Business Context and Reporting Period
Company: Mid-America Apartment Communities, Inc. (MAA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: MAA is a self-administered and self-managed REIT focused on acquiring, owning, and operating apartment communities in the Sunbelt region of the United States. As of December 31, 2007, the company owned 100% of 137 properties comprising 40,248 apartment units across 13 states. The company operates through a single business segment and utilizes an operating partnership structure.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Operating Revenues | $352.96 million | $323.66 million |
| Net Income | $39.95 million | $20.95 million |
| Net Income Available to Common Shareholders | $25.67 million | $6.98 million |
| Funds from Operations (FFO) | $99.10 million | $87.20 million |
| FFO per Share/Unit (Diluted) | $3.55 | $3.33 |
| Net Cash Provided by Operating Activities | $117.89 million | $100.91 million |
| Total Debt Outstanding | $1.26 billion | $1.20 billion |
| Weighted Average Interest Rate | 5.4% | 5.6% |
| Fixed Charge Coverage Ratio | 2.27x | 2.15x |
| Physical Occupancy (Same Store) | 94.8% | 94.2% |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by approximately $29.5 million (9.1%) compared to 2006. This was driven by a 2.5% increase in average rent per unit for same-store properties, revenue from six properties acquired in 2006, and four properties acquired in 2007.
- Profitability: Net income increased by approximately $19.0 million, primarily due to improved operating performance, gains on the disposition of four communities ($9.2 million), and a gain on the sale of a joint venture community ($5.4 million).
- FFO Performance: FFO increased by 13.6% to a record $99.1 million, reflecting a 6.6% increase in FFO per share/unit.
- Portfolio Activity: The company acquired four communities (997 units) and sold four communities (720 units) in 2007. Additionally, 2,075 apartments were renovated, achieving average rent increases of 14%.
- Dividends: The common dividend was increased to an annual rate of $2.46, effective with the January 31, 2008 distribution.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects rental demand to remain strong in most markets due to limited new apartment construction and controlled competition from single-family housing. The company anticipates positive absorption for the next two to three years. MAA plans to continue its strategy of acquiring properties with repositioning potential and selling mature assets to enhance shareholder value.
Risks and Contingencies
- Capital Market Volatility: The filing highlights unusual volatility in domestic financial markets, particularly in the subprime mortgage sector, which has tightened liquidity. This poses a risk to refinancing and the creditworthiness of FNMA, which provides credit enhancement for approximately $906 million of MAA's debt.
- Interest Rate Risk: Approximately $226 million of debt bore variable interest rates at year-end. While the company uses swaps and caps to hedge, continued market volatility could impact hedge accounting treatment or debt covenants.
- Insurance and Catastrophes: A significant portion of assets are in areas exposed to windstorms and the New Madrid earthquake zone. Insurance deductibles and limits may be insufficient in the event of a major loss, potentially breaching loan covenants.
- REIT Qualification: Failure to qualify as a REIT would subject the company to corporate income tax, significantly reducing earnings available for distribution.
Unusual Items
- Discontinued Operations: Gains on the sale of discontinued operations totaled $9.2 million in 2007, compared to zero in 2006.
- Joint Venture Gains: The company recorded a $5.4 million gain and a $1.0 million incentive fee from the sale of a joint venture property (Verandas at Timberglen) in early 2007.
- Preferred Stock Redemption: In October 2007, MAA redeemed all outstanding Series F Cumulative Redeemable Preferred Stock for $11.9 million.
Investor Verification Checklist
- Debt Maturities: Verify the schedule of debt maturities, noting that a significant portion of the $1.1 billion in secured credit facilities matures between 2008 and 2014, requiring refinancing in a volatile market.
- Interest Rate Hedging Effectiveness: Review the details of interest rate swaps and caps to ensure they remain effective hedges given the widening spread between LIBOR and DMBS rates mentioned in the filing.
- Same-Store NOI Trends: Confirm the sustainability of the 5.8% same-store NOI growth, particularly in Florida markets which underperformed compared to Texas and Tennessee.
- Insurance Coverage: Assess the adequacy of insurance coverage and deductibles for properties in high-risk zones (wind/earthquake) relative to the company's loan covenants.
- Joint Venture Fund I: Monitor the performance of the newly formed Mid-America Multifamily Fund I, LLC, which made its first acquisition in January 2008.