Business Context and Reporting Period
Mid-America Apartment Communities, Inc. (MAA) and its operating partnership filed this unaudited Form 10-Q for the quarter ended June 30, 2017. MAA operates substantially all of its business through the partnership. At quarter-end, the company owned or had an interest in 305 apartment communities with 100,237 units across 16 states and the District of Columbia, plus four commercial properties. The December 2016 acquisition of Post Properties materially expanded the portfolio; acquired communities remain in the non-same-store segment, making total-company comparisons less comparable.
Key Financial Metrics
Amounts below are in millions, except per-share data, percentages, and unit counts.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $382.8 | $272.2 | $761.7 | $541.3 |
| Net income available to MAA common shareholders | $47.4 | $45.1 | $88.4 | $88.6 |
| Diluted earnings per common share | $0.42 | $0.60 | $0.78 | $1.17 |
| Funds from operations (FFO), attributable to company | $174.5 | $122.6 | $346.1 | $241.9 |
| Dividends declared per common share | $0.87 | $0.82 | $1.74 | $1.64 |
- Q2 total net operating income (NOI) was $236.8 million versus $169.3 million. Same-store revenue increased 3.1% and same-store NOI increased 3.2% for the quarter.
- Q2 same-store physical occupancy ended at 96.7%; average effective rent per unit grew 3.2% year over year. The broader portfolio’s average effective rent was $1,166 per unit and occupancy was 96.5%, excluding lease-up and development properties.
- For the six months, operating cash flow was $321.8 million versus $238.2 million; investing cash outflow was $189.4 million versus $185.4 million; financing cash outflow was $126.3 million versus $64.1 million. Cash and cash equivalents were $39.7 million at June 30.
- Total debt was $4.573 billion, with a 3.6% weighted-average interest rate and 4.2-year average maturity. Debt included $3.443 billion unsecured and $1.130 billion secured. Approximately 87.6% was fixed or capped after derivatives. The $1.0 billion revolving facility had $160 million borrowed and approximately $2.3 million used for letters of credit.
- Total assets were $11.534 billion and total liabilities were $4.991 billion at June 30. The filing does not provide a single current-ratio measure.
Material Changes Versus the Prior Comparable Period
- Revenue rose 40.6% in Q2 and 40.7% in the first half, principally reflecting the Post Properties merger. Same-store revenue growth was more modest: 3.1% in Q2 and 3.2% for the first half.
- Q2 common-shareholder net income increased about 5%, while diluted EPS declined from $0.60 to $0.42. For the first half, common-shareholder net income was nearly flat, but diluted EPS declined from $1.17 to $0.78. The merger substantially increased the share count; added depreciation, interest, preferred dividends, and merger-related costs also affected results.
- FFO increased 42% in Q2 and 43% for the first half, benefiting from the enlarged portfolio, partly offset by higher property expenses, overhead, merger/integration costs, and interest expense. FFO is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- Merger and integration expenses totaled $4.2 million in Q2 and $10.4 million in the first half. First-half depreciation and amortization increased $105.5 million year over year; interest expense increased $10.8 million.
- In May, the operating partnership issued $600 million of 3.60% senior notes due 2027, using proceeds to reduce revolver borrowings. It also repaid approximately $172 million of secured mortgages during the first half.
Outlook, Risks, Contingencies, and Unusual Items
- Management reported strong apartment demand and expected the high occupancy entering the summer leasing season to support third-quarter pricing. It cited a 6% year-over-year decline in multifamily permitting across its markets as of May 2017, while acknowledging supply additions and competition vary by market. No formal earnings or full-year financial guidance is provided in the supplied filing text.
- Six development communities totaling 1,766 units were under construction. Expected total project costs were $396.1 million, with $293.1 million incurred by June 30; projected completion dates range from Q4 2017 through Q4 2018.
- Management stated it believed liquidity was adequate for operations, property refurbishment, and incremental investment. It cautioned that significant deterioration in operations could require reducing distributions. Common dividends declared were $0.87 per share for Q2.
- Principal risks include apartment demand, rent and expense trends, development budgets and lease-up, merger integration, financing and refinancing costs, interest rates, insurance/catastrophe exposure, REIT compliance, cyber and environmental risks, and litigation.
- A Department of Justice case inherited from Post Properties alleges accessibility violations under the Fair Housing Act and ADA; requested remedies include retrofits, monetary damages, and civil penalties. No trial date had been set, and the filing states that a possible loss range was not clearly estimable. Aggregate loss-contingency accruals were $38.9 million at June 30.
- Three apartment communities and one land parcel were classified as held for sale at quarter-end. Three communities were sold in July; management expected approximately $60 million of net gains in Q3. The company also paid off $150 million of senior unsecured notes at maturity on July 17.
Most Important Facts for Investors to Verify
- Separate merger-driven portfolio growth from underlying same-store performance, especially revenue, NOI, expenses, and occupancy.
- Reconcile the decline in EPS with flat first-half common earnings, the larger post-merger share count, preferred dividends, and increased depreciation and interest costs.
- Review debt maturities, revolving-facility availability, variable-rate exposure, refinancing needs, and development funding commitments.
- Track the DOJ accessibility litigation, the $38.9 million aggregate contingency accrual, and whether any potential additional loss becomes estimable.
- Confirm the completion and lease-up of development projects and the realized proceeds and gains from the July dispositions.