Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) filed this combined Form 10-Q with its 96.4%-owned operating partnership for the quarter ended September 30, 2017. MAA is a multifamily REIT and conducts substantially all of its business through the partnership. At quarter-end, the company owned or had interests in 303 communities in 17 states and the District of Columbia, with approximately 99,900 units. The December 2016 acquisition of Post Properties materially expanded the portfolio; consequently, reported year-over-year growth includes acquired operations and is not directly comparable to organic growth.
Key financial metrics
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total operating revenues | $384.6 | $276.9 | $1,146.2 | $818.2 |
| Net income | $119.0 | $88.9 | $212.5 | $182.3 |
| Net income available to MAA common shareholders | $113.8 | $84.3 | $202.2 | $172.8 |
| Diluted EPS | $1.00 | $1.12 | $1.78 | $2.29 |
| FFO attributable to the company (non-GAAP) | $176.2 | $117.3 | $522.4 | $359.2 |
| Operating cash flow | — | — | $553.1 | $389.2 |
- Q3 revenue grew 38.9%; same-store revenue rose 2.4% overall (2.5% large markets; 2.4% secondary markets). Nine-month revenue grew 40.1%; same-store revenue increased 3.0%.
- Q3 same-store average effective rent per unit rose 2.8% year over year. Same-store physical occupancy ended the quarter at 96.5%; portfolio occupancy excluding lease-up and development was 96.4%.
- Q3 FFO increased about 50%; nine-month FFO increased about 45%. Growth reflects the larger post-merger portfolio and should not be read as same-store growth.
- EPS declined despite higher common income, reflecting the substantially larger share count following the merger. Common dividends declared were $0.87 per share for Q3 and $2.61 for the nine months, versus $0.82 and $2.46, respectively, in 2016.
- Q3 property NOI was $235.4 million, approximately 61.2% of revenue, versus $170.3 million, approximately 61.5%, a year earlier. NOI is a non-GAAP measure.
Debt, liquidity and capital investment
- Total debt was $4.493 billion at September 30, 2017, with a weighted-average effective rate of 3.5% and average maturity of 4.1 years. Approximately 85.3% was fixed or capped after derivatives.
- Cash and cash equivalents were $47.9 million; restricted cash was $80.3 million. The $1.0 billion revolving facility had $250 million drawn and approximately $2.5 million supporting letters of credit, leaving about $747.5 million of stated capacity before other availability conditions.
- For the first nine months, operating cash flow was $553.1 million; investing activities used $232.3 million and financing activities used $306.5 million. Capital spending included $142.5 million for development and $82.0 million for normal improvements.
- In May, the partnership issued $600 million of 3.60% notes due 2027; proceeds were used to reduce revolver borrowings. Five developments totaling 1,434 units were under construction; estimated total costs were $305.0 million, of which $235.3 million had been incurred.
- Total assets were $11.53 billion and total equity was $6.55 billion at quarter-end. Management said operating cash flow exceeded normal capital improvements and common distributions, and it believed resources were adequate for operations and planned investment.
Material changes, outlook and risks
- The Post Properties merger drove much of the increase in revenue, expenses, depreciation, and debt. Q3 non-same-store revenue increased 390.0%; same-store results provide a clearer view of underlying operating trends.
- Q3 included $58.8 million of gains on real estate sales, $4.1 million of merger and integration costs, and $38.8 million of additional depreciation and amortization. Nine-month merger and integration costs were $14.5 million. These items affect interpretation of reported earnings.
- Management reported continued apartment demand and expected strong occupancy to support solid pricing growth in Q4 2017, while noting that fall and winter are typically slower leasing seasons. Elevated apartment supply was affecting the broader portfolio, particularly urban submarkets, including many acquired in the merger. Management cited lower year-to-date permitting in its markets as a potentially favorable future trend. No numerical earnings or FFO guidance was provided in the supplied filing text.
- Hurricane-related property expenses were reported in Q3, including impacts from Hurricanes Harvey and Irma. The filing also noted a $0.7 million loss from Hurricane Irma damage, offset by insurance proceeds related to an earlier casualty.
- A longstanding DOJ lawsuit inherited from Post Properties alleges accessibility violations under the Fair Housing Act and ADA; the DOJ seeks retrofits, damages and civil penalties, and no trial date had been set. The aggregate loss-contingency accrual was $35.1 million at quarter-end; the filing does not give a clear amount attributable specifically to this case or a reasonably estimable potential range.
- Other risks include rent and expense pressures, development cost or timing overruns, refinancing and interest-rate exposure, integration of the merger, and the possibility that deterioration in operations could require a reduction in distributions. Management reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Separate merger-driven growth from same-store performance; assess same-store rent growth, occupancy, expenses and NOI margins.
- Reconcile GAAP earnings to FFO and evaluate the effects of property-sale gains, merger/integration costs, derivative valuation changes and higher depreciation.
- Review debt maturities and refinancing needs, variable-rate exposure, revolver availability and the planned funding of development and capital spending.
- Monitor apartment supply and leasing conditions, especially in acquired urban markets, and track hurricane-related costs and insurance recoveries.
- Follow developments in the DOJ accessibility litigation, the loss-contingency accrual and finalization of the merger purchase-price allocation.