Business Context and Reporting Period
Company: Mid-America Apartment Communities, Inc. (Mid-America)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: Mid-America 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, 2008, the company owned or held interests in 140 multifamily communities comprising 41,120 apartments across 13 states.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Operating Revenues | $92,144 | $84,991 |
| Net Income | $7,679 | $11,324 |
| Net Income Available to Common Shareholders | $4,463 | $7,833 |
| Funds From Operations (FFO) | $26,982 | $24,092 |
| Net Cash Provided by Operating Activities | $31,188 | $20,110 |
| Total Debt Outstanding | $1,271,773 | $1,264,620 |
| Cash and Cash Equivalents | $7,059 | $17,192 |
| Dividends Declared per Common Share | $0.615 | $0.605 |
Material Changes vs. Prior Period
- Revenue Growth: Total property revenues increased by approximately $7.2 million (8.4%) compared to Q1 2007. This was driven by a $3.8 million increase from five properties acquired since Q1 2007, a $0.4 million increase from development communities, and a $3.0 million increase from the existing portfolio. The same-store portfolio saw a 2.6% increase in average effective rent and a 0.7% increase in occupancy.
- Net Income Decline: Net income decreased by approximately $3.6 million. This decline was primarily due to the absence of a $6.4 million gain in Q1 2008 from the sale of a joint venture property and associated incentive fees that occurred in Q1 2007. Additionally, interest expense increased by $0.3 million due to higher average debt outstanding, partially offset by a decrease in the average borrowing cost (5.12% in 2008 vs. 5.53% in 2007).
- FFO Increase: Funds From Operations (FFO) increased by $2.9 million to $26.98 million, reflecting improved performance from existing properties and the contribution of recent acquisitions.
- Cash Flow: Net cash provided by operating activities increased by $11.1 million to $31.2 million. However, net cash used in investing activities increased significantly to $45.8 million (from $1.0 million in 2007) due to $23.5 million in wholly owned acquisitions and $6.8 million in joint venture acquisitions.
Guidance, Outlook, Risks, and Unusual Items
- Market Outlook: Management notes continued improvement in rental demand and occupancy in most markets, with Texas and Tennessee performing exceptionally well. Florida markets showed slower performance following years of rapid growth. Management anticipates positive absorption for the next two to three years due to limited new supply.
- Derivative Instruments: The company adopted FAS 157 (Fair Value Measurements) on January 1, 2008. This resulted in a marked-to-market adjustment on derivative instruments of $(25.58) million, creating a total comprehensive loss of $(17.9) million for the quarter, despite positive net income. These unrealized losses relate to interest rate swaps and caps used to hedge variable rate debt.
- Liquidity and Debt: Total debt was $1.27 billion with a weighted average interest rate of 5.1%. Approximately 71% of debt is credit-enhanced by FNMA. The company has $1.3 billion in available borrowing capacity under secured credit facilities.
- Risk Factors:
- Interest Rate Risk: Approximately $185 million of debt is variable rate and unhedged. Volatility in the spread between LIBOR and FNMA DMBS rates could impact hedge effectiveness and liquidity.
- Refinancing Risk: Significant reliance on FNMA and Freddie Mac for credit enhancement and financing.
- REIT Compliance: Failure to generate sufficient cash flow could limit the ability to pay required distributions to maintain REIT status.
- Market Conditions: Potential for overbuilding, competition from condominiums/single-family homes, and economic downturns affecting job growth.
Investor Verification Checklist
- Derivative Valuation: Verify the impact of the $25.6 million unrealized loss on derivatives (classified as Level 3 inputs) on future earnings and equity, and assess the effectiveness of the hedging strategy given market volatility.
- Debt Maturities: Review the schedule of debt maturities, noting that a significant portion of variable rate debt and credit facilities mature or renew in the near term (2008-2009), requiring refinancing.
- Acquisition Performance: Monitor the performance of the five properties acquired since Q1 2007 to ensure they meet projected return criteria and contribute to revenue growth as anticipated.
- Dividend Coverage: Confirm that Funds From Operations (FFO) continue to cover dividend payments ($0.615 per share) and capital expenditure requirements, especially given the reduction in net income.
- FNMA Exposure: Assess the creditworthiness of FNMA, which provides credit enhancement for approximately $901 million of the company's debt, and the potential impact of any disruption in the FNMA DMBS market.