Business Context and Reporting Period
Company: Mid-America Apartment Communities, Inc. (MAA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
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, 2006, the company owned 100% of 137 properties (39,771 units) and held a 33.33% interest in one joint venture property (522 units), totaling 40,293 units across 138 communities in 13 states.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenues | $325,999,000 | $296,132,000 |
| Net Income | $20,945,000 | $19,744,000 |
| Net Income Available for Common Shareholders | $6,983,000 | $5,415,000 |
| Funds From Operations (FFO) | $87,197,000 | $77,414,000 |
| FFO Per Share (Diluted) | $3.33 | $3.20 |
| Net Cash Provided by Operating Activities | $101,326,000 | $99,426,000 |
| Total Debt Outstanding | $1,196,349,000 | $1,140,046,000 |
| Weighted Average Interest Rate | 5.6% | 5.4% |
| Debt to Undepreciated Book Value | 52% | N/A |
| Shareholders' Equity | $449,066,000 | $362,526,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by approximately $29.98 million (10.1%) compared to 2005. This was driven by a $15.13 million increase from same-store properties (due to a 3.1% increase in average rent per unit) and $14.85 million from acquisitions made in 2005 and 2006.
- Acquisitions: MAA acquired six properties totaling 2,066 units in 2006, investing approximately $194.97 million. No properties were sold in 2006.
- Operating Expenses: Property operating expenses increased by $10.65 million, primarily due to higher insurance premiums and utility costs, as well as expenses from new acquisitions.
- Interest Expense: Interest expense rose by $5.07 million due to increased debt levels and a rise in the average borrowing cost from 5.2% in 2005 to 5.5% in 2006.
- Equity Issuances: The company raised significant capital through equity, including a public offering of 1.15 million shares ($59.5 million net proceeds) in May 2006 and a controlled equity offering of 194,000 shares ($11.4 million net proceeds) in late 2006.
- Preferred Stock Redemption: In May 2006, MAA redeemed all outstanding Series G Cumulative Redeemable Preferred Stock ($10 million) using proceeds from the common stock offering.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects improved operating results in the near future due to strong job formation, improved demand in key markets (Atlanta, Dallas, Austin), and muted supply pressures. The company plans to implement a new "yield management" pricing program across its portfolio in 2007 to optimize rental revenues. MAA intends to continue acquiring properties in larger, faster-growing markets and selling mature assets that no longer meet investment criteria.
Risks and Contingencies
- Interest Rate Risk: Approximately $226 million of debt bore variable interest rates and was not hedged at year-end. Rising rates could increase debt service requirements.
- Insurance and Catastrophe Risk: A significant portion of assets are in areas exposed to windstorms and the New Madrid earthquake zone. Insurance limits may be inadequate for catastrophic losses, potentially breaching loan covenants.
- REIT Qualification: Failure to qualify as a REIT would subject the company to corporate income tax. MAA must distribute at least 90% of taxable income to maintain status.
- Environmental Liability: Potential liabilities related to mold or hazardous substances, though management believes exposure is limited and controlled.
Unusual Items
Subsequent to year-end (January 2007), MAA sold its interest in a joint venture (Verandas at Timberglen), booking a gain of $5.4 million and an incentive fee of $1 million, which will be recorded in 2007 financial statements.
Investor Verification Checklist
- Debt Maturities: Verify the schedule of debt maturities, noting that a significant portion of variable rate debt is subject to renewal or maturity in the near term (2007-2008).
- Insurance Coverage: Review the specific limits and deductibles for windstorm and earthquake coverage, given the concentration of assets in high-risk zones.
- FFO vs. Net Income: Confirm the reconciliation of Net Income to Funds From Operations (FFO), as FFO is the primary metric for REIT performance.
- Joint Venture Exit: Monitor the 2007 financial statements for the recognition of the $6.4 million gain from the joint venture disposition.
- Dividend Sustainability: Assess whether operating cash flow continues to cover distributions, noting a $4.9 million shortfall in 2006 that was covered by borrowings.