Mid-America Apartment Communities, Inc. (MAA) — Q1 2013 Form 10-Q
Business and period. MAA is a self-administered REIT owning, acquiring, developing and managing Sunbelt apartment communities. This unaudited report covers the three months ended March 31, 2013, compared with Q1 2012. At quarter-end, MAA owned or held interests in 166 communities with 49,697 apartments across 13 states, and had 774 units under construction.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total operating revenue | $133.4 million | $116.3 million |
| Income from continuing operations | $22.0 million | $15.2 million |
| Net income available to MAA common shareholders | $21.2 million | $23.9 million |
| Basic and diluted EPS | $0.50 | $0.60 |
| Funds from operations (FFO; non-GAAP) | $55.2 million | $46.4 million |
| Cash provided by operating activities | $42.1 million | $37.9 million |
| Cash used in investing activities | $51.2 million | $34.1 million |
| Cash and cash equivalents at period-end | $8.2 million | $9.1 million at Dec. 31, 2012 |
Property revenues were $133.2 million, up $17.2 million (about 14.8%). Property NOI was $80.4 million versus $69.5 million; NOI was about 60.4% of property revenue versus 59.9%. Interest expense rose to $15.7 million from $14.1 million. Dividends declared were $0.695 per common share, compared with $0.66.
Balance sheet and debt. Total assets were $2.775 billion and total liabilities $1.808 billion at March 31, 2013. Total debt was $1.691 billion, versus approximately $1.674 billion at year-end 2012; it comprised $1.114 billion secured and $577 million unsecured. Weighted average effective debt rate was 3.6%; approximately $173 million of debt was variable-rate and not hedged by swaps or caps. MAA reported $8.2 million cash and a $325 million unsecured credit facility with $117 million drawn. Management stated it was in compliance with debt covenants.
Material changes and operating trends
- Large-market same-store revenue rose 5.8% and secondary-market same-store revenue rose 3.4%; non-same-store and other revenue increased 169%, primarily due to acquisitions. Overall same-store revenue increased 4.7%.
- Management cited effective rent growth, ancillary income and acquisition activity. Average effective rent per unit in the wholly owned portfolio was $861.76, up from $805.00 a year earlier; occupancy was 96.1% versus 96.3%.
- FFO increased about $8.8 million, reflecting higher revenue partly offset by increased property operating costs. Common net income and EPS declined year over year because Q1 2012 included a $9.4 million gain on sale of discontinued operations; Q1 2013 had no such gain. Continuing-operations EPS improved to $0.50 from $0.37.
- MAA issued 325,166 shares through its at-the-market programs for $22.0 million net proceeds. Investing activity included $32.6 million of real estate purchases and $12.2 million of development spending.
Outlook, risks and unusual items
Management described apartment demand as strong, with low current new-unit deliveries and rent pricing momentum, while noting that permitting increased and could lead to greater future supply. Job formation remained below average; a recession or weaker employment could constrain rent growth. No specific numerical earnings or FFO guidance is provided in the filing. MAA expected to complete three development projects by Q4 2014; estimated total project costs were $101.3 million, of which $56.3 million had been incurred by quarter-end.
Management said operating cash flow exceeded recurring capital improvements, distributions to unitholders and common dividends by approximately $2.8 million in Q1. It warned that sustained operating deterioration could require a distribution reduction. Key risks include dependence on Fannie Mae and Freddie Mac financing and credit enhancement, variable-rate and refinancing exposure, collateral and covenant requirements, construction and lease-up execution, rising taxes and insurance, catastrophe losses, and real estate market and supply changes. MAA estimated $13.4 million of derivative losses would be reclassified to interest expense over the next 12 months. Derivative contracts also contain default and credit-rating provisions that could require collateral or settlement.
Subsequent events: MAA acquired a 316-unit Houston-area community on May 1, 2013, and entered into $150 million of forward swaps on April 23 to hedge planned future financings. The filing reports no legal proceedings and no material change in internal control over financial reporting; disclosure controls were assessed as effective.
Important facts for investors to verify
- Reconcile the quarter’s common net income and EPS decline with improved continuing-operations results and the prior-year property-sale gain.
- Review debt maturities, variable-rate exposure, hedge terms, and the company’s reliance on agency-backed financing and lender covenants.
- Assess whether development costs, completion timing and lease-up assumptions remain on plan, and whether new supply could pressure rents.
- Confirm cash available for dividends and capital needs; the filing notes distributions could be reduced if operating conditions deteriorate.
- FFO is a non-GAAP measure; compare MAA’s calculation and adjustments with other REITs before using it as a performance or liquidity proxy.