Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA), a Sunbelt-focused apartment REIT, filed this unaudited Form 10-Q for the three months ended March 31, 2011, with comparison to Q1 2010. At quarter-end it owned or held interests in 159 communities with 46,950 apartments across 13 states; 638 units were under construction.
Financial and operating highlights
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Total operating revenue | $107.3 million | $97.5 million |
| Property revenue | $107.1 million | $97.3 million |
| Property NOI | $61.5 million | $55.8 million |
| Consolidated net income | $9.2 million | $9.8 million |
| Net income attributable to MAA | $8.8 million | $9.4 million |
| Net income available to common shareholders | $8.8 million | $6.2 million |
| Basic / diluted EPS | $0.25 / $0.24 | $0.21 / $0.21 |
| Funds from operations (FFO) | $37.0 million | $31.1 million |
| Cash from operations | $31.3 million | $25.1 million |
| Cash and cash equivalents at quarter-end | $47.2 million | $45.9 million at Dec. 31, 2010 |
| Total debt at quarter-end | $1.452 billion; weighted average rate 3.9% | $1.500 billion at Dec. 31, 2010 |
Property NOI was approximately 57.4% of property revenue, compared with 57.3% in Q1 2010. Common dividends declared were $0.6275 per share, up from $0.6150.
Material changes versus Q1 2010
- Total operating revenue rose about 10%; property NOI increased about 10%, and FFO increased about 19%.
- Same-store revenue increased 3.6% in large markets and 4.5% in secondary markets. Non-same-store and other revenue more than doubled, primarily due to acquisitions.
- Occupancy for MAA’s wholly owned units was 95.9%, down from 96.6%; average rent per unit increased to $749 from $731.
- Property operating expenses excluding depreciation rose about $4.0 million; depreciation increased about $2.7 million. General and administrative expense rose about $1.8 million.
- MAA-attributable net income declined about $0.6 million, despite higher property results, partly reflecting higher corporate costs and a $0.4 million joint-venture contribution gain in Q1 2010. Common-shareholder income increased because preferred dividends fell from $3.2 million to zero following the 2010 redemption of Series H preferred stock.
- Investing cash flow shifted from a $31.5 million source in Q1 2010 to a $47.3 million use in Q1 2011, reflecting acquisitions and development spending; Q1 2010 included about $47.0 million of disposition proceeds.
Liquidity, debt, outlook and risks
Financing cash flow was $17.3 million provided, versus $38.1 million used in Q1 2010. MAA raised approximately $61.2 million through at-the-market share sales and $30.0 million through its dividend reinvestment/share purchase program. The company reported approximately $1.642 billion of collateralized borrowing capacity against $1.452 billion of debt, with roughly $190 million of capacity not borrowed. It stated that $6.4 million of total line capacity was not collateralized and available to borrow.
About 83% of outstanding debt was borrowed through or credit-enhanced by Fannie Mae or Freddie Mac. Debt maturities are concentrated in 2014: contractual principal due that year was approximately $448 million. MAA had $735 million of interest-rate swaps and $271 million of interest-rate caps; derivative liabilities had a reported fair value of $41.4 million. The company estimated that $24.8 million would be reclassified from accumulated other comprehensive income to interest expense over the next 12 months.
Management described improving rental demand, positive rent trends and low new-apartment supply, and expected rent growth to strengthen during 2011 as economic and job growth returned. It remained cautious because job growth was slower than desired and noted that recession or weak employment could constrain rent increases. Management stated it believed resources were adequate for operations, refurbishment and incremental investment; however, operating cash flow fell about $2.5 million short of funding improvements and distributions in Q1. It warned that sustained deterioration could require a distribution reduction.
Principal risks include dependence on agency-backed financing and refinancing access; rising rates, rate-spread volatility and hedge ineffectiveness; loan covenants and collateral revaluation; acquisition, development and lease-up execution; operating-cost inflation; weak employment or oversupply; catastrophe losses; and maintaining REIT qualification and distributions. MAA reported no material change in market risk from its 2010 annual report, no legal proceedings, and effective disclosure controls as of March 31, 2011. Subsequent to quarter-end, it acquired two Florida communities and bought land for a planned 312-unit Arkansas development.
Important facts for investors to verify
- Whether same-store rent growth and occupancy trends continued after Q1, given occupancy was below the prior-year level.
- Debt maturities, especially the approximately $448 million of 2014 principal, and availability and terms of refinancing.
- MAA’s continuing reliance on Fannie Mae and Freddie Mac for credit support and the effect of any changes to agency financing.
- Whether operating cash flow covers capital spending and distributions, and the sustainability of the current dividend.
- The impact of share issuance and dilution, and whether acquisitions and development deliver expected operating returns.
- Interest-rate hedge exposure, potential collateral or settlement requirements, and the projected $24.8 million interest-expense reclassification.