Mid-America Apartment Communities, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a stand-alone fourth-quarter filing; quarterly figures are included. MAA is a multifamily REIT operating primarily in the Southeast, Southwest and Mid-Atlantic through its 96.6%-owned Operating Partnership.
Business context and portfolio
At year-end, MAA had interests in 300 apartment communities representing 100,031 units, including one unconsolidated community, plus four commercial properties. Same Store communities totaled 94,552 units and averaged 95.9% physical occupancy for 2019. The portfolio is concentrated in multifamily housing and geographically: about 39.9% was in its five largest markets.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Rental and other property revenues | $1.641 billion | $1.571 billion | Up 4.4% |
| Net income available to MAA common shareholders | $350.1 million | $219.2 million | Up 59.7%; includes gains and a noncash derivative valuation benefit |
| Diluted earnings per common share | $3.07 | $1.93 | Up from prior year |
| Funds from operations (FFO), attributable to the Company | $773.2 million | $712.7 million | Up $60.5 million; non-GAAP measure |
| Net cash from operating activities | $781.4 million | $734.3 million | Up $47.1 million |
| Net cash used in investing activities | $238.3 million | $366.4 million | Lower outflow, chiefly reflecting higher disposition proceeds |
| Net cash used in financing activities | $524.3 million | $405.1 million | Higher outflow, including lower net credit-line borrowings and increased dividends |
| Total assets | $11.230 billion | $11.324 billion | Down year over year |
| Total debt | $4.455 billion | $4.528 billion | 22.2% of total market capitalization; 31.4% of adjusted total assets |
| Common dividend declared per share | $3.88 | $3.7275 | 2019 cash distributions paid were $3.84 per share |
Same Store revenue increased 3.4%, with average effective rent per unit up 3.6%; occupancy eased to 95.9% from 96.1%. Same Store property operating expenses rose 2.9%, including a $10.0 million increase in real estate tax expense. Total NOI was $1.028 billion. Property operating expenses excluding depreciation and amortization increased 3.1% overall. Interest expense was $179.8 million, up $6.3 million.
Material changes and unusual items
- 2019 net income included $81.0 million in gains on sales of depreciable real estate, $12.0 million in gains on non-depreciable assets, and $17.9 million of noncash income from the fair-value adjustment of the preferred-stock embedded derivative. The corresponding 2018 results included $2.6 million of derivative adjustment expense and $4.5 million of real estate gains.
- Management reported revenue growth of 4.4% and FFO growth of about 8.5%. FFO is non-GAAP and should not be treated as a substitute for net income or cash flow.
- MAA sold five apartment communities totaling 1,368 units during 2019. It completed two development projects, spent $112.9 million on development, and had seven projects totaling 2,108 units under construction at year-end. Remaining budgeted cost for those projects was approximately $345.6 million ($489.5 million total budget less $143.9 million incurred).
- MAA renovated 8,329 units at an average cost of $5,876 per unit; renovated units achieved average rent increases of 9.8% over normal market rates for comparable non-renovated units.
- The company adopted the new lease accounting standard in 2019, recognizing $53.8 million of right-of-use assets and $33.1 million of related lease obligations at year-end; management said the impact on rental revenue accounting was not significant.
Liquidity, debt and capital
Year-end cash and cash equivalents were $20.5 million, with $50.1 million of restricted cash. MAA had a $1.0 billion unsecured revolving credit facility, with no borrowings outstanding and $2.7 million of capacity used for letters of credit; the facility includes an expansion option to $1.5 billion. Commercial paper outstanding was $70.0 million. Management identifies the commercial paper program and revolver as primary short-term liquidity sources.
Debt had a weighted-average effective rate of 3.8% and average years to maturity of 7.5. About 98.4% of outstanding debt was fixed-rate or hedged at year-end. Contractual principal maturities were $207.8 million in 2020, $193.5 million in 2021, and $665.3 million in 2022, based on the filing’s maturity schedule. MAA issued $850 million of senior unsecured notes in 2019 and entered into a $191.3 million fixed-rate secured mortgage. Management targets net debt of approximately 30% to 36% of undepreciated asset book value; this is a target, not a covenant.
Outlook, management commentary and risks
- Management said demand remained strong but elevated supply was weighing on rent growth, particularly in urban submarkets, and could persist in some markets for the next couple of years. It cited strong job growth, current occupancy and demographic trends as supports for rental demand and expressed confidence in continued pricing growth in 2020. The filing provides no numerical 2020 earnings or operating guidance.
- Key business risks include economic or employment deterioration, apartment oversupply, limits on rent growth, rising property taxes and insurance costs, natural disasters and uninsured losses, development cost or lease-up overruns, competition, and the company’s concentration in multifamily and certain regions.
- Interest-rate and refinancing risk remains relevant. Variable-rate debt and future refinancing could become more costly; the filing also flags the planned phase-out of LIBOR after 2021 and uncertainty around replacement benchmarks.
- Two certified class actions in Texas allege unlawful tenant late fees. Management estimated maximum exposure of $54.6 million in one case and $8.4 million in the other, excluding possible prejudgment interest. The company had accrued $8.6 million in total for unresolved legal matters and said it would continue to defend and appeal the cases. The Fifth Circuit had heard oral arguments on class certification in September 2019.
- MAA reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements and on MAA’s internal controls. The auditor identified legal contingencies and valuation of the preferred-stock embedded derivative as critical audit matters.
Important facts for investors to verify
- How much of 2019 earnings growth reflects recurring property operations versus property-sale gains and the noncash preferred-stock derivative adjustment.
- Whether rent growth and occupancy hold up as new supply remains elevated, including performance by urban and suburban submarket.
- Updates to the Texas class actions, the possible loss range and whether the $8.6 million accrual changes; the stated maximum exposure is materially higher.
- Progress, lease-up, budgets and remaining funding needs for the seven active developments, alongside planned renovation and capital spending.
- Debt maturities, refinancing terms, commercial-paper rollover capacity, interest-rate hedge positions and the transition away from LIBOR.
- Cash available for dividends after operating needs and capital investment; distinguish the $3.88 declared dividend from $3.84 paid during 2019.