Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA), a Sunbelt-focused apartment REIT, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. At quarter-end, it owned or held interests in 165 communities totaling 48,626 apartments in 13 states, and had 950 units under construction. The portfolio includes joint ventures.
Financial and operating highlights
Dollar amounts below are in millions except per-share data. Comparisons are with the same 2010 period.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total operating revenue | $115.8 | $100.9 | $333.2 | $296.3 |
| Income from continuing operations | $9.5 | $6.9 | $26.3 | $23.5 |
| Net income attributable to MAA | $13.8 | $6.7 | $30.1 | $22.8 |
| Diluted EPS | $0.37 | $0.11 | $0.81 | $0.36 |
| FFO | $39.2 | $29.9 | $112.5 | $87.4 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $129.2 | $106.7 |
Q3 total property revenue was $115.6 million and property NOI was $64.7 million, versus $100.7 million and $56.1 million, respectively, in Q3 2010. Same-store revenue rose 5.6% in Q3 (5.5% excluding the bulk cable program). At September 30, average rent per unit for wholly owned communities, excluding lease-up units, was $784 versus $729 a year earlier; period-end occupancy was 96.3% versus 96.4%.
Financial position, cash flow and material changes
- Total assets were $2.412 billion at September 30, 2011, up from $2.176 billion at December 31, 2010. Cash and cash equivalents were $24.3 million; restricted cash was $12.9 million.
- Total debt was $1.588 billion, compared with $1.500 billion at year-end 2010: $1.453 billion secured and $135 million unsecured. The reported weighted-average rate on total debt was 3.9%; secured debt averaged 3.8% and unsecured notes 5.1%. The debt-to-undepreciated-book-value ratio was approximately 47%.
- Nine-month investing cash outflow was $321.2 million, principally acquisitions ($261.9 million), improvements and renovations, and $21.9 million of development spending. Financing cash inflow was $170.3 million. Common-share issuances generated $170.5 million of proceeds; shares outstanding increased during the period.
- MAA acquired 2,277 units for $264.6 million during the first nine months, contributing $8.6 million of reported revenue. Q3 acquisitions included two communities. The company sold the 260-unit Lodge at Timberglen in August, recording a $4.9 million gain.
- Common dividends declared were $0.6275 per share in Q3 and $1.8825 for the nine months, compared with $0.6150 and $1.8450, respectively, in 2010.
Outlook, risks and unusual items
- Management reported improving apartment demand, pricing and effective rent trends, and expected rent growth to continue through the remainder of 2011 and into 2012. It remained cautious because job growth was stagnant and warned that a weak economy could constrain rent growth. No quantified earnings or FFO guidance was provided.
- Key exposures include economic and employment weakness, property operating-cost increases, acquisition and development execution, refinancing and covenant risk, interest-rate volatility, and reliance on FNMA- and Freddie Mac-supported financing. Approximately 68% of outstanding debt was borrowed through or credit-enhanced by those agencies.
- MAA had 24 interest-rate swaps with $601.8 million notional and 21 caps with $270.7 million notional. Swap liabilities had a reported fair value of $39.2 million; management estimated $20.4 million would be reclassified to interest expense over the next 12 months. Derivative contract provisions could require collateral or settlement in specified default or credit-rating situations.
- A $1.8 million non-cash G&A adjustment was recorded in Q2 for restricted-stock compensation accounting; management deemed the out-of-period component immaterial. The Q3 and nine-month net income comparisons also benefited from the $4.9 million property-sale gain.
- Subsequent events: MAA acquired a 300-unit Nashville-area community on October 18, 2011, and closed a $250 million unsecured revolving facility on November 1, with an accordion option up to $400 million. Management said it believed resources were adequate, but noted sustained operating deterioration could require reducing distributions.
- Management reported effective disclosure controls as of September 30, 2011, and no material internal-control changes during the quarter. The filing reported no legal proceedings.
Important facts for investors to verify
- Whether same-store rent and revenue growth can continue while occupancy remains near 96% and employment growth is weak.
- Debt maturities, available borrowing capacity, covenant compliance, and continued access to agency-supported financing and capital markets.
- Interest-rate hedge performance, swap and cap counterparty/credit risks, and the expected $20.4 million derivative-related interest expense reclassification.
- Acquisition and development returns, including lease-up timing and costs for the 950 units under construction.
- How recurring operating performance and cash available for distributions compare with reported earnings, FFO, and the property-sale gain.