Business Context and Reporting Period
Mid-America Apartment Communities, Inc. (MAA) is a Sunbelt-focused apartment REIT. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013; figures are in U.S. dollars. At quarter-end, MAA owned or held interests in 160 communities with 48,343 apartments, including joint-venture properties, and had two developments totaling 564 units under construction.
The October 1, 2013 Colonial Properties Trust merger closed after the reporting date, so Colonial’s assets and operating results are not included in these financial statements. The combined company issued 31.9 million MAA shares and 2.6 million operating-partnership units; the transaction was valued at approximately $2.2 billion.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total operating revenue | $136.4m | $123.2m | $398.3m | $353.0m |
| Income from continuing operations | $16.6m | $15.1m | $53.7m | $43.9m |
| Net income attributable to MAA common shareholders | $44.3m | $30.9m | $124.6m | $82.9m |
| Diluted EPS | $1.04 | $0.74 | $2.91 | $2.03 |
| Funds from operations (FFO) | $50.1m | $48.2m | $156.1m | $142.9m |
| Cash provided by operating activities | — | $168.8m | $158.0m | |
| Total debt at September 30 | $1,860.2m | December 31, 2012: $1,673.8m | ||
| Cash and cash equivalents at September 30 | $181.1m | December 31, 2012: $9.1m | ||
| Dividends declared per common share | $0.695 | $0.660 | $2.085 | $1.980 |
At September 30, total assets were $3.03 billion, total liabilities $1.99 billion, and total equity $1.03 billion. Reported total debt carried a weighted-average effective rate of 3.2%; $1.05 billion was secured and $810 million unsecured. Management reported a net-debt-to-undepreciated-book-value ratio of approximately 41%. The $500 million unsecured revolver had $350 million drawn; availability and other borrowing capacity are subject to facility terms, collateral and covenants.
Material Changes Versus Prior Period
- Q3 operating revenue rose 10.8%; property revenue growth reflected higher same-store rents and acquisitions. Large-market same-store revenue increased 5.0% and secondary-market same-store revenue 2.8% year over year.
- For the wholly owned portfolio, average effective rent per unit increased to $891 from $854, and occupancy rose to 96.3% from 96.0%. Management reported same-store effective monthly rent per unit growth of 3.4% and same-store revenue growth of 4.0% for Q3.
- Q3 net income attributable to common shareholders increased by about $13.4 million, but included $28.8 million of gains on sales of discontinued operations. Nine-month net income likewise included $71.9 million of sale gains. Continuing-operations diluted EPS was $0.38 in Q3 versus $0.35, providing a comparison less affected by property-sale gains.
- Q3 FFO increased 3.9% and nine-month FFO increased 9.2%. Growth reflected higher property revenue, partly offset by higher property operating expenses and merger-related costs.
- Debt increased from year-end, while nine-month operating cash flow increased. Investing cash outflow was $94.4 million versus $311.0 million a year earlier, reflecting lower acquisition and development spending, property-sale proceeds of $118.8 million, and $57.4 million placed in escrow for exchange acquisitions.
Outlook, Risks and Unusual Items
- Management described apartment demand as strong and expected favorable rental demand to continue, citing rent growth, high occupancy, household formation and migration to the Southeast and Southwest. It also noted that multifamily permitting had increased and could lead to more supply. No quantified earnings or FFO guidance is provided in the supplied filing text.
- Management said strong occupancy entering the winter leasing season could support pricing in Q4. It believed resources were adequate for operations, refurbishments and incremental investment, while noting sustained operating deterioration could require a distribution reduction.
- MAA incurred $5.6 million of merger-related expense in Q3 and $11.3 million in the nine-month period. Management expected merger integration to take about 18 months; costs, execution challenges and failure to realize expected savings are material risks.
- Development projects had expected total costs of $74.0 million, with $43.1 million incurred by quarter-end. Completion was expected in Q4 2013 for one project and Q4 2014 for the other; timing, costs and lease-up are uncertain.
- Key exposures include variable interest rates, refinancing and covenant risk, reliance on agency-supported financing, collateral-value changes, catastrophe and insurance losses, rising property taxes and insurance costs, and regional economic or apartment-supply weakness. MAA reported compliance with borrowing covenants at September 30 and no material market-risk change beyond the liquidity and financing developments discussed.
- Other notable subsequent events: MAA received approximately $9.6 million from settling forward swaps on October 8 and issued $350 million of 4.300% senior notes due 2023 on October 16. The initial purchase-price allocation for Colonial was not complete as of November 7.
Most Important Facts to Verify
- Separate recurring operating performance from income driven by property-sale gains; review same-store results and FFO alongside GAAP net income.
- Confirm the Colonial merger’s final purchase-price allocation, integration costs, realized synergies and effect on leverage and per-share results.
- Review debt maturities, variable-rate exposure, actual undrawn capacity, covenant headroom and the availability of agency-backed financing.
- Track occupancy, effective rents, expense growth—particularly real estate taxes and insurance—and new apartment supply across MAA’s markets.
- Monitor development budgets and completion/lease-up progress, and assess whether operating cash flow supports dividends, capital spending and debt service.