Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) is a multifamily REIT operating primarily in the Southeast and Southwest through its Operating Partnership. This combined Form 10-K reports the fiscal year ended December 31, 2015; it is an annual filing, not a standalone fourth-quarter report. At year-end, MAA owned or operated 254 apartment communities with 79,496 units across 15 states.
Financial performance and position
- Revenue: Total operating revenue was $1.043 billion, up 5.1% from $992.3 million in 2014. Same-store revenue increased 5.7%: large-market communities rose 6.3% and secondary-market communities 4.7%.
- Profit: Net income available to MAA common shareholders was $332.3 million, or $4.41 per diluted share, versus $148.0 million and $1.97 in 2014. The 2015 result included a $190.0 million gain on sales of depreciable real estate assets; the filing notes a change in discontinued-operations presentation, so reported earnings comparisons are affected by both dispositions and accounting classification.
- Operating performance: Same-store NOI was $562.3 million (large-market $361.3 million; secondary-market $201.0 million). Total NOI was $642.1 million, about 61.6% of property revenue. Core FFO increased 10% to $5.51 per diluted share and unit, as reported by the company.
- Occupancy and rents: Same-store average physical occupancy was 96.1% for the year and 96.5% at year-end. Same-store effective rent per unit increased 4.4% year over year. Average revenue per occupied unit increased 4.9%.
- Cash flow and investment: Operating cash flow was $463.7 million, up from $385.4 million. Investing activities used $136.2 million; financing activities used $316.6 million. Property purchases were $328.2 million, capital improvements and renovations totaled about $119.4 million, and development spending was $38.7 million. Cash and cash equivalents ended the year at $37.6 million.
- Debt and liquidity: Total debt was $3.428 billion, down from $3.513 billion; weighted-average interest rate was 3.7%, and average years to rate maturity were 4.8. Debt was 32.2% of total capitalization; debt to undepreciated asset book value was approximately 41.1%. The $750 million unsecured revolver had $75 million drawn and $746.7 million available after letters of credit. About 95.9% of debt was fixed-rate or capped after derivatives.
- Distribution: MAA declared $3.13 per share in 2015; it reported paying $3.08 per share during the year. The quarterly dividend was $0.82 per share at the time of filing, following a fourth-quarter increase.
Material changes versus the prior comparable period
- Revenue increased 5.1%, while total property operating expenses were nearly flat at $695.2 million, including depreciation and amortization. Same-store property operating expenses increased 3.4%.
- Operating cash flow rose $78.3 million, while net debt declined $85.1 million. Interest expense declined modestly to $122.3 million from $124.0 million.
- Gain on depreciable property sales rose to $190.0 million from $42.6 million, reflecting sales of 21 apartment communities in 2015 versus eight in 2014. MAA also sold one commercial property.
- Portfolio size contracted to 254 communities and 79,496 units from 268 and 82,316, respectively, mainly reflecting the year’s dispositions. MAA acquired seven communities totaling 1,782 units.
- MAA issued $400 million of 10-year senior notes at a 4.00% coupon and refinanced its unsecured revolver, increasing capacity to $750 million. Merger and integration expenses were zero in 2015, versus $11.5 million combined in 2014.
Outlook, commentary, risks and unusual items
Management described apartment demand as strong and cited high occupancy and rent growth. It expected year-end occupancy to support pricing during the first quarter of 2016 and anticipated that population and demographic trends would continue to support rental demand. Management also noted rising apartment permitting and new supply in several key markets, while expecting demand to keep supply and demand broadly balanced. The filing provides no specific numerical earnings or revenue guidance.
Growth strategy emphasizes operations, selective acquisitions and dispositions, renovations, and limited development. Five development communities totaling 748 units were under construction at year-end, with estimated total project costs of $116.6 million; $42.3 million had been incurred. The filing identifies risks from apartment supply and competition, geographic and sector concentration, operating-cost increases, development delays or overruns, refinancing and interest-rate exposure, and changes affecting REIT qualification. Approximately 34.2% of the portfolio was in the five largest markets; roughly 65% of units were in Florida, Georgia, North Carolina, and Texas.
Two South Carolina lawsuits allege construction deficiencies at a condominium development associated with Colonial before the merger. MAA accrued its estimate of probable loss, but plaintiffs’ claimed damages were not disclosed and the company could not estimate further possible loss. Aggregate loss-contingency accruals were $13.5 million at year-end. No material environmental liabilities were identified by management. On February 1, 2016, MAA paid off a $13.5 million mortgage.
Most important facts for investors to verify
- Separate recurring property and same-store performance from the $190.0 million disposition gain when assessing the sharp increase in GAAP earnings.
- Review the filing’s non-GAAP Core FFO definition and reconciliation; the reported $5.51 per-share/unit figure is not GAAP earnings or operating cash flow.
- Assess debt maturities, revolver availability, covenant headroom, and exposure to floating rates and refinancing, including the Fannie Mae facility’s 2016–2018 rate tranches.
- Track rent growth, occupancy, concessions, and new apartment supply in major markets, particularly the large-market portfolio.
- Monitor development budgets and completion schedules, and the potential outcome of the Regatta at James Island litigation beyond the amount accrued.
- Confirm future dividend coverage from operating cash flow and recurring capital requirements; the filing states distributions remain subject to board discretion.