Mid-America Apartment Communities, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. MAA operates through Mid-America Apartments, L.P. (MAALP), its 94.7%-owned operating partnership. Figures below are consolidated and generally apply to both registrants.
Business context
MAA owned or had an interest in 271 multifamily communities across 14 states. The October 2013 Colonial Properties merger nearly doubled the company’s size; Colonial’s results are included from the acquisition date, so year-over-year comparisons are not like-for-like. The filing describes approximately 83,000 apartment units and four development projects totaling 999 units.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total operating revenue | $243.5 million | $127.9 million |
| Income from continuing operations | $6.7 million | $20.2 million |
| Net income available to MAA common shareholders | $14.9 million | $21.2 million |
| Diluted EPS | $0.20 | $0.50 |
| Operating cash flow | $113.8 million | $42.1 million |
| Cash and cash equivalents, March 31 | $121.9 million | — |
| Total debt, March 31 | $3.46 billion | — |
| Weighted-average debt interest rate | 3.8% | 3.6% |
| Dividend declared per common share | $0.73 | $0.695 |
Net income included a $5.5 million gain on sale of discontinued operations and $3.1 million of other real estate sale gains. FFO was $97.4 million and Core FFO was $95.6 million; these are non-GAAP measures and should not be treated as substitutes for GAAP earnings or cash flow.
Net cash from investing activities was $12.3 million, versus $51.2 million used in Q1 2013, reflecting $93.1 million of disposition proceeds. Financing activities used $93.5 million, including $54.7 million of common dividends and $18.0 million of debt principal payments. Net property-level NOI was $147.6 million, compared with $80.4 million; the increase largely reflects the merger.
Changes versus the prior comparable period
- Revenue increased 90.5%, primarily because the Colonial portfolio was included in 2014 but not in Q1 2013. Same-store revenue grew 4.0% in large markets and 1.9% in secondary markets; management attributed the increases primarily to 4.5% higher average rent per unit.
- Same-store effective rent per unit rose 3.4% year over year. Occupancy for the portfolio excluding lease-up and development was 95.5%, versus 96.1% a year earlier.
- Despite higher revenue, continuing-operations income fell to $6.7 million from $20.2 million. Depreciation and amortization rose by $57.8 million and interest expense by $15.1 million, largely reflecting the expanded portfolio and higher debt following the merger. MAA common-shareholder net income and EPS also declined.
- Merger and integration expenses totaled $5.9 million in Q1 2014; none were reported in Q1 2013. Declared dividends increased to $0.73 per share from $0.695.
Debt, liquidity, outlook, and risks
- Debt comprised $1.79 billion secured and $1.68 billion unsecured. A $500 million unsecured revolver had no borrowings; the company reported $496.3 million available under it after letters of credit. MAALP was in compliance with its disclosed debt covenants at quarter-end.
- Management said liquidity was adequate for current operations, property refurbishment, and incremental apartment investment. Operating cash flow exceeded normal capital improvements and distributions by approximately $45.6 million during the quarter. Management cautioned that sustained operating deterioration could require a distribution reduction.
- Management reported strong apartment demand and anticipated the strong occupancy position would support rent pricing during the second-quarter leasing season. It also noted that increased multifamily permitting could lead to greater supply. The filing provides no specific earnings or FFO guidance.
- Development exposure: four projects were under construction, with expected total costs of $146.0 million, of which $98.7 million had been incurred; completion was expected by Q1 2015. Cost overruns, delays, and slower lease-up are disclosed risks.
- Interest-rate and refinancing exposure remains material. Approximately $3.36 billion of debt was fixed or hedged; the filing identifies 2014 maturities, including $154 million of senior notes due in June and a Freddie Mac facility maturing in 2014. The company uses swaps and caps to manage rate exposure.
- Merger integration, realization of expected synergies, operating-cost growth, market supply and demand, financing access, and Sunbelt concentration are material risks. Construction-deficiency lawsuits remain pending in South Carolina; one seeks $24.7 million. The company has accrued estimated probable losses but says it cannot reasonably estimate additional possible loss. The merger-related Williams litigation was settled.
Important facts for investors to verify
- Separate underlying same-store performance from merger-driven portfolio growth, and reconcile differences between reported GAAP earnings and FFO/Core FFO.
- Review upcoming 2014 debt maturities, refinancing plans, variable-rate exposure, and the availability of secured credit facilities.
- Track Colonial integration costs and progress toward anticipated cost savings, including whether integration is completed on the expected timeline.
- Monitor same-store rent growth, occupancy, expense trends, and new apartment supply in MAA’s markets.
- Assess development budgets and delivery schedules, and monitor the South Carolina construction litigation and related loss contingencies.