Executives
Jerry Brewer – IR
Tom Lowder – Chairman and CEO
Reynolds Thompson – President and CFO
Analysts
Jana Galan – Bank of America/Merrill Lynch
Derek Bower – UBS
Rich Anderson – BMO Capital
Eric Wolfe – Citi
Andy McCulloch – Green Street Advisors
Colonial Properties Trust (CLP) Q2 2012 Earnings Call July 26, 2012 2:00 PM ET
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Colonial Properties Trust Second Quarter 2012 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, July 26, 2012.
I would now like to turn the conference over to Jerry Brewer, Executive Vice President-Finance with Colonial Properties Trust. Please go ahead, sir.
Jerry Brewer
Thank you, and welcome to everyone joining us today. We released our earnings this morning via Business Wire. A copy of this earnings release may be found on our website.
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 estimates are based on a number of assumptions, any of which, unrealized, could adversely affect their accuracy. Please see our latest SEC filings for the detail of explanation of risk. Any non-GAAP financial measures we discuss are reconciled to the closest GAAP measures in filings that can be found on our website.
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 second quarter, and our updated guidance for 2012. After their comments, we’ll open up the call to take your questions. Paul Earle, our Chief Operating Officer, is also here to field questions.
I’ll now turn the call over to Tom.
Tom Lowder
Thank you, Jerry, and again welcome to everyone joining us. Higher quality Sunbelt multi-family portfolio coupled with solid fundamentals resulted in another quarter of strong operating results. As I’ve discussed on our quarterly calls this year, 2012 initiatives are to grow the company, achieve investment grade rating and improved our portfolio.
During the quarter, we were able to execute on all of these objectives. We grew our core business by increasing our same-property net operating income by 7.3% as compared to last year. We acquired one asset in Dallas for $29.8 million and began two new developments, one in South Orlando in the Lake Nona sub-market and the second phase at Colonial Grand at Ayrsley in Charlotte, North Carolina. We now have seven multifamily developments under construction, representing over 2, 000 units and of total investments of approximately $250 million.
As I mentioned on our last call, S&P upgraded our unsecured debt rating to BBB- and we are scheduled to meet with Moody’s next month. Our improving operations, coupled with the progress on our balance sheet, yielded a debt-to-EBTIDA ratio of 7.8 times and a fixed charge ratio of 2.3 times for the second quarter. Our leverage was 45.2% as of June 30. We’ve been able to achieve all of these balance sheet ratios while we are in the midst of the development pipeline I’ve previously discussed. This pipeline will begin delivering income for us in 2013, which will further improve our ratios.
All of these improved balance sheet ratios in the more simplified business will help us in our discussions with the rating agencies and hopefully allow us to regain our investment grade rating with both Moody’s and Fitch in the near term. As we announced earlier this month, we had exited the 18 assets DRA/CLP Office joint venture. This was our largest remaining joint venture and was the significant step in simplifying our business in shifting our assets to multi-family. This joint venture was highly leveraged and we were able to renew $111 million of secured financing that was scheduled to mature in 2014. We planned to transition management of these properties to a third-party over the next 60 to 90 days, which will allow us the opportunity to further simplify our internal structure. Following this transaction, multifamily assets now represent approximately 86% of our net operating income bringing us closer to our target mix of 90% multifamily and 10% commercial. We have additional commercial assets being marketed for sale that I will discuss at the end of the call.
Now Reynolds will provide more details on our operating performance and other activities during the quarter. Reynolds?
Reynolds Thompson
Thanks Tom. FFO for the second quarter was $0.32 per share consistent with the year ago and up from $0.30 per share in the first quarter. Our second quarter same property net operating income increased 7.3% and revenue increased 4.9% versus the prior year. Multifamily same-property physical occupancy was 96% at the end of the quarter. New lease rates were up 3.9% and renewal rates were up 6.6% in the second quarter for a blended growth rate of 5.1%. July new lease rates are up 3.3% today. Renewal letters are going out at 6.5% consistent with the second quarter. Average revenue per occupied unit reached $928 during the second quarter of 1.9% sequentially and up 5.8% from the second quarter of 2011. Revenue per occupied unit is above our prior peak in all of our markets except for Phoenix, which is less than 1% below the prior peak. Rents as a percent of income were 15.9% for the quarter, 400 basis points below our prior peak of approximately 20% in 2008.
Resident turnover was 61.4%, 290 basis points above the prior year while this is an increase, the comparison is to historically low turnover rate. Move-outs due to new home purchases were 14.4% for the quarter, up 70 basis points over last year. The turnover due to new home purchases are still below our historical average.
Our strongest markets were Austin, Charlotte, Phoenix, Raleigh and Birmingham with revenue growth over 5% and NOI growth over 9% for each market during the quarter. As Tom mentioned, we took a major step in the quarter in simplifying the business and improving the mix of multifamily commercial assets. We exited the DRA/CLP Office joint venture for $2 million and were released from $111 million of secured debt that was scheduled to mature in 2014.
As a result of this sale, we will transition property management leasing of certain of these properties over the next 60 to 90 days. The company had a deferred gain of $21.9 million that was recognized in net income during the quarter as a result of this transaction. The FFO per share impact of unwinding this joint venture is approximately $0.04 on an annualized basis. $0.01 to $0.02 is attributable to the property operations in $0.02 to $0.03 is related to the loss of management leasing fees. The assets are approximately 80% occupied today and significant capital requirements will be needed to lease up the properties. Given our multi-family focused strategy and the potential need for new capital, we believed it was the right time to exit the joint venture without having to invest any capital.
During the second quarter, we began two new multifamily developments. We started construction on the 462-unit Colonial Grand at Randal Park in South Orlando and an 81-unit second phase at Colonial Grand at Ayrsley in Charlotte. We now have projects underway in Tampa, Austin, Orlando, and Charlotte. Our development pipeline includes seven projects with a total value of over $250 million, representing over 2,000 units.
Three of these projects are in lease up. All are at or above pro forma rents and absorption in Tampa and Orlando is ahead of plan. Additionally, all the projects are at or below the budgeted construction cost. During the quarter, we acquired the newly developed 256-unit Colonial Grand at Fairview in Dallas for $29.8 million. The apartment community is currently in lease up and is anticipated to have a stabilized cap rate of 6.6%.
Regarding financing, we closed $150 million unsecured term loan that matures in May 2017 and bears interest at LIBOR plus an initial margin of 160 basis points. We executed interest rate swaps at fixed interest rate through maturity at a rate of 2.71% based on the initial margin. Debt plus preferred to gross assets was 45.2% at the end of the quarter. The fixed charge ratio was 2.3 times and debt-to-EBITDA was 7.8 times for the quarter.
A line of credit balance at the end of the quarter was $117 million, leaving us with an additional capacity of $383 million on the line. We only have $80 million of consolidated debt maturing in 2012. Tom?
Tom Lowder
Okay, thanks, Reynolds. Our full-year 2012 FFO guidance is now a $1.23 to a $1.27 per share. We’ve lowered the top end of our guidance range about $0.02 primarily as a result of the loss of management fees from the disposition of our interest in the DRA/CLP joint venture. We tightened our full year multifamily same property net operating income estimates to 6.25% to 7.75% representing a 25 basis point movement on each end of the range, but leaving the midpoint unchanged at 7%.
Revenue is now expected to increase 4.75% to 5.5% and expenses are anticipated to increase 2.25% to 3%. Our acquisition and disposition guidance remains unchanged at $100 million to $150 million with $75 million and $116 million completed to date respectively. We anticipate development spending of $110 million to $130 million was down slightly from our previous guidance, which is purely timing between this year and next year. We have four commercial assets being marketed for sale. We’ve received strong interest in these properties but are still in the marketing process. We’ve not included the impact of these potential sales in our current guidance. We’re successful in closing all our portion of these assets this year. We’ll revise our guidance as needed. The ultimate timing and volume of these potential sales could impact the final FFO results. We’ve not included any additional recycling of older multifamily assets in our guidance for the remainder of the year. The volume of our multifamily dispositions will be governed by ability to find multifamily acquisition opportunities.
Now, at this time our operator, we’d like to open up the call for questions please.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions) Our first question will come from the line of Jana Galan with Bank of America/Merrill Lynch. Please go ahead.
Jana Galan – Bank of America/Merrill Lynch
Thank you. Good afternoon. I was wondering if you could comment on turnover by market.
Tom Lowder
We’ll be happy to do that.
Jerry Brewer
Sure. The overall turnover as Reynolds mentioned was up slightly to 61%, just over 61%, that’s below our long term run rate. So we’re still pleased with that number, (inaudible) upward pressure on that turnover is moving through the rent roll with additional rent increase by renewals. But you can see, place like Atlanta and Austin running in the mid 55%, 57% range, the Dallas/Fort Worth, 61%, Orlando is running at about 57% to 59%, all the way to Savanna where we have some military influence, we’d run closer to the 75%. So where there is a military influence you will see a little bit of higher number or a student influence, you will see a little bit of higher number but typically our core markets like a Raleigh, a Charlotte and a Dallas, 55% to 57%.
Jana Galan – Bank of America/Merrill Lynch
Thank you. Very helpful. And then just turning on to the development pipeline, I guess how are you thinking about funding the remaining $126 million?
Tom Lowder
The funding is going to come from our sale of the commercial assets. So as we talked about in the past, we believe we’ve got an opportunity to recycle some of that commercial capital back into the multifamily development pipeline, and that’s what we see it happening over the next several quarters.
Jana Galan – Bank of America/Merrill Lynch
Thank you.
Operator
Our next question comes from line of Derek Bower with UBS. Please go ahead with your question.
Derek Bower – UBS
Hey, good afternoon guys.
Tom Lowder
Good afternoon.
Derek Bower – UBS
I was wondering if you could talk about the trend in new lease rates. It looks like July splits a little bit from Q2, and I think last year at (inaudible) – so can you just provide me with a little bit more visibility on how you expect that new rate to trend over the next coming months?
Tom Lowder
Well, we really think there were new lease rate and the renewal rates will trend lot like the second quarter and each market going through July renewals and then going out and looking at the August-September offer letters, everything is turning a lot like the second quarter. So, we don’t see a material change.
Derek Bower – UBS
And I mean – this is – what were the July – I mean sorry, what were the August and September offers going out for?
Reynolds Thompson
The August offer letters are out at 6.6%. The September offer letters are out at 6.4%. July offers were out at 6.8%.
Derek Bower – UBS
Okay. July is 6.8%. Okay, great. Thanks. And then on the – it same store expense revision, can you talk about what some of the drivers were to that reduction and maybe talk about any changes to taxes so far and why repair and maintenance might have ticked down with turnover turns up this quarter?
Tom Lowder
Well, two significant drivers behind the expense reduction were insurance and advertising and promotion. On the advertising side, we – because of the automation that’s available through our firm Lead2Lease which tracks each individual lead, it allows us to go back and really refine our print media and also refine the use of locaters. And so the reduction in advertising and promotion was pretty significant this quarter. And then the – on the R&M side, increasing the amount of in-house paints that we request helped us somewhat, and then on the insurance side of things just simply a better loss experience.
Derek Bower – UBS
Okay. Thanks. And then just lastly before you meet with Moody’s in the next month, is there anything left on sort of your priority list that you like to pick off before you go into the meeting with them.
Tom Lowder
Now we really feel very good about what we’ve got and done with the balance sheet. We think we have checked all the boxes so to speak. The debt-to-EBITDA was a number we were really focused on and we wanted to get that number down below 8 times and with our second quarter number, we’ve been able to do that and we believe we don’t be able to maintain that kind of a number as we look forward. So we feel like we’ve got a very, very good group of credit metrics the way out front of them combined with where we see the balance sheet headed in the quarters ahead, we’re going to have a very good meeting with Moody’s next month.
Derek Bower – UBS
Okay. Thank you.
Tom Lowder
Yep.
Operator
Our next question comes from the line of Richard Anderson with BMO Capital. Please go ahead.
Rich Anderson – BMO Capital
Hey, thanks. Good afternoon everybody.
Tom Lowder
Hey, Rick.
Reynolds Thompson
Good afternoon.
Rich Anderson – BMO Capital
Did you give a cap rate on the sale of the joint venture sale?
Reynolds Thompson
Yes, it’s in the supplemental, but it’s a 7.2% cap rate based on annualizing our first six months of income.
Rich Anderson – BMO Capital
Okay. I just missed that. Referring to your plan to do some – start some new developments or having started some new development activity, and understand that when you’re making investment in development, you presume that over the next 10 years you’re going to have some ups and downs in a real estate cycle. There are some good times and bad times. But are you making this a decision to start some new projects on the view that it will be a good time still to deliver product and call it 2014 or whatever it might – whenever you might finish those projects? I mean, how do we know that you’re confident that it’s going to be a good time to be bringing product to market?
Tom Lowder
Well, we are just as you follow-up Axiometrics and PPR and other economists out there and our on the ground view of things, we are looking at the planned projects and funded projects as we know them, but sub-market. And we’ve been following first of all, as you know Rich, first starting projects on the dirt that we already own, the legacy dirt that we’ve had on the balance sheet for the last five years and getting those projects underway and feeling confident about where we are, you’ll get a better view of how we feel long term if you see us acquiring a new dirt, which we don’t have anything in the hopper at this moment.
Rich Anderson – BMO Capital
So, beyond 2014, you mean?
Tom Lowder
Yes.
Rich Anderson – BMO Capital
Yeah. Okay, so if you buy dirt then that is good.
Tom Lowder
If we buy dirt, then we feel confident about our view on that particular market or submarket.
Rich Anderson – BMO Capital
Okay.
Tom Lowder
We’re following the macro numbers of – about deliveries and we thought we would get to the levels of maximum deliveries in the latter part of 2013, maybe third quarter, but that seems to be sliding out a couple of quarters.
Rich Anderson – BMO Capital
Okay.
Tom Lowder
So we’re just keeping an eye on that.
Rich Anderson – BMO Capital
I’m sorry. If this is disclosed some place to, but did you mention the percentage of your turnover tied rent being too high?
Reynolds Thompson
Yes, (inaudible). We’ll give you that number, it’s a 13.9%.
Rich Anderson – BMO Capital
And where do that stand rentals compared to history?
Jerry Brewer
If you go back to be fourth quarter of 2007, it was under 7%. So it has been growing the last eight quarters.
Rich Anderson – BMO Capital
Okay.
Tom Lowder
That wouldn’t be unusual in the environment that we’re in, in a rising rate environment or it’s typically one of the top reasons for people moving out and it’s never recently been out until -I think until the last month or so it might have been out top reason for moving out.
Rich Anderson – BMO Capital
Okay.
Tom Lowder
That home purchases and job transfers going to trade places is being the leading reason for turnover.
Reynolds Thompson
Yeah, I think, we’ll go back and look at all the recoveries that we have experienced over the last 15 to 20 years, it’s less recovery in rent increased environment and move out percentage is about the same, actually rent increase are running ahead of most recoveries but percent of move out as it relates to rent increase is about typical.
Rich Anderson – BMO Capital
Right, but the reason for move out for a job related change would also be the reason for move in, right, so that’s the kind of thing where you have that zero some gain but for rents and for home purchases you don’t have like that offsetting move in factor, right. That’s why you are counting on home ownership declining and household formation and the rest. Just trying to do the math and try to figure it all out and so I appreciate the color.
And then finally the question to Tom and this is more of a hypothetical kind of theoretical thing, but now that we are kind of in the midst of a really good picture of multifamily, I don’t know if we are at the peak or past the peak or whatever, but would you say this is the time where we might see some M&As trickle through the – to the finish line because buyers might, or sellers might be more willing to strike a deal because things are getting full value?
Tom Lowder
M&A in the public market?
Rich Anderson – BMO Capital
In the public markets or even large private deals, that kind of thing.
Tom Lowder
Well, M&A is as we all know are hard to do in the public market, they are few and far between and synergies are more questionable except at the very top because it takes the same management to operate a portfolio from the ground up as it does if you combine the entity so that synergies come at the corporate area. If someone wants to – if an investor wants to cycle out of the apartment sector into another sector, they’re able to do that and so our shareholders, our long-term shareholders if they take a view that we’re – the part in the market is peaking, I would suppose those dedicated REIT investors would choose hotel or office or some other product to cycle out of.
Rich Anderson – BMO Capital
Right. But that you don’t see yourself as from where you are sitting right now, you don’t think that there will be a whole lot of public to public type of activity in the multifamily space because of those issues that you just described, is that right?
Tom Lowder
I think the chance of combinations there is very small. You could see some of that happen and particularly in some of the other sectors as well. But you would probably have a better feel for that than I would Rich. But largest combination has seemed to be very successful. So –
Rich Anderson – BMO Capital
So if maybe...
Tom Lowder
Those combinations are a few.
Rich Anderson – BMO Capital
If you invite me into your boardroom, I would have a better view of this. All right. Thank very much. That’s all I have.
Tom Lowder
Thank you, Rich.
Operator
(Operator Instructions). Our next question comes from the line of Eric Wolfe with Citi. Please go ahead.
Eric Wolfe – Citi
Hi, good afternoon. I just want to make sure I heard you correctly. Did you see that the impact from exiting the DRA JV would be negative $0.04 this year?
Reynolds Thompson
Not this year, on an annualized basis.
Eric Wolfe – Citi
Okay. On an annualized basis, so just $0.02 this year.
Reynolds Thompson
Yeah.
Reynolds Thompson
Yeah. That’s correct.
Jerry Brewer
And Eric, we may have mentioned earlier that if we don’t, we’ll clarify, that’s a FFO impact. We think on an adjusted FFO is probably a push making a little bit gain because there is a substantial capital required in the lease-up of that portfolio. So we had to make a judgment call on that and even though it might be a slight thing to FFO I think on an AFFO basis will come out as a push.
Eric Wolfe – Citi
Right, I understood. And you mentioned that you are marketing the four commercial assets. Could you share with us the total volume amount that represents?
Reynolds Thompson
We’ve – you will find an increase in our line item of asset sales for sale on the income statements, excuse me, the balance sheet. And – which is our share is our share our pro rata share of the joint venture the wholly owned assets that we have out there. But it’s only the consolidated assets, right. So it’s close to $200 million in gross value and when you net out our JV interest, it’s probably about $180 million or so, $185 million.
Eric Wolfe – Citi
Okay. So around $185 million. So if you are successful in selling those assets I think you said that you are at 14% commercial NOIs, a percentage of the total now that would take you I guess below your 10% goal then, right?
Reynolds Thompson
It would get us right there to it.
Eric Wolfe – Citi
Right, okay. And then just last question, if you are successful in being able to sell these commercial assets and redeploy the capital into development, I would think that could actually hurt your leverage ratios depending on how highly levered they are and what cap rate you are selling at, so I am just curious, is that a strategy that the rating agencies are comfortable with and are they comfortable with your the amount of development that you have as percentage of your total assets.
Tom Lowder
Answer to your last questions is yes. We’re very cognizant keeping that at a reasonable level and but longer term, we do lose a little earnings, selling the stabilized commercial assets and but we’ve been able to produce balance sheet metrics that we discussed earlier with this action in mind. So as we redeploy that capital from commercial and multifamily and it goes through the development and lease up phase, we really get these ratios looking even that much better when we look down the road into 2013 and 2014 as those things stabilize.
Eric Wolfe – Citi
Right and so that.
Tom Lowder
We’re getting these metrics even and doing this, but we’re giving up some income in the short run while we’re moving from commercial to multifamily.
Eric Wolfe – Citi
Great and then presumably the agencies will look at that on a 2013 and 2014 basis, not just in the next quarter kind of basis.
Tom Lowder
Yes, but still closed in the same ratio as they want to see next quarter as well.
Eric Wolfe – Citi
Great. Okay, understood. Thank you.
Tom Lowder
(Inaudible).
Operator
Our next question comes from the line of Andy McCulloch with Green Street Advisors. Please go ahead.
Andy McCulloch – Green Street Advisors
Good afternoon. Just follow-up on that line of question, on those four commercial assets can you just quickly list out which ones those are?
Reynolds Thompson
Colonial Promenade-Tannehill, Colonial Promenade – Alabaster, Colonial Promenade – Smyrna, and Metropolitan in Charlotte are the four assets that are being marketed.
Andy McCulloch – Green Street Advisors
Great and then can you give a rough range on expected cap rates?
Reynolds Thompson
The power centers kind of mid-7%s to mid-8%s and Metropolitan kind of low 7%s to high 7%s.
Andy McCulloch – Green Street Advisors
Great. And then just one other question. For the full year 2012, can you provide like a dollar amount of NOI that you are expecting for the Austin retail stuff assuming you don’t sell those four and then maybe what your partner share of that is? I’m just trying to tie out your FFO for the year.
Tom Lowder
I’m not sure we answered the question.
Andy McCulloch – Green Street Advisors
Your guidance for total of a dollar amount of NOI for all your commercial property for the full year 2012 assuming you don’t sell those four that are held for sale and we can follow up offline if you want.
Tom Lowder
Yeah. Let me follow back up on that one with you, Andy.
Andy McCulloch – Green Street Advisors
Okay great. Thank you.
Operator
Mr. Brewer, we have no further questions at this time. I’d now turn the call back to you, sir.
Jerry Brewer
All right. Thank you all for your attendance today and we will look forward to talking to you soon. Have a great day.
Operator
Ladies and gentlemen, that does conclude the conference call for today. We do thank you again for your participation and ask that you please disconnect your lines.
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