Mid-America Apartment Communities, Inc. — 2013 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2013. MAA is a multifamily REIT operating primarily in the Sunbelt through Mid-America Apartments, L.P. The portfolio comprised 275 apartment communities with 83,641 units, plus five commercial properties. MAA completed its merger with Colonial Properties Trust on October 1, 2013; reported 2013 results include Colonial only from that date, while year-end assets and debt reflect the combined company.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Total operating revenue | $634.7 million | $475.9 million |
| Net income attributable to MAA | $115.3 million | $105.2 million |
| Income from continuing operations attributable to MAA | $36.1 million | $58.8 million |
| Diluted EPS, continuing operations | $0.70 | $1.43 |
| Diluted EPS, total | $2.25 | $2.56 |
| FFO | $231.0 million | $196.3 million |
| Core FFO | $262.4 million; $4.94 per diluted share/unit | $197.8 million |
| Cash from operating activities | $264.6 million | $211.0 million |
| Cash and cash equivalents at year-end | $89.3 million | $9.1 million |
| Total debt at year-end | $3.47 billion | $1.67 billion |
Reported revenue rose 33.4%, substantially reflecting Colonial’s addition for the fourth quarter. Same-store revenue grew 5.1% in large markets and 2.8% in secondary markets; same-store effective rent per unit increased 3.9%, while average physical occupancy was 95.75%, compared with 95.83% in 2012. Management reported total NOI of $389.0 million, versus $297.1 million.
Total net income includes a $76.8 million gain on sales of discontinued operations, compared with $41.6 million in 2012. Consequently, continuing-operations earnings and total EPS provide different views of performance. FFO and Core FFO are non-GAAP measures and should not be treated as substitutes for GAAP earnings or cash flow.
Interest expense increased to $75.9 million from $57.9 million, primarily because average debt rose following the merger. Year-end debt carried a 3.9% weighted-average rate; approximately 97% was fixed, swapped, or capped after considering derivatives. Debt represented 42% of total capitalization; management’s stated target was debt of approximately 40%–45% of undepreciated asset book value. The $500 million unsecured revolving facility had no borrowings and $496.3 million available, subject to facility terms and covenants. Scheduled 2014 principal maturities were approximately $447.0 million.
Material changes and unusual items
- The Colonial merger nearly doubled the portfolio and added 115 wholly owned apartment communities (34,370 units) and commercial properties. MAA issued approximately 31.9 million shares and 2.6 million OP units; merger purchase price was approximately $2.16 billion.
- Merger and integration expenses totaled $37.5 million in 2013. Management expected integration to take approximately 18 months after closing and anticipated savings, but noted that costs or delays could exceed expectations.
- Fourth-quarter operating revenue was $239.6 million, but MAA reported a $9.3 million loss attributable to common shareholders, or diluted EPS of $(0.12). The filing does not provide a single clear attribution for the quarterly loss; merger/integration costs and other period-specific items should be assessed in the quarterly details.
- 2013 investing cash outflow was $83.8 million, versus $329.2 million in 2012, reflecting lower acquisition spending and property-sale proceeds. Financing activities used $100.5 million, compared with $70.0 million provided in 2012.
- The quarterly dividend paid was $0.695 per share throughout 2013; the rate declared for the next quarter was increased to $0.73. Management stated future distributions remain subject to Board discretion and financial conditions.
Outlook, risks, and contingencies
Management described apartment demand as strong and expected pricing opportunities to continue, citing same-store rent growth, high occupancy, ancillary revenue initiatives, and demographic trends. It anticipated completing five multifamily projects under construction, totaling 1,461 units, by the end of 2014; estimated total project costs were $203.0 million, with $134.5 million incurred by year-end. Management did not provide quantified earnings or FFO guidance in the supplied filing text. It said development would remain a smaller growth channel than acquisitions.
Key risks include integrating Colonial and achieving expected synergies; Sunbelt and market concentration (the top five markets represented approximately 39.5% of the portfolio); rent, occupancy, supply, operating-cost and property-tax pressures; refinancing and interest-rate exposure; covenant and credit-market access; development execution; and continued REIT qualification. Although management considered liquidity adequate for current operations and planned investment, it cautioned that sustained operating deterioration could require a dividend reduction.
At year-end, the company had an $11.9 million aggregate accrual for loss contingencies, versus none in 2012. Construction-defect litigation concerning Regatta and Plantation Point remained in discovery; the Plantation Point plaintiffs sought $24.7 million, and the company said it could not reasonably estimate additional possible loss or a range. The Williams merger-related class action had a preliminary settlement approval, with final approval hearing scheduled for March 6, 2014; the stated monetary obligation was limited to attorneys’ fees subject to court approval and described as immaterial. MAA’s internal-control assessment excluded Colonial operations acquired in October, which represented $3.95 billion of year-end assets and $104.0 million of 2013 revenue; management said it would complete the acquired operations’ assessment within one year.
Important facts for investors to verify
- How Colonial integration costs, synergies, and operating results develop after the limited three-month contribution to reported 2013 results.
- Underlying recurring earnings and property performance apart from gains on asset sales, merger expenses, and other non-routine items; reconcile GAAP EPS with FFO/Core FFO.
- Debt refinancing needs, especially 2014 maturities, covenant headroom, available borrowing capacity, and the impact of higher rates despite hedges.
- Final outcomes and any additional exposure from the construction-defect cases and other accrued contingencies.
- Progress on development budgets, completion and lease-up, and whether the $0.73 quarterly dividend is supported by ongoing cash generation and capital needs.