Mid-America Apartment Communities, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. MAA operates through Mid-America Apartments, L.P. (MAALP), which MAA owned approximately 94.8% of at quarter-end. The company owned and operated 251 apartment communities with 79,170 units in 15 states.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $276.9 million | $262.0 million | $818.2 million | $779.4 million |
| Net income available to MAA common shareholders | $84.3 million | $91.7 million | $172.8 million | $289.3 million |
| EPS, diluted | $1.12 | $1.22 | $2.29 | $3.84 |
| FFO attributable to the company | $117.3 million | $114.5 million | $359.2 million | $333.8 million |
| Core FFO attributable to the company | $118.6 million | $109.9 million | $351.8 million | $323.1 million |
| Dividends declared per common share | $0.82 | $0.77 | $2.46 | $2.31 |
- Q3 revenue rose 5.7%; same-store revenue increased 3.6%. Same-store average effective rent per unit rose 4.2% year over year, and same-store physical occupancy ended the quarter at 96.6%.
- Q3 total NOI was $170.3 million, up from $160.4 million; NOI as a share of operating revenue was approximately 61.5%, versus 61.2% in Q3 2015. Nine-month NOI was $507.7 million versus $476.3 million.
- Cash from operations for the first nine months was $389.2 million, compared with $361.5 million. Investing used $216.1 million and financing used $182.9 million; cash declined $9.7 million to $27.8 million. Restricted cash was $31.0 million.
- Total debt was $3.434 billion, with a 3.6% weighted-average rate and approximately 4.1 years to maturity. Approximately 92.9% of debt was fixed or capped after derivatives. Total assets were $6.881 billion and total liabilities $3.724 billion at quarter-end.
Material changes and unusual items
- Net income and EPS declined despite revenue and FFO growth, primarily because gains on depreciable real estate sales were lower. Nine-month gains were $48.6 million in 2016 versus $190.0 million in 2015; prior-year sales included 21 apartment communities and a commercial property, compared with seven communities and a commercial property in 2016.
- Q3 interest expense increased $1.9 million to $32.2 million; nine-month expense increased $4.9 million to $96.4 million, including effects of debt issued in late 2015 and lower fair-value amortization, partly offset by lower mortgage interest.
- The company recorded $3.9 million of merger-related expenses in Q3 and year to date. Nine-month real estate purchases were $262.3 million, development spending $42.6 million, and real estate disposition proceeds $187.4 million.
- Operating cash flow exceeded normal capital improvements and shareholder and unitholder distributions during the nine-month period. The company said it had adequate resources for current operations, refurbishment, and incremental property investment.
Outlook, risks and contingencies
- No specific financial guidance is provided in the supplied filing text. Management described apartment demand as strong, citing occupancy and rent growth, while noting that leasing traffic typically slows in fall and winter. Management expected market supply and demand to remain broadly balanced, but acknowledged future supply growth.
- MAA agreed to acquire Post Properties in a stock-based merger: Post common shares were to convert at 0.71 MAA shares per share. The company anticipated issuing approximately 38 million common shares and 868,000 preferred shares, with closing expected on or about December 1, 2016, subject to shareholder approvals and other conditions. Completion and anticipated integration benefits were not assured.
- Key disclosed risks include apartment-market supply, rent and expense pressures, development and acquisition execution, access to financing and refinancing, interest-rate exposure, catastrophe losses, and merger approval, completion, integration, costs, and possible disruption. Management said it might need to reduce dividends if operations deteriorated significantly and resources proved insufficient.
- Loss-contingency accruals were $9.5 million at September 30, 2016, down from $13.5 million at year-end 2015. Management believed ordinary-course legal matters would not have a material adverse effect, but outcomes remain uncertain.
- Three development communities totaling 550 units were under construction; expected total project costs were $81.8 million, of which $48.6 million had been incurred. Two projects were expected to finish by Q2 2017 and one by Q4 2017.
Important facts for investors to verify
- Post Properties merger status, shareholder approvals, final consideration, closing timing, transaction costs, and integration plans.
- Underlying same-store rent, occupancy, revenue, and expense trends, especially real estate taxes and utilities, as well as market-by-market supply conditions.
- Debt maturities, variable-rate exposure, refinancing needs, covenant headroom, and the effects of interest-rate hedges.
- Whether operating cash flow continues to cover capital improvements and distributions, and whether the dividend remains sustainable.
- Actual development costs, completion dates, lease-up, and returns; and the resolution or change in legal contingencies.