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Mid-America Apartment Communities Inc. Message Board

  • arizzzona arizzzona May 23, 2002 2:36 PM Flag

    Lazy Question

    Hi, sorry for not taking the time to look it up myself, but does anyone here know how MAA has structured their debt? Is it long term or short term? How much of it is fixed?

    The reason why I ask is that their is a case to be made that we will have higher interest rates in the future* and the cost of debt would effect MAA's earnings.

    TIA,

    AZ

    *Return to an era of higher growth (20% chnace IMO) OR decline of dollar (100% chance IMO.)

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    • Cates, et al have responded to my questions in the past on this subject in a way that makes me think that they couldn't necessarily stop such a deal, even if they wanted to. And, I think managements in general tend to look at preferred shareholders as more like lenders, and less like shareholders.
      They liklely will "protect" them only to the extent that they have to.

      Cates' preferred holdings are pretty minimal, so I wouldn't take much comfort from that, either.

    • Zebra is definitely right. The Walden deal showed that a buyer of a REIT could consider Preferred's as mezzanine financing. The preferred's could allow the potential buyer to leverage higher. Why?...because the new owner could simply stop dividend payments, since those payments are at the DISCRETION of the board of directors. Hence a new buyer who is looking primarily capital gains, would simply stop dividend payments, leverage the purchase higher, and have a higher % return on investment. Maybe the fact that George Cates owns some preferred might help prevent mgm't from considering such a deal.

    • A fatual dispute is correct. I think the Zebra has it correct. I purchased MAApra&b during the Walden turmoil in addition to seven other preferred issues. Walden created a market phobia that created tremendous opportunity. The price appreciation in the preferreds over the past 18 months or so have dwarfed the returns on the common shares for all issues I purchased. Howerver, IMO there is now more downside in the preferreds. Virtually all preferred issues lack call provisions in the preferred indentures for change in ownership or providing for some type of debt limitations.
      Growth in REIT's comes from several sources. One is simply locking debt cost and allowing the income to rise with time while effectively managing the operations of the assets. Acquistions/development can have the effect of accelerating growth if done properly. I think MAA is a soild conservatively run REIT that will not produce dramatic growth, but soild returns in a slow growth environment.
      My greater concern is the future risk of capital rotation once the main-line stock market begins to grow.

    • Thanks for assuming I'm right about the Walden-related reasons preferreds tanked a couple of years ago. Believe me, I know of what I speak. It was a painful experience (though, it ended up to be a great opportunity).
      It wasn't "coincidental".

      I do believe that the specific risk I refer to is much more particular to the preferred than to common, for reasons I've already cited. If they come to do an aggressive Walden-like deal again, the preferreds are still the securities that are likely to be mistreated. That didn't (almost) happen by accident last time.

      Anyway, yeah, sure there is risk all around in the markets. You are always exposed to calamities, greed and downturns.
      But, when you own equity, you are also exposed to the good things that might happen, that might go right. You're also exposed to appreciation in asset values, due to inflation, etc.

      When you own preferreds, and when they are trading at par and are callable at par, you have no such exposure to good things happening or to appreciation -- you don't own any assets or reap any earnings windfall.
      Preferreds are basically more like debt than equity (and, for that matter, real debt is more secure).

      So, simply, for me, all the exposure is to the downside, and none to the upside.

      The main reasons, IMHO, that one might "prefer" preferred over common stock would be if one were concerned about the outlook for the company (I'm not, in MAA's case) or to get a better yield (MAA common yields the same as the preferred currently).

    • >>I owned twenty or so preferreds at the time and none of them
      showed any effect whatsoever. Unless you owned that particular
      issue, you weren't even aware of its difficulties. Even if you owned
      it, unless you panicked, you weren't impacted. Yes, this is a phobia!<<

      If nothing but the Walden preferred went down, why did MAA preferred go down at the same time (allowing me, and you, I suppose, to buy them in the 'teens)? Your memory is off on this one, I believe.
      I've talked to MAA management about this issue, and they cited it as the reason it cratered their preferreds for awhile.

      The bad deal did get called off fairly quickly, allowing these to recover over time (decreasing interest rates no doubt helped, as well).
      Imagine if Hicks. Muse had taken the time to go to court and fight over it (rather than modifity the deal, so as to move it along) and had prevailed!

      Nothing that I know will prevent someone else from trying this again.
      I asked MAA management if they can assure me that this couldn't happen against their preferreds, and they said they couldn't -- the preferreds apparently have vulnerabilities, and it's beyond the control of management to stop similar future aggressiveness.
      And, if it happens against another REIT, it will have ramifications here.
      It's naive to think otherwise.

      The rest of what you write seems right for you.
      If you want the dividend, and that's it - and don't worry about event risk- you probably are in the right issue.

    • OK, on paper, the preferreds have less risk. But, the reality is - as evidenced by their market price over the past few years -- they are more volatile than the common, and therefore, they seem to have more market risk.

      What you call my Walden- phobia caused all REIT preferreds to drop like crazy, for a year or so. Sure, the actual Walden bad deal was later modified under pressure. But REIT preferreds stayed down for quite a while.
      Why?
      Because the Walden bad deal attempt exposed the weakness in REIT preferreds. That weakness is still there; nothing has changed, except now the market has selective memory and has run the prices back up to par (from the mid-teens), as they chase yield, and ignore the risk that they fled from, just a short while ago. The current sentiment could change in a flash, if a bad deal came along against ANY OTHER REIT preferreds, and these preferreds could lose 30%(again) in a heartbeat.

      The common, on the other hand, would be the beneficiary of any deal to buy MAA....recall, in the Walden deal, the reason the preferred shareholders were getting screwed was so they could pay the common shareholders more!(Walden's management owned common shares).

      The prospects for near term upside in the common is slight, perhaps, but certainly not "unreasonable". EQR or AVB or one of the other big players are looking for acquistions. MAA might be a nice "middle of the country" fit for an AVB. They would have to pay some kind of a premium about current price, and MAA management thinks high-$20s, low-$30s is intrinsic value here.
      From $25 and change, that gives you maybe 25% upside....not too shabby, and the fact that there is some upside gives you some value, some protection, that is not present in the preferreds.

      Rising interest rate risk can hurt either, true...but, the preferreds probably have more risk, since at least with the common you own something that can go up -with inflation, appreciation, demand, whatever- where you don't have any of that with the preferreds.

      I used to think preferreds were safer, too. On paper, they are. In reality, I'm not so sure. They sure looked better when they were lower than they do now at par.

    • Almost all of their debt is fixed rate (90+%?), and at low interest rates. Average is less than 7%, I believe.
      They really took full advantage of dropping rates over the past couple of years.

      If rates go up, it may actually help them, as less tenants will be able to move out to buy houses.

 
MAA
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