Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) and its operating partnership filed a combined, unaudited Form 10-Q for the quarter ended June 30, 2015. MAA operates through the partnership and owned approximately 94.7% of it. At quarter-end, the company owned or had an interest in 254 apartment communities with 79,977 units across 14 states.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenues | $258.9 million | $245.3 million | $517.4 million | $489.5 million |
| Net income attributable to MAA | $136.3 million | $31.6 million | $197.6 million | $46.5 million |
| Diluted EPS | $1.81 | $0.42 | $2.62 | $0.62 |
| Funds from operations (FFO), attributable to company | $112.4 million | $95.5 million | $219.3 million | $192.9 million |
| Core FFO, attributable to company | $108.0 million | $93.9 million | $213.2 million | $189.5 million |
| Net cash from operating activities | — | $226.5 million | $188.4 million |
Q2 total property NOI, a non-GAAP measure, was $158.0 million, up from $147.3 million. Same-store property revenue increased 6.4% in Q2; average effective rent per unit rose 4.7% and average physical occupancy increased 1.0 percentage point year over year. Quarter-end occupancy, excluding lease-up and development properties, was 96.7%.
At June 30, total assets were $6.84 billion, total liabilities $3.69 billion, and cash and cash equivalents $30.0 million. Debt totaled $3.44 billion, with a weighted average interest rate of 3.6% and average maturity of about four years. The company reported $1.41 billion of secured debt and $2.03 billion of unsecured debt. It had a $500 million unsecured revolving credit facility, with $159 million borrowed, and reported compliance with debt covenants. Dividends declared were $0.77 per share in Q2 and $1.54 per share for the first half.
Six-month investing cash outflow was $29.2 million, including $238.8 million of real estate sale proceeds; financing cash outflow was $194.0 million. Cash increased $3.4 million during the period. Operating cash flow exceeded normal capital improvements and distributions/dividends, according to management.
Material changes versus prior comparable periods
- Q2 operating revenues rose 5.6%; same-store large-market and secondary-market revenues grew 7.0% and 5.3%, respectively. Total property operating expenses increased 3.0% in Q2, with same-store expenses up 4.7%, mainly due to higher real estate taxes and personnel costs.
- Reported earnings increased sharply, but were significantly affected by property-sale gains: $105.2 million in Q2 and $135.4 million for the first half, versus $3.7 million and $6.2 million in the respective 2014 periods. FFO and Core FFO also increased, but exclude or adjust for specified items; they are not substitutes for GAAP earnings.
- First-half same-store property revenue increased 5.7%, while same-store property operating expenses rose 4.2%. First-half operating cash flow increased $38.2 million year over year.
- Depreciation and amortization declined 7.6% for the first half, largely because amortization of Colonial merger-related in-place leases and resident relationships declined. Merger and integration costs were absent in 2015, compared with $9.9 million combined in the first half of 2014. The company recorded a $3.4 million first-half debt-extinguishment loss.
- The company sold 18 apartment properties and one commercial property in the first half and acquired three apartment communities and four land parcels. Three properties totaling $64.3 million were classified as held for sale at June 30.
Outlook, commentary, risks and unusual items
Management said apartment demand remained strong and expected high occupancy entering the summer leasing season to support pricing in Q3. It cited continued rent growth and ancillary-service revenue opportunities, while noting elevated multifamily permitting and the potential for increased supply. Management believes its diversified Southeast and Southwest portfolio helps limit exposure to any single market. It stated that resources were adequate for operations, refurbishment and incremental investment, and that it could issue equity or debt if additional capital were needed. The filing provides no clear numerical earnings or FFO guidance.
Interest-rate exposure includes variable-rate debt; the company used $550 million of swaps and approximately $165 million of interest-rate caps. Management estimated $4.7 million of hedge-related losses would be reclassified to interest expense over the next 12 months. Management warned that covenant breaches, reduced collateral values, refinancing conditions, higher operating costs, adverse market or supply changes, development delays, and insufficient operating cash flow could affect results or liquidity. It said no material changes had occurred in previously disclosed risk factors or market risk.
A sale agreement for the Nord du Lac commercial property fell through; the property was reclassified from held for sale to held for use, producing $2.3 million of additional Q2 depreciation and amortization. The company accrued $13.0 million in aggregate loss contingencies. A construction-deficiency lawsuit relating to sold condominium units remains in discovery; plaintiffs’ claimed amount was not disclosed, and further possible loss could not be reasonably estimated. Subsequent to quarter-end, three properties totaling 1,602 units were sold on July 1; management expected approximately $54 million in gains in Q3. Two communities were acquired later in July.
Important facts for investors to verify
- How much of reported net income and EPS growth reflects property-disposition gains versus recurring property operations; review the company’s FFO and Core FFO reconciliations.
- Whether same-store rent and occupancy growth can be sustained as new apartment supply increases in key markets, and whether expense growth—particularly taxes and personnel—remains controlled.
- Debt maturities, variable-rate exposure, available revolving-credit capacity, covenant compliance, and the effect of interest rates and refinancing conditions.
- Completion costs and lease-up progress for four development projects totaling 806 units, with expected total costs of $118.8 million.
- Proceeds and final gains from the post-quarter property sales, the status of the Nord du Lac property, and any developments in the construction-deficiency litigation.