Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) filed this unaudited Form 10-Q for the three months ended March 31, 2017. MAA operates primarily through its 96.4%-owned operating partnership. At quarter-end, the company owned or had an interest in 304 multifamily communities across 16 states and the District of Columbia, with approximately 100,035 apartment units.
Results include Post Properties, acquired December 1, 2016. The acquisition substantially expanded the portfolio and makes year-over-year consolidated comparisons less like-for-like; acquired communities are classified as non-same-store.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total operating revenue | $378.9 million | $269.0 million; up 40.8% |
| Net income | $43.4 million | $45.8 million |
| Net income available to MAA common shareholders | $41.0 million | $43.4 million |
| Diluted earnings per common share | $0.36 | $0.58 |
| Funds from operations (FFO), attributable to the company | $171.7 million | $119.4 million; up approximately $52.3 million |
| Operating cash flow | $138.0 million | $104.1 million |
| Cash and cash equivalents at quarter-end | $34.0 million | $33.5 million at Dec. 31, 2016 |
| Total debt at quarter-end | $4.56 billion | $4.5 billion at Dec. 31, 2016 |
| Quarterly dividend declared per common share | $0.87 | $0.82 |
Total NOI was $237.6 million, versus $168.1 million. NOI as a share of operating revenue was approximately 62.7%, compared with 62.5%; this property-level measure excludes depreciation and amortization and is not a GAAP profit margin. Same-store revenue increased 3.3%, while same-store NOI increased 3.6%.
Property operating expenses were $141.3 million, up 40.0%; depreciation and amortization was $130.0 million, up $54.9 million. Interest expense was $36.6 million, up $4.4 million. The company reported merger and integration costs of $6.2 million and $29.3 million of additional depreciation and amortization related to the merger’s asset-value step-up.
Investing cash outflow was $90.7 million, including $59.8 million for development. Financing cash outflow was $46.9 million, including $98.8 million of common dividends. Net cash increased $0.4 million. Debt carried a weighted average interest rate of 3.4%; approximately 92.9% was fixed or capped after derivatives. The $1.0 billion revolving facility had $570 million borrowed and approximately $2.2 million supporting letters of credit at quarter-end.
Material changes versus the prior comparable period
- Revenue rose 40.8%, largely reflecting the acquired Post portfolio. Non-same-store and other revenue increased 411.5%; large-market same-store revenue rose 3.8% and secondary-market same-store revenue rose 2.4%.
- Common-shareholder net income declined approximately $2.4 million, and diluted EPS fell to $0.36 from $0.58. The filing attributes the decline principally to merger-related costs, higher depreciation and amortization, higher operating expenses and interest, and the absence of $2.4 million of prior-year real estate sale gains.
- FFO increased despite lower GAAP common income, primarily reflecting higher property revenue and the exclusion of real-estate depreciation from FFO.
- Operating cash flow increased to $138.0 million. Investing outflow rose to $90.7 million, with development spending of $59.8 million versus $13.0 million a year earlier; financing outflow was broadly similar year over year.
- Same-store average effective rent per unit increased 2.9% in each same-store segment in the quarter. Same-store physical occupancy ended March at 96.7%; average daily same-store occupancy was 96.2%.
Outlook, management commentary, risks and unusual items
- Management reported strong apartment demand and expected the quarter-end occupancy level to support rent pricing during the typically busy spring and summer leasing seasons. It offered no specific numerical earnings or operating guidance in the supplied filing text.
- Management expects merger integration, shared practices, scale and purchasing power to support potential revenue and cost efficiencies, while cautioning that integration and realization of anticipated benefits are uncertain.
- Seven development communities totaling 2,420 units were under construction. Estimated total project costs were $505.4 million, of which $376.7 million had been incurred by March 31, 2017. Completion timing ranges from Q2 2017 through Q3 2018.
- Management said operating cash flow exceeded normal capital improvements and common distributions in both periods, but warned that significant deterioration in operations could make resources insufficient to maintain distributions at the current rate. It otherwise believed resources were adequate for operations, refurbishment and incremental investment.
- Debt and interest-rate exposure remain material. Debt maturities include amounts due in 2017 and 2018; the filing reports $4.56 billion of debt and significant variable-rate borrowing, partly managed with swaps and caps. Management identifies refinancing access and cost, interest rates, real-estate market conditions, operating costs, development execution, acquisition integration, and insurance or catastrophe losses among key risks.
- The company inherited a Department of Justice case alleging accessibility violations at certain Post properties under the Fair Housing Act and ADA. The DOJ seeks retrofits, injunctive relief, monetary damages and civil penalties; no trial date was set, and the filing says a loss range was not clearly estimable. Aggregate loss-contingency accruals were $41.8 million at March 31, 2017.
- The merger’s preliminary purchase-price allocation remained subject to adjustment. The preferred-stock redemption feature was recorded as an embedded derivative; its fair value was $14.7 million at quarter-end, with a $2.3 million mark-to-market increase recorded in non-property expense during the quarter.
Important facts for investors to verify
- Review the contribution of Post Properties and distinguish acquired-portfolio growth from same-store performance; assess whether integration benefits emerge as anticipated.
- Track same-store rent growth, occupancy, expense trends and supply conditions across markets, particularly as leasing enters the spring and summer season.
- Confirm debt maturities, revolver availability, refinancing terms, variable-rate exposure and the continuing effectiveness of interest-rate hedges.
- Assess development budgets, remaining commitments, completion schedules and lease-up outcomes for the seven projects under construction.
- Monitor the DOJ accessibility litigation, the $41.8 million aggregate contingency accrual and any revisions to the merger purchase-price allocation.
- Compare recurring cash generation and capital needs with dividends; the filing expressly notes that a significant operating deterioration could require a distribution reduction.