MAA (NYSE: MAA) is a real estate investment trust (REIT) that focuses primarily on the acquisition, selective development, redevelopment and management of multifamily homes throughout the Southeast and Southwest regions of the United States.

MAA employs a portfolio strategy focused on high-growth, large and secondary markets to capture superior risk-adjusted performance over full market cycles. This strategy combined with our disciplined capital deployment, balance sheet strength, technologically driven operating platform and experienced team of real estate professionals has allowed MAA to deliver consistent and superior long-term investment returns for our shareholders.

As of March 31, 2015, MAA owned or had ownership interest in 81,976 operating apartment homes in 265 communities in 14 states. Headquartered in Memphis, Tennessee, MAA is traded on the New York Stock Exchange under the symbol MAA and is included in the S&P MidCap 400 index.

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John:  Good morning. Thank you for attending the MAA presentation here at the 2015 NAREIT Investor Forum. My name is John Kim with BMO Capital Markets. It is my pleasure to introduce senior management of MAA, Eric Bolton, Chairman, President, CEO as well as Al Campbell, Executive Vice President and CFO. I’m going to turn the floor over to Eric for an overview and update on the company, then we’ll have a Q&A session afterwards and we’ll open it up to the floor as well. The floor is yours, Eric.

Eric:  Thank you. I appreciate you being here this morning. Just by way of quick introduction MAA, we’re apartment only, obviously a REIT. We’ve been public for a little over 21 years. I’ve been with the company for 21 years. Our focus is really deploying capital across the southeast, southwest US. A big differentiation to our strategy as compared to a lot of the other apartment REITs is that other than the regional focus is we work at allocating capital across both large as well as secondary markets across this region of the US.

Our approach is really built around a concept of trying to optimize results and performance over a full cycle. We like our presence in larger markets, Atlanta, Dallas, Houston, Tampa, Orlando, Charlotte, in order to harvest the opportunity out of the up part of the cycle. We also work to deploy capital in secondary markets, markets like Charleston, Greenville, South Carolina, San Antonio, Kansas City, Nashville, which tend to be a little bit more stable, tend to be a little bit more resilient during the down part of the cycle. Ultimately, obviously our objective is to outperform over the full cycle.

You’ll see in our materials and our presentation that we filed I guess either late yesterday or this morning, you’ll see that our performance tracks, as compared to the sector, very comparable over the full cycle. Our story tends to always trade at a slightly lower multiple of earnings relative to the sector. Most of the sectors, you may know, it’s an interesting fact if you take all nine out of the large multifamily REITs, roughly about 82-83% of the capital for the entire sector is concentrated in just 25 cities.

Our approach again is to be a little bit different in terms of how we allocate. The thing that I would also just by way of quick background, you may be familiar, we went through a merger about a year and a half ago and merged our company with Colonial Properties, really scaled up the operating platform. We continue to harvest a lot of opportunity out of that merger. There’s another slide you’ll see in our presentation there where we’ve improved operating margins pretty significantly over the last five years, both as a consequence of a pretty active recycling program coupled with just benefits that we continue to get out of the merger and some efficiencies that we’re driving out of that merger process.

By way of quick background on balance sheet, we’re investment grade rated by all three rating agencies, have been active in the public bond market for some time, about 70% of our balance sheet is unsecured at this point. I think if you’ll look at all the credit metrics, you’ll see that we’re in a very strong position in that regard. About 80,000 apartments, market caps well over five billion dollars.

John:  Quick introduction. I’ll start off the Q&A. I think one of the hot topics today right now is M&A in the REIT space. In particular, in the multifamily, we’ve seen Associated Estates and Trade Street Residential agreed to be acquired and there’s one or two more that’s rumored. I guess my question is, are you surprised at all by the pricing of those mergers as far as the cap rate basis or price per units and is that what you’re seeing in the market on the acquisition side?

Eric:  No, I’m not surprised. We are seeing very high level of interest by institutional capital really across the space. We ourselves have been a pretty active seller this year. We’ve sold 18 properties so far this year. We’ve got another three under contract that we’ll sell later early in the third quarter. These are average age of 26-year-old apartment properties. These are some of the older assets that we’ve owned for some time that we were looking to harvest capital out of and reinvest it, but average age 26 years old, heavy concentration of some of the more tertiary markets of the portfolio.

If you look at it on trailing 12 month NOI, average capex of about $1,200 a unit per year. We got about a 5-6% cap rate, economic cap rate, on what we were selling this year, so very aggressive buyers out there for this real estate. This is a private institutional buyer using agency financing, leveraging up 70-75%. The private equity markets have a huge appetite for apartment real estate. I think that as evidenced by those two transactions that you referenced and certainly based on what we’re selling and what we’re seeing in the marketplace, folks want to get into the apartment real estate space in a pretty aggressive way.

John:  You yourself have been an active participant in M&A as you discussed with the Colonial merger. Now that you’ve had time to fully digest it, are you seeing benefits of scale and also if you could discuss maybe some of the redevelopments that you’re doing with that portfolio.

Eric:  Well, we definitely are seeing benefits from scaling up the platform all the way from just the way we’re able to go out and procure products and services for the various vendors and companies that we do business with. We just announced a program that we started this year with two of our major vendors that supply all of our maintenance supplies as an example where essentially they are replacing our inventory of maintenance supplies with their own product at our property. As an example, our maintenance guys now as we turn apartments, they will go into the maintenance shop, pull needed supplies off the shelf. We don’t own it until they pull it off the shelf and then they will use it.

Our maintenance guys, as an example, are no longer going to have to be worrying about managing the inventory, managing supply, ordering supplies or even worse having to leave the property to go to the store to pick up supply. The ability to put such a program in place as an example was really as a consequence of the scale that we were able to create and scale of business that we were able to offer these vendors to supply us this product whether it’s that kind of a program, whether it’s our ability to have some great efficiencies that we picked up and how we go out and procure property and casualty insurance, employee benefits cost.  We’re definitely seeing some opportunity for margin enhancement I should say as a result of the scale.

In the Colonial portfolio, one of the real opportunities that we felt like was there was in the redevelopment of a number of their assets, we got about 15-20,000 units. There’s a slide in the presentation that touches on this, 15-20,000 units that we’re in the process of redeveloping. This is a program that we have been pretty active with going back five or six years ago and saw a real opportunity to execute on this within the Colonial portfolio. Over the next two to three years, we’ll continue to harvest that opportunity.

Going into the capital markets, Al can talk a little bit about the bond programs that we’ve put in place. We’re pretty active in that market as well. The benefits of just the greater liquidity and greater presence in the capital markets have driven some benefits we think.

John:  Given your answer, do you want to increase your scale in certain markets, in some of your primary markets? Are you looking to do more than your guided acquisition target for the year?

Eric:  Exceeding our acquisition target for the year is going to be tough. There’s a lot of competition out there for the kind of quality real estate that we’re after, but we continue to believe very much in the merits of being focused in the southeast, southwest as we are. We are continuing to fill out our footprint and our presence in a number of markets, some of the secondary markets that we recently have gone into, San Antonio, Kansas City as an example, Charleston we’re getting ready to launch a new project there.

In terms of really any plans or visions of altering our footprint in any sort of meaningful way or going into a number of different markets is really not what we’re looking to do. It’s really just getting more efficient in the markets that we’re in.

John:  There’s some commentary that this may be one of the strongest markets in recent history. I want to know if you agree with that statement. Certainly if you look at the vacancy statistics, right now it’s at 4.2% nationally. We’re seeing a lot of new jobs per new units being built at a very high ratio. We estimate that at 9x. Can you just discuss if this is the strongest market you’ve seen and what is it most similar to in your operation history?

Eric:  Well, certainly I think that the fundamentals are stronger than I can remember ever seeing. I think there’s been some correlations drawn to this market environment compared to back in the early ‘90s as an example, even back if you go back to 2006-2007 timeframe before we went into the Great Recession, fundamentals were pretty good. Even compared to those timeframes, I think what we’re seeing today is stronger and frankly more sustainable than the previous up cycles and previous positive times for apartments. It’s really driven by a number of factors.

One is we’ve got some very powerful demographics working in our favor. The millennial generation, that group 20-34 years of age has got a growth rate associated with it that it’s going to be the largest growth segment of the US population over the next 10 years and bigger than it ever has been. That’s driving a lot of very healthy demand. As long as we continue to see the economy show improvement and the employment markets continue to show steady improvement, it really is allowing that demographic benefit to really be unleashed if you will.

Interestingly what’s also happening is you all are familiar with the other big segment of the US population, the baby boomers as they continue to retire, we’re seeing more and more folks looking to downsize, more and more couples looking to simplify their housing situation and looking for a community lifestyle, looking for the onsite amenities, looking for the 24-hour onsite maintenance and so we’re seeing a lot more of the baby boomers, the retiring baby boomers, starting to come in to our apartments, into our leasing offices much more so than they ever have in the past.

When you think about those structural demand characteristics, I think it begins to set up what should be a fairly healthy outlook for apartment real estate and the demand for apartment real estate going forward. Of course, I think we’re all familiar with the whole psychology surrounding owning homes and how society continues to think about that in a different fashion. On the supply side of the equation, certainly the ability for capital to have greater insights and greater transparency into what’s going on in terms of supply trends in given markets causes me to have some at least reason for optimism, reason for hope that it’s unlikely that markets get wildly over built like we’ve seen in past cycles, back in the ‘90s, in some of the earlier timeframes that I can remember where markets would just get way, way over built.

A most recent example has been what we saw take place in Houston towards the end of last year as worries began to build about the environment in Houston given the collapse in oil pricing. We saw a number of development projects that were slated to begin that all of a sudden stopped or pulled back. Just given the greater flow of information, greater transparency, I think that as compared to what we’ve seen historically, I think that there’s reason to believe that the supply side of the equation is likely to be a little bit more disciplined than it has in the past, you couple that with all the points I was making about the demand side of the equation, I think it sets up for a different dynamic, stronger dynamic than we’ve ever seen.

John:  Can I put on the spot a little bit? Your historically high occupancy rate was 96.6%. Do you think you will match or exceed that figure in the near term or is it a different period as far as how you price apartments?

Eric:  I think we’re testing that limit right now and continue to see occupancies across our portfolio running in that 96% range. What’s going to be interesting as I think that most, at least in the apartment space and increasingly so even on the private side, most of the companies, the larger platforms have these yield management, revenue management systems. We’re just at a much more sophisticated place than we’ve ever historically been in terms of managing occupancy and managing down exposure.

I think really what the challenge for us, as an example now, what we’re really focused on is the things that we can do to manage down effective vacancy and really looking at the processes that we have in place to manage the number of days vacant that you have between turns of apartments. We really compartmentalize the process into four different segments. There’s managing the process of the day that someone moves out of the apartment until the day that someone comes in. Our maintenance staff comes in to start to turn the apartment. How quickly does that happen and what are we doing to stage the move outs to correspond to the staff and the availability of staff that we have onsite to minimize that number of days between the move out and the day that our maintenance guys get started on turning the apartment.

Of course, there’s the number of days it actually takes to turn the apartment. As a consequence of this maintenance supply program I talked about earlier, we’re able to drive a little bit more efficiency in terms of how our maintenance staff does their job and how they execute their job day in and day out and the ability for them to be more onsite, not having to worry about going to pick up supplies and so forth. We drive a little bit more efficiency in terms of the number of days it takes to actually turn the apartment. The third one is of course then once the apartment is ready to be leased, how quickly does it in fact get leased. The online rental portal that we now have and the way that we execute online renting is really starting to shave that down a little bit.

Finally, of course what matters is that once the apartment is rented, when does somebody actually move in and start paying rent. With our yield management systems now, we’re able to even manage that a little bit more aggressively. If someone wants that particular apartment but they don’t want to move in for another 15 days, we’ll be glad to do that but there’s a certain price associated with holding that property for that long a time vacant versus if someone wants that apartment, they’re ready to move in tomorrow, there’s a different fee associated with that.

I think it’s all about as these systems become increasingly more sophisticated and the tools that we have at our disposal become more sophisticated, we’re able to manage that down. I think on a comparative basis physical occupancy, where we test historical highs, I think we’re already there. What I’m really optimistic about is surpassing effective occupancy hurdles that we’ve had in the past.

John:  Can I ask you about interest rates? The tenure has certainly gone up this year as far as the yield and has created volatility in the stock market. How has that impacted your business if at all? Are you underwriting acquisitions and developments differently? Are you seeing it in the market impacted? What’s been the change if anything?

Eric:  Well, certainly the rate environment today has fueled on the private equity side a lot more aggressive uses of debt. As I mentioned earlier, we’ve sold 21 properties this year, agency financing, supply and financing for all those asset sales, 70-75% loan to value. I think that as long as … In some ways, I almost look forward to eventually rates starting to rise a little bit in a sense that as long as that’s accompanied by continued improvement in the economy and continued improvement in the employment markets and that’s what really is supporting the ability for the Fed to start raising rates, I think that our ability to be increasingly competitive in the acquisition environment gets better.

I think that our cost to capital or access to capital starts to become increasingly more competitive to what the private capital sources are able to do and the growth opportunities, external growth opportunities start to become even more attractive. In terms of our own balance sheet, I’m going to let Al maybe address that a little bit in terms of how we’re thinking about it.

Al:  I think we’ve certainly work hard to manage our balance sheet to think about the changing interest rates and changing environment and our balance sheet is in great shape right now. As Eric mentioned, we’re investment grade rated and we have about $300 to $350 million in debt coming due this year. More toward the fourth quarter of the year, we plan to be in the marketplace refinancing that. Right now, if we would look at where the market would give us, it’s somewhere below 4%, probably 3-3/4% or 4%. That’s still a pretty good rate, attractive rate. That could go up, but I don’t see anything right now that says it’s going to dramatically increase before we get to that point. If it does, we’ll be doing things from now until then to hopefully manage that with some liability management things.

We feel very good about where our balance sheet is. We have no significant years of maturities that are greater than, nothing over 15% of our balance sheet. We’re well-managed or well-staged to protect ourselves against significantly rising rates in near term and we can manage ourselves through that. I think from here, as Eric mentioned, fundamentals are good. We continue to expect earnings to grow. If you look at our earnings coverage ratios, our debt to EBITDA ratios, all those things are continuing to improve marginally.

Where we are right now is in a great shape, even compared to investment grade peers that are one notch above us. We think that our position is going to marginally improve over the next several quarters as our earnings grow. We certainly work hard to prepare ourselves for rising interest rates. As Eric said, the other side of that is very positive things. If things rise, it will give us more opportunities in the acquisition side and we’re going to be ready for that. We’re going to have the credit facility. We’re going to have the flexibility as a business and take advantage of that.

John:  You make a very compelling case in your presentation that your credit metrics are as strong or on par with triple B plus peers. What’s the impediment of getting that kind of rating from the agencies?

Al:  I’ll say this, we’re fairly new to the investment grade market, two years. We’re very active talking to all three. We’re rated by all three agencies, very active talking to them. I think we get good reception when we show our comparisons to those peers. I think it’s going to take a little more time, maybe a few more quarters of us showing we’ve had very good performance of late. We think we’ll continue to have that in this year. I think just a few quarters of showing that and some marginal improvement on the balance sheet which we expect to happen this year, John. We hope those things are positive.

John:  What would that do to your pricing?

Al:  I think it would obviously have a positive impact. It’s hard to know exactly how much that would be, but there’s definitely a difference between that. We’re a triple B flat rated company, triple B plus, 25 bases points more, add a little bit more on the bond deal, so it’s hard to know exactly what that is. There’s company dynamics related to that, but we would certainly think if that happens there’s a positive to that.

We’re just going to continue to manage our balance sheet obviously in the company to continue to improve and hope that positive things like that happen and help our cost of capital over time. I think our cost of capital over time with or without that will continue to go down just because of increased liquidity of our company, increased flexibility, all those things.

John:  Any questions from the audience? I will go on to my next one. On the first quarter call, Eric, you mentioned that some of your acquisitions were acquired from developers and they were previously contracted with somebody else and those fell through. Can you just talk about the dynamic and are developers more willing to sell in this market to re-fund other developments or just maybe discuss what has happened?

Eric:  Well, I think that our history by way of just again clarification, we are not a developer. Let me just make that point. I’ve always believed that in the southeast US where we focus our effort that at the end of the day long term, I don’t believe our capital would get rewarded sufficiently for the risk of ramping up a big in-house development operation. We prefer to let others do that and provide an exit opportunity for developers. Our markets tend to have a higher number of the so-called merchant builder model that tends to do the development in these markets and they tend to not build these properties with the intent of owning them for very long. They want to build them and flip them and move on and keep doing it.

What we look for are situations where we can bring our balance sheet, our flexibility in terms of how we would pay for it and our operating skills and offer the developer an opportunity to have a … we will negotiate a takeout of some sort either in some cases we pay for it as they build it and we just fund it. They build it and they walk away when it’s built and we lease it up. We’re able to ultimately bring brand new product into the portfolio that we feel offers great long-term growth opportunity with it and do so at a price point that’s well below retail pricing, what would normally be the price of that property we trade at where it’s fully leased, fully stabilized and much more easily financed.

It’s important to recognize that the agencies and a lot of lenders are reluctant to get into a lot of aggressive financing on anything other than fully stabilized properties, fully leased properties. That’s where we’re able to talk to the developers about either pre-purchase arrangements and/or we find cases where developers will be underway with their construction and their lease up. There may be other competing product nearby. The lease up may not be proceeding quite as strong as they had hoped it would. They’re getting nervous about their exit and they become more motivated to leave a little value on the table for us and go ahead and negotiate a takeout and we’ll come in and finish the lease up.

That’s where we’re finding the best value plays right now. Where we’re having the tough time is on fully stabilized, easily financed deals, easily financed properties. That’s where the private capital buyers are able to come in with very, very aggressive pricing. At this point, most of what we’re doing are either pre-stabilized or deals that are just getting underway.

John:  You’re not a developer. You do have a redevelopment pipeline. You have added to that pipeline in the presentation that was released yesterday with two new projects. When you do those kinds of redevelopments, what kinds of returns are you looking for and also how big can this development pipeline get in any one particular year?

Eric:  Well, a couple of things. As far as redevelopment, when we talk about redevelopment, it’s generally what we refer to as kitchen and bath upgrades. I think I may have mentioned earlier, we have about 15-20,000 units in the portfolio that we picked up through the merger with Colonial that we believe are great candidates for this redevelopment opportunity. The returns are very, very attractive. We spend on average about $4,000-$4,200 a unit to do the upgrade. We get incremental rent growth that’s above the rent growth that we would otherwise get because the market is just … If the market moves up 3%, we’re going to get that anyway. It’s the incremental rent growth on average, we’re getting around $80 a month, let’s call it $1,000 a year, $960 a year, incremental cash flow on top of a $4,000 investment.

Of course, what we’re talking about with the investment, we’re talking about new counter tops, new light fixtures, new plumbing fixtures, new cabinetry, new appliances. These are elements, upgrades that are going to last for many, many years. It’s very, very creative uses of capital. We’re getting about a 20+% cash on cash return on a leverage basis. This is going to be mid-teens IRR’s that we’re getting on this redevelopment opportunity.

Now the other thing you’re alluding to is the two projects that we announced, our expansion developments where we take existing communities that are doing very well for us and we either own or can acquire the adjacent land and add incremental new apartment units and really leverage off of the staff and the fixed overhead costs that we have running that existing community and get just that much more efficient with that operation and really drive even higher margins out of that investment. We announced that we’re expanding two new projects, one in Charleston and one in Orlando and we just got started with those. We’re also underway with similar projects in Nashville, in Virginia - Fredericksburg, Virginia - and also a new development we’re doing in  Jacksonville, Florida.

John:  Last chance for any questions. We’ve got one.

Male:  You have talked in the past about maybe your exposure to tertiary markets weighing on valuation of the stock. I guess first up, how many more markets or assets do you have to sell to complete exiting? The implication is that you expect some of the discount valuation to go away when you guys are done. To follow up to your interest rate question, you talked about acquisitions, do rising rates affect your disposition outlook, the pricing you can get on what you’re planning? Thanks.

Eric:  Well, in terms of the thought about tertiary market composition of our portfolio, we went into this year with a belief that we had a last residual tertiary market asset sales that we wanted to complete. Now what really was behind that was an effort that we’ve had underway really now for the last five years to continue to pull capital out of some of the older higher capex requirement investments that we have. It’s interesting to note that over the last five years, we’ve sold almost three-quarters of a billion dollars’ worth of apartment real estate.

This year is a big year for us. We’ll be exiting … Well, let me back up. Again, it’s driven by investments where we feel the margins are starting to deteriorate and/or just older assets. Particularly on the after capex basis, the margins are starting to deteriorate. Given the history of the company, it just so happens that a lot of these older investments are in some of the more tertiary markets of the portfolio. As a consequence of cycling capital out of some older investments and redeploying newer investments, we’re also eliminating if you will a number of the tertiary markets.

 We’re exiting 11 markets this year. What we’re left with now at this point is a portfolio profile that we feel pretty good about. We’re about 65% weighted in large markets and about 35% weighted in secondary markets. We’re really, for the  most part now, completely out of the tertiary markets. You’ll see in the presentation there, as a consequence of this recycling effort, I may have talked about  this a little bit, we’ve materially improved the operating margins of the company over the last five years, on a same store basis, a 550 basis points lift.

I think a lot of the transformation that we were after has now been accomplished. Now, it was expensive for us this year. We diluted our earnings this year about roughly 16 cents of FFO because not only are we selling older assets and looking to redeploy into newer assets which are initially lower yielding, now long term the earnings yield will be much greater than what we’re selling. We front loaded the dispositions believing that we wanted to get out in front of any potential rise in interest rates and harvest the best value we could out of those sales.

We sold it all in the first part of this year and then the back half of the year will be when we do the acquisitions. It’s a combination of yield spread, initial yield spread and timing difference. We diluted our earnings about 16 cents a share this year. Now going forward with the portfolio where it is today, we are very comfortable with it, we will continue to look at opportunities to pull money out of some of the older investments, but the yield spread if you will and the dilution issue will not be nearly as great going forward. We’ll also be in a position to be much more sensitive to match funding the disposition with use of proceeds on either development or acquisition or redevelopment.

We like where the portfolio is now positioned today. We simplified the story. As I’ve said, we’re exiting 11 markets this year so the number of markets has come way down. We’re able to .. We’re driving a lot more efficiency with overhead. We eliminated two regional vice president positions this year as a consequence of scaling back our markets. I think going forward, we will look every year as we always do at what we have in the portfolio and look to continue to take advantage of a great appetite that private capital has for apartment real estate. If we can continue to sell some more going into next year, we will, but we will do so with less near-term earnings dilution.

John:  I think that’s all the time that we have today. Eric Bolton, Al Campbell, thank you so much for your presentation and thanks for attending the session.