Business Context and Reporting Period
Company: Mid-America Apartment Communities, Inc. (MAA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: MAA 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 September 30, 2009, the portfolio consisted of 145 multifamily communities comprising 42,687 apartments across 13 states.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2009 |
|---|---|---|
| Total Operating Revenues | $94.5 million | $282.6 million |
| Net Income (Consolidated) | $6.9 million | $29.4 million |
| Net Income Attributable to MAA | $6.6 million | $27.9 million |
| Net Income Available to Common Shareholders | $3.4 million | $18.3 million |
| Earnings Per Share (Diluted) | $0.12 | $0.64 |
| Funds From Operations (FFO) | $27.4 million | $88.0 million |
| Net Cash Provided by Operating Activities | N/A | $107.7 million |
| Total Debt Outstanding | $1.31 billion | $1.31 billion |
| Cash and Cash Equivalents | $16.5 million | $16.5 million |
| Weighted Average Interest Rate | 4.35% | 4.35% |
Material Changes vs. Prior Period
- Revenue Growth: Total property revenues increased by $6.5 million (2.4%) for the nine months ended September 30, 2009, compared to the same period in 2008. This was driven by $7.6 million in revenue from six properties acquired in 2008 and 2009 and $1.9 million from development/lease-up communities. These gains were partially offset by a $3.0 million decrease in revenue from the "same store" portfolio due to a 1.5% decline in average effective rent per unit.
- Expense Management: Property operating expenses increased by $2.9 million year-over-year, primarily due to acquired properties. However, same-store expenses decreased by $0.9 million due to lower turnover expenses and reduced real estate taxes.
- Interest Expense: Interest expense decreased by $3.2 million for the nine-month period, attributed to a lower average cost of debt (4.35% vs. 4.89% in 2008) despite a slight increase in average debt outstanding.
- Discontinued Operations: The company recognized a $2.6 million gain on the sale of two properties (Woodstream and Riverhills) during the nine months ended September 30, 2009. No properties were sold in the comparable 2008 period.
- Net Income: Net income attributable to MAA increased by approximately $5.4 million for the nine-month period compared to 2008.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management anticipates that the decline in same-store revenue is temporary. They expect revenue growth to resume once economic growth returns and job growth recommences, potentially in the middle to latter part of 2010. The company expects favorable interest rates to continue for the remainder of 2009. Management notes that limited new apartment supply due to financing constraints should support absorption rates later in 2010.
Key Risks and Contingencies:
- Market Conditions: Weakness in the overall economy and job losses continue to impact apartment demand and pricing. Same-store occupancy ended the third quarter at its highest level since 2007, but revenue per unit remains under pressure.
- Financing & Liquidity: Approximately 93% of outstanding debt is provided by or credit-enhanced by FNMA and Freddie Mac, which are under U.S. government conservatorship. Volatility in the spread between LIBOR and agency rates (DMBS/Reference Bill) creates forecasting challenges.
- Interest Rate Risk: While the company utilizes swaps and caps to hedge variable rate debt, there is a risk that hedge accounting treatment could be lost if market volatility persists, potentially impacting earnings and loan covenants.
- Asset Valuation: A significant reduction in real estate values could trigger collateral requirements or loan covenant defaults.
Investor Verification Checklist
- Debt Maturity Profile: Verify the schedule of debt maturities, noting that significant portions of credit facilities mature between 2011 and 2018, requiring refinancing in a potentially volatile market.
- Derivative Exposure: Review the fair value of interest rate swaps (liability position of ~$63 million) and the potential impact of counterparty credit risk (JP Morgan, RBC, Deutsche Bank) on hedge effectiveness.
- Same-Store Performance: Monitor the trend in average effective rent per unit and occupancy rates in the "same store" portfolio, as this is the primary driver of organic revenue growth.
- Agency Dependence: Assess the stability of the relationship with FNMA and Freddie Mac, given their conservatorship status and the company's heavy reliance on them for ~$1.2 billion of debt.
- Capital Expenditures: Review the balance between cash flow from operations and capital needs for development, renovations, and debt service to ensure dividend sustainability.