Mid-America Apartment Communities, Inc. (MAA) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars. MAA is a multifamily REIT operating primarily in the Southeast, Southwest and Mid-Atlantic. At quarter-end, it owned and operated 303 apartment communities across 17 states and the District of Columbia, and had six developments under construction. MAA conducts substantially all business through its 96.6%-owned operating partnership.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Rental and other property revenue | $415.6 million | $397.1 million | $1,224.2 million | $1,173.2 million |
| Net income | $81.5 million | $54.7 million | $211.6 million | $167.5 million |
| Net income available to MAA common shareholders | $77.7 million | $51.9 million | $201.5 million | $158.9 million |
| Diluted earnings per common share | $0.68 | $0.46 | $1.77 | $1.40 |
| Funds from operations (FFO), attributable to the Company | $202.9 million | $177.2 million | $575.0 million | $529.7 million |
| Net cash provided by operating activities | Not presented by quarter | $621.5 million | $601.1 million |
FFO is a non-GAAP measure; the company cautions that it is not a substitute for GAAP earnings or cash flow and may not be comparable to other REITs.
- Property operations: Q3 Same Store revenue increased 4.0% and Same Store NOI increased 4.5% to $238.1 million. Same Store average effective rent per unit rose 3.9%; average daily physical occupancy was 96.1%, versus 96.0% a year earlier. Nine-month Same Store revenue rose 3.2% and NOI rose 3.4% to $708.3 million.
- Costs and margins: Q3 property operating expenses, excluding depreciation and amortization, increased 3.1% to $159.5 million; nine-month expenses increased 3.4% to $463.1 million. Real estate taxes, personnel, repairs and maintenance were key cost increases. Q3 total NOI was $256.1 million, up from $242.4 million.
- Balance sheet: Total assets were $11.25 billion at September 30, 2019. Total debt was $4.48 billion, with a weighted-average effective rate of 3.8%; approximately 92.2% was fixed-rate or hedged. Unsecured debt was $3.83 billion and secured debt was $645.4 million.
- Liquidity: Cash and cash equivalents were $25.8 million, plus $16.9 million of restricted cash. The $1.0 billion revolving credit facility had no borrowings outstanding, with $2.8 million of capacity supporting letters of credit. Commercial paper outstanding was $200 million. Nine-month investing cash outflow was $230.7 million and financing cash outflow was $399.8 million.
- Capital returns: The quarterly common dividend was $0.96 per share; nine-month dividends paid on common shares totaled $328.2 million. The 8.50% Series I preferred stock had $43.4 million total liquidation preference.
Changes versus the prior comparable periods
- Q3 property revenue increased 4.7%; nine-month revenue increased 4.3%. Non-Same Store growth reflected continued lease-up of recently developed communities.
- Reported common-shareholder net income rose 49.8% in Q3 and 26.8% year to date. The increases were materially affected by noncash gains on the fair value of the embedded derivative in Series I preferred stock: $15.5 million in Q3 and $19.6 million for nine months. Excluding the impact is important when assessing recurring performance.
- FFO increased 14.5% in Q3 and 8.5% for the first nine months. Higher revenue and lower merger-integration costs contributed, while operating, management, G&A and (year to date) interest expenses partly offset growth.
- Nine-month interest expense increased $7.0 million to $136.1 million, primarily reflecting an approximately 18-basis-point increase in the effective rate and amortization of fair-value adjustments on acquired debt. Merger and integration expenses were zero in 2019, compared with $8.5 million in the first nine months of 2018.
- Operating cash flow increased to $621.5 million from $601.1 million. Investing cash outflow declined, primarily because real estate purchases were lower; capital improvements and development spending increased.
Outlook, risks and notable items
- Management reported relatively strong apartment demand and said current occupancy and job growth positioned the company well for the rest of 2019. It expected improved pricing growth over the comparable 2018 period. No numerical full-year earnings or FFO guidance is provided in the supplied filing text.
- Management noted elevated new apartment supply in some markets, particularly urban submarkets, and said supply could remain elevated over the next couple of years. Rent growth depends on job growth relative to new supply; operating-cost increases, including taxes, insurance and utilities, are also risks.
- Six developments totaling 1,686 units had expected total costs of $389.5 million, of which $106.7 million had been incurred. Planned completion dates extend from Q4 2019 through the second half of 2021.
- In October 2019, MAA completed the sale of Ridge at Chenal Valley, with an expected gain of approximately $20 million to be recorded in Q4. A separate land sale was expected to generate an approximately $3 million Q4 gain. Additional communities met held-for-sale criteria after quarter-end; their sales were expected in Q4.
- Two Texas class actions allege unlawful late fees. Class certification and partial summary judgment were granted by the district court; the Fifth Circuit heard arguments on class certification in September 2019. Management estimates maximum exposure of $54.6 million and $8.4 million, respectively, excluding possible prejudgment interest. The aggregate accrual for unresolved legal matters was $9.0 million at quarter-end.
- Other notable accounting items include adoption of the new lease standard on January 1, 2019, which added $53.0 million of right-of-use assets and $33.0 million of lease obligations at quarter-end; management said lease expense remained immaterial. The company also identified LIBOR transition, financing access and interest-rate exposure among forward-looking risks.
Key facts for investors to verify
- How much reported earnings growth reflects recurring apartment operations versus the $15.5 million Q3 and $19.6 million year-to-date preferred-stock derivative gains?
- Whether rent growth and occupancy hold up as new supply remains elevated, especially in urban submarkets, and whether expense growth remains below revenue growth.
- Near-term refinancing and liquidity exposure, including the $200 million commercial paper balance shown with a short weighted-average maturity, and scheduled debt maturities.
- Developments’ remaining costs, delivery timing and lease-up performance, as well as the expected Q4 asset dispositions and gains.
- Developments in the Texas late-fee litigation, including appellate outcomes and any potential loss beyond the recorded legal accrual.