MID-AMERICA APARTMENT COMMUNITIES, INC. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. MAA is a multifamily REIT operating primarily in the Southeast and Southwest through Mid-America Apartments, L.P. (MAALP), which held substantially all real estate assets. MAA owned 96.4% of MAALP at year-end.
Business context and operating performance
At year-end, the company owned or partially owned 302 multifamily communities totaling 99,792 units, plus four commercial properties. The 2016 acquisition of Post Properties materially expanded the portfolio; its properties remained in non-same-store results during 2017.
- Same-store physical occupancy averaged 96.2% for 2017 and was 97% at year-end. Average effective rent per unit increased 3.0% year over year.
- MAA renovated 8,375 units at an average cost of $5,463 per unit; renovated units achieved average rent increases of 8.8% above comparable non-renovated units.
- Three development projects totaling 937 units were underway at year-end, with $167.7 million incurred against a $214.0 million total budget.
Key financial metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Rental and other property revenue | $1,529.0 million | $1,125.3 million |
| Net income | $340.5 million | $224.4 million |
| Net income available to MAA common shareholders | $324.7 million | $211.9 million |
| Diluted EPS | $2.86 | $2.69 |
| Funds from operations (FFO; non-GAAP) | $699.6 million | $463.4 million |
| Net cash provided by operating activities | $658.5 million | $484.0 million |
| Net cash used in investing activities | $283.4 million | $710.5 million |
| Net cash used in financing activities | $397.9 million | Net cash provided: $222.4 million |
Revenue grew 35.9% and common net income grew 53.2%. Total NOI was $952.3 million, or approximately 62.3% of property revenue; this is a derived ratio, not a company-reported margin. GAAP net income also included $127.4 million of gains on sales of depreciable real estate assets and $14.4 million of other non-operating income. FFO excludes real estate depreciation and gains on property sales and is not a substitute for GAAP earnings or cash flow.
Balance sheet, debt and liquidity
- Total assets were $11.49 billion; real estate assets, net, were $11.26 billion.
- Total debt was $4.50 billion, versus $4.50 billion at year-end 2016. Debt was 27.5% of total market capitalization; the company reported a 33.2% covenant ratio of debt to adjusted total assets.
- Approximately 83% of debt was fixed or hedged. Total debt’s weighted average effective rate was 3.6%, with an average 3.9 years to maturity. Cash and cash equivalents were $10.8 million; restricted cash was $78.1 million.
- The $1.0 billion unsecured revolving facility had $410 million drawn at year-end and an expansion option to $1.5 billion. Debt maturities included approximately $418.9 million in 2018 and $579.3 million in 2019.
- Operating cash flow exceeded cash dividends paid on common shares of $395.3 million, but investing outflows and other financing uses resulted in a $22.8 million decrease in cash during the year.
Material changes and unusual items
- Year-over-year growth largely reflects the full-year inclusion of Post Properties in 2017 versus only one month in 2016. Non-same-store revenue increased $375.2 million, primarily due to the merger.
- Interest expense rose $24.8 million to $154.8 million, mainly reflecting merger-related borrowing and the 2017 issuance of $600 million of 3.60% senior notes due 2027.
- Merger and integration expense was $20.0 million, down from $40.8 million in 2016. The 2017 amount included systems, professional and legal costs.
- Capital improvements, development and other investing outflows increased to $343.9 million from $184.0 million.
- MAA declared $3.5325 per common share for 2017, versus $3.33 in 2016. The company reported $3.48 per share paid during 2017; the current quarterly dividend rate was $0.9225, subject to board approval.
Outlook, risks and contingencies
Management reported relatively strong apartment demand and expected year-end occupancy to position the company for solid pricing in the first half of 2018. This is commentary, not formal earnings guidance; the filing provides no numerical 2018 revenue, earnings or FFO forecast. Management noted that new supply was affecting the portfolio, particularly urban submarkets and many Post-acquired properties, while multifamily permits across its markets declined 5% in 2017. It also identified job growth relative to supply as a key demand driver.
- Primary exposures include regional economic and employment conditions, new apartment supply and competition, operating-cost inflation, interest-rate increases, refinancing and debt covenant risk, development execution, and the integration and realization of merger benefits.
- Two significant lawsuits involve properties acquired from Post: a 2010 DOJ accessibility case seeking retrofits, damages and civil penalties, and a 2017 Fair Housing Act case alleging discriminatory criminal-record screening. No trial date was set for the DOJ matter. The filing does not provide a clear estimate of possible loss for these proceedings.
- Aggregate accrued loss contingencies were $32.1 million at year-end, compared with $42.1 million in 2016; this balance is not identified as an estimate solely for the two lawsuits.
- A $13.5 million potential future capital contribution to an equity-method limited partnership may be called through September 2022. A $38.5 million mortgage was retired on February 1, 2018.
- Management stated that it believed the company qualified as a REIT and intended to maintain that status. The filing also describes risks from the Tax Cuts and Jobs Act, disasters and insurance limitations, environmental liabilities, cybersecurity, and the company’s concentrated multifamily and regional exposure.
Important facts for investors to verify
- Separate same-store operating trends from Post Properties’ contribution and confirm the timing of acquired properties entering the same-store portfolio.
- Review FFO reconciliation and recurring capital needs; FFO is non-GAAP and does not measure liquidity or fully capture property investment requirements.
- Check upcoming debt maturities, variable-rate exposure, refinancing plans and covenant headroom, especially the 2018–2020 maturities.
- Monitor lease-up, costs and completion timing for the three development projects, and the rent and return performance of renovated units.
- Track the status and potential financial exposure of the DOJ accessibility and Fair Housing Act cases; the filing does not quantify their possible outcomes.
- Confirm future dividend decisions against cash generation, capital expenditures, debt requirements and REIT distribution obligations.