MID-AMERICA APARTMENT COMMUNITIES, INC. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. Unaudited consolidated results cover MAA and its Operating Partnership, through which substantially all business is conducted. MAA owned approximately 94.8% of the Operating Partnership at quarter-end.
Business context
MAA owned and operated 255 apartment communities with 79,896 units across 15 states. Four development communities totaling 628 units were under construction; expected total project costs were $96.7 million, of which $34.0 million had been incurred. The company also owned interests in commercial properties.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total operating revenue | $269.0 million | $258.6 million; up 4.0% |
| Net income attributable to MAA common shareholders | $43.4 million | $61.3 million |
| MAA diluted EPS | $0.58 | $0.81 |
| Dividends declared per common share | $0.82 | $0.77 |
| Net operating income (NOI) | $168.1 million | $157.9 million |
| Funds from operations (FFO), attributable to MAA | $119.4 million | $106.9 million |
| Core FFO, attributable to MAA | $114.5 million | $105.2 million |
| Net cash from operating activities | $104.1 million | $102.9 million |
| Cash and cash equivalents at period-end | $28.2 million | $37.6 million at December 31, 2015 |
| Total debt | $3.444 billion | $3.428 billion at December 31, 2015 |
Operating cash flow was $104.1 million; investing activities used $65.9 million and financing activities used $47.5 million. Cash decreased by $9.4 million during the quarter. Net income fell despite revenue and NOI growth, largely because Q1 2015 included substantially larger gains on sales of depreciable real estate.
Same-store revenue rose 5.5% overall: large-market same-store revenue increased 5.9% and secondary-market revenue increased 4.6%. Management attributed the same-store growth primarily to 4.5% higher average effective rent per unit and 0.6% higher average physical occupancy. Same-store property expenses increased 2.9%. Average same-store physical occupancy was 96.2% for the quarter; reported portfolio physical occupancy, excluding lease-up and development, was 96.7%.
Debt, liquidity and capital
- Debt carried a weighted-average interest rate of 3.7%. Approximately 92.9% of outstanding debt was fixed-rate or capped after considering derivatives; borrowings were 29.7% of total capitalization.
- Debt comprised $2.196 billion of unsecured notes payable and $1.248 billion of secured notes payable. The $750 million unsecured revolving credit facility had $130 million drawn and approximately $2.8 million supporting letters of credit; it matures in April 2020 and has an expansion option up to $1.5 billion.
- At March 31, total assets were $6.828 billion and total liabilities were $3.683 billion. The filing reports $21.6 million of restricted cash in addition to $28.2 million of cash and cash equivalents.
- Management stated that resources were adequate for current operations, property refurbishment and incremental investment. It noted that significant operating deterioration could make resources insufficient to maintain distributions, potentially requiring a dividend reduction.
Changes, outlook and risks
- MAA reported net income of $45.8 million versus $64.7 million a year earlier; MAA common-shareholder income was $43.4 million versus $61.3 million. The prior-year period included a $30.2 million gain on depreciable real estate sales, compared with $0.8 million in Q1 2016. Q1 2016 also included a $1.6 million gain on non-depreciable real estate sales and a $0.9 million net casualty loss, primarily from fires at three properties.
- FFO increased approximately $12.5 million and Core FFO approximately $9.3 million year over year, according to management. These are non-GAAP measures and should not be treated as substitutes for GAAP results or cash flow.
- Management described apartment demand as strong and said high occupancy positioned the company to pursue pricing during the typically strong spring leasing season. It provided no specific numerical earnings, rent-growth or FFO guidance in the supplied filing text.
- Interest-rate exposure, refinancing and access to financing, property-market conditions, operating-cost increases, development timing and budgets, acquisition and disposition execution, casualty losses, and REIT qualification are among the disclosed risks. Derivative liabilities were $12.3 million; management estimated $3.6 million would be reclassified to interest expense over the next 12 months.
- Regatta at James Island construction-deficiency litigation was settled after quarter-end, with court approval on April 11, 2016; the settlement amount was included in the loss-contingency accrual. Aggregate accrued loss contingencies were $14.0 million at March 31, 2016, compared with $13.5 million at year-end.
- During the quarter, the company acquired one 314-unit community and sold commercial property and undeveloped land. It also reported subsequent April sales of two parcels totaling 10.5 acres. Management reported no material changes to risk factors from its 2015 Form 10-K and no material changes to internal control over financial reporting.
Key facts for investors to verify
- Whether same-store rent growth and occupancy remained strong after the spring leasing season, and how those trends affected later-quarter results.
- Debt maturities and refinancing needs, available revolver capacity, interest-rate exposure, and the assumptions underlying the 92.9% fixed-or-capped debt figure.
- The composition and expected cash impact of the $14.0 million loss-contingency accrual, including the completed Regatta settlement.
- Development project costs, completion schedules and lease-up progress, plus the returns expected from acquisitions and dispositions.
- Reconciliation of FFO and Core FFO to GAAP net income and the sustainability of the $0.82 quarterly dividend in relation to operating cash flow and capital needs.