Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Leslie Wolfgang - Director External Reporting

Eric Bolton - CEO

Simon Wadsworth - CFO

Al Campbell – Treasurer

Tom Grimes – Director Property Management

Drew Taylor – Director Asset Management

Analysts

David Cohen - Morgan Stanley

[Steve Radanovich] – BB&T Capital Markets

Mike Salinsky - RBC Capital Markets

Richard Anderson - BMO Capital Markets

Sheila McGrath - Keefe, Keegan & Company

Andy McCulloch - Green Street Advisors

Mid-America Apartment Communities, Inc. (MAA) Q1 2008 Earnings Call May 2, 2008 10:15 AM ET

Operator

Good morning ladies and gentlemen and thank you for participating in the Mid-America Apartment Communities first quarter earnings release conference call. The company will first share its prepared comments followed by a question and answer session. At this time I would like to turn the call over to Leslie Wolfgang, Director of External Reporting. Ms. Wolfgang, you may begin.

Leslie Wolfgang

Good morning everyone. This is Leslie Wolfgang, Director of External Reporting for Mid-America Apartment Communities. With me this morning are Eric Bolton, our CEO; Simon Wadsworth, our CFO; Al Campbell, Treasurer; Tom Grimes, Director of Property Management; and Drew Taylor, Director of Asset Management.

Before we begin I want to point out that as part of the discussion this morning company management will make forward-looking statements. Please refer to the Safe Harbor language included in yesterday’s press release and our 34-X filings with the SEC which describe risk factors that may impact future results. These reports along with a copy of today’s prepared comments and an audio copy of this morning’s call can be found on our website.

I’ll now turn the call over to Eric.

Eric Bolton

Thanks Leslie and thanks for calling into our first quarter earnings call. As outlined in yesterday’s release Mid-America is off to a terrific start in 2008. Strong first quarter results support our belief that the company is poised to deliver another year of solid performance. Within our markets and portfolio, the steady employment conditions, minimal new construction starts and a lack of pressure from vacant single-family and condo product drives our expectation for steady NOI and FFO growth this year and into 2009.

Employment trends in those markets where we have higher concentration, such as Houston, Dallas, Atlanta, Jacksonville and Memphis, continue to show positive job growth trends and overall steady employment conditions. While the research we all read supports that job growth is indeed slowing from last year’s growth rate, we continue to believe that the employment levels in our markets are likely to hold up pretty well and at this point we don’t see any evidence developing for significant job loss. From what we’re seeing in our leasing offices and submarkets, indications are the leasing environment will remain stable as we head into the busy summer leasing season.

Of course to some degree demand levels are also being supported by the pull-back in single-family home buying. Its hard to tell how much of the slowdown in job growth is being offset by the pull-back in home buying but there’s clearly some offset and I expect it will very significantly by market across the country. Further supporting what we expect to be continued net positive absorption trends is the pull-back by developers in starting new projects. Most of the developers we talk to are clearly having a difficult time securing financing and also having a real challenge in making their numbers work when they can secure financing.

I continue to believe that the necessary components are not in place to support any sort of significant ramp-up in new development activity across our markets and expect that it will remain so for some time. Now if one wants to forecast a more severe slowdown in the economy and a meaningful deterioration in employment levels as the year unfolds, we continue to believe that overall the apartment business will avoid the severe collapse that occurred in the 2002 2003 timeframe. The lack of new construction pressure and the return to a more disciplined mortgage financing market will provide some continued relief unlike the 2002 2003 downturn.

As you may recall Mid-America’s regional focus and diversification held up as one of the stronger performers during this period of very weak fundamentals for the apartment business. So while some moderation in job growth is occurring there are other cross-currents at work to keep us comfortable that leasing fundamentals within our portfolio are in pretty good shape as we head into the busy leasing quarters of Q2 and Q3.

Looking more specifically at some of the performance trends in Q1 total walk-in leasing traffic was up 3% over last year’s strong performance. We continue to see an explosion in the growth rate of folks initiating contact with us through the internet and via email. Traffic in these two areas more than doubled from Q1 last year and now represents close to 40% of our total traffic. We expect this trend to grow with long-term positive implications to our leasing and marketing cost efficiency. With the volume of leasing traffic running higher than last year and closing ratios strong, the average days to lease vacant units across the portfolio declined to 15 days in Q1, down from 19 days in the first quarter of last year.

That’s a pretty meaningful metric and has positive implications for improving year-over-year effective occupancy and lowering vacancy loss. In addition to these positive front-door trends for the third consecutive quarter we saw move-outs due to home buying post a decline as compared to the prior year. Turnover attributed to buying a home declined by 16% in Q1 versus last year. Additionally move-outs to rent a home only increased by 3% or an insignificant 4% of all move-outs as compared to last year. We remain comfortable that Mid-America’s portfolio is not materially exposed to the shadow market of vacant single-family homes and condos that are pressuring apartment fundamentals in a number of markets across the country.

With traffic and demand levels running higher than last year same-store physical occupancy at the end of the first quarter was a very healthy 95.6%, 70 basis points higher than the same point in 2007 and up 80 basis points from year-end. We expect to see this trend continue; in fact we closed April with same-store occupancy ahead of last year by 65 basis points at a strong 95.3%. In addition to the solid occupancy result in Q1 leasing concessions declined by a significant 46% and helped to drive effective pricing on a same-store basis, up 2.6% over the prior year. Our property management operation continues to become increasingly knowledgeable in using our new yield management program and we have been very pleased with the ability to more actively manage pricing and revenue management decisions on site.

Another area of performance that we have been closely monitoring for any signs of weakness is collections. And again not only do we see, we saw no indication of performance deterioration in this area and in fact overall performance on net collection loss improved in the first quarter as compared to last year. Current month, uncollected rents held steady in Q1 as compared to last year at 1.1% of total net potential rent. However as a result of additional system enhancements and procedural changes recently introduced the recovery of prior month collections and collection agency recoveries improved a significant 28% over last year and as a result our total net collection loss in Q1 improved to just four-tenths of one percent in the first quarter, which is down from five-tenths of one percent last year.

This result marks another quarterly performance record achieved in Q1. In fact it’s the strongest net collections performance we’ve captured in our 14-year history and is another example of an area where retooled systems and practices have made a significant positive impact to our performance.

So with occupancy running ahead of last year’s strong performance and pricing power intact and no signs of deterioration in collections we continue to feel pretty good about our expectations for another solid year of performance. Simon will provide additional insights on our updated earnings guidance for the year. But in addition to the overall stable leasing environment we continue to capture positive momentum from several new enhancements with our operating systems including the recent rollout of a new purchase order system and expanded capabilities for on site operations to more actively manage their expenses, also our kitchen and bath upgrade initiative has continued to capture terrific results and is making great progress and steadily penetrating a higher percentage of the portfolio.

In the first quarter our renovation team completed just over 800 units, capturing an average price increase of 12% on the renovated units. Our guidance this year was based on completing a total of 3,000 units so we’re clearly off to a great start against this goal. On the transactions front, there are some changes starting to take place. From what we are seeing sellers are slowly starting to recalibrate their expectations. More distressed situations such as a leased up property or high leverage deals facing refinancing, offer better opportunities for those who can execute a close quickly and close without financing contingencies. The competition for value-add or repositioning investment opportunities where the buyer can get a little more creative or aggressive with their underwriting remains very competitive and pricing is holding up pretty well.

Assuming the operating fundamentals continue to be good, we don’t expect to see any sort of significant shift in overall pricing but the number of distressed situations brought on by financing issues is growing and we believe that buying opportunities are increasing. Our goal for the year of adding $150 million of high quality properties on a 100% owned basis to our balance sheet is off to a good start with $23 million completed to-date. We currently have a new lease-up property in the Raleigh market that is undergoing due diligence and we expect to close on this acquisition later this month. We are also very active in underwriting acquisitions for our joint venture; Mid-America Fund 1, with a focus on repositioning investment opportunities.

In the first quarter we closed on two investments for $60 million for the Fund and are on track to also capture our goal of $150 million of JV investments this year as well.

And with that, I’ll now turn the call over to Simon.

Simon Wadsworth

Thanks Eric. First quarter FFO per share of $0.96 was $0.04 ahead of the mid point of our guidance and a 10% increase over the first quarter of 2007. Excluding the $0.04 per share promote fee from the [pro] joint venture that we reported in the same quarter last year, the growth in FFO per share was 16%. The strong growth was driven by excellent operating results and a 40 basis point reduction in our average interest rates.

First quarter year-over-year same-store revenue growth was 3.8% slightly ahead of our internal forecast. NOI growth was 5% which compares favorably to the 4.3% growth we reported a year ago and other than the first quarter of 2006, is the best first quarter we have reported in the last 12 years. Fee revenues and reimbursements continue to climb more rapidly than rent of 6.9% and 7.2% respectively, as we continue to grow fees and fine tune our reimbursement collection procedures. All of these contributed towards excellent revenue performance.

Same-store expenses increased 2.1% over the first quarter of 2007. This was a little higher than we’d forecast partly due to the timing of some personnel costs that we expect to moderate during the year. Increasing utility costs were partially recovered through our rebilling programs and repair and maintenance and marketing expenses had some modest reductions which helped to offset some of the cost increases.

Same-store results included 5% revenue growth and 7.9% NOI growth in our high-growth markets with strong revenue performance in Dallas, Houston and Nashville and strong overall performance in most of our other markets. Florida is the only significant area which has shown any weakness but even there, revenues increased 0.8% over the same quarter a year ago.

Our portfolio is well positioned for the current Florida market conditions as we have very limited exposure to markets that are over supplied with condos and single-family houses. We only have one property in south Florida, one in Orlando and four in Tampa of which two are in protected submarkets. Our biggest Florida concentration is in Jacksonville, which has performed well and where we have just one property, Lighthouse Court that is experiencing tough competition from single-family housing. Excluding this property Jacksonville property revenues were up 2.1%.

Overall we expect positive revenue growth from Florida for all of 2008. In Columbus, Georgia revenues at our two properties dropped 3% but we expect to recover as the year progresses. NOI in our three Texas markets is up by 11% and by 12% in our northern Tennessee and Kentucky markets. The strength of the markets and the implementation of the yield management software enabled us to reduce concessions in the first quarter on a cash basis by more than 50%, from $370 per movement a year ago to $179 this year, down from 2.6% of net potential rent to 1.2% which is likely now approaching stabilized levels.

We were pleased with turnover decrease of 1.6% compared to the same period a year ago from 54.1% on an annualized basis to 52.5%. Turnover is generally lower during the first quarter of the year so on a trailing 12-month basis it is 63.6%. As Eric mentioned the number of people leaving us to buy a house continued to decline, dropping 16% to 25.5% of move-outs from 29.3% in the first quarter of 2007.

Turning to the balance sheet our leverage, defined as debt plus preferred to gross assets, dropped by 40 basis points from March of last year to 58.5%. As a percentage of total market capitalization our debt plus preferred stands at the sector median; 48.5% and our fixed charge coverage continued to improve rising to 2.4 from 2.22 in the first quarter of 2007. We have $280 million of unused pre-committed credit under our agency and bank facilities of which $160 million is available under in-place mortgages and an additional $120 million is committed to our existing credit spreads.

We benefited as treasury and swap rates have dropped and as agency debt securities have traded very favorably compared to LIBOR. We have $180 million of debt refinancing and swap maturities to address in 2008 of which we completed $27 million in the first quarter. Since quarter-end we have now put in place a further $100 million of forward swaps locking in attractive interest rates that will be effective between May and December. We will be working on refinancing the remaining $50 million of maturities using our Fannie May and Freddie Mac credit facilities.

As a result we expect to pick up interest savings beginning in the third quarter which is in both our original and our current guidance. We continue to benefit from the fact that 20% of our debt is floating rate including the 4% that’s capped, mostly tied to very attractive Fannie May DMBS rates. We have sold 300,000 shares raising $15.5 million net of new common equity in the first quarter through our continuous equity program. In April we sold an additional 350,000 shares raising $18.4 million net. So we netted about $52.14 a share. We will either use this equity together with some debt to repurchase some of the preferred which will lower our blended cost of capital or if the acquisition environment continues to improve as we think it may, we will use the equity to fund additional new investment.

In either case we anticipate leaving some of the preferred in place with affectively a free call option to use if we choose at some future date. As a reminder if we do take out some of the preferred H, we have to write-off the original issuance cost of non-cash cost. This works out to be just over $0.01 per share for each $10 million that we redeem. Because of our strong first quarter we’ve added $0.03 to our full FFO forecast taking the range to $3.68 to $3.88 per share. Our guidance for the remaining three quarters which we’ve outlined in the press release remains very close to our original forecast.

We continue to expect property operations to perform in line with our initial 2008 forecast with same-store NOI growth in the range of 4% to 5%, revenues growth 3.5% to 4.5% and expense growth for the full year in a range of 2.5% to 3%. Remembering in the second half of the year we will have some tough expense comparisons because of the favorable insurance renewal on July 1 of last year and the favorable real estate tax adjustments in the second half of last year. We do have a few pieces of the forecast that are moving around.

We have increased our forecast for same-store real estate tax expense to just over 4.5%. This is almost offset by our expectation of moderation from our July insurance renewal that’s coming up. Taxes are always one of our biggest areas of uncertainly at least until we get greater clarity towards the end of the third quarter. A 1% change in taxes impacts our results just over $0.01 per share. We are now hopeful of a flat renewal of our insurance program on July 1 and we’ll be pretty focused on this over the next couple of months.

Compared to our original forecast, lower short-term interest rates continue to help us although longer term interest rates have moved up. For the full year we expect interest rates to average 5% to 5.1%. We also will have slight FFO dilution from raising the additional equity that I mentioned. Our new guidance assumes we’ll sell and additional 300,000 shares during the balance of this year and the net of all of this adds $0.02 to 2008 FFO. We now expect about $0.03 of FFO dilution this year from the likely acquisition of the Raleigh property that Eric mentioned because it’s in lease-up.

Combining these items with the $0.04 that we beat our Q1 forecast gives us a $0.03 addition to the mid point of our full year guidance. We preliminarily identified our disposition candidates and subject to approval by our Board we anticipate starting the marketing process in the next 90 days. We think our prior guidance for acquisitions both of Fund 1 and for our wholly-owned account and for dispositions seems approximately correct.

Eric Bolton

Thanks Simon. We continue to believe that our disciplined value oriented approach to deploying capital diversified in high-growth markets across the Sunbelt region, supported by a culture that is passionate and our focus on property operations will continue to deliver performance that competes favorably with those strategies focused on high [barrier] markets and large new development operations. Over the last few years we’ve made a lot of changes to our portfolio profile, operating platform and balance sheet all of which continue to deliver record levels of performance from Mid-America. We believe that at times like these when strategies and platforms are challenged with a more difficult part of the credit cycle and concerns about moderating market fundamentals, those companies with a history of disciplined investment practices and a strong operating platform are at their most competitive.

This is also a time when a value buyer and a disciplined investor are presented with more opportunities. We built a platform that we believe will create a lot of long-term value for shareholders and we are working hard to leverage the platform with additional assets. We have several new growth initiatives teed up and a platform that is well prepared to execute. We look forward to another year of good results and are enthused about the foundation we continue to build for long-term value growth for our shareholders.

That’s all of our prepared comments, so operator we will turn it back to you for any questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from David Cohen - Morgan Stanley

David Cohen - Morgan Stanley

You talked about the turnover declining and you have fewer move-outs due to home purchases and you have more people coming in I guess due to foreclosures and stuff, but your turnover actually declined not that much, and I guess my question is are there other reasons that are increasing in terms of, this turnover is not down that much, but you’re talking about the turnover coming down for other reason so are there other reasons other than homes that are increasing to keep this turnover ratio kind of relatively steady?

Unidentified Company Representative

Sure David and we’re, just for the quarter, looking at only quarter year-to-date we had 148 fewer move-ins, 225 of those were by homes and really the point that had the largest increase was rent increase at 97 offsetting that and frankly that’s a metric we’re willing to stomach a little bit. We’ll gladly trade fewer move-outs to home buying for half as many move-outs for rent increases as we push that.

David Cohen - Morgan Stanley

So they’re just moving to other apartments that are cheaper?

Unidentified Company Representative

I don’t have an answer for you on where they’re going from here when we raise the rents.

David Cohen - Morgan Stanley

Okay and then you talked about a lot fewer new developments and other developers not being able to get financing, does that leave opportunity for you to do more development or are you similarly as cautious about new development?

Eric Bolton

We’ve always been pretty cautious frankly about new development. We are seeing more interest particularly from developers that either have projects teed up or they’re in the middle of lease-up and they are worried about their take-out financing and we are being approached a lot more actively on that front. I don’t think you will see Mid-America, well you won’t I can tell you, you won’t see us jump into new development in a big way but we are starting to see a lot more opportunities for some very attractive properties in great markets that we’d like to be in where people are coming to us saying, look we’re worried about our financing or we can’t get the financing and so let’s talk and so that’s, like the deal in Raleigh we just mentioned and the deal in Houston we bought at the very start of the year, we are seeing a lot more in that area.

David Cohen - Morgan Stanley

So would you likely jump in as kind of an equity partner or would you do kind of a [mez] with the possibility of loan-to-own type of…?

Eric Bolton

We would do it straight up as the owner, as the equity and it would be a situation where we would come in and just provide the take-out or provide the, we would just go in and buy it in the middle of lease-up like the deal in Raleigh. We’re not really interested in going in as some sort of [mez] lender and all that kind of stuff.

Simon Wadsworth

We have done a couple of deals and probably will do some more where we have gone in on a fixed price contract with a developer on a ground-up development and for Brier Creek Phase 2 was one of those. We have one of those going on with Copper Ridge right now which is a phase 2 also. So we’ll probably continue to look for those opportunities and you’re right, there may be some more of those opportunities, particularly when we can come in on a value add basis to take advantage of the situation.

David Cohen - Morgan Stanley

And can just review the $0.01 difference in the $0.03 guidance you kind of reviewed some dilution from the equity issuance and then you had lower short-term rates, can you just kind of review those pieces again?

Al Campbell

As Simon mentioned the first portion of that is just the $0.04 in the first quarter. I think he mentioned the quarter, the color on that really is strong operations for the year, mainly interest expense and some G&A being a little less than we expected. But then on top of that, the yield curb has changed since our previous forecast and we have about a 20 basis points reduction in our average borrowing cost projected for 2008 so if you do the math on that, that’ll give you about another $0.06 for the year. And then you have offsetting obviously the equity that Simon talked about, the limited equity that we are issuing this year and also the $0.03 on a lease-up property in Raleigh that Simon talked about. So if you add all that down you get to a mid-point that’s about $0.03 higher than the guidance from the previous quarter.

Operator

Your next question comes from [Steve Radanovich] – BB&T Capital Markets

[Steve Radanovich] – BB&T Capital Markets

You touched on dispositions I guess there were no sales in the quarter, can you give us a little more detail on what the timing is on the roughly $60 million you do have targeted?

Eric Bolton

We will be talking with our Board about our plans on that in another couple of weeks at our meeting and I would expect that we will start to the marketing of those properties in early Q3, late Q2 and get them done by year-end we expect.

[Steve Radanovich] – BB&T Capital Markets

So more late third quarter or fourth quarter events.

Eric Bolton

Yes.

[Steve Radanovich] – BB&T Capital Markets

In general can you comment on the cap rate environment in your markets, one of your coastal peers commented that they’ve been seeing cap rates back up anywhere from 25 to 75 basis points, what are you seeing in your primary markets?

Eric Bolton

It’s hard to give you a real fix on cap rates with any real certainty. For sure transaction volume really fell off there for awhile and it’s just now starting to show any sort of movement so it’s hard to give you a real sense on that. I will tell you that operating results and NOIs are holding up pretty well so we continue to believe that if you see any sort of moderation really start to take hold in cap rates that to some degree the improving operating, or continued growth in NOIs will offset it to some degree. But clearly the high leverage buyer and the condo converter out of the market at this point and so that capital is out of the environment but there continues to be a lot of equity out there looking to deploy in the multi family space and so at least what we’re seeing, prices are holding pretty firmly.

Probably the only real thing I could point to is that we are seeing that some of those sellers that are really being impacted by the financing environment, the developers or those that have put together pretty high leveraged deals over the last several years that are now facing some refinancing pressure, I think that that’s where you’re going to start to see the biggest opportunities but having said that, particularly on the value add deals, that’s where we’re seeing a lot of capital still actively chasing opportunities where capital can go in and put a repositioning story on their underwriting. You can get pretty aggressive still with the underwriting assumptions and so the [inaudible] spread if you will in those areas is still pretty tight. I would tell you that just in an effort to kind of give you some sense of it I would tell you that cap rates may be moved 10 basis points on really sort of the value add stuff and we think that on some of the more opportunistic plays where sellers are facing some financing risks that somewhere upwards close to 50 basis points spread in cap rates may be taking place but not a whole lot of movement to be honest with you.

[Steve Radanovich] – BB&T Capital Markets

And then lastly just back on Jacksonville I know you said taking out the one Lighthouse property you see revenues up 2.1%, what is rent growth looking like if you took that property out. Is it still pretty good, is it still around 2% or is there some weakness in that market in Jacksonville?

Unidentified Company Representative

It’s primarily that. Rent growth I think with it was 0.07% and that property is holding us back a little bit on rent growth.

Eric Bolton

To give you some sense of sort of what Florida is in general means overall our effective pricing performance was 2.6% up. You take the Florida properties out of the equation; total effective pricing growth was…

Unidentified Company Representative

…33 so Florida is sort of the anchor on overall growth.

Operator

Your next question comes from the line of Mike Salinsky - RBC Capital Markets

Mike Salinsky - RBC Capital Markets

With regard to Fannie and Freddie can you just update us on what you’re hearing from them in terms of their willingness to lend, spreads just what you’re hearing from the lenders?

Al Campbell

As you know we’ve had a relationship with really both agencies for a long time as that’s been our primary borrowing platform for some years. We talked to both, been at their offices over the last few months and we really expect that they’ll continue to be very committed to both the multi family industry and us, Mid-America because of our relationship and really the key to that is as you think about it lending to multi family meets their charter and right now in these tough times its not only a profitable part of their business but its also a very low risk part of their business. So that we expect them to continue to be committed and we’re hearing that they’ve got the capacity they need and they’re going to be committed to the industry and especially the people who have relationships with them.

Simon Wadsworth

And of course obviously as everybody has said spreads are widening but absolute, because of the absolute drop in treasury and swap rates on a year-over-year basis has helped a lot but still the spreads widening, probably the overall borrowing cost compared to a year ago on a seven or 10 year is probably up about 20 or 30 basis points or something like that.

Al Campbell

Just a little color, I think for many weeks there I think both agencies have meetings each week to look at their current spreads and I think for a while there the spreads were going up between five and 10 basis points every week. I think we’re hearing now, they’re obviously at a much higher level then they were but they’re starting to stop and hopefully maintain or come back in the future so we’ll see how that plays out.

Simon Wadsworth

So for moderate level borrowers like us, we feel we’re in pretty good shape.

Al Campbell

And also if you think about as Simon mentioned we have about $250 million of capacity from agencies that we have the historic credit rates locked in on from our credit facilities that mature between 2011 and 2018 so we feel pretty good about that too.

Mike Salinsky - RBC Capital Markets

The asset you added to the joint venture fund in late March what was the cap rate on that?

Eric Bolton

I can tell you of course this is a repositioning deal so we don’t really get that focused on the ingoing cap rate.

Simon Wadsworth

The ingoing cap rate was 5 ¾.

Mike Salinsky - RBC Capital Markets

In terms of your redevelopments you had pretty good activity there in the first quarter is there a possibility for upside to that later in the year?

Drew Taylor

Typically we expect to do 20% or so in the first quarter, we did a little bit, 20% of our total units that we planned for the year in the first quarter. We planned 3,000 units this year we did 800 so we’re a little ahead of pace there. The program, the production is good; the acceptance is good, we’re seeing the 12% rent increases that we sort of expect in the program so the appetite for the apartments continues to be good. So we’ll do 20%, we did slightly more than 20% in the first quarter we’ll do, we’ll ramp that up as turnover increases in the second and third quarter, certainly we’ll do more units and we expect to do 3,000 when the year is complete.

Eric Bolton

But more specific I don’t think you’re going to see that program ramp up at a run rate much higher than what we planned this year. We continue to think its pretty important to manage this thing very, very aggressively and watch it carefully and of course we’re also pretty sensitive to how much dilution if you will we are willing to take as we take more units offline for longer periods of time and run up the vacancy loss so we’re pretty comfortable with the sort of the 3,000 a year run rate from an execution and our earnings management perspective and think that we’ll probably carry that same run rate into next year. But we’ll look at it more later in the year as we prepare for 2009.

Mike Salinsky - RBC Capital Markets

You mentioned in April that occupancies were up about 60 basis points, how is rent growth performing?

Drew Taylor

We’ve still got some scrubbing since that was really just yesterday and with the rent growth the way we measure it just sort of balancing concessions and ARU growth to get to effective, we don’t have that number just yet. It’s not a clean number, not one that we are comfortable sharing but continuing a positive year-over-year.

Eric Bolton

I would expect it to be pretty consistent but we’ll see as we get more color on the numbers.

Operator

Your next question comes from the line of Richard Anderson - BMO Capital Markets

Richard Anderson - BMO Capital Markets

Did you have any comment about a change to your acquisition volume targets, I know it was $150 million but did you comment on that?

Eric Bolton

Nothing other than to say that we still feel pretty good about our assumptions. We closed on one deal earlier this year for our 100% on balance sheet.

Richard Anderson - BMO Capital Markets

How much was that by the way?

Al Campbell

It was $23.5 million the first one in January.

Eric Bolton

It was $23.5 million and then we’ve got another one under contract right now in Raleigh for $30 million and so we’ll see how it plays out. We still feel pretty good about the guidance.

Richard Anderson - BMO Capital Markets

Raleigh is $34 million?

Eric Bolton

Yes, about that.

Richard Anderson - BMO Capital Markets

Now in terms of the outperformance and the good results for the first quarter were you able to breakout how much of that $0.04 was interest expense, how much was operations, how much was G&A? Was it like sort 30-30-30?

Al Campbell

We’ll try to detail that a bit more but I think really in terms of performance compared to what we expected the operating performance was strong but it was about what we expected for the quarter. We had projected a good quarter so the majority of that $0.04 really more than half was really interest expense and then G&A primarily bonus expense kind of a little less than we had expected and prior year a portion of that in G&A.

Richard Anderson - BMO Capital Markets

Simon you mentioned the likelihood at least in terms of how you feel right now about keeping the preferred outstanding and using it as a potential redeployment source if other things don’t materialize, is that sort of the mindset right now that if you were to do this you would, if you were to think it through today that the preferred would sort of not get redeemed?

Simon Wadsworth

I think that’s a fair way of putting it. I think we feel as Eric has mentioned we feel reasonably good that we may be approaching an attractive environment for investing in some of these opportunities and so and of course the preferred is about an 8.3% yield which is about what its replacement cost would be and we will have the free call option so I think that we probably will leave most of it out if things play out as we think it will play out.

Richard Anderson - BMO Capital Markets

Same question from the acquisition volume I asked earlier, what about on dispositions, I think the number was 60 are you still targeting that?

Eric Bolton

Yes we are.

Richard Anderson - BMO Capital Markets

The big swing factor for the second quarter $0.10, what’s causing that? Is it just the timing of the acquisition?

Simon Wadsworth

I think we try to keep a fairly wide range as you know we always do and some of that has come because of actually from sort of our conversations we had with our audit committee, but I think the big uncertain thing is interest rates and how, frankly how some of the Fannie May DMBS trades because that is, can be, those can fluctuate. I think the timing of this Raleigh acquisition would make a difference too because that is dilutive, because its only 40% leased. But those I would say would be the two biggest factors. Now the third one which I mentioned in the call which we will get further clarity on as the quarter develops of course is and as most of you know by now I’m paranoid about real estate taxes and we still have to get more information as time goes on about real estate taxes and that is a big wildcard. And as I mentioned for every 1% that [I’m wrong] that’s about $0.01 a share and of course you have to kind of catch up if you’ve been either over or under for the full year accrual. But those I suppose would be the three items that would cause us to kind of be wanted to change from the mid point of the guidance.

Operator

Your next question comes from the line of Sheila McGrath - Keefe, Keegan & Company

Sheila McGrath - Keefe, Keegan & Company

I was wondering if you could give us an update on the development projects, how the lease-up is going versus your expectations and pro forma rents, etc?

Tom Grimes

Things are honestly just rolling along on all of them. We are pleased with where the pricing is and we are pleased with the way the leasing is going. Brier Creek Phase 2 is 71% occupied, 76 leased and on target from a pricing area. And there’s been really no cannibalization of phase one which is 97 occupied right now. Then St. Augustine and Copper Ridge are yet to, we haven’t started leasing those two yet. So that’s a far as the pure wholly-owned development that we’re doing, those are the three biggies.

Sheila McGrath - Keefe, Keegan & Company

And how is the lease-up going on the Phoenix property?

Tom Grimes

The Phoenix property is coming along. We are excited. It broke the 90% barrier, 91 occupied now, 94 leased. So we’ve been a little behind the curve I think we mentioned on start-up, we started a little behind the curve when we bought it but given the headwinds in the Phoenix market we’re very pleased with how its leased up and stabilized.

Operator

Your next question comes from the line of Andy McCulloch - Green Street Advisors

Andy McCulloch - Green Street Advisors

You touched on this a little bit but can you just give us a little bit more color on Florida and where you think we are in the cycle there both in Jacksonville and your other markets?

Tom Grimes

I think where we’re most concerned about on the shadow supply type issues are in south Florida and in Tampa and Orlando. Mercifully we have light exposure in south Florida and our products have been somewhat protected there because of its suburban location and a very, very good school district along with very good operating team. In Tampa we’ve had sort of the benefit of deed-restricted neighborhoods on the northern two and then the other two that are in more of a wide open market we’ve just had a little bit better performance in terms of managing the gap between physical and effective occupancy in closing that and frankly we’ve had the benefit of 16 units come back online that were on down status from a fire. The other places, Jacksonville, we’ve hit on before with the turnover primarily focused at Lighthouse Court our southern most asset. What we’re seeing about that that is a little encouraging the whole, the reason the property has run behind us is because move-outs and home buying and the house renting, that was particularly evident in the fourth quarter. We are sort of pleased to see that moderating at that property specifically in the first quarter and while performance wasn’t great there, there were 160,000 behind last year we saw some recovery take place as those trends moderated, occupancy grew. So we’re hoping it’s on the rebound a little bit. And then we’re also seeing some weaknesses in places like Melbourne and Ocala but with one asset there in each of those, we’re coming along. So Florida to me feels a little better. We’re certainly learning to, we can compete much better today than we could a year ago. We’ve leaned our organization up and we are feeling better about the way we compete. It’s hard for me to call the bottom of Florida yet. I just don’t have that kind of insight and I apologize for not giving you a firmer answer on that.

Andy McCulloch - Green Street Advisors

What was the NOI for the quarter from Brier?

Tom Grimes

NOI for the quarter on Phase 2 on development was up 7% ahead of where we thought it would be, it was $232,000.

Operator

Your next question is a follow-up from the line of David Cohen - Morgan Stanley

David Cohen – Morgan Stanley

Can you talk about just the St. Augustine project, it looks like you pushed back the completion and stabilization date, is that just due to the market conditions or did I miss something?

Drew Taylor

Essentially we had some construction delays at St. Augustine where we had some soil condition issues to start the project that delayed it slightly and then frankly there’s been some rain down in Florida which has delayed construction there but its nothing to do certainly with our expectation of how we think the project is going do. It’s just off to a bit of a slower start than we expected.

David Cohen - Morgan Stanley

Does that impact your [IOR] expectations for the project?

Drew Taylor

It doesn’t. I think it increased our capitalized interest costs just a little bit but we have contingencies that are going to cover or sort of that the [IOR] is intact. We expect it to be 7.5% still. NOI stabilized yield at 7.5 rather.

David Cohen - Morgan Stanley

When you do redevelopment what are the rules in terms of capitalizing the units that you’re redeveloping, it sounds like you keep them in service but what are the rules in terms of the capitalization?

Al Campbell

We use a criteria, if you see we have a few of, I think eight properties we pulled out of same-store and really we pull them out of same-store if they are significant rehab and I think…

Drew Taylor

If we’re going to renovate 50% more of our turns and we’re going to spend more than $6,500 a unit, we pull it out of same-store.

Al Campbell

And if it’s a lighter rehab given those criteria we keep it in same-store.

David Cohen – Morgan Stanley

In terms of same-store, but does it still impact your income statement?

Simon Wadsworth

No it doesn’t. Let me put it like this, taking units out of service, yes it does impact our income statement because the units are going to be down during the redevelopment period and so we do not capitalize any costs associated with the down period. That gets expensed through the P&L statement. Now the only possible impact on the P&L statement is that as part of the redevelopment process inevitably some normal rehab, some normal turn costs may get capitalized. But generally that’s pretty small. And so but we don’t if you like; capitalize any costs associated with units that are taken out of service. That’s expensed through the P&L.

David Cohen - Morgan Stanley

Greenville’s been particularly weak; can you touch a little bit more on that?

Tom Grimes

That really is driven by our largest property there and Eric touched on this a little bit earlier where we have a significant rehab going on at that property and we just got a little bit of dilution caused by there. We’re happy with what Greenville is doing but we’re incurring a little more vacancy loss there than we normally would because of the renovation project.

Operator

Your final question is a follow-up from [Steve Radanovich] – BB&T Capital Markets

[Steve Radanovich] – BB&T Capital Markets

Real quick on the developments, can you just remind me of what the yields are on those three developments and if they’re moved at all?

Drew Taylor

They have not moved. They are intact and what we expected them to be before we started. Brier Creek which we finished but is still leasing up is 77; the other two are mid 7 annualized stabilized yields both for St. Augustine and for Copper Ridge.

Simon Wadsworth

Having been in the development business one thing we’ve learned is to have a bit of a cushion in there to protect us against Murphy’s Law and so we’re still well within the cushion thank goodness.

Operator

There are no further questions at this time; please proceed with any further remarks.

Eric Bolton

We appreciate everyone being on the call. Call if you have any questions. Thanks.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mid-America Apartment Communities, Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts