Business Context and Reporting Period
Company: Mid-America Apartment Communities, Inc. (MAA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: MAA is a Real Estate Investment Trust (REIT) engaged in the acquisition and operation of multifamily apartment communities. As of March 31, 2006, the Company owned or had an ownership interest in 134 communities comprising 38,789 units across 12 states.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2006 | Q1 2005 |
|---|---|---|
| Total Operating Revenues | $78,646 | $71,693 |
| Net Income | $5,126 | $4,326 |
| Net Income Available to Common Shareholders | $1,636 | $613 |
| Funds From Operations (FFO) | $20,781 | $18,741 |
| Net Cash Provided by Operating Activities | $21,535 | $19,814 |
| Net Cash Used in Investing Activities | $(60,274) | $(51,171) |
| Net Cash Provided by Financing Activities | $35,748 | $28,233 |
| Total Debt Outstanding | $1,181,046 | $1,140,046 |
| Cash and Cash Equivalents | $11,073 | $14,064 |
| Weighted Average Shares Outstanding (Diluted) | 22,366 | 21,212 |
| Earnings Per Share (Diluted) | $0.07 | $0.03 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by approximately $7.0 million (9.7%) compared to Q1 2005. This was driven by a $2.4 million increase from properties acquired in 2005, a $0.6 million increase from Q1 2006 acquisitions, and a $4.0 million increase from the "same store" portfolio due to improved collections, utility reimbursements, and higher occupancy.
- Expense Increases: Property operating expenses rose by $1.9 million, primarily due to acquisitions and a 9.0% increase in utility costs. Interest expense increased by $2.1 million due to higher debt balances ($1.18 billion vs. $1.12 billion) and a rise in the average borrowing cost from 5.0% to 5.4%.
- Profitability: Net income increased by approximately $0.8 million. Net income available to common shareholders more than doubled to $1.6 million from $0.6 million, aided by a reduction in preferred dividend distributions.
- Acquisitions: The Company acquired two communities in Q1 2006: Preserve at Brier Creek (250 units, Raleigh, NC) and Silverado (312 units, Austin, TX).
- Debt Extinguishment: The Company incurred a $0.55 million loss on debt extinguishment related to the refinancing of $13.3 million in tax-exempt bonds.
Guidance, Outlook, and Risks
- Market Outlook: Management notes that property performance is improving, particularly in Florida and Georgia, with signs of absorbing oversupply in large-tier markets. Demand is expected to be supported by household formation, while supply growth may slow due to rising development costs and interest rates.
- Liquidity: The Company maintains secured credit facilities with a total borrowing capacity of $1.1 billion, with $925 million available under FNMA facilities. Management believes resources are adequate for operations and distributions, though a significant deterioration in operations could necessitate a reduction in distribution rates.
- Dividends: The Company declared and paid $0.595 per common share in Q1 2006 and declared an additional $0.595 per share payable in April 2006.
- Accounting Changes: The Company adopted FASB Statement No. 123(R) regarding share-based payments effective January 1, 2006, using the modified prospective method. This resulted in an increase of approximately $187,000 in net income for the quarter.
- Risks: Key risks include reliance on the creditworthiness of FNMA for credit enhancement of approximately $856 million of debt, interest rate fluctuations, and the requirement to distribute at least 90% of taxable income to maintain REIT status.
Investor Verification Checklist
- Debt Maturities: Verify the schedule of debt maturities, noting that $37.4 million in principal payments are due in 2006, including the $10 million redemption of Series G Preferred Stock in May 2006.
- Occupancy Trends: Confirm the reported occupancy rate of 95.4% for 100% owned units and the average monthly rental of $701 against market comparables.
- Interest Rate Exposure: Review the effectiveness of the $684 million in interest rate swaps and $42 million in interest rate caps in hedging variable rate debt.
- Discontinued Operations: Note that two Memphis properties (Gleneagles and Hickory Farm) were listed for sale in April 2006 and will be classified as held for sale.
- FFO Calculation: Review the reconciliation of Net Income to Funds From Operations (FFO) to understand the non-GAAP metric used by management to assess performance.