Mid-America Apartment Communities, Inc. (MAA) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing combines MAA and its 96.5%-owned operating partnership, which holds substantially all real estate assets. Financial figures below are consolidated and in U.S. dollars.
Business context and reporting period
MAA is a multifamily-focused REIT. At quarter-end it owned and operated 303 apartment communities across 17 states, plus four commercial properties and interests in unconsolidated ventures. Four developments totaling 717 units were under construction; expected total costs were $148.0 million, of which $45.7 million had been incurred.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Rental and other property revenue | $397.1m | $384.6m | $1,173.2m | $1,146.2m |
| Net income available to MAA common shareholders | $51.9m | $113.8m | $158.9m | $202.2m |
| Diluted earnings per common share | $0.46 | $1.00 | $1.40 | $1.78 |
| Funds from operations (FFO), attributable to MAA | $177.2m | $176.2m | $529.7m | $522.4m |
| Total net operating income (NOI) | $242.4m | $235.4m | $725.3m | $709.8m |
- Q3 revenue rose 3.3%; same-store revenue grew 2.0% and non-same-store and other revenue grew 18.6%. Same-store NOI increased 1.9% in Q3 and 1.8% year to date.
- Q3 total NOI margin was approximately 61.0% of property revenue, compared with 61.2% in Q3 2017. NOI is a non-GAAP measure.
- Same-store average daily physical occupancy was 96.0% in Q3, versus 96.1% a year earlier; average effective rent per unit grew 2.1%.
- For the nine months, operating cash flow was $601.1m, investing cash outflow $287.8m and financing cash outflow $322.8m. Cash, cash equivalents and restricted cash ended at $79.4m.
- Quarter-end total assets were $11.42bn and total debt was $4.50bn: $3.58bn unsecured and $921.4m secured. Weighted-average effective debt rate was 3.7%; approximately 84% of debt was fixed or hedged. Cash and cash equivalents alone were $46.1m.
- The $1.0bn unsecured revolving facility had $370.0m outstanding, with about $1.9m of capacity used for letters of credit. An $80.0m Fannie Mae facility was due December 3, 2018. Debt maturities included $568.3m in 2019 and $680.0m in 2020.
- Dividends declared were $0.9225 per common share in Q3, up from $0.8700; year-to-date dividends were $2.7675 versus $2.6100.
Material changes versus the prior comparable period
- Despite higher revenue, Q3 net income available to common shareholders fell 54.4%. The principal comparison was the $58.8m gain from apartment-community sales in Q3 2017; there were no apartment-community dispositions in Q3 2018. Q3 2018 included only $1.0m of gains on non-depreciable real estate.
- Q3 interest expense increased $4.7m to $44.7m, primarily due to a higher effective interest rate and lower capitalized development interest. Property operating expenses, excluding depreciation, increased 3.7%.
- Q3 FFO increased approximately $1.0m. For the first nine months, FFO increased approximately $7.4m, supported by revenue growth and lower merger-integration costs, partly offset by higher interest and property operating expenses.
- MAA issued $400m of 4.20% senior notes due 2028 in May and retired a $250m term loan and $50m private-note tranche at maturity. Total debt was $4.50bn at September 30, 2018, compared with $4.50bn at December 31, 2017.
Outlook, management commentary, risks and unusual items
- Management said apartment demand remained relatively strong and occupancy supported potential pricing growth in Q4, a typically slower leasing season. The filing provides no quantified earnings, revenue or FFO guidance.
- Management noted elevated apartment supply was pressuring rent growth, particularly in urban submarkets, and that 2018 year-to-date multifamily permitting had increased in MAA markets. Job growth relative to new supply was identified as important to occupancy and rents.
- Interest-rate exposure remains a key risk: rising rates could increase costs on variable-rate debt and future refinancing. Other disclosed risks include market and supply conditions, operating-cost increases, development delays or overruns, financing availability, insurance/catastrophe losses, REIT qualification, and legal matters.
- Two Texas late-fee class actions received adverse class-certification and partial-summary-judgment rulings in September. Management estimated maximum exposure of approximately $54.6m and $8.4m, excluding possible prejudgment interest; appeals were being pursued. A separate accessibility lawsuit had reached an agreement in principle with the DOJ in October, but no settlement agreement had been entered. Another fair-housing screening-policy case was settled in October.
- Aggregate loss-contingency accruals were $23.4m at September 30, 2018, down from $32.1m at year-end 2017. The filing does not specify how much of the accrual relates to the described lawsuits.
- Four land parcels were sold during the first nine months; two additional land parcels were classified as held for sale, with sales expected in Q4. A new accounting system implementation was completed in August, and management reported disclosure controls were effective.
Important facts for investors to verify
- Reconcile the sharp GAAP earnings decline with prior-year property-sale gains and compare recurring operating performance using FFO and same-store measures.
- Track same-store rent growth, occupancy, and supply trends, particularly in urban markets.
- Review upcoming debt maturities and refinancing of the $80m facility due in December 2018, as well as sensitivity to interest rates.
- Monitor developments, appeal outcomes and any recorded accrual changes in the Texas late-fee cases, and the final terms of the DOJ settlement.
- Check development spending, project completion and lease-up against the stated $148m expected cost and delivery schedule.