Business Context and Reporting Period
Company: Mid-America Apartment Communities, Inc. (MAA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: MAA is a self-administered Real Estate Investment Trust (REIT) owning, acquiring, renovating, developing, and managing apartment communities in the Sunbelt region of the United States. As of March 31, 2009, the portfolio consisted of 144 multifamily communities with 42,252 apartments across 13 states.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Operating Revenues | $93,600 | $90,749 |
| Net Income (Consolidated) | $11,845 | $8,211 |
| Net Income Attributable to MAA | $11,139 | $7,679 |
| Net Income Available for Common Shareholders | $7,923 | $4,463 |
| Funds From Operations (FFO) | $30,725 | $26,982 |
| Diluted EPS (Common) | $0.28 | $0.17 |
| Net Cash Provided by Operating Activities | $28,572 | $31,188 |
| Total Debt Outstanding | $1,354,246 | $1,323,056 |
| Cash and Cash Equivalents | $47,666 | $9,426 |
| Weighted Average Interest Rate | 4.5% | 5.1% |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by approximately $2.8 million (3.1%) compared to Q1 2008. This was driven by a $3.2 million increase from five properties acquired in 2008 and a $0.6 million increase from development communities. These gains were partially offset by a $1.0 million decrease in revenues from the "same store" portfolio due to a 0.2% decline in average effective rent and a 0.2% decline in physical occupancy.
- Profitability: Net income attributable to MAA increased by approximately $3.5 million. This improvement was primarily due to lower interest expenses (down $2.0 million) resulting from decreased interest rates, despite an increase in average debt outstanding. Additionally, the company recognized a $1.4 million gain on the sale of a property (Woodstream apartments).
- Operating Expenses: Property operating expenses increased by $1.3 million, largely due to the inclusion of 2008 acquisitions. However, expenses for the same store portfolio decreased by 7.7% in repair and maintenance costs due to lower resident turnover and operational efficiencies.
- Liquidity: Cash and cash equivalents increased significantly from $9.4 million to $47.7 million. This was driven by a net increase in credit line borrowings of $31.8 million to pay off a maturing mortgage and proceeds from the sale of real estate assets ($11.3 million).
Guidance, Outlook, and Risks
Management Commentary and Outlook: Management anticipates that the decline in same-store revenue is temporary, expecting revenue growth to resume in the second half of 2010. The company notes that weaker job formation impacted demand, but this was partially mitigated by a trend of households moving from homeownership back to rentals due to tighter mortgage standards. Management expects limited new apartment supply due to financing constraints, which should support absorption later in 2010. Interest costs are forecasted to remain lower for the balance of 2009 due to government actions improving liquidity in credit markets.
Key Risks and Contingencies:
- Capital Market Dependence: Approximately 90% of outstanding debt is provided by or credit-enhanced by Fannie Mae (FNMA) and Freddie Mac, which are under U.S. government conservatorship. Volatility in the relationship between LIBOR and the rates paid on these facilities could increase interest expense.
- Interest Rate Hedging: The company utilizes interest rate swaps and caps to manage variable rate debt. Continued market volatility could cause these hedges to become ineffective, potentially triggering loan covenant breaches or significant mark-to-market losses.
- Refinancing Risk: While the company has limited scheduled refinancings prior to 2011, a significant reduction in asset values could reduce available credit or require additional collateral postings.
- REIT Status: Failure to generate sufficient cash flows to pay required distributions could jeopardize REIT qualification, resulting in corporate taxation.
Investor Verification Checklist
- Debt Maturities: Verify the status of the $38.3 million Regions Bank mortgage that matured April 1, 2009, and the $50 million credit facility maturing May 24, 2010.
- Derivative Exposure: Review the fair value of interest rate swaps (liability of $71.3 million) and the potential impact of credit rating downgrades on swap counterparties (JP Morgan, RBC, Deutsche Bank) on collateral requirements.
- Same-Store Performance: Monitor the trend of same-store revenue and occupancy rates, specifically in weaker markets like Memphis, Atlanta, and Jacksonville, to validate the management's outlook for a 2010 recovery.
- Agency Support: Assess the stability of FNMA and Freddie Mac support for the company's $1.2 billion in credit-enhanced debt facilities.
- Discontinued Operations: Confirm the final disposition of assets held for sale (River Trace and Riverhills apartments) and the impact on future cash flows.