MID-AMERICA APARTMENT COMMUNITIES, INC. — Q1 2012 Form 10-Q
Business context and reporting period. This REIT owns, develops, renovates and manages Sunbelt apartment communities. For the three months ended March 31, 2012, it owned or held interests in 167 communities with 48,685 apartments across 13 states; 1,020 units were under construction. The financial statements are unaudited.
Financial performance and position
- Revenue and property operations: Total operating revenue was $119.6 million, up 14.0% from $104.9 million. Property revenue was $119.4 million. Same-store revenue rose 4.5%; large-market and secondary-market same-store revenue increased 5.2% and 3.6%, respectively. Total NOI was $69.5 million versus $61.5 million, up 13.0%; NOI as a share of property revenue was approximately 58.2%, versus 58.7% a year earlier.
- Profit: Net income attributable to MAA was $23.9 million, or $0.60 per diluted share, versus $8.8 million, or $0.24 per diluted share. Continuing-operations income attributable to common shareholders was $0.37 per share in both basic and diluted terms. The 2012 result included a $9.5 million gain from selling two properties; discontinued operations contributed $0.23 per diluted share. Income from continuing operations was $15.9 million versus $8.6 million.
- FFO: Funds from operations were $46.4 million, up from $37.0 million. Management attributed the increase principally to revenue growth, partly offset by higher property operating costs.
- Cash flow: Operating cash flow was $37.8 million, compared with $31.3 million. Investing used $34.0 million, including $26.7 million for development and $15.2 million for improvements and renovations; disposition proceeds were $29.0 million, of which approximately $21.6 million was placed in escrow for a tax-deferred exchange. Financing used $19.3 million. Cash and cash equivalents ended the quarter at $41.8 million, down from $57.3 million.
- Liquidity and debt: Total debt was $1.540 billion, down from approximately $1.650 billion at year-end 2011. The weighted-average debt rate was 3.8%; $1.375 billion was fixed or hedged, while approximately $165.3 million was variable-rate and unhedged. Unrestricted cash was $41.8 million; restricted cash was $22.7 million. The company reported $248.8 million available under its $250 million unsecured KeyBank facility and believed resources were adequate for operations, refurbishment and incremental investment.
- Capital and distributions: A March public offering generated approximately $120.1 million net proceeds. Common shares outstanding increased to 40.94 million from 38.96 million at December 31. The declared quarterly dividend was $0.66 per common share, up from $0.6275.
Material changes versus the prior comparable period
- Operating revenue, NOI, operating cash flow and FFO increased year over year, reflecting same-store rent growth and a larger non-same-store portfolio, primarily from acquisitions.
- Net income growth was amplified by the $9.5 million property-sale gain; the filing’s continuing-operations results provide a better view of recurring performance.
- Development spending rose to $26.7 million from $3.6 million. The company issued equity in a public offering rather than relying on the prior-year ATM and DRSPP issuances described in the filing.
- Debt declined by approximately $109.7 million from year-end, following debt repayments and use of equity proceeds.
Outlook, commentary and risks
- Management described apartment demand, occupancy and rents as strong, while remaining cautious because employment growth was slow. At quarter-end, portfolio average effective rent was $805 per unit versus $749 a year earlier, and occupancy was 96.3% versus 95.9%. Management expected positive pricing trends into the spring and summer leasing season but gave no quantified earnings or revenue guidance.
- Management cited limited new apartment supply, market diversification across more than 50 Sunbelt markets, and long-term demographic trends as supportive. It also noted that recession or weak employment could constrain rent growth.
- Key exposures include reliance on FNMA- and Freddie Mac-supported financing, refinancing and credit-market availability, variable interest rates and hedge effectiveness, loan covenants and collateral values, development and lease-up execution, property taxes and insurance, catastrophes, and the ability to sustain distributions. Approximately 64% of outstanding debt was borrowed through facilities provided by or credit-enhanced by the agencies, per the risk discussion.
- Management said first-quarter operating cash flow fell about $1.4 million short of funding property improvements and distributions, attributing the seasonal shortfall partly to real estate tax payments. It cautioned that sustained operating deterioration could require a dividend reduction. Credit facilities were reported in covenant compliance at March 31.
- Unusual item: management recorded an approximately $655,000 out-of-period adjustment related to capitalization of land acquisition costs. No material asset impairment was reported for continuing operations. The filing reported no legal proceedings and said disclosure controls were effective.
- After quarter-end, MAA acquired Adalay Bay (240 units) and Legacy at Western Oaks (479 units); the latter was purchased from a joint venture and generated a gain. In February it had purchased land and contracted to build a 270-unit community.
Important facts for investors to verify
- How much of reported earnings growth is recurring after excluding the $9.5 million disposition gain, and how same-store rents, occupancy and NOI develop in subsequent quarters.
- Whether development projects meet cost, completion and lease-up expectations, including the 1,020 units under construction.
- Debt maturities, actual availability of secured borrowing capacity, covenant headroom, and the company’s continued access to agency-supported financing.
- Exposure to interest-rate and hedge-basis movements, including the estimated $18.6 million expected reclassification to interest expense over the next 12 months.
- Whether operating cash generation supports capital spending and the $0.66 quarterly dividend without increased borrowing or further equity issuance.
- The effect and final treatment of the $655,000 out-of-period capitalization adjustment.