Business Context and Reporting Period
Company: Mid-America Apartment Communities, Inc. (MAA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: MAA is a self-administered and self-managed Real Estate Investment Trust (REIT) based in Memphis, Tennessee. It focuses on acquiring, owning, and operating apartment communities in the Sunbelt region of the United States. As of December 31, 2008, the company owned 100% of 143 properties (41,928 units) and held a 33.33% interest in a joint venture owning 2 additional properties (626 units). The portfolio is concentrated in 13 states, with approximately 75% of units located in Georgia, Florida, Tennessee, and Texas.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Operating Revenues | $369.9 million | $347.3 million |
| Net Income | $30.2 million | $39.9 million |
| Net Income Available to Common Shareholders | $17.4 million | $25.7 million |
| Earnings Per Share (Diluted) | $0.64 | $1.01 |
| Funds From Operations (FFO) | $109.7 million | $99.1 million |
| FFO Per Share (Diluted) | $3.72 | $3.55 |
| Total Debt Outstanding | $1.32 billion | $1.26 billion |
| Weighted Average Interest Rate | 4.8% | 5.4% |
| Debt to Total Capitalization | 50.6% | 48.2% |
| Net Cash Provided by Operating Activities | $137.9 million | $118.6 million |
| Dividends Declared (Common) | $2.46 per share | $2.43 per share |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by approximately $22.3 million (6.5%) compared to 2007. This was driven by acquisitions made in 2008 and 2007, development communities, and a 1.8% increase in average effective rent per unit in the same-store portfolio.
- Net Income Decline: Net income decreased by approximately $9.7 million. This decline was primarily due to the absence of significant gains on property dispositions in 2008, whereas 2007 included approximately $14.6 million in gains from the sale of four communities and a joint venture property.
- Interest Expense Reduction: Interest expense decreased by approximately $1.6 million, driven by a reduction in the weighted average borrowing cost from 5.4% in 2007 to 4.9% in 2008, partially offset by an increase in average debt outstanding.
- Portfolio Expansion: The company acquired five 100%-owned properties and two joint venture properties in 2008, adding 1,966 units to the portfolio. No properties were sold in 2008.
- Occupancy: Overall occupancy for 100%-owned communities was 93.4% at year-end 2008, down from 94.7% in 2007. Same-store portfolio occupancy remained strong at 95.3%.
Guidance, Outlook, and Risks
Management Commentary and Outlook: Management noted that rental demand weakened in the second half of 2008 due to slowing economic conditions and job formation. However, they believe revenue growth will resume in 2010, supported by limited new apartment supply and a potential reversion of homeownership rates to sustainable levels, which should favor rental demand. The company expects to face declining economic growth in 2009 but anticipates positive absorption in most markets by 2010.
Key Risks and Contingencies:
- Capital Market Volatility: A significant portion of the company's debt (89%) is credit-enhanced by Fannie Mae and Freddie Mac, which were placed under conservatorship by the U.S. Government in 2008. Management relies on these entities continuing to support multifamily lending.
- Interest Rate Risk: While 86% of debt is fixed or capped via swaps, the company faces risks related to the effectiveness of these hedges due to market volatility and the creditworthiness of swap counterparties.
- Liquidity and Distributions: The company maintains sufficient liquidity to pay distributions at current rates, but a significant deterioration in operations could necessitate a reduction in the dividend rate.
- Environmental and Catastrophic Loss: Properties are exposed to windstorms and earthquakes. While insured, catastrophic losses could exceed coverage limits, potentially impacting loan covenants.
Investor Verification Checklist
- Debt Maturities: Verify the refinancing plan for the $38.6 million Regions Bank term loan maturing in April 2009 and the $50 million credit facility maturing in May 2010.
- Agency Support: Monitor the status of Fannie Mae and Freddie Mac conservatorship and their continued ability to provide credit enhancement for the company's $1.2 billion in agency-backed debt.
- Interest Rate Hedge Effectiveness: Review the impact of the widening spread between LIBOR and agency rates (DMBS/Reference Bill) on interest expense and hedge accounting treatment.
- Occupancy Trends: Track the recovery of occupancy rates in Florida markets, which weakened significantly in 2008, and the performance of recently acquired properties in lease-up.
- Dividend Sustainability: Assess whether Funds From Operations (FFO) continue to cover dividend requirements given the economic slowdown and potential for increased operating costs.