Business context and reporting period
Mid-America Apartment Communities, Inc. (MAA) is a Sunbelt-focused apartment REIT that owns, acquires, renovates, develops and manages multifamily communities. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods.
At quarter-end, MAA owned or held interests in 164 communities totaling 48,189 apartments, including joint ventures; 950 units across development projects were under construction. Its 100%-owned portfolio included 45,928 units in 157 communities.
Key financial results
Amounts are in millions of dollars except per-share data and operating statistics.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total operating revenue | $110.5 | $98.4 | $217.3 | $195.4 |
| Net income attributable to MAA | $7.4 | $6.7 | $16.3 | $16.1 |
| Net income available to common shareholders | $7.4 | $1.4 | $16.3 | $7.6 |
| Basic / diluted EPS | $0.20 / $0.20 | $0.04 / $0.04 | $0.45 / $0.44 | $0.25 / $0.25 |
| Funds from operations (FFO) | $36.2 | $26.4 | $73.2 | $57.5 |
| Net operating income (NOI) | $63.0 | $56.1 | $124.5 | $111.9 |
- Q2 revenue rose about 12%; NOI rose about 12% and FFO about 37%. For the first half, revenue rose about 11%, NOI about 11% and FFO about 27%.
- Six-month net income attributable to MAA increased only modestly. The sharp year-over-year increase in common-shareholder income and EPS primarily reflects preferred-stock dividends and redemption costs in 2010, not a comparable increase in operating income.
- Six-month operating cash flow was $83.6 million, versus $66.9 million in 2010. Investing used $226.6 million, mainly for acquisitions, improvements and development; financing provided $109.9 million. Cash and equivalents were $12.8 million at June 30, down from $45.9 million at year-end 2010.
- Quarterly common dividends declared were $0.6275 per share; first-half declarations were $1.255 per share.
- Total debt was $1.536 billion, versus $1.500 billion at December 31, 2010. The reported weighted-average interest rate was 3.8%. Approximately $1.338 billion was fixed-rate or hedged; about $198 million remained variable-rate and unhedged.
- Total assets were $2.314 billion and total equity was $640.3 million at June 30. The balance sheet reported $41.1 million of interest-rate-swap liabilities.
Material changes and operating performance
- Property revenue growth reflected both same-store improvement and acquisitions. Q2 large-market same-store revenue increased 4.0%, secondary-market same-store revenue increased 4.6%, and non-same-store and other revenue increased 163.8%, primarily from acquisitions.
- Management reported Q2 same-store revenue growth of 4.3%, or 3.8% excluding the effect of its bulk-cable program. Same-store physical occupancy remained in the low-to-mid 96% range; overall occupancy for the 100%-owned portfolio was 96.3%, versus 96.2% a year earlier. Average rent per unit for that portfolio was $762, up from $721.
- Five wholly owned communities were acquired during Q2; a 312-unit Little Rock development was also contracted. The acquisitions were funded with common-share issuances and borrowings.
- Property operating costs excluding depreciation increased by approximately $5.0 million in Q2 and $9.1 million in the first half, partly due to acquisitions. Depreciation and corporate expenses also increased.
Outlook, risks and unusual items
- Management described apartment demand and pricing as improving, and expected stronger revenue growth in the latter half of 2011 as rent increases affected more of the portfolio. It expected positive pricing trends to continue through 2011 and into 2012, while emphasizing caution because job growth remained stagnant and a weak economy could constrain rent growth.
- Management cited limited new apartment supply, diversified markets and revenue initiatives as supportive factors. It also noted that a recession, rising operating costs, higher interest rates or weaker employment could pressure operations and distributions.
- MAA stated it believed it had adequate resources for operations, refurbishment and incremental investment. However, it warned that sustained deterioration could make current distributions unaffordable. Operating cash flow exceeded specified property-improvement, unitholder-distribution and common-dividend outflows by about $10 million in the first half.
- Financing and liquidity risks include reliance on FNMA- and Freddie Mac-supported facilities: approximately 75% of debt was borrowed through or credit-enhanced by those agencies. Facility availability depends on collateral, covenants and lender conditions. About $80 million of credit-facility line limits matured in 2011 and $130 million in 2012; contractual debt principal maturities were $81.9 million for the remainder of 2011 and $86.7 million in 2012.
- MAA had 25 interest-rate swaps with $651.8 million notional and 21 caps with $270.7 million notional. It estimated $23.0 million would be reclassified from accumulated other comprehensive income to interest expense over the next 12 months. Derivative terms could require collateral or settlement under specified credit events.
- In Q2, MAA recorded a $1.8 million noncash G&A adjustment for restricted-stock awards, correcting prior-period accounting cumulatively over 3.5 years. Management deemed the out-of-period portion immaterial; the related share-repurchase practice was discontinued after Q2.
- Subsequent event: on July 29, 2011, MAA issued $135 million of senior guaranteed notes with a 9.1-year average maturity and 5.15% average interest rate.
- The filing reported no legal proceedings and stated disclosure controls were effective as of June 30, 2011.
Important facts for investors to verify
- Whether same-store rent and occupancy gains continue, and how much reported growth comes from acquisitions versus existing communities.
- Distribution coverage from recurring operating cash flow, considering capital expenditures, debt service and the declared dividend.
- Debt maturities, available collateral and covenant headroom, particularly given reliance on FNMA- and Freddie Mac-supported financing.
- Exposure to unhedged variable rates, derivative counterparties and potential hedge-related cash or earnings effects.
- The effect of the restricted-stock accounting adjustment on reported compensation expense and any subsequent-period costs.
- How the July 2011 note issuance affects liquidity, interest expense and the maturity profile.