Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA), a multifamily REIT, filed this combined annual report with its 96.5%-owned Operating Partnership for the fiscal year ended December 31, 2018. The company owns, operates, acquires and selectively develops apartments, primarily in the Southeast, Southwest and Mid-Atlantic. At year-end it held interests in 304 communities totaling 100,864 units across 17 states and the District of Columbia.
Key financial results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Rental and other property revenue | $1,571.3 million | $1,529.0 million | +2.8% |
| Net income | $231.0 million | $340.5 million | -32.1% |
| Net income available to common shareholders | $219.2 million | $324.7 million | -32.5% |
| Diluted EPS | $1.93 | $2.86 | Down $0.93 |
| Funds from operations (FFO; non-GAAP) | $712.7 million | $699.6 million | +1.9% |
| Cash provided by operating activities | $734.3 million | $660.8 million | +11.1% |
Same Store revenue rose 1.9%, supported by 1.9% growth in average effective rent per unit; average daily physical occupancy remained 96.1%. Same Store NOI was $905.8 million, and total NOI was $976.8 million. Property operating expenses excluding depreciation and amortization increased 3.1%, faster than revenue growth.
Fourth-quarter 2018 revenue was $398.1 million, net income was $63.5 million, common-shareholder net income was $60.4 million and diluted EPS was $0.53. In fourth-quarter 2017, these were $382.7 million, $128.0 million, $122.5 million and $1.08, respectively.
Debt, liquidity and distributions
Total debt at year-end was $4.53 billion, compared with $4.50 billion a year earlier. Debt represented 28.6% of total market capitalization; debt was 32.6% of adjusted total assets. The weighted-average effective interest rate was 3.8%, with a 5.1-year average maturity. Approximately 25% of debt was variable rate and 75% fixed or hedged. Cash and cash equivalents were $34.3 million, plus $17.4 million of restricted cash.
The $1.0 billion unsecured revolving facility had $540 million drawn and $4.2 million of capacity supporting letters of credit at year-end. Scheduled debt principal maturities were approximately $333 million in 2019 and $849 million in 2020. Operating cash flow exceeded investing outflows of $366.4 million and financing outflows of $405.1 million. Common dividends paid were $419.8 million. The 2018 annual dividend paid was $3.69 per share; dividends declared per share were $3.7275.
Material changes and unusual items
- Common-shareholder net income declined despite revenue and FFO growth. The main comparison effect was $127.4 million of gains on depreciable property sales in 2017, versus none in 2018. 2018 also included $4.5 million of gains on non-depreciable assets and a $2.6 million expense from marking the Series I preferred-stock embedded derivative to market; 2017 had $8.8 million of related income.
- Interest expense rose $18.8 million to $173.6 million, reflecting a higher effective rate and less capitalized interest. Merger and integration expense fell to $9.1 million from $20.0 million.
- In 2018 MAA acquired one 374-unit apartment community and sold five land parcels; it did not dispose of apartment communities. It spent $57.1 million on development and completed three projects. Three projects totaling 577 units remained under construction, with $118.5 million budgeted total cost and $30.9 million incurred at year-end.
- MAA renovated 8,155 units at an average $6,138 per unit; renovated units achieved average rent increases of 10.5% above comparable non-renovated units.
Outlook, risks and contingencies
Management described apartment demand as relatively strong but warned that elevated new supply, including higher 2018 permitting, could restrain rent growth—particularly in urban submarkets. It expected sustained occupancy and strong job growth to support modestly improved pricing growth in 2019; the filing provides no clear numeric earnings or revenue guidance. A February 2019 land sale generated a $9.0 million gain, not included in initial 2019 guidance; management said it would review guidance after first-quarter results. The company also entered into a $191.3 million fixed-rate mortgage at 4.43%, maturing in 2049.
Two Texas tenant late-fee class actions were certified, and the district court granted plaintiffs partial summary judgment; appeals were being pursued. Management estimated maximum exposure, excluding possible prejudgment interest, at $54.6 million and $8.4 million, respectively. Accrued loss contingencies for unresolved legal matters totaled $8.7 million at year-end. Other notable risks include interest-rate and refinancing exposure, regional concentration, apartment supply and competition, operating-cost inflation, development execution, severe weather and cybersecurity. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and MAA’s internal controls.
Important facts for investors to verify
- Underlying operating momentum: same-store rent growth, occupancy, NOI and expense trends, particularly in markets with elevated supply.
- Debt refinancing and interest-rate sensitivity, especially 2019–2020 maturities and variable-rate borrowings; confirm available revolver capacity and subsequent refinancing activity.
- Progress and financial exposure in both Texas late-fee class actions, including appeal status, any updated loss estimate and accrual adequacy.
- Whether management’s 2019 pricing outlook and post-first-quarter guidance update were achieved, including treatment of the $9.0 million land-sale gain.
- Development costs, completion timing and lease-up performance for the 577 units under construction.
- Dividend coverage against operating cash generation and capital requirements; FFO is non-GAAP and is not a substitute for cash flow or net income.