Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) filed this Form 10-K for the fiscal year ended December 31, 2010. MAA is a self-managed REIT focused on Sunbelt apartment communities. At year-end, it owned 151 properties with 44,349 units and held 33.33% interests in joint ventures owning six properties; the combined portfolio covered 13 states.
Financial and operating performance
Unless otherwise noted, dollar amounts are in millions.
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total operating revenue | $402.2 | $378.5 | +6.3% |
| Net income attributable to MAA | $29.8 | $37.2 | -20.0% |
| Net income available to common shareholders | $18.1 | $24.3 | -25.8% |
| Diluted EPS | $0.56 | $0.85 | Down $0.29 |
| Funds from operations (FFO) | $122.0 | $116.7 | +4.6% |
| Net operating income (NOI) | $226.9 | $219.9 | +3.2% |
| Cash provided by operating activities | $133.8 | $140.3 | -4.6% |
- Revenue growth was mainly from acquisitions and a new bulk-cable program. Same-store revenue increased 1.2%; excluding cable revenue and expense effects, it decreased 0.6%.
- Property operating expenses excluding depreciation rose $14.9 million, while depreciation rose $8.0 million. Property NOI as a share of property revenue was approximately 56.5%, compared with 58.1% in 2009.
- Year-end occupancy for wholly owned units was 95.8%, versus 95.2% in 2009. Average effective rent per unit, excluding lease-up units, was $736.51, versus $715 in 2009; management notes this is a pricing measure, not collected rent.
- Debt was $1.50 billion, up from $1.40 billion; weighted-average year-end interest rate was 3.8%, versus 4.0%. Approximately 85% of debt was fixed-rate or capped after derivatives; $227.8 million was variable-rate and unhedged.
- Cash and cash equivalents were $45.9 million. Credit-facility capacity collateralized and available to borrow was approximately $119.8 million, subject to facility terms, covenants and collateral tests. Debt-to-undepreciated-book-value was approximately 49%; debt represented 38.9% of total capitalization on a market-value basis.
- Investing cash outflow was $254.3 million, including $284.0 million of real estate and other asset purchases; financing cash inflow was $152.6 million. MAA raised $274.6 million net through ATM common-share sales and redeemed all Series H preferred shares for approximately $155.0 million.
- MAA paid $2.46 per common share in 2010 distributions. The annual dividend rate was raised to $2.51 in the fourth quarter, with the $0.6275-per-share quarterly dividend paid in January 2011. The filing reports $2.4725 of dividends declared per share for 2010.
Material changes versus the prior comparable period
- Operating revenue rose, but higher property costs, depreciation and acquisition expenses contributed to lower income from continuing operations and lower net income attributable to MAA. Interest expense declined by $1.1 million as the lower average borrowing cost outweighed higher average debt.
- FFO increased despite a $1.9 million impairment charge. Lower preferred dividends after the Series H redemption were largely offset in reported common results by a $5.1 million charge for redemption premiums and original issuance costs.
- MAA acquired eight wholly owned properties during 2010 and made additional joint-venture acquisitions; total acquisition spending included properties later contributed to Fund II and land for development. It sold no apartment communities in 2010, compared with three sales in 2009.
- Common shares outstanding increased, and MAA issued 5.08 million shares through its ATM program in 2010. The share issuance funded acquisitions and, in part, the preferred-stock redemption.
Outlook, risks and unusual items
- Management reported improving rental demand, occupancy and new-lease and renewal pricing during 2010. It expected pricing trends to continue and revenue growth to strengthen in 2011 as the economy and employment improved, but provided no numerical earnings or revenue guidance.
- Management cited limited new apartment supply and long-term Sunbelt demographic trends as supportive of demand, while emphasizing that slow job growth remained a constraint and a deeper recession could weaken rent growth.
- Significant financing exposure is concentrated with Fannie Mae and Freddie Mac: approximately 85% of outstanding debt was provided or credit-enhanced by these agencies, and facility maturities extend from 2011 through 2018. Management warned that agency retrenchment could raise borrowing costs, restrict refinancing and affect liquidity.
- Refinancing and covenant risks include $180 million of scheduled 2011 debt maturities, collateral revaluation requirements, and possible reduced borrowing availability. Interest-rate basis volatility could weaken hedge effectiveness; derivative counterparty or credit-support problems could require collateral or settlement payments.
- Other principal risks include economic and employment weakness, competition and oversupply, rising property taxes and insurance, catastrophic losses, environmental liabilities, joint-venture partner risks, and maintaining REIT qualification and required distributions. Routine litigation was not expected to have a material adverse effect; no material litigation was reported.
- Unusual items included the $1.9 million impairment of the Cedar Mill community and the preferred-stock redemption charge. MAA began construction on a planned 428-unit Nashville-area development in late 2010; management also planned a second phase at 1225 South Church in Charlotte during 2011.
Important facts for investors to verify
- Reconcile the decline in GAAP earnings and diluted EPS with FFO growth, acquisition-related costs, the Cedar Mill impairment and Series H redemption accounting.
- Review 2011 debt maturities, refinancing availability and covenants, including the company’s dependence on agency-backed financing and collateral requirements.
- Assess whether improving occupancy and rents translate into durable same-store revenue and NOI growth, considering the bulk-cable program and concessions.
- Evaluate liquidity and dividend coverage against operating cash flow, recurring capital needs, acquisition spending and debt service; distributions remain subject to Board discretion.
- Confirm the effects of ATM issuance and preferred-stock redemption on share count, financing costs and per-share returns, and track lease-up at recently acquired communities and development projects.