our knowledge of B would be pretty stale. The deals that typically making sense for us are the ones, like we discussed in Raleigh that are recently developed and have construction financing on, I mean there is some kind of capital event that’s causing a transaction to need to take place.

Haendel St. Juste - KBW

All right, fair enough guys. Thank you.

Jerry Brewer

Thanks.

Operator

And I’m showing no further questions at this time. I’ll now turn the conference back over to you. Please continue with your presentation.

Jerry Brewer

Well thank you all for joining us today. We look forward to talking to you soon. Have a great day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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