Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) and its operating partnership filed this combined unaudited Form 10-Q for the quarter ended September 30, 2014. MAA conducts substantially all business through the partnership, in which it held a 94.7% interest. At quarter-end, the company owned or operated 265 apartment communities with 81,137 units in 14 states. The October 2013 Colonial Properties merger substantially expanded the portfolio; 2013 comparative results generally do not include Colonial.
Key financial metrics
Amounts below are in millions except per-share data, occupancy and where noted.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total operating revenue | $248.8 | $135.4 | $736.8 | $395.1 |
| Net income attributable to MAA common shareholders | $67.0 | $44.3 | $113.5 | $124.6 |
| Basic/diluted EPS | $0.89 | $1.04 | $1.51 / $1.51 | $2.92 / $2.91 |
| EPS from continuing operations | $0.89 | $0.37 | $1.43 | $1.19 |
| FFO | $103.8 | $50.1 | $296.7 | $156.1 |
| Core FFO | $101.6 | $55.4 | $291.0 | $167.4 |
- Operations: Q3 same-store property revenue grew 4.7% in large markets and 1.6% in secondary markets. Management cited a 5.2% increase in average rent per unit as a key driver. Same-store physical occupancy averaged more than 95.6% for the quarter and ended September at 96.4%; same-store effective rent increased 3.2% year over year.
- Cash flow: For the first nine months, operating cash flow was $323.1 million, investing cash outflow was $81.4 million, and financing cash outflow was $243.3 million. Cash and cash equivalents were $87.8 million at September 30, versus $89.3 million at year-end 2013.
- Debt and liquidity: Total debt was $3.43 billion, down from approximately $3.47 billion at December 31, 2013. Debt comprised $1.55 billion secured and $1.88 billion unsecured; the weighted average rate was 3.7%, with average maturity of 4.7 years. The $500 million unsecured bank facility had no borrowings and $496.2 million available. The company reported compliance with debt covenants.
- Balance sheet and distributions: Total assets were $6.78 billion and total liabilities $3.70 billion. MAA declared dividends of $0.73 per common share in Q3 and $2.19 per share for the nine months.
Material changes versus prior comparable periods
- Revenue, FFO and Core FFO rose sharply, primarily because the Colonial portfolio was included in 2014 but not in the 2013 comparison. Same-store revenue growth was more moderate.
- Q3 net income attributable to MAA increased to $67.0 million from $44.3 million. Nine-month net income fell to $113.5 million from $124.6 million, while continuing-operations EPS rose to $1.43 from $1.19. The prior-year period included larger gains on sales of discontinued operations, affecting reported net income and EPS.
- Nine-month property operating costs increased to $525.5 million from $256.2 million, and depreciation and amortization to $229.9 million from $97.2 million, largely reflecting the enlarged portfolio. Interest expense increased to $89.1 million from $45.7 million, primarily due to higher average debt after the merger.
- Interest rates and debt balances reflect refinancing and new issuance: the company issued $400 million of 3.75% notes due 2024, and reported a 3.7% weighted average borrowing rate versus 3.2% a year earlier.
Outlook, commentary, risks and unusual items
- Outlook: No quantified earnings or FFO guidance is provided in the supplied filing text. Management said strong occupancy and sequential rent growth positioned it to maintain occupancy while maximizing pricing in Q4 2014. It expects increased apartment supply from recent permitting, while citing household formation and demographic trends as supportive of demand.
- Portfolio and investment: Two developments totaling 514 units were under construction; expected total cost was $72.9 million, of which $49.2 million had been incurred. Completion was expected in Q1 and Q2 2015. The company also reported substantial 2014 property dispositions and acquisitions.
- Unusual items: Q3 included a $36.0 million gain on sale of depreciable real estate not classified as discontinued operations, a $3.1 million gain from real estate joint ventures (including a $2.8 million Fund II promote), and a $2.6 million debt-extinguishment loss. For nine months, the corresponding real-estate sale gain was $42.3 million. A noncash $2.3 million out-of-period adjustment was recorded in Q3 for interest expense related to acquired off-market swaps; management said the prior-year impact understated 2013 MAA net income by about $0.8 million, or $0.01 per diluted share, and did not affect shareholders’ equity.
- Risks and contingencies: The filing highlights exposure to apartment-market conditions, rent and expense trends, acquisition integration, development costs and timing, refinancing and interest rates, credit availability, and real-estate values. Derivative liabilities were $13.1 million; management estimated $7.5 million would be reclassified to interest expense over the next 12 months. Construction-deficiency litigation relating to a former Colonial property remains in discovery; a probable-loss accrual was recorded, but any additional reasonably possible loss could not be estimated. Management said it believed resources were adequate for operations and planned investment, while warning that significant deterioration could require reducing distributions.
- Subsequent events: On October 1, 2014, the company amended a $150 million term loan to lower its spread and extend maturity to March 2020. It subsequently closed purchases of two communities totaling 808 units.
Important facts for investors to verify
- Separate the Colonial merger’s scale effect from underlying same-store rent, occupancy, revenue and NOI trends; confirm the precise scope of each comparison.
- Review FFO and Core FFO reconciliations and the effect of sale gains, debt adjustments, merger costs and integration costs; these are non-GAAP measures.
- Assess debt maturities, variable-rate exposure, credit-facility availability, refinancing needs and covenant headroom, including the effect of interest-rate hedges.
- Track development spending, lease-up and completion timing, as well as proceeds and returns from property sales and acquisitions.
- Monitor the construction-deficiency litigation and any changes to the recorded loss estimate, and review the $2.3 million out-of-period adjustment and its accounting treatment.
- Confirm the company’s subsequent operating results against management’s stated Q4 occupancy and pricing expectations; the filing provides no numerical forward guidance.