Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) filed this unaudited Form 10-Q for the quarter ended September 30, 2015. MAA operates through its 94.7%-owned Operating Partnership. At quarter-end, the company owned or had an interest in 253 apartment communities with 79,024 units across 15 states.
Financial performance and position
Amounts below are in millions, except per-share data and where noted.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $262.0 | $249.6 | $779.4 | $739.1 |
| Net income available to MAA common shareholders | $91.7 | $67.0 | $289.3 | $113.5 |
| Diluted EPS | $1.22 | $0.89 | $3.84 | $1.51 |
| FFO attributable to the company | $114.5 | $103.8 | $333.8 | $296.7 |
| Core FFO attributable to the company | $109.9 | $101.6 | $323.1 | $291.0 |
- Same-store property revenue rose 6.1% in Q3 and 5.8% for the nine-month period. Same-store NOI was $160.4 million for Q3 (up from $148.7 million) and $476.3 million for nine months (up from $443.7 million).
- Q3 same-store occupancy averaged 96.6%, versus 95.7% a year earlier; effective rent per unit rose 4.6%. Companywide average effective rent per unit was $999, and physical occupancy was 96.6%, excluding lease-up and development communities.
- For the nine months, operating cash flow was $361.5 million, versus $297.3 million. Investing activities used $75.9 million; financing activities used $267.4 million. Cash and cash equivalents ended at $44.9 million, with restricted cash of $89.3 million.
- Capital spending included $72.8 million of normal improvements, $22.5 million of renovations, and $24.9 million of development. Dividends declared were $0.77 per share in Q3 and $2.31 per share for nine months.
- Total debt was $3.43 billion, down from $3.52 billion at December 31, 2014; the weighted-average rate was 3.6%. Debt comprised $1.37 billion secured and $2.05 billion unsecured. Total assets were $6.89 billion and total liabilities were $3.71 billion.
- At September 30, the company had a $500 million unsecured revolving facility, with $184 million borrowed, and a $360 million Fannie Mae facility, with $320.8 million borrowed. It reported compliance with borrowing covenants.
Material changes versus prior comparable periods
- Revenue growth and lower operating costs in non-same-store properties supported higher continuing-operations income. Same-store property expenses rose 3.0% in Q3 and 3.8% for nine months, below same-store revenue growth.
- Reported net income growth substantially reflects property-sale gains: $54.6 million in Q3 and $190.0 million for nine months in 2015, compared with $36.0 million and $42.3 million, respectively, in 2014. The nine-month 2015 results included a roughly $40.4 million gain on a property held for 18 years.
- FFO and Core FFO increased more moderately than GAAP net income: nine-month FFO rose to $333.8 million from $296.7 million, and Core FFO to $323.1 million from $291.0 million.
- Merger and integration costs were zero for the 2015 nine-month period, compared with $3.2 million and $7.1 million, respectively, in 2014. General and administrative expense increased $3.0 million, mainly due to higher legal costs.
- The portfolio had 253 properties and 79,024 units at quarter-end, compared with 265 properties and 81,137 units a year earlier. During the first nine months, the company acquired five apartment communities and sold 21 apartment communities and one commercial property.
Outlook, management commentary, risks and unusual items
- Management said apartment demand remained strong, with record-high quarterly average occupancy. It expected high occupancy entering the typically slower fourth-quarter leasing season to support pricing while protecting occupancy. The filing provides no quantified earnings or FFO guidance.
- Management noted increased rental-unit supply and elevated multifamily permitting in several markets, but believed strong household demand and limited prior construction would help maintain balance. It cited diversified exposure to approximately 42 metropolitan areas across 15 states as a mitigating factor.
- Four development communities totaling 806 units were under construction; 232 units were complete. Expected total costs were $119.5 million, of which $65.5 million had been incurred. Completion dates ranged from Q4 2015 through Q2 2017.
- Principal risks include local market supply and demand, operating-cost increases, acquisition and development execution, refinancing and interest-rate exposure, collateral values, insurance losses, and maintaining REIT tax status. Approximately $5.0 million of derivative-related losses were expected to be reclassified into interest expense over the next 12 months.
- Construction-deficiency litigation concerning the sold Regatta at James Island condominiums remains in discovery. The company recorded aggregate loss-contingency accruals of $13.1 million but said it could not reasonably estimate any additional possible loss or range. Other ordinary-course legal matters were not expected by management to have a material adverse effect.
- Subsequent events: the company repaid $184.9 million of senior notes at maturity on October 1, 2015; replaced its revolving facility with a $750 million facility maturing in April 2020 (with an option to expand to $1.5 billion); and extended one $150 million term loan maturity from 2017 to 2021 while reducing its spread.
Important facts for investors to verify
- How much of reported earnings growth is attributable to property-sale gains versus recurring apartment operations; compare GAAP EPS with FFO and Core FFO.
- Whether same-store rent growth and occupancy can persist as new supply increases, and how property taxes, utilities, and personnel costs affect NOI.
- The timing and funding of development commitments, planned acquisitions and dispositions, and the expected returns on invested capital.
- Debt maturities, available borrowing capacity, covenant headroom, variable-rate exposure, and the impact of the new revolving facility and term-loan amendment.
- Potential exposure beyond the $13.1 million recorded legal-contingency accrual, given that additional losses in the Regatta litigation could not be estimated.