Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) and its 96.5%-owned operating partnership filed this unaudited Form 10-Q for the three months ended March 31, 2018, with comparisons to Q1 2017. MAA is a multifamily REIT that conducts substantially all operations through the partnership. At quarter-end, the company operated 302 apartment communities and had interests in additional unconsolidated investments.
Financial performance and position
- Revenue: Rental and other property revenue was $386.0 million, up 1.9% from $378.9 million. Same-store revenue rose 1.8% to $356.8 million; non-same-store and other revenue increased 3.0% to $29.2 million.
- Profit: Net income available to MAA common shareholders was $48.1 million, up 17.4% from $41.0 million; diluted EPS rose to $0.42 from $0.36. Net income was $50.8 million versus $43.4 million.
- Property operations: Total NOI was $241.6 million versus $237.6 million. Same-store NOI increased to $225.4 million from $221.2 million. Total property operating expenses increased 2.2% to $144.4 million. Depreciation and amortization fell $9.3 million to $120.7 million, primarily because certain intangible assets became fully amortized.
- Cash flow: Operating cash flow was $152.7 million, compared with $132.8 million. Investing used $46.7 million versus $149.2 million; financing used $112.8 million versus $46.9 million. Cash, cash equivalents and restricted cash totaled $82.1 million at quarter-end.
- Debt and liquidity: Debt totaled $4.499 billion, with a weighted effective rate of 3.6%; approximately 82% was fixed or hedged. Unsecured debt was $3.567 billion and secured debt $932.2 million. The $1.0 billion revolving facility had $450 million drawn and approximately $2.5 million of capacity used for letters of credit. Contractual debt maturities include $380.2 million in 2018 and $575.6 million in 2019.
- Distributions: The declared common dividend was $0.9225 per share, up from $0.87. FFO, a non-GAAP measure, was $169.6 million versus $171.7 million.
Material changes versus Q1 2017
- Revenue growth outpaced growth in property operating expenses, supporting higher net income and EPS.
- Interest expense increased $4.3 million to $40.9 million, primarily reflecting the $600 million of senior notes issued in May 2017.
- Other non-operating results shifted from $2.7 million of income to $2.3 million of expense, mainly due to a $2.6 million noncash mark-to-market loss on the embedded derivative in Series I preferred stock; the prior-year quarter included $2.3 million of related income.
- Merger and integration expense declined to $3.8 million from $6.2 million. Despite higher GAAP earnings, FFO declined about $2.1 million, reflecting higher interest and property-related expenses and the change in non-operating results.
- Management combined the former large- and secondary-market same-store categories into one Same Store segment; prior-year segment data was revised to conform.
Outlook, risks and notable items
- Management reported relatively strong apartment demand, 96.3% average daily same-store physical occupancy for the quarter (30 basis points above Q1 2017), and 1.4% growth in average effective rent per unit. Quarter-end same-store occupancy was 96.8%. Management said occupancy positioned the company for solid pricing growth in the typically busy second and third quarters; the filing provides no formal earnings or financial guidance.
- Management noted current apartment supply is affecting demand, particularly in urban submarkets, many acquired in the Post Properties merger. Multifamily permitting in company markets increased year to date through March 2018 versus the same period in 2017; if that trend continues, supply could rise in mid-2020 and beyond.
- Interest-rate increases could raise expense on variable-rate debt and refinancing. Other stated risks include local economic and rental-market conditions, competition and supply, operating costs, development execution, financing availability, insurance exposure, REIT tax compliance, and merger integration.
- Two lawsuits involving acquired Post Properties communities remain pending: a DOJ accessibility/FHA/ADA matter and a suit alleging unlawful criminal-record screening under the FHA. No trial date was set for the DOJ case. The company reported aggregate loss-contingency accruals of $31.8 million; the filing does not specify that this accrual relates to either lawsuit. Management stated it could not predict outcomes and did not believe other ordinary-course matters would materially affect the company.
- Two development projects totaling 578 units were under construction, with expected total costs of $125.8 million, of which $101.4 million had been incurred. One was expected to complete in Q3 2018 and the other in Q4 2018. After quarter-end, the company sold a Las Vegas land parcel for $9.5 million, expecting a $2.8 million gain, and acquired a 374-unit Denver community.
- The company adopted revenue-recognition, restricted-cash cash-flow, and hedge-accounting standards in 2018; management reported no material impact from the adoptions. Management was evaluating the lease-accounting standard for adoption on January 1, 2019.
Important facts for investors to verify
- Whether same-store rent, occupancy and NOI trends persist amid supply growth, particularly in urban submarkets.
- How the company will refinance or repay upcoming maturities, including 2018–2020 obligations, and its sensitivity to higher interest rates.
- Whether FFO stabilizes or improves as interest costs rise and merger-related expenses decline.
- Developments in the two FHA-related lawsuits, the amount and scope of the reported loss-contingency accrual, and any subsequent changes in exposure.
- Completion costs and timing for the two development projects, and the realized results of the post-quarter land sale and Denver acquisition.