Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) and its 96.5%-owned operating partnership filed this combined unaudited Form 10-Q for the quarter ended June 30, 2019. MAA owns, operates, acquires and develops apartments, principally in the Southeast, Southwest and Mid-Atlantic. At quarter-end, it operated 303 communities, held an interest in one additional community through a joint venture, and had five developments under construction.
Financial results and position
Unless noted otherwise, amounts are in millions of dollars. Comparisons are with the corresponding 2018 period.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Property revenue | $407.4 | $390.1 | $808.6 | $776.1 |
| Net income | $64.1 | $62.0 | $130.1 | $112.8 |
| Net income available to MAA common shareholders | $61.0 | $58.9 | $123.7 | $107.0 |
| Diluted earnings per common share | $0.53 | $0.52 | $1.09 | $0.94 |
| Funds from operations (FFO), attributable to the Company | $185.7 | $182.9 | $372.1 | $352.6 |
- Same Store revenue grew 3.2% in Q2 and 2.8% in the first half. Same Store NOI was $237.3 million in Q2 (+3.0%) and $474.7 million in the first half (+2.7%).
- Operating cash flow for the first half was $368.5 million, versus $364.0 million. Investing used $140.8 million, compared with $221.4 million; financing used $221.6 million, compared with $170.7 million.
- At June 30, cash and cash equivalents were $41.0 million and restricted cash was $16.7 million. Total debt was $4.54 billion, with a 3.8% weighted-average effective rate; approximately 85% was fixed-rate or hedged.
- Debt included $3.88 billion of unsecured debt and $660.5 million of secured debt. The $1.0 billion revolving facility had no borrowings outstanding, with $2.5 million of capacity supporting letters of credit. Commercial paper outstanding was $367.0 million, within a $500 million program.
- MAA paid common dividends of $0.96 per share in Q2 ($1.92 in the first half), up from $0.9225 per share in Q2 2018 ($1.845 in the first half).
Material changes versus the prior comparable period
- Q2 revenue increased 4.4%; common-shareholder net income rose 3.6%. First-half revenue increased 4.2%, while common-shareholder net income rose 15.7%.
- Q2 Same Store average effective rent per unit rose 3.2%; average daily physical occupancy was 96.0%, unchanged year over year. First-half Same Store rent growth was 3.1%, partly offset by slightly lower occupancy.
- First-half property operating expenses, excluding depreciation, increased 3.5%; real estate taxes were a significant driver. Interest expense increased $7.1 million for the first half, with management citing an approximately 18-basis-point rise in the effective interest rate and amortization of fair-value adjustments on assumed debt.
- No merger and integration expense was recorded in 2019, versus $2.8 million in Q2 2018 and $6.6 million in the first half of 2018, following completion of Post Properties integration activities.
- Debt funding changed: MAA issued $300 million of 3.95% senior notes due 2029 and $191.3 million of secured mortgages during the first half, retired a $300 million term loan, and established a commercial paper program. Net property purchases were lower than in the prior-year period.
Outlook, risks and unusual items
- No quantified full-year guidance is stated in the supplied filing text. Management said occupancy and job growth supported its position for the remainder of 2019 and expected improved pricing growth in the second half versus the same period in 2018.
- Management reported strong apartment demand but cautioned that elevated new supply—particularly in urban submarkets—could constrain rent growth and may persist in some markets for the next couple of years. Development and redevelopment execution, property taxes and personnel costs are also relevant operating factors.
- Five developments totaling 1,090 units had expected aggregate costs of $230.5 million; $82.5 million had been incurred by June 30. Expected completion dates range from the second half of 2019 through the first half of 2021.
- Q2 results included $4.6 million of income from a fair-value adjustment to the embedded derivative in Series I preferred stock. First-half results included a $9.3 million gain on sales of non-depreciable real estate assets. These items affect comparability.
- Two Texas class actions allege unlawful late fees. Class certification and partial summary judgment were granted at the district court and appeals were being pursued. Management estimated maximum exposure of $54.6 million and $8.4 million, respectively, excluding possible prejudgment interest. Aggregate accruals for unresolved legal matters were $8.6 million at quarter-end.
- Interest-rate, refinancing, LIBOR transition, development, supply, insurance, legal and REIT-compliance risks are discussed. Management reported no material change to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material quarter-specific change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $367 million of commercial paper—shown with a July 16, 2019 maturity—was refinanced or repaid, and the availability and terms of replacement liquidity.
- Subsequent Same Store rent growth, occupancy, concessions and market supply, especially in urban submarkets.
- Development budgets, delivery timing, lease-up progress and remaining funding needs for the five projects.
- Updates on the Texas late-fee litigation, including appeals, potential exposure, and whether the recorded legal accrual changes.
- Recurring operating performance excluding derivative fair-value income and real-estate sale gains; FFO is a non-GAAP measure and should be considered alongside GAAP results and cash flows.