Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA), a multifamily REIT, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. MAA conducts substantially all business through Mid-America Apartments, L.P. (MAALP), in which it held a 96.5% interest. At quarter-end, the company owned and operated 303 apartment communities; it also had four developments under construction totaling 1,076 units.
Financial performance and position
- Second-quarter revenue: Rental and other property revenue was $390.1 million, up 1.9% year over year. Same Store revenue increased 1.5%; Non-Same Store and Other revenue rose 7.2%.
- Second-quarter earnings: Net income available to MAA common shareholders was $58.9 million, up 24.2%; diluted EPS was $0.52 versus $0.42. Total net income was $62.0 million. Dividends declared were $0.9225 per common share, up from $0.8700.
- Six-month results: Revenue was $776.1 million, up 1.9%; net income available to common shareholders was $107.0 million versus $88.4 million; diluted EPS was $0.94 versus $0.78. Dividends declared were $1.8450 per share versus $1.7400.
- Property operations: Second-quarter Same Store NOI was $224.2 million, up 1.7%; total NOI was $241.3 million versus $236.8 million. Same Store occupancy averaged 96.0%, compared with 96.1%, while effective rent per unit rose 1.7%.
- Cash flow: For the six months, operating cash flow was $364.0 million, compared with $321.2 million. Investing used $221.4 million and financing used $170.7 million. Cash, cash equivalents and restricted cash ended at $60.8 million.
- Debt and liquidity: Total debt was $4.55 billion, with a 3.7% effective rate and 4.4-year average maturity. About 90% was fixed-rate or hedged/capped. Unsecured notes payable were $3.62 billion and secured notes payable $926.8 million. The $1.0 billion revolving facility had $110 million drawn and approximately $2.6 million of capacity used for letters of credit. Total assets were $11.45 billion and total liabilities $4.96 billion.
- Capital investment: Four developments had expected total costs of $219.8 million, of which $122.7 million had been incurred by June 30. The company acquired the 374-unit Sync36 community in Denver during the period.
Material changes versus prior comparable periods
- Quarterly revenue growth exceeded property operating expense growth: revenue rose 1.9%, while property operating expenses increased 1.9% overall; Same Store expenses rose 1.1% against Same Store revenue growth of 1.5%.
- Interest expense increased $5.1 million in the quarter and $9.4 million for the six months, primarily reflecting lower capitalized development interest and reduced amortization of acquired debt fair-value adjustments.
- Depreciation and amortization declined $3.4 million in the quarter and $12.7 million in the six months, mainly because certain Post Properties merger-related intangible assets had become fully amortized.
- Merger and integration expenses fell to $2.8 million for the quarter and $6.6 million for the six months, as integration activity declined.
- Operating cash flow improved year over year. Investing outflows were lower, principally due to reduced development and capital-improvement spending, partly offset by higher real estate purchases.
- The company revised its segment presentation in 2018, combining former large- and secondary-market Same Store segments. Prior-period segment figures were revised to conform.
Outlook, management commentary, risks and unusual items
- Management reported relatively strong apartment demand and said effective-rent growth accelerated in the second quarter. It expected second-quarter occupancy levels to support solid pricing growth in the typically busy third quarter; no formal numerical earnings or operating guidance was provided.
- Management noted current supply pressure, particularly in urban submarkets, many associated with the Post Properties portfolio. Multifamily permitting in company markets had increased year to date through May 2018; if the trend continued, supply could rise in mid-2020 and beyond.
- Second-quarter results included $4.4 million of income from settlement of a historical executive life insurance policy, $2.8 million of income from a preferred-stock embedded-derivative fair-value adjustment, and $2.8 million of gains on non-depreciable real estate sales. These items affect comparability of reported earnings.
- After quarter-end, the company sold an Atlanta-area land parcel on July 2 for $1.8 million, with an expected $1.0 million gain. It retired $50 million of private-placement notes at maturity on July 30 and a $250 million Wells Fargo term loan at maturity on August 1.
- Key exposures include apartment supply and demand, rent and occupancy trends, operating-cost inflation, development completion and lease-up, financing and refinancing costs, and interest-rate changes. The company disclosed two Fair Housing Act-related lawsuits involving properties acquired from Post Properties, including a DOJ accessibility case and a criminal-record-screening policy case. Aggregate loss-contingency accruals were $29.0 million; the filing does not provide a clear estimate of potential loss for these matters.
- Four development projects had staggered expected completion dates from the third quarter of 2018 through the third quarter of 2020. The company also had a commitment for up to $12.8 million of additional contributions to a limited partnership if called before September 2022.
- Management said disclosure controls were effective. A new accounting system was being implemented in phases, with the revenue-management module expected to reach all properties by September 30, 2018. Management was evaluating the new lease-accounting standard for adoption in 2019.
Important facts for investors to verify
- Whether rent growth and occupancy hold up in markets facing increased apartment supply, especially urban submarkets.
- The contribution of insurance-settlement income, derivative fair-value changes and land-sale gains to reported earnings, and the relationship between GAAP earnings and FFO.
- Debt maturities, refinancing needs and interest-rate exposure after the reported July and August 2018 repayments, including the $80 million Fannie Mae facility maturing in December 2018.
- Potential outcomes and financial exposure from the disclosed Fair Housing Act litigation; the filing does not quantify a potential loss range.
- Development budgets, completion schedules, lease-up performance and the remaining capital commitment for the four projects.
- Progress and control effectiveness as the new revenue-management system is rolled out across properties.