Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) is a self-managed REIT focused on apartment communities in the U.S. Sunbelt. This Form 10-K covers the fiscal year ended December 31, 2011; fourth-quarter figures are included where provided. At year-end, MAA owned 160 communities with 46,872 units and held 33.33% interests in two joint ventures owning seven communities with 2,261 units.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Total operating revenue | $449.0 million | $398.0 million |
| Property revenue | $448.0 million | $397.3 million |
| Property operating expenses, excluding depreciation and amortization | $191.5 million | $172.4 million |
| Net operating income (NOI) | $258.0 million | $226.9 million |
| Income from continuing operations | $37.7 million | $30.0 million |
| Net income attributable to MAA | $48.8 million | $29.8 million |
| Net income available to common shareholders | $48.8 million; $1.31 diluted EPS | $18.1 million; $0.56 diluted EPS |
| Funds from operations (FFO) | $155.5 million | $123.9 million |
| Cash provided by operating activities | $172.3 million | $133.8 million |
| Cash and cash equivalents at year-end | $57.3 million | $45.9 million |
| Total debt at year-end | $1.650 billion | $1.500 billion |
Revenue increased 12.8%; NOI rose 13.7%. Approximate NOI margin on property revenue was 57.6%, versus 57.1% in 2010. Same-store revenue grew 4.4% overall (4.0% after netting bulk cable expense against cable revenue). Same-store occupancy averaged 96%; year-end occupancy for wholly owned units was 95.1%. Effective rent per unit for wholly owned units, excluding lease-up units, was $793.46 at year-end, versus $736.51 a year earlier.
Net income available to common shareholders included a $12.8 million gain on sales of discontinued operations. Continuing-operations diluted EPS was $0.97. FFO is a non-GAAP measure; the filing cautions it is not a substitute for GAAP income or cash flow.
Fourth-quarter 2011 revenue was $117.6 million and net income available to common shareholders was $18.8 million, or $0.49 per diluted share. The quarter included a $7.9 million gain on sale of discontinued operations. Fourth-quarter 2010 revenue was $103.4 million and common net income was $6.9 million, or $0.20 per diluted share.
Cash, debt, liquidity, and capital
- 2011 investing cash outflow was $442.2 million, including $362.7 million for acquisitions, $38.2 million for development, and $64.8 million for improvements and renovations. Financing activities provided $281.2 million.
- Debt was 39.2% of total capitalization; net debt to undepreciated book value was approximately 46%, within the stated covenant limit of 60%. Weighted-average debt interest rate was 3.7%.
- Approximately 84% of debt was fixed-rate or capped after derivatives. MAA reported $249 million available on its $250 million unsecured bank facility, with none drawn; secured facilities were largely collateralized and available subject to borrowing conditions and collateral revaluation.
- About 69% of outstanding debt was borrowed through or credit-enhanced by Fannie Mae or Freddie Mac. The filing’s debt maturity schedule lists approximately $80 million due in 2012, $203 million in 2013, and $447 million in 2014.
- MAA issued $135 million of senior unsecured notes in July 2011 at rates of 4.7%–5.6%, with maturities of seven, ten, and twelve years. It sold 3.30 million common shares through its at-the-market program for net proceeds of $204.5 million and raised $30.0 million through its direct stock purchase plan.
- Distributions declared were $2.5425 per common share for 2011; the company reported paying $2.51 per share during the year for REIT tax purposes. The current quarterly dividend was $0.66, subject to quarterly Board approval.
Changes, outlook, risks, and unusual items
- MAA acquired 11 wholly owned properties totaling 3,057 units in 2011 and disposed of two properties totaling 534 units. Portfolio size, including joint-venture properties, grew to 167 communities and 49,133 units from 157 communities and 46,310 units in 2010.
- Management said apartment demand and pricing improved in 2011, with limited new supply supporting prospects. Effective rent growth was 3.8% for the year and accelerated by quarter; management expected pricing growth to continue in 2012. It remained cautious about weak job growth and the possibility of recession. No numerical earnings or FFO guidance was provided.
- MAA renovated 3,118 units, reporting a 9.6% rent increase above the normal renewal rate. Three development projects totaling 950 units were under construction at year-end, with no units completed; development and lease-up risks remain.
- General and administrative expense increased $5.8 million, including a $1.8 million non-cash out-of-period restricted-stock compensation adjustment and $1.4 million higher employee medical insurance costs. Management deemed the prior-period portion of the adjustment immaterial. Interest expense rose $2.7 million as average debt increased.
- MAA reported no material litigation and no material environmental liabilities known to it. Risks include agency-financing concentration and refinancing, interest-rate and hedge effectiveness, covenant and collateral requirements, property values, operating costs, natural catastrophes and insurance limits, and REIT qualification and distribution requirements.
- Subsequent to year-end, MAA sold Kenwood Club at the Park on January 12, 2012, recognizing an approximately $9.6 million gain, and sold Cedar Mill on February 9, 2012, with no material gain or loss. MAA had recorded a $1.9 million impairment on Cedar Mill in 2010.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also reported effective disclosure controls and internal control as of December 31, 2011.
Important facts for investors to verify
- How much of reported earnings and EPS reflects property-sale gains, and how recurring operating results compare using FFO and same-store NOI.
- The 2012–2014 refinancing schedule, especially the approximately $447 million maturity in 2014, and the availability and cost of replacement financing.
- MAA’s exposure to Fannie Mae and Freddie Mac, collateral requirements, covenant headroom, and effectiveness and counterparties of interest-rate hedges.
- Whether rent growth and occupancy can persist amid slow employment growth, and whether planned development projects meet cost, timing, and lease-up expectations.
- The sustainability of the dividend relative to operating cash flow, capital spending, debt service, and REIT distribution requirements; also assess dilution from equity issuance.