Mid-America Apartment Communities, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparisons are primarily with 2011. MAA is a self-managed REIT focused on owning and operating Sunbelt apartment communities. At year-end, it owned 160 communities with 47,809 units and held interests in six additional communities through joint ventures.
Financial performance
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Total operating revenue | $497.2 million | $430.8 million | Up 15.4%; property revenue growth reflected same-store rent gains and acquisitions. |
| Property NOI | $297.1 million | $258.0 million | Up 15.1%; approximately 59.9% of property revenue in 2012 versus 60.0% in 2011. |
| Income from continuing operations | $67.6 million | $34.8 million | Up 94.1%. |
| Net income attributable to MAA | $105.2 million | $48.8 million | Includes a $41.6 million gain on property sales in 2012, versus $12.8 million in 2011. |
| Diluted EPS | $2.56 | $1.31 | Continuing-operations diluted EPS was $1.57 versus $0.89. |
| FFO | $196.3 million | $155.5 million | Up approximately $40.8 million; non-GAAP measure defined by the company. |
| Cash from operating activities | $211.0 million | $172.3 million | Up $38.7 million. |
| Cash and cash equivalents | $9.1 million | $57.3 million | Down $48.2 million. |
| Total debt | $1.674 billion | $1.650 billion | Weighted-average rate was 3.8%; 95% of debt was fixed or capped after derivatives. |
| Dividends declared per common share | $2.675 | $2.5425 | Quarterly rate increased to $0.695; the declared fourth-quarter dividend was paid in January 2013. |
Material changes and operating trends
- Same-store revenue increased 4.7% overall. Large-market same-store revenue rose 6.0% and secondary-market revenue rose 3.2%; effective monthly rent per unit increased 5% year over year.
- Average occupancy for the wholly owned portfolio was 95.1%, unchanged from 2011. Management reported strong rental demand and limited new supply, while noting that job growth remained below average.
- Acquisitions added 2,452 units for $312.0 million. MAA sold nine communities totaling 2,254 units and reported $110.1 million of disposition proceeds.
- Property operating expenses excluding depreciation rose $20.7 million, mainly from acquisitions and higher personnel and insurance costs. Interest expense increased $1.3 million, partly reflecting higher average debt.
- MAA raised equity in 2012, including $120.1 million net proceeds from a public offering and $75.9 million net proceeds from at-the-market sales. The resulting share issuance increased the equity base.
Liquidity, debt, outlook and risks
- Operating cash flow exceeded normal capital improvements, distributions to unitholders and dividends by approximately $51.0 million in 2012. Investing activities used $329.2 million, including $312.0 million for acquisitions and $74.0 million for development; financing activities provided $70.0 million.
- At year-end, net debt to undepreciated book value was approximately 44%, against a 60% covenant limit. Management’s stated target was total debt of approximately 43%–48% of undepreciated asset book value. MAA reported covenant compliance and investment-grade ratings.
- Debt included substantial agency-backed borrowing. The company’s credit access and refinancing capacity depend in part on Fannie Mae and Freddie Mac, lender availability, collateral values and compliance with covenants. Interest-rate swaps and caps reduce, but do not eliminate, rate and counterparty risks.
- Three development projects totaling 774 units remained under construction or not yet delivered at year-end. Expected total project costs were $101.1 million, of which $43.9 million had been incurred; completion was expected by the fourth quarter of 2014. Two completed developments were each 77% leased.
- Management expected apartment demand and rent growth to benefit from demographic trends and disciplined mortgage lending, but cautioned that recession, weaker employment or increased multifamily supply could constrain rent growth. No quantified earnings or FFO guidance is provided in the supplied filing text.
- Key risks include refinancing and agency funding dependence, variable rates and hedge effectiveness, property-tax and insurance cost increases, development delays or lease-up shortfalls, competition, catastrophic losses and maintaining REIT qualification. Management stated that distributions at current rates could require additional borrowing if operating conditions deteriorate.
Unusual items and disclosures
- The 2012 net-income increase was materially affected by gains on property sales; the filing’s financial statements report a $41.6 million 2012 gain and $12.8 million in 2011. Investors should distinguish these gains from recurring property operations.
- MAA recorded an out-of-period equity adjustment that reduced additional paid-in capital by $27.0 million and increased accumulated distributions in excess of net income by $24.9 million and noncontrolling interests by $2.1 million. Management deemed it immaterial and reported no net effect on total equity or net income. A separate $655,000 land-cost capitalization adjustment was also deemed immaterial.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. No material litigation was reported.
Most important facts for investors to verify
- Reconcile reported earnings growth with recurring operating performance, property-sale gains and the company’s FFO calculation.
- Review the full debt maturity schedule, available borrowing capacity, covenant headroom and agency-financing exposure, including the timing and terms of refinancing.
- Assess whether operating cash flow and recurring FFO support dividends, capital spending and development commitments without continued reliance on borrowing or equity issuance.
- Check lease-up progress, project costs and delivery timing for developments, and monitor occupancy, rent growth and new supply in MAA’s markets.
- Confirm the treatment and materiality of the out-of-period adjustments, and consider share dilution from equity offerings and redeemable partnership units.