MAA Q1 2015 Form 10-Q Summary
Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) and its operating partnership (MAALP) reported for the three months ended March 31, 2015, compared with Q1 2014. MAA operates as an apartment-focused REIT through MAALP, in which it held a 94.7% limited partnership interest. At quarter-end, the company owned or had an interest in 265 communities with 81,976 apartments across 14 states.
Key financial results and position
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Total operating revenue | $257.8 million | $243.5 million; up 5.9% |
| Net income attributable to MAA common shareholders | $61.3 million | $14.9 million |
| Diluted EPS | $0.81 | $0.20 |
| FFO | $106.9 million | $97.4 million |
| Core FFO | $105.2 million | $95.6 million |
| Operating cash flow | $100.9 million | $96.1 million |
| Cash and cash equivalents | $18.3 million | $25.4 million at Dec. 31, 2014 |
| Total debt | $3.48 billion | $3.52 billion at Dec. 31, 2014 |
- Same-store property revenue increased 5.0% overall: large-market revenue rose 5.7% and secondary-market revenue rose 3.7%. Management cited a 6.5% increase in average rent per unit as the primary driver.
- Total NOI was $157.9 million versus $147.6 million. NOI margin on property revenue was approximately 61.2%, compared with 60.6% in Q1 2014.
- Same-store property operating expenses, excluding depreciation and amortization, increased 3.7%. Company-wide property operating costs on this basis increased 3.1%; real estate taxes, personnel, and water and sewer costs contributed to same-store increases.
- Net income rose sharply, but the comparison includes a $30.2 million gain on depreciable real estate sales in Q1 2015. It also reflects lower depreciation and amortization, including a $20.4 million decrease in amortization of merger-related in-place leases and resident relationships, and no merger or integration costs (Q1 2014: $5.9 million combined). Q1 2015 also included a $3.4 million debt-extinguishment loss.
- Debt carried a 3.7% weighted-average interest rate. Secured debt was $1.43 billion and unsecured debt $2.05 billion; $3.22 billion was fixed or hedged. The company reported $179 million drawn on its $500 million KeyBank revolver and $496.2 million available under that facility.
- Cash flow from investing was a $32.2 million use, compared with $28.3 million provided in Q1 2014; financing used $75.8 million, compared with $91.8 million. The quarterly dividend declared was $0.77 per share, up from $0.73.
Material changes, outlook, and risks
Management described apartment demand as strong. Same-store physical occupancy averaged 95.6% during the quarter versus 95.1% a year earlier, and same-store effective rent per unit increased 4.0%. Quarter-end physical occupancy was 96.3%; management said this position could support stronger pricing in the spring leasing season. Average effective monthly rent per unit, excluding lease-up and development properties, was $959.39 versus $900.86 a year earlier.
Management reported increased rental supply and permitting in several markets, while expecting household formation and demographic trends to support demand. It stated that available resources were adequate for current operations, refurbishment, and incremental investment. No quantified earnings or FFO guidance was provided. Management cautioned that a significant deterioration in operations could require a dividend reduction.
Four apartment communities were sold during Q1. Seventeen multifamily properties were classified as held for sale at March 31; subsequent to quarter-end, 14 properties were sold in transactions disclosed in the filing, and management expected approximately $105 million of total net gains from the subsequent dispositions. The company also had three development communities under construction, with 634 planned units; expected total cost was $93.9 million, of which $69.5 million had been incurred. Completion was expected during Q2 through Q4 2015.
Key risks include market and rent competition, rising operating costs, development and acquisition execution, refinancing and interest-rate exposure, credit-facility covenants and collateral values, and the possibility of losses exceeding insurance coverage. The company had $12.4 million accrued for loss contingencies. Construction-deficiency lawsuits concerning a former condominium development remained in discovery; plaintiffs’ claimed damages were not disclosed, and the company could not estimate additional possible losses. Management said it was in compliance with credit-facility covenants and that disclosure controls were effective.
Important facts for investors to verify
- How much of the increase in reported earnings reflects property operations versus real-estate sale gains and lower merger-related amortization; review FFO and Core FFO reconciliations and their non-GAAP limitations.
- Disposition proceeds, expected gains, and the final number and timing of properties sold after quarter-end.
- Same-store rent, occupancy, and expense trends, particularly as new apartment supply increases in key markets.
- Debt maturities, variable-rate exposure, derivative hedge costs, facility availability, and compliance with debt covenants.
- Development budgets and completion schedules, along with the eventual resolution and potential additional exposure from the construction-deficiency litigation.