Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) and its operating partnership filed this combined Form 10-Q for the quarter ended March 31, 2020. MAA is a multifamily REIT operating primarily in the Southeast, Southwest and Mid-Atlantic; at quarter-end it owned and operated 299 apartment communities across 16 states and the District of Columbia, with seven developments under construction.
Financial performance and condition
Unless noted otherwise, amounts are for the three months ended March 31 and are in U.S. dollars.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Rental and other property revenue | $418.1 million | $401.2 million; up 4.2% |
| Same-store revenue | $392.4 million | $376.5 million; up 4.2% |
| Same-store NOI | $249.3 million | $237.8 million |
| Total NOI | $264.9 million | $251.8 million |
| Net income | $38.0 million | $66.0 million |
| Net income available to MAA common shareholders | $35.7 million | $62.7 million; down 43.1% |
| Diluted earnings per common share | $0.31 | $0.55 |
| Core FFO, a non-GAAP measure | $191.2 million | $177.3 million; up 7.8% |
| Net cash from operating activities | $160.6 million | $154.7 million |
| Net cash used in investing activities | $90.0 million | $52.9 million |
| Net cash used in financing activities | $92.1 million | $94.1 million |
Property operating expenses excluding depreciation rose 2.5%; same-store expenses rose 3.2%. Interest expense declined $2.2 million to $43.5 million. The company paid a $1.00 common dividend per share for the quarter, compared with $0.96 a year earlier.
At March 31, total assets were $11.16 billion, total liabilities $4.93 billion, and total equity $6.22 billion. Cash and cash equivalents were $34.5 million, with an additional $14.5 million of restricted cash. Debt totaled $4.48 billion, including $3.86 billion unsecured and $624.7 million secured; weighted average effective interest rate was 3.8%. Management reported 91.1% of debt at fixed rates. The $1.0 billion revolving facility had $100 million drawn and $2.7 million of capacity supporting letters of credit; commercial paper outstanding was zero. Total cash, cash equivalents and restricted cash ended the quarter at $49.0 million.
Material changes versus prior period
- Revenue grew 4.2%, supported by 4.2% same-store average effective rent per unit growth and continued lease-up of completed developments. Average same-store physical occupancy was 95.7%, versus 95.9%.
- Common-shareholder net income fell 43.1%, principally reflecting a $27.6 million non-cash expense from remeasurement of the embedded derivative in MAA Series I preferred shares. The comparable expense was $0.5 million in Q1 2019.
- Core FFO increased $13.9 million, primarily on revenue growth and lower interest expense; this non-GAAP measure excludes selected items and may not be comparable with other REITs.
- Capital improvements, development and other investing cash outflows rose to $84.6 million from $53.2 million. Q1 2020 included no apartment-community, land-parcel or commercial-property dispositions; Q1 2019 included a $9.0 million gain on sale of a land parcel.
Outlook, risks, contingencies and unusual items
Management said the balance sheet remained strong, with low leverage, substantial revolver availability and limited near-term maturities and funding obligations. No quantified earnings or operating guidance was provided. Management expected lower-than-normal rent collections in Q2 2020 and reduced apartment demand, potentially pressuring new-lease rents. It cited rising unemployment, restrictions on leasing activity, elevated urban supply, and possible disruption to development and financing as key uncertainties. The company offered affected residents up to 60 days of payment flexibility for April and May rent, waived late fees and interest, and agreed not to pursue nonpayment remedies for those rents.
Seven developments totaling 2,108 units had expected total costs of $489.5 million, of which $184.6 million had been incurred. Management expected two completions in 2020, four in 2021 and one in 2022. The company was also committed to potential future capital contributions of $23.8 million to technology-focused partnerships through February 2025.
Two Texas class actions allege unlawful late fees. After class certification and partial summary judgment rulings, the company was pursuing appeals and stated it would vigorously defend the cases. Management estimated maximum exposure, including damages and attorneys’ fees but excluding possible prejudgment interest, at $54.6 million and $8.4 million. Accruals for unresolved legal matters totaled $8.6 million. The filing states that COVID-19 and related mitigation measures could materially adversely affect business, financial condition, results and cash flows; ultimate effects were not predictable.
Important facts for investors to verify
- Subsequent rent collections, payment-plan usage, delinquencies and occupancy after quarter-end, especially during Q2 2020.
- Whether new-lease rents, renewal rates and leasing demand weakened as management anticipated, and how effects differed by market and urban versus suburban properties.
- Progress, costs, timing and lease-up performance of the seven development projects, plus any changes to redevelopment activity.
- Liquidity and debt access under prolonged market disruption, including revolver availability, debt maturities and refinancing conditions.
- Developments in the Texas late-fee litigation, including appeal outcomes, potential interest and any changes to the recorded accrual.
- How much of the reported earnings decline reflects the preferred-share derivative valuation rather than property operations; review Core FFO alongside GAAP results.