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 quarter ended March 31, 2019. MAA owns, operates, acquires and selectively develops multifamily properties, primarily in the Southeast, Southwest and Mid-Atlantic. At quarter-end, it operated 303 apartment communities, had an interest in one unconsolidated community, and had five developments under construction totaling 1,090 units.
Financial performance and position
- Revenue: Rental and other property revenue was $401.2 million, up 3.9% from $386.0 million. Same-store revenue rose 2.3%; non-same-store and other revenue rose 34.6%, primarily from lease-up of recent developments.
- Profit: Net income was $66.0 million versus $50.8 million. Net income available to MAA common shareholders was $62.7 million, or $0.55 per diluted share, compared with $48.1 million, or $0.42, a year earlier.
- Operating results and margins: Same-store NOI increased 2.5% to $237.4 million; total NOI increased 4.2% to $251.8 million. Total NOI was approximately 62.8% of property revenue versus 62.6% in the prior-year quarter. Same-store average effective rent per unit increased 3.1%; average daily physical occupancy was 95.9%, down from 96.2%.
- FFO: Funds from operations attributable to the Company, a non-GAAP measure, rose 9.9% to $186.4 million from $169.6 million. The filing cautions that FFO is not a substitute for GAAP earnings or cash flow and may not be comparable across REITs.
- Cash flow: Operating cash flow was $154.7 million versus $152.7 million. Investing cash outflow was $52.9 million, including $53.2 million of capital improvements, development and other spend. Financing cash outflow was $94.1 million. Cash and cash equivalents were $44.6 million and restricted cash was $14.8 million at quarter-end.
- Debt and liquidity: Total debt was $4.55 billion, with a weighted average effective rate of 3.9% and average maturity of 6.9 years. Approximately 85.2% of debt was fixed-rate or hedged. The $1.0 billion revolving facility had $75 million drawn and $2.5 million of capacity supporting letters of credit; it matures in April 2020, with a six-month extension option. Total assets were $11.30 billion and total liabilities were $4.97 billion.
- Distributions: Common dividends were $0.96 per share for the quarter, up from $0.9225 a year earlier. The Series I preferred dividend was $922,000.
Material changes versus the prior-year quarter
- Common-shareholder income increased 30.4%; reported results included a $9.0 million gain on sale of non-depreciable real estate assets. Prior-year results included $3.8 million of merger and integration expenses, while none were recorded in Q1 2019.
- Interest expense rose $4.8 million to $45.7 million, primarily reflecting an approximately 18-basis-point increase in the effective interest rate. Property operating expenses excluding depreciation rose 3.4%, including higher real estate taxes.
- In March, the Company issued $300 million of 3.95% senior unsecured notes due 2029 and issued $191.3 million of fixed-rate secured mortgages. Proceeds from the unsecured notes were used to reduce revolver borrowings.
- Effective January 1, 2019, MAA adopted the new lease accounting standard. It recognized $54.3 million of operating lease right-of-use assets and $33.6 million of related obligations. Management said the adoption did not significantly change rental revenue accounting.
Outlook, risks and contingencies
- Management stated that apartment demand remained relatively strong, but elevated supply was affecting rent growth, particularly in urban submarkets. It cited strong job growth and current occupancy as supportive and expected potential for improved pricing growth during the balance of 2019; this was commentary, not quantified formal guidance.
- Five developments totaling 1,090 units had expected total costs of $230.5 million, with $59.5 million incurred by March 31. Management expected two completions in the second half of 2019, with the remaining projects scheduled through the first half of 2021.
- Key risks include market supply and demand, rent and occupancy trends, operating-cost increases, development execution, financing and refinancing conditions, interest rates, and the transition away from LIBOR. Management reported no material change to the risk factors in its 2018 Form 10-K.
- Two Texas class actions allege unlawful late fees. Class certification and partial summary judgment were granted in 2018, and the Company is pursuing appeals. Estimated maximum exposures were $54.6 million and $8.4 million, respectively, excluding possible prejudgment interest. Accrued loss contingencies for unresolved legal matters totaled $8.8 million.
- The Company had a $13.6 million commitment for additional contributions to an unconsolidated investment if called through September 2022. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether same-store rent growth and occupancy hold up as new apartment supply remains elevated in certain markets.
- Debt maturities and refinancing needs, especially the reported 2019 and 2020 maturities and the revolving facility’s April 2020 expiry.
- How much reported earnings growth reflects recurring operations versus the $9.0 million real estate gain and the absence of prior-year merger costs.
- Developments’ budgets, completion timing and lease-up performance, along with the timing and amount of planned capital spending.
- Developments in the Texas late-fee litigation, including appeals, potential damages and the relationship between estimated exposure and recorded accruals.