Mid-America Apartment Communities, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; comparative periods ended September 30, 2011. MAA is a Sunbelt-focused apartment REIT. At quarter-end, it owned or held interests in 167 communities totaling 49,723 apartments across 13 states, with 1,220 units under construction.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total operating revenue | $127.1 million | $110.3 million | $364.7 million | $316.7 million |
| Net income attributable to MAA/common shareholders | $30.9 million | $13.8 million | $82.9 million | $30.1 million |
| Diluted EPS | $0.74 | $0.37 | $2.03 | $0.81 |
| Funds from operations (FFO) | $48.2 million | $39.2 million | $142.9 million | $112.5 million |
| Operating cash flow | Not separately reported | Not separately reported | $158.0 million | $129.2 million |
Q3 property revenue increased 15.3%; total NOI rose to $74.5 million from $64.7 million. Same-store revenue grew 5.8% in large markets and 2.4% in secondary markets; same-store NOI increased 8.3% and 4.9%, respectively. For the nine months, total NOI was $217.4 million versus $189.2 million. The filing does not present a single consolidated operating margin measure.
Reported earnings benefited substantially from property-sale gains: $16.1 million in Q3 and $38.5 million for the nine months, compared with $4.9 million in each 2011 period. Continuing income attributable to MAA was $15.8 million in Q3 and $45.7 million for the nine months. FFO, which excludes real estate disposition gains, increased 22.7% in Q3 and 27.1% year to date.
Cash and cash equivalents were $13.4 million at September 30, down from $57.3 million at December 31, 2011. Total assets were $2.776 billion. Debt totaled $1.706 billion ($1.192 billion secured and $514 million unsecured), versus approximately $1.650 billion at year-end. The reported weighted average debt rate was 3.7%; net debt to undepreciated book value was approximately 45%. The $325 million unsecured credit facility had $108 million drawn and approximately $323.8 million available, subject to facility conditions and covenants.
Nine-month investing cash outflow was $311.0 million, including $314.9 million of acquisitions and $54.2 million of development spending, partly offset by $97.1 million of disposition proceeds. Financing cash inflow was $109.1 million, including approximately $174.0 million of net equity proceeds. Dividends declared were $0.66 per share in Q3 and $1.98 year to date.
Material changes and notable items
- MAA acquired 2,451 units for $314.9 million during the first nine months. Acquisitions contributed $8.8 million of reported revenue and $1.1 million of net income in that period.
- Eight properties were sold through September 30, generating a $38.5 million net gain. A ninth property, Walden Run, was classified as held for sale.
- Equity issuance supported funding and balance-sheet activity: the company raised approximately $120 million net in a March public offering and $53.7 million net through at-the-market sales year to date.
- During Q3, MAA recorded an out-of-period equity-account reclassification that reduced additional paid-in capital by $27.0 million and increased accumulated distributions in excess of net income and noncontrolling interest. Management said it was immaterial and had no net effect on total equity or consolidated net income.
Outlook, risks and contingencies
Management reported strong rental demand, same-store occupancy above 96%, and same-store effective rent per unit up 5.2% year over year in Q3. It remained cautiously optimistic, citing below-average job growth, while identifying limited new apartment supply and long-term demographic trends as supportive. Management expected seasonality to have less effect on pricing given strong occupancy and described near-term interest rates as favorable, with rates expected to rise as the economy improves. The filing gives no numerical earnings or FFO guidance.
Four development projects were expected to complete by Q4 2013; expected total costs were $143.9 million, of which $108.8 million had been incurred. On October 24, 2012, MAA entered a development contract for a 294-unit Jacksonville community. Management said resources were adequate for current operations, refurbishment and incremental investment, but warned that sustained deterioration could require distribution reductions.
Key risks include reliance on Fannie Mae and Freddie Mac-supported financing, refinancing and interest-rate exposure, variable-rate debt, loan covenants and collateral values, development cost and lease-up risk, property taxes and insurance, economic/job weakness, and catastrophic losses. MAA had $576.8 million of interest-rate swaps and $256.4 million of designated caps; derivative liabilities were $25.8 million. It estimated $16.7 million would be reclassified from accumulated other comprehensive income as additional interest expense over the next 12 months. The company reported compliance with debt covenants at quarter-end. Legal proceedings: none reported.
Important facts for investors to verify
- How much reported earnings growth reflects recurring property operations versus the $38.5 million year-to-date property-sale gain; compare continuing income and FFO.
- Acquisition performance, same-store rent and occupancy trends, and whether expense growth—especially taxes and insurance—offsets revenue gains.
- Funding and completion costs for the 1,220-unit construction pipeline, including the expected timing of lease-up and stabilization.
- Debt maturities, available borrowing capacity, covenant headroom, and continued access to agency-backed financing and capital markets.
- Potential cash-flow effects from interest-rate movements, derivative settlements or collateral requirements, and the stated $16.7 million expected hedge-related interest expense reclassification.
- Whether operating cash flow continues to cover recurring capital spending and distributions without relying on additional borrowing or equity issuance.