MID-AMERICA APARTMENT COMMUNITIES, INC. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. The company is a Sunbelt-focused apartment REIT; it owned or held interests in 155 communities with 45,841 apartments across 13 states.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total operating revenue | $101.4 million | $95.0 million | $297.7 million | $283.2 million |
| Property revenue | $101.2 million | $94.9 million | $297.3 million | $283.0 million |
| Total NOI | $56.1 million | $53.1 million | $167.9 million | $164.8 million |
| Income attributable to MAA | $6.7 million | $6.6 million | $22.8 million | $27.9 million |
| Net income available to common shareholders | $3.5 million | $3.4 million | $11.1 million | $18.3 million |
| Diluted EPS | $0.11 | $0.12 | $0.36 | $0.64 |
| FFO | $29.9 million | $27.4 million | $87.4 million | $88.0 million |
| Operating cash flow | Not separately stated | Not separately stated | $106.7 million | $111.1 million |
Reported NOI was 55.4% of property revenue in Q3 2010 versus 55.9% in Q3 2009; for the nine-month periods, it was 56.5% versus 58.2%. These ratios are calculated from reported total NOI and property revenue. Common dividends declared were unchanged at $0.615 per share in Q3 and $1.845 per share for the nine months.
- Q3 revenue increased 6.7%, primarily from acquisitions and the new bulk-cable program. Management said the program required cable revenue and expense to be reported gross rather than net, inflating comparisons. Excluding this accounting presentation effect, same-store revenue declined 1.1% year over year in Q3.
- Nine-month revenue rose 5.1%, while income attributable to MAA fell about 18%. The prior-year period included $2.6 million of gains on sales of discontinued properties; 2010 included a $1.9 million impairment charge. Preferred-stock redemption costs also reduced common earnings.
- Q3 FFO increased approximately $2.5 million year over year; nine-month FFO declined approximately $0.6 million. FFO is a non-GAAP measure and the company cautions that its calculation may not be comparable with other REITs.
Balance sheet, debt and liquidity
- At September 30, 2010, total assets were $2.190 billion, cash and cash equivalents were $100.1 million, total liabilities were $1.701 billion, and shareholders’ equity including noncontrolling interests was $485.5 million.
- Notes payable totaled $1.551 billion, up from $1.400 billion at December 31, 2009. The weighted-average debt rate was 3.8%; management reported debt equal to approximately 51% of undepreciated asset book value.
- Debt included $1.053 billion of fixed-rate or swapped obligations at an average effective rate of 5.2%, and $498.5 million of variable-rate obligations at 1.0%. The filing also reports approximately $228 million of variable-rate debt not protected by swaps or caps.
- Interest-rate swaps covered approximately $784.8 million notional and caps covered approximately $270.7 million. The balance-sheet fair-value liability for interest-rate swaps was $60.1 million. Management estimated $28.9 million would be reclassified from accumulated other comprehensive income to interest expense over the next 12 months.
- Nine-month investing cash use was $188.3 million, mainly reflecting $215.1 million of real-estate purchases, partly offset by $71.4 million of disposition proceeds. Financing provided $167.9 million, including substantial common-equity issuance and $137.9 million of new debt proceeds. Cash rose from $13.8 million at year-end 2009 to $100.1 million.
- MAA raised approximately $216.5 million through at-the-market common-share sales and $30.0 million through a DRSPP issuance during the first nine months. It used $155.0 million to redeem all 6.2 million Series H preferred shares, which carried an 8.30% coupon. Common shares issued and outstanding rose to 33.9 million from 29.1 million at year-end.
- Management stated it believed liquidity was adequate for operations, property refurbishment and incremental investment. Credit facilities were heavily dependent on Fannie Mae and Freddie Mac; the company disclosed covenant, collateral-valuation and refinancing risks. Debt maturities were concentrated in 2014, with $539.1 million of total borrowing capacity scheduled to mature that year.
Outlook, risks and unusual items
- Management reported improved rental demand, same-store occupancy 50 basis points above the prior-year quarter, and effective rent per unit up 40 basis points from the preceding quarter—the first sequential increase in seven quarters. New-lease pricing had improved since January.
- Management expected same-store revenue growth to turn positive in late 2010 or early 2011, but emphasized that slow job growth made near-term demand and pricing uncertain. Limited new apartment supply was viewed as supportive; a weak economy or employment market could still constrain rent growth. No specific full-year numerical guidance was provided.
- Eight communities totaling 2,233 units were acquired in the first nine months. A further 428-unit development was announced after quarter-end, following an October 26, 2010 land purchase in Franklin, Tennessee. The Venue at Stonebridge Ranch was classified as held for sale pending an intended joint-venture contribution.
- The $1.9 million impairment related to the Cedar Mill community after a purchase offer indicated its carrying amount was not recoverable. The Series H redemption generated $5.1 million of premiums and issuance-cost charges for the nine-month period.
- Key disclosed risks include economic weakness, unemployment and rental demand; availability and cost of financing; dependence on government-supported Fannie Mae and Freddie Mac financing; interest-rate and hedge effectiveness risks; debt maturities and covenants; property-value declines and collateral requirements; catastrophic losses and insurance limits; and the possibility that cash flow may not support distributions. Management warned that sustained operating deterioration could require a distribution reduction.
- The filing reported no legal proceedings, no defaults on senior securities, and no material change in internal control over financial reporting. Disclosure controls were deemed effective as of September 30, 2010.
Important facts for investors to verify
- Whether occupancy, new-lease pricing and same-store revenue continued improving, and how much reported growth reflects bulk-cable gross presentation rather than underlying rents.
- Current available borrowing capacity, collateral and covenant headroom, and the refinancing terms for significant 2011–2014 maturities, given reliance on Fannie Mae and Freddie Mac.
- The effect of unhedged variable-rate debt, hedge-accounting effectiveness, swap counterparties and the $60.1 million derivative liability on future interest expense and liquidity.
- Whether operating cash flow covers capital spending and distributions, particularly after the substantial common-share issuance and preferred-stock redemption.
- Execution and performance of recent acquisitions, the planned joint-venture contribution, and the newly announced Franklin development.