MAA

Business Context and Reporting Period

Company: Mid-America Apartment Communities, Inc. (Mid-America)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: Mid-America is a self-administered Real Estate Investment Trust (REIT) owning, acquiring, renovating, developing, and managing apartment communities in the Sunbelt region of the United States. As of March 31, 2010, the portfolio consisted of 147 multifamily communities comprising 43,605 apartments across 13 states.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by $3.8 million (4.1%) compared to Q1 2009. This was driven by a $3.1 million increase from four properties acquired in 2009 and a $0.5 million increase from development/lease-up communities. Same-store revenues decreased slightly by 0.2% overall, but would have decreased by 1.7% without the impact of a new bulk cable program that required separate booking of revenues and expenses.
• Profitability: Net income attributable to Mid-America decreased by approximately $1.7 million. This decline was primarily due to the absence of a $1.4 million gain on the sale of discontinued operations recorded in Q1 2009, partially offset by lower interest expense.
• Interest Expense: Interest expense decreased by $0.3 million to $13.9 million, driven by a reduction in the average cost of debt from 4.32% to 4.06%.
• Cash Flow: Operating cash flow decreased by $6.9 million, largely due to timing differences in interest payments and capital improvements. Investing cash flow turned positive ($31.5 million) due to significant disposition activity, specifically the contribution of the Legacy at Western Oaks property to a joint venture, compared to a net use of cash in the prior year.
• Debt Reduction: Total notes payable decreased by approximately $40.9 million. The company reduced borrowings under credit lines by $60 million while issuing $29.9 million in common stock.

Guidance, Outlook, and Risks

• Market Outlook: Management notes that rental demand stabilized somewhat compared to early 2009, with same-store occupancy increasing by 120 basis points year-over-year. However, revenue growth is expected to remain subdued through 2010 due to lower rents on leases signed in late 2009. Management anticipates revenue growth will resume when sustainable job growth returns.
• Supply Dynamics: New apartment supply is expected to contract further, which should benefit absorption rates later in 2010. The company benefits from reduced competition from condominiums and single-family homes reverting to rentals.
• Capital Strategy: The company continues to utilize its continuous equity offering program (CEO) to fund operations and acquisitions. In Q1 2010, 571,000 shares were sold for net proceeds of $29.9 million.
• Preferred Stock Redemption: On May 3, 2010, the company announced a 50% redemption of its 8.30% Series H Cumulative Redeemable Preferred Stock, scheduled for June 2, 2010, funded by common share issuances.
• Key Risks:
  • Interest Rate Risk: Approximately 91% of outstanding debt is provided by or credit-enhanced by FNMA and Freddie Mac. Volatility in the spread between DMBS/Reference Bill rates and LIBOR could impact interest expense and hedge effectiveness.
  • Liquidity and Refinancing: Significant debt maturities are scheduled between 2011 and 2018. The company relies on the continued support of government-sponsored enterprises (GSEs) for refinancing.
  • Economic Conditions: Continued weakness in the broader economy and job market could adversely affect occupancy and rental rates.

Investor Verification Checklist

• Preferred Stock Redemption: Verify the execution and funding of the 50% redemption of Series H Preferred Stock announced in May 2010.
• Debt Maturity Profile: Review the schedule of debt maturities, noting that significant portions of credit facilities mature between 2011 and 2014, requiring refinancing in a potentially volatile market.
• Derivative Exposure: Confirm the effectiveness of interest rate swaps and caps, particularly given the volatility in spreads between GSE rates and LIBOR, and the potential for hedge ineffectiveness to impact earnings.
• Same-Store Performance: Monitor same-store revenue and occupancy trends to validate management's expectation of revenue growth resumption later in 2010.
• Joint Venture Activity: Track the performance and capital contributions related to Mid-America Multifamily Fund I and Fund II, which hold significant assets.