Mid-America Apartment Communities, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. MAA is a Sunbelt-focused apartment REIT. At quarter-end, it owned or held interests in 168 communities with 49,002 apartments across 13 states, and had development projects totaling 1,220 units under construction.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total operating revenue | $123.9 million | $107.2 million | $242.1 million | $210.8 million |
| Net income attributable to MAA | $28.2 million | $7.4 million | $52.1 million | $16.3 million |
| Income from continuing operations attributable to common shareholders per diluted share | $0.37 | $0.18 | $0.73 | $0.41 |
| Diluted EPS, including discontinued operations | $0.69 | $0.20 | $1.29 | $0.44 |
| Funds from operations (FFO) | $48.3 million | $36.2 million | $94.7 million | $73.2 million |
- Q2 property revenue rose 15.7%; six-month property revenue rose 14.9%. Same-store revenue growth was 4.6% in Q2: large-market communities increased 5.9% and secondary-market communities 3.1%.
- Total property NOI was $73.4 million in Q2 versus $63.0 million a year earlier; NOI as a share of property revenue was approximately 59.3% versus 58.9%. Six-month NOI was $142.9 million versus $124.5 million.
- Q2 and six-month net income included gains on property sales of $13.0 million and $22.5 million, respectively. These gains materially lifted reported earnings; FFO, which excludes real estate disposition gains, increased 33.5% in Q2 and 29.4% for the six-month period.
- Quarterly average same-store effective rent per unit was up 5.2% year over year. At June 30, wholly owned portfolio occupancy was 96.0%, compared with 96.3% a year earlier. Management notes effective rent is a pricing measure, not actual rent collected per unit.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $100.9 million, up from $83.6 million. Investing cash outflow was $113.2 million, compared with $226.6 million; financing cash outflow was $22.6 million, versus $109.9 million of inflow in 2011.
- Cash and cash equivalents declined to $22.3 million from $57.3 million at year-end 2011. Investing included $96.9 million for property purchases, $42.6 million for development and $51.1 million of disposition proceeds.
- Total debt was $1.589 billion at June 30, 2012, versus approximately $1.650 billion at December 31, 2011. Debt comprised $1.226 billion secured and $363.0 million unsecured; reported weighted-average effective rate was 3.8%. Net debt was approximately 44% of undepreciated book value.
- MAA issued shares in a March public offering, receiving approximately $120 million net proceeds. Common shares outstanding were about 41.1 million at June 30, up from 39.0 million at year-end. Dividends declared were $1.32 per share for the six months, compared with $1.255 a year earlier.
- Assets held for sale were $8.5 million, with related liabilities of $9.3 million. The balance sheet also reported $27.6 million of derivative liabilities for interest-rate swaps.
Material changes, outlook and risks
- During the quarter MAA acquired three communities totaling 949 units. It sold three properties in the first half, recognizing the $22.5 million aggregate gain; a fourth property, TPC Florence, was classified as held for sale and sold on August 1, 2012.
- Management described apartment demand and rent trends as strong, citing same-store effective rent growth and occupancy above 96%. It remained cautious because employment growth was below average, while expressing optimism about long-term rental demand and limited new supply. Management expected positive pricing trends to continue through the summer leasing season; the filing provides no formal earnings or FFO guidance.
- Development costs for the projects were expected to total $143.6 million, of which $97.1 million had been incurred by June 30. Management anticipated three project completions by Q4 2012 and the final project by Q4 2013.
- Subsequent to quarter-end, MAA expanded its Key Bank line from $250 million to $325 million and received a Moody’s Baa2 investment-grade rating. Management said the rating, together with an existing Fitch BBB rating, enabled lower pricing on unsecured credit facility and term-loan borrowings, reducing borrowing costs by an estimated 30–40 basis points from the prior pricing.
- Key risks include dependence on Fannie Mae and Freddie Mac financing or credit enhancement (approximately 53% of outstanding debt), refinancing and interest-rate exposure, covenant and collateral requirements, development and lease-up execution, economic and employment weakness, rising property taxes and insurance costs, and potential catastrophe losses. Management reported compliance with debt covenants at June 30 and adequate resources for current operations and planned investment, while warning a sustained operating deterioration could require reducing distributions.
- An approximately $655,000 out-of-period adjustment related to capitalization of land acquisition costs was recorded in Q1 2012. Management stated interim results are not necessarily indicative of full-year results. Disclosure controls were deemed effective; no material internal-control changes or legal proceedings were reported.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring property operations versus the $22.5 million first-half disposition gain; compare GAAP earnings with FFO and continuing-operations results.
- Debt maturity and refinancing exposure, variable-rate debt sensitivity, swap and cap effectiveness, and continued access to agency-backed financing.
- Whether occupancy and rent growth can persist amid slower employment growth, and whether development projects meet cost, timing and lease-up expectations.
- Cash and borrowing capacity after capital spending, dividends and acquisitions; the filing’s available-credit disclosures are not fully clear, so confirm current facility availability directly.