Monogram Residential Trust Inc (NYSE:MORE)
Q4 2016 Earnings Conference Call
February 28, 2017, 05:00 PM ET
Kara Smith - IR
Mark Alfieri - CEO, President and COO
Peggy Daly - EVP, Property Management
Daniel Swanstrom - EVP, CFO
Jim McGinley - SVP and Chief Development Officer
Howard Garfield - SVP and Chief Accounting Officer
Michael Kodesch - Canaccord Genuity
John Kim - BMO Capital Markets
Greetings, and welcome to Monogram Residential Trust's Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.
I would now like to turn the conference over to Ms. Kara Smith, Investor Relations for Monogram Residential. Thank you, Ms. Smith. You may now begin.
Good afternoon. Thank you for joining us today for Monogram Residential's fourth quarter and full year earnings conference call. In addition to the press release distributed this afternoon, we have filed a supplemental package with additional detail on our results and our portfolio, both of which are available on the Investor Relations section on our Web site at www.monogramres.com.
On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, including, without limitation, those contained in Item 1A, Risk Factors, of Monogram Residential's annual report on Form 10-K for the year-ended December 31, 2016, and its other SEC filings, that may cause actual results to differ materially from those discussed today.
Examples of forward-looking statements include those related to revenue, operating income, financial guidance, as well as non-GAAP financial measures such as same-store results, FFO, core FFO, AFFO, NOI and EBITDA. As a reminder, forward-looking statements represent management's current estimates. Monogram Residential Trust assumes no obligation to update any forward-looking statements in the future.
We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the Company's filings with the SEC, and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the Company's Web site at www.monogramres.com.
This afternoon's conference call is hosted by Monogram Residential's Chief Executive Officer, President and Chief Operating Officer, Mark Alfieri; Executive Vice President of Property Management, Peggy Daly; and Executive Vice President and Chief Financial Officer, Dan Swanstrom. Also participating on today's call are Monogram Residential's Senior Vice President and Chief Development Officer, Jim McGinley, and Senior Vice President and Chief Accounting Officer, Howard Garfield. Management will make some prepared comments, after which we will open up the call to your questions.
Now, I will turn the call over to Mark.
Thank you, and welcome to our fourth quarter and full year 2016 earnings conference call. This afternoon I will begin with a summary of our significant 2016 accomplishments and provide an overview of our recent transactions. Peggy will follow with a summary of our markets and our portfolio performance. Dan will then provide more detail on our financial results and balance sheet, and introduce our guidance for 2017. After our prepared remarks, we will open up the call to your questions.
During 2016, we completed four and stabilized five projects, totaling 1,519 units. The development project stabilized represented a total of $176 million of investment from Monogram at our share, delivered in estimated stabilized yields of about 6.8%, and resulted in total estimated value creation of approximately $62 million, which is further discussed in our supplemental. We define as a difference between the stabilized value and our developing cost.
Over the coming quarters, our recently stabilized development lease-up projects predominantly located in core coastal markets will contribute meaningful to our total portfolio NOI growth. During 2016, we sold two projects for $123 million while realizing significant gain on these investments. For our existing portfolios, during the full year 2016, same store revenue and NOI growth on a proportion of share basis was 2.6% and 3.9% respectively.
Finally, for the year, we delivered AFFO of $0.38 per share, which was at a high-end of the initial range of guidance we provided last year. In summary, it was a very active and successful year for Monogram. I would like to acknowledge and thank all of my talented collogues for their hard work and commitment. Now, let me discuss our fourth quarter 2016 results and recent activity in more detail.
In the fourth quarter, our proportionate share of same-store NOI increased 1.9%, driven by 0.7% increase in revenue and 1.7% decrease in operating expenses. Total portfolio proportionate NOI increased 21.2% as compared to fourth quarter of 2015. During the quarter, we continued to make progress on our development and lease-up projects, which included the stabilization of The Mile in Miami. In January, we achieved stabilization on OLUME, our downtown San Francisco development project, which was awarded best new development of 2016 by the San Francisco apartment association. At this point, our development program consists of just three communities in lease up and two under construction. We expect that all but one these projects will be completed and stabilized by year-end 2017.
In total, the average yield on cost of these properties is expected to stabilize at 5.8% with the total value creation estimated to be approximately $90 million at our share. On the transaction front, during the quarter, we sold reserve at LaVista Walk in Atlanta, for a total gross price of $57.2 million. Additionally, subsequent to year-end, we sold Grand Reserve in Dallas for a total gross sales price of $42 million. The weighted average unlevered IRR on these assets was 9.25%.
With combined proceeds from these two sales, we acquired The Desmond through a 1031 exchange for approximately $105 million. The recently completed 175 unit property is located a quarter-block off of Wilshire Boulevard along the Miracle Mile in Los Angeles. This highly amenitized property has just begun leasing, and offers sweeping views of Los Angeles from the rooftop suite. We expect the Desmond to stabilize by the end of 2017.
These transactions are representative of our ability to redeploy the proceeds from non-core asset sales into core coastal markets that we expect to produce stronger NOI growth and incremental value creation over the long-term.
Turning now to 2017, as we've discussed, multifamily demand remains healthy but several markets continue to face headwinds from elevated construction and deliveries particularly in urban submarkets, what have triggered increased concessions. Our effective rental rates have been impacted limiting our revenue growth as we work through the new supply in our urban core submarkets. We've operated through many cycles and is our experience that these headwinds do not last long.
The capital barrier that is been forming with lender pullback and high construction costs has made it difficult to finance urban project, and that should continue well into the future, which bodes well for our strategy. As construction deliveries begin to ease later in 2017, we believe we're extremely well positioned to resume stronger growth into 2018 across our portfolio. Within this backdrop, we will continue to lease and stabilize our development properties and drive strong operating performance across our portfolio.
As we have stated since the beginning, we will continue to evaluate our portfolio for opportunities to strategically enter markets and properties. We believe we've multiple options to optimize that capital, including acquisitions of high quality assets that meet our long-term total return objectives in our core markets. Cap rates have compressed in our non-core and non-barrier markets to the point to where the spread between those cap rates and cap rates in our core markets are at historical lows.
We have a long history of redeploying capital strategically during market dislocation. Our goal is to reduce the total number of markets and increase concentration in markets that have proven over-time to produce higher returns and are less exposed to supply and property tax volatility. Fewer markets were also result in G&A efficiencies over the long-term. Overall, we will continue to consider a variety of potential options on the reallocation of capital, including acquisitions, repayment of debt, and return of capital to shareholders. And we will remain disciplined and focused on our long-term shareholder value creation.
I will now turn the call over to Peggy. Peggy?
Thanks, Mark and good afternoon everyone. Demand fundamentals continue to remain strong at cost most of our market. But as Mark alluded to earlier, the new supply equation is forcing us to remain aggressive and competitive from a pricing perspective; hindering our ability to drive rental growth as we push to maintain occupancy. We expect this trend to continue through 2017 with some improvement in the second half of the year. Certain markets, however, particularly in-field submarkets in San Francisco, Houston and Denver, will experience the effect of new unit deliveries more than others.
Now, I'll turn to our fourth quarter results. Please note that all numbers that I mentioned will represent our proportionate share. At quarter end, our same-store portfolio consisted of 30 of our 49 properties in which we own interest. Our same-store revenue increased 0.7%. Traffic declined approximately 4% in the fourth quarter with the largest decreases in Northern California and Denver. We continued to be able to drive rents more aggressively in South Florida and Southern California. And similar to past quarters, we continue to be able to push rents more on renewals than on new leases.
In the fourth quarter, our average renewal rents increased 3.5%. However, our new lease growth over prior lease was 3.5% decrease for the quarter with the primary impact coming from Houston, Northern California and Denver. While we anticipated Q4 to show a decrease in expenses, we ended more favorable than expected. During the quarter, property operating expenses decreased 1.7% year-over-year due to a favorable timing on our net expenses and a decrease in turn over expenses for the quarter; reduced non-recurring maintenance project; reduced no renewable cost and favorable advertising expenses. As a result, fourth quarter same-store NOI increased 1.9% compared to the fourth quarter of 2015.
As we dive deeper into several of our markets, Southern California, which represents approximately 11.1% of our fourth quarter same-store NOI, realized 5% increase in NOI. Although, new leased rents were relatively flat in Q4, primarily due to seasonality, renewal increases averaged 4.2% increase. Occupancy was 95.2%, indicating a continued strength in the market despite the shattering of new supply. We anticipate Southern California to be one of our best performing markets in 2017.
Northern California, which represents 17.7% our fourth quarter same-store sales NOI, generated 3.8% increase in NOI. Our income assets continue to feel the impact of new inventory deliveries, causing net effective new lease rents to dial back from last year. However, renewal rents continue to track positively with 3.9% growth in Q4. We anticipate the bulk of this supply to be absorbed by the end of 2017; and depending on the employment trends in the tech sector, a return to a more favorable leasing environment by early 2018.
Our Texas portfolio, which comprises 14.6% of fourth quarter same-store NOI, continues to face challenges with new supply deliveries. Houston, which comprises only 4.3% of our NOI, realized 6.2% decrease in rental revenue and a 16.1% decrease in NOI, impacted heavily by real-estate taxes.
But Dallas remains positive with revenue increasing 3.2% and NOI increasing 3.1%. Both of which were in line with expectations. Both cities continue experience increasing pressures from new competition which impacts our outlook for 2017; although, we believe both cities will meaningfully improve over the long-term.
Along with San Francisco and Houston, Denver is one of our most supply challenge markets today and anticipated through 2017. While occupancy has been impacted to some degree, our blended rent growth on new leases and renewals remains positive; although, it's a significant deceleration from our prior two years.
As we move into 2017, our strategy is to favor occupancy over new lease rent growth. In particular, in our most supply challenged markets. Our rent growth itself will be largely driven by renewals as we continue to get positive growth on that front in virtually all our markets. But our total revenue growth will depend largely on moving occupancy, which we anticipate will improve as we move into the high leasing season.
Over the past year, we have done a great job of controlling operating expenses, ending the year with a very moderate 0.3% growth rate. However, in 2017, while we expect our controllable expense growth will be within the normal range of 2% to 2.5%, almost two-thirds of our total expense growth, is due to real-estate taxes. This is because we are adding eight new developments into our same-store portfolio for the year, compounding the tax growth as these properties move towards a stabilized valuation.
With that, I'll turn the call over Dan.
Thanks, Peggy, and good afternoon everyone. In my comments today, I will summarize our fourth quarter financial results, update you on our balance sheet and introduce our outlook for 2017.
Beginning with our fourth quarter financial results, today we reported core FFO of $0.11 compared to $0.08 in the fourth quarter 2015. Please note that all per share amounts are on a diluted share basis. AFFO was $0.12 for the fourth quarter of 2016 compared to $0.09 for the same period of the prior year. And on a sequential quarter basis our $0.11 of fourth quarter of core FFO compares to $0.10 in the third quarter and our $0.12 fourth quarter AFFO compared to the $0.10 for the third quarter of 2016.
The year-over-year and sequential quarter increases were primarily due to contributions from recently stabilized and leased up property, including Verge and Ev in San Diego, SoMa in Miami, Zinc in Boston and Nouvelle in Tysons Corner. These increases more than offset the combined effects of less capitalized interest as our development properties transitions operating properties and less interest income as three of our mezzanine notes receivables were repaid in 2015 and 2016.
As a note, in our supplemental you will find all the details and itemized adjustments between NAREIT-defined FFO and our core FFO as well as additional disclosures to calculate our AFFO.
Moving onto our balance sheet, as of December 31, 2016, we had total consolidated debt outstanding of approximately $1.5 billion. Our proportionate share of contractual debt outstanding totals approximately $1 billion. In total, our proportionate share of net debt to gross total asset that book value of approximately 37% at the end of the fourth quarter, and our net debt EBITDA was 8.5 times versus 11.3 times a year ago, as we continue to organically improve our leverage by realizing the embedded NOI from our development program.
With respect to our 2017 debt maturities, we closed on a five year 3.2% fixed rate mortgage for our 5,500 property in Arlington, Virginia, which was our only first quarter maturity. For the balance of the year our remaining maturities totaled about 100 million of out share as adjusted for in place extension option. We are currently focused on extending several of our coming maturities and we will update you as we move forward.
Following the recent stabilization of OLUME in San Francisco, our development program now consist of just three communities in lease up and two under construction, containing 1,874 units representing aggregate investment in our share 382 million. With only two properties still under construction, our remaining total estimated development cost to complete is about 86 million. During the fourth quarter, we closed on a new construction loan for Luce our Huntington Beach California development, which represents the bulk of our remaining development spend. As a result, we now have binding commitments in place for each of our development project.
Finally, I would like to review our outlook for 2017. We expect to achieve full year same store 2017 NOI growth of 0% to 2% based on revenue growth of 1.25% to 0.75% and expense of 3.5% to 4.5%. As Peggy mentioned, we expect operating expense growth in 2017 to be impacted by higher property tax.
Turning to our AFFO guidance, as discussed in further detail in our supplemental our guidance range for AFFO for 2017 is $0.39 to $0.44. I'd like to highlight the major drivers of our full year 2017 guidance as compared to our 2016 reported AFFO of $0.38. We expect the total positive contribution of $0.11 to $0.13 from NOI recently stabilized lease up and development properties; as we continue to capture the embedded NOI from our development program.
For the lease up and development properties, Zinc, Nouvelle, The Alexan and Caspian Delray Beach, they're expected to achieve stabilization in the second half of 2017. So, we expect the contributions from these properties to be more backend loaded. Partially, offsetting these positive contributions, we expect the reduction to 2017 AFO guidance of $0.05 to $0.07 from the impact of our 2016 and anticipated 2017 disposition activity.
We continue to evaluate potential strategic dispositions where we can realize gains on non-core properties. As such, our guidance includes 200 million to 300 million of dispositions including the recent sale of Grand Reserve for approximately 42 million and assumes the dispositions are more front end loaded for the year. Our guidance also includes 105 million to 300 million of acquisitions, including the recent 105 million acquisition of The Desmond through 1031 exchange. The Desmond is currently in lease up is expected to reach stabilization by the end of 2017. So, its earnings flow through will be mostly in 2018.
As we complete any dispositions, as Mark noted, we'll evaluate the best used for the proceeds at that time. Our guidance also includes the expected impact from the reduction in interest income in 2017 due to the repayment of mezz notes receivable in 2016 and higher total interest expense net of capitalized interest in 2017 primarily due to less capitalized interest. These items more than offset the positive contributions expected in 2017 from the lower total G&A expenses as we continue to achieve cost savings following our work force reduction in 2016 and higher property management fee income.
Together these all contribute a net negative impact on 2017 AFFO guidance up to $0.03. Overall 2016 was a strong year of accomplishments for Monogram, as we continue to execute our strategic initiatives. We continue to de-risk our development program, stabilizing five properties during the year, and opportunistically disposed the two non-core properties while using the proceeds to pay down debt and recycle capital into a new asset within one of our core coastal markets that we believe will produce favorable total returns over the long term.
We remain focused on executing on our strategy and b our efforts in the past three years have positioned us well to deliver strong operating performance as we continue to realize the significant embedded NOI in our high quality portfolio.
That concludes our prepared remarks. We'll now open the call to your questions. Operator?
Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Michael Kodesch of Canaccord Genuity. Please go ahead.
Just a couple actually from me. I was wondering, did you disclose the cap rates on the dispositions and acquisitions?
No, we did not, we don’t disclose cap rates on either dispositions or acquisition, but we are very pleased with the result and as being consistent with what you've seen in the market over the recent history.
Fair enough, okay. And then in terms of the Desmond deal, I am just kind of wondering how that was done? Was it a marketed deal or was there competition? How does that come about?
It was, I'd say a quasi-market and we've been hanging around the hoop on that deal for six months. And at the end of price, it just came back to us, and so we probably first looked at it last September and overtime we just hang around and have an opportunity in conjunction with the sales who make the deal.
Great, and that's also helpful. And then just one last one, if you don’t mind. Just on the Behringer Harvard promote, just when you think we might hear about timing -- or excuse me when you might -- we might here decision on that?
Well, the measurement period has ended and the preferred shares have been resolved. They are not around anymore. So, we're -- there is some litigation pending and we're looking for a court to rule on it, but the timing is still unknown at this point. Hopefully, soon it'd be.
[Operator Instructions] Our next question is from John Kim of BMO Capital Markets. Please go ahead.
I just wanted to understand your strategy going forward on acquisitions. So, are you focusing more on the coastal markets with higher margin potential or potentially lower barrier markets? Can you just help us understand the strategy?
Sure. Our stated strategy from the beginning is to focus on our core coastal markets and to gain more concentration in those markets. And so, yes, the answer to your question would be, low barrier coastal markets for sure our primary focus.
And what does that mean as far as some of your interesting markets like Dallas and Houston and Denver in particular?
Well, we have sizeable portfolios in those markets we certainly are looking to grow, but those would fall into the bucket of non-core long-term for us and so we're going to strategically look at selected dispositions in those markets as opportunities present and we do have partners in a lot of these and some of those partnerships have are getting close to full-cycle so that you will see some disposition in Dallas, Houston and Denver as well.
But Texas is non-core enough?
Texas would not fall into the bucket of core growth markets. It would fall into the bucket of we are not grow in those markets.
Okay, got it. And then can you provide some kind of guidance as far as where you think that net debt to EBITDA is going to end up this year and potentially at the end of next year as you complete this development. I think offsetting this is this acquisition disposition strategy so that might keep leverage elevated, but I was wondering if you could provide some guidance?
Hi, John this is Dan. Yes as we said from the beginning and as you are seeing in our reported numbers, we are continuing to capture the embedded NOI from the development. And so prior to any of this recent transaction activity, we said that we expect account stabilization of the development to be in general plus or minus three times debt to EBITDA. So, a little bit below that on a net debt EBITDA basis depending on our cash balance at that time. And so, that’s where we continue to expect to land going forward. We haven’t provided specific guidance for 2017 as for example the Desmond is leased up and the earnings will really flow through in 2018, but generally overall eight times plus or minus.
And as your development book start to decrease overtime as a complete development, are you looking to replenish the pipeline or are you looking more towards the acquisitions of newer assets like you've done or potentially giving your toe back into more mezzanine investments?
John, it's Mark. Yes we are -- we have not really entered into any new development opportunities over the last couple of years, as costs have increased and it's just come increasing difficult to underwrite and reach our return expectations. That being said we are constantly in the market looking for development opportunities and created enormous value overtime. So land pricing and construction cost have been the biggest offs to go with those coming certainly we will be there to look at development opportunities moving forward.
But the immediate term, we are more focused on acquisitions and buying JV interest and other options for using our disposition proceeds. On the acquisition front, there has been also a lot of new supply that limit the last few years, and a lot more coming from merchant builders. So, there is terrific amount of opportunity to acquire core properties in our markets. So, we look to that to be a primary source for us.
Thank you. We have no further questions in the queue at this time. I would like to turn the conference back over to Mr. Alfieri for closing remarks.
Thank you for joining us today, and we appreciate your interest in Monogram. We look forward to speaking with you next quarter.
Thank you. Ladies and gentlemen, this does conclude today teleconference. You may disconnect your lines at this time. And thank you for your participation.
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