MID-AMERICA APARTMENT COMMUNITIES, INC. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 24, 2015. The filing covers MAA and its controlled operating partnership, Mid-America Apartments, L.P. MAA is an apartment-focused REIT operating primarily in the U.S. Southeast and Southwest. At year-end it owned or partially owned 268 multifamily communities with 82,316 units and three commercial properties.
Financial and operating highlights
| Metric | 2014 | 2013 |
|---|---|---|
| Total operating revenue | $989.3 million | $634.7 million |
| Net income attributable to MAA | $148.0 million | $115.3 million |
| Diluted EPS | $1.97 | $2.25 |
| Income from continuing operations | $149.1 million | $37.3 million |
| Funds from operations (FFO) | $404.1 million | $231.0 million |
| Core FFO | $395.7 million; $4.99 per diluted share and unit | $262.4 million |
| Cash provided by operating activities | $384.1 million | $258.4 million |
| Free cash flow, as defined by MAA | $62.5 million | $57.7 million |
| Total debt at year-end | $3.525 billion | $3.473 billion |
- Property revenue was $989.1 million. Same-store property revenue increased 3.1%; large-market same-store revenue rose 4.5% and secondary-market same-store revenue rose 1.8%. Total NOI was $598.8 million, approximately 60.5% of property revenue.
- Same-store effective rent per unit grew 3.3% year over year; same-store physical occupancy averaged 95.3% and ended the year at 95.5%. Portfolio occupancy excluding lease-up and development was 94.1%.
- Net income includes a $42.6 million gain on sales of depreciable real estate assets presented in continuing operations. MAA also recorded $3.2 million of merger expenses, $8.4 million of integration expenses, and a $2.6 million loss on debt extinguishment.
- Year-end assets were $6.831 billion, including net real estate assets of $6.664 billion. Cash and cash equivalents were $25.4 million; restricted cash was $28.2 million.
- Debt was 37.3% of total capitalization; net debt to undepreciated book value was approximately 42.6%, against a stated target debt range of 40%–45% of undepreciated asset book value. Weighted-average debt cost was 3.7%; the company reported 96.7% of debt as fixed or capped after derivatives. Approximately $496.2 million was available under its $500 million unsecured revolving credit facility.
- MAA paid $2.92 per common share in 2014 and declared $2.96 per share. The quarterly dividend was raised to $0.77 per share for the next payment after the fourth quarter.
Changes versus the prior period
- Revenue increased 56.0%, primarily because 2014 included a full year of Colonial Properties Trust operations, compared with only three months in 2013 following the October 1, 2013 merger. The comparison is therefore not like-for-like.
- Net income attributable to MAA rose approximately 28%, while diluted EPS fell from $2.25 to $1.97. The 2013 result included substantially larger gains on sales of discontinued operations; 2014 also had a much larger weighted-average share count following the merger.
- Core FFO rose to $395.7 million from $262.4 million. Interest expense increased $43.5 million to $119.5 million, principally reflecting higher average debt following the merger.
- MAA acquired eight apartment communities totaling 2,698 units and sold eight totaling 3,063 units; it also sold two commercial properties. It completed three development communities and had two projects totaling 514 units under construction at year-end.
- Cash from operations increased, while investing outflows rose with acquisitions and capital spending. Dividends paid increased to $219.2 million, and cash declined to $25.4 million from $89.3 million.
Outlook, risks, and unusual items
- No formal numerical earnings or operating guidance is provided. Management described apartment demand as strong and expected high occupancy to support pricing into the first quarter of 2015. It also noted increased new supply and permitting in several markets, while expecting demand and supply to remain broadly balanced.
- Management intends to emphasize operating existing properties, selective acquisitions, dispositions, renovations, and limited development. Two projects were under construction at year-end, with estimated total costs of $73.1 million, of which $60.8 million had been incurred; completion was expected in the first and second quarters of 2015.
- Key risks include regional and market concentration, new apartment supply and competition, operating-cost inflation, acquisition and development execution, refinancing and interest-rate exposure, access to agency financing, REIT qualification, catastrophic losses, environmental matters, and cybersecurity. The company reported compliance with debt covenants at year-end.
- Two lawsuits allege construction deficiencies at the former Colonial Regatta at James Island condominium development. MAA recorded an estimate of probable loss, but stated it could not reasonably estimate any additional possible loss or range. Aggregate loss-contingency accruals were $12.3 million at year-end.
- Adoption of the revised discontinued-operations accounting standard changed the presentation of certain 2014 property-sale gains. The filing also reports reclassifications to interim cash-flow statements, including transfers involving option-exercise proceeds and acquisition escrow activity; verify comparatives when assessing quarterly cash flow.
- After year-end, MAA acquired a 298-unit Kansas City community and paid off a $15.2 million mortgage and $91.1 million tax-free Fannie Mae facility balance.
Important facts for investors to verify
- Separate merger-driven growth from underlying same-store performance; confirm portfolio and same-store occupancy, rent growth, concessions, and supply trends in key markets.
- Reconcile reported net income and EPS with FFO/Core FFO, including the $42.6 million property-sale gain and merger-related adjustments; these non-GAAP measures may not be comparable with other REITs.
- Review debt maturities, revolving-credit availability, covenant headroom, interest-rate hedges, and the effect of refinancing or higher rates on distributions.
- Assess whether operating cash flow and capital needs support the dividend; free cash flow is a company-defined non-GAAP measure and was $62.5 million after specified improvements and distributions.
- Monitor the construction-deficiency litigation, recorded contingency, development budgets and lease-up, and the accounting and cash-flow reclassifications noted in the filing.