Business Context and Reporting Period
Company: Mid-America Apartment Communities, Inc. (Mid-America)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Mid-America is a self-administered Real Estate Investment Trust (REIT) owning, acquiring, renovating, developing, and managing apartment communities in the Sunbelt region. As of June 30, 2008, the company owned or held interests in 142 multifamily communities comprising 41,633 apartments across 13 states.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Operating Revenues | $184.98 million | $171.77 million |
| Net Income | $16.32 million | $20.44 million |
| Net Income Available to Common Shareholders | $9.89 million | $13.46 million |
| Funds From Operations (FFO) | $54.81 million | $47.49 million |
| Net Cash Provided by Operating Activities | $71.30 million | $58.85 million |
| Total Debt Outstanding | $1.24 billion | $1.26 billion (Dec 31, 2007) |
| Weighted Average Interest Rate | 4.9% | 5.5% (June 30, 2007) |
| Cash and Cash Equivalents | $9.98 million | $17.19 million (Dec 31, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Total property revenues increased by approximately $13.2 million (7.7%) for the six months ended June 30, 2008, compared to the same period in 2007. This was driven by $7.7 million from acquisitions, $0.8 million from development communities, and $4.7 million from the same-store portfolio due to rent growth and reduced concessions.
- Net Income Decline: Net income decreased by approximately $4.1 million year-over-year. This decline was primarily due to the absence of approximately $10.0 million in gains from property dispositions and joint venture sales that occurred in the first half of 2007, which were not repeated in 2008.
- Interest Expense Reduction: Interest expense decreased by $0.6 million to $31.5 million, driven by a reduction in the average borrowing cost from 5.52% in 2007 to 4.97% in 2008.
- Acquisitions: The company acquired four communities during the first half of 2008: Cascade at Fall Creek (TX), Milstead Village (GA), Greenwood Forest (TX), and Providence at Brier Creek (NC).
- Discontinued Operations: No properties were sold in the first six months of 2008, whereas 2007 included significant gains from the sale of discontinued operations.
Outlook, Risks, and Management Commentary
- Market Trends: Rental demand remained robust in most markets, though Florida showed weakness. Management noted a modest slowdown in traffic and revenue growth toward the end of the second quarter, attributed to general economic conditions. Same-store effective rent growth was 2.2% for the first half of 2008.
- Liquidity and Capital: The company raised $79.5 million through a controlled equity offering program in the first six months of 2008, exhausting the authorized shares. A new agreement for up to 1.35 million shares was entered into subsequent to the period end. Operating cash flow exceeded funding needs for improvements and distributions by $11.8 million.
- Debt and Interest Rate Risk: Approximately 87% of outstanding debt is provided by or credit-enhanced by Fannie Mae (FNMA) and Freddie Mac. The company utilizes interest rate swaps and caps to hedge variable rate debt. Management highlighted risks associated with the volatility of the FNMA DMBS market and the potential for loss of hedge accounting treatment.
- Future Dispositions: Subsequent to June 30, 2008, the company listed four communities (River Trace, Riverhills, Woodstream, and Westbury Springs) for sale, which will be classified as held for sale.
- Accounting Changes: The company adopted FASB Statement No. 157 (Fair Value Measurements) effective January 1, 2008. Future adoption of FASB Statement No. 141R (Business Combinations) and No. 160 (Noncontrolling Interests) is expected to impact financial statement presentation.
Key Facts for Investor Verification
- Dividend Coverage: Verify if the current dividend rate ($1.23 per share for the six months) is sustainable given the decline in net income and the reliance on external financing for distributions if operating cash flow deteriorates.
- Debt Concentration: Assess the risk exposure to Fannie Mae and Freddie Mac, which provide credit enhancement for approximately $885 million of the company's debt, amidst broader financial market volatility.
- Interest Rate Hedging: Review the effectiveness of the $853 million in interest rate swaps and $72 million in caps, particularly regarding the spread between LIBOR and FNMA DMBS rates which widened significantly in 2008.
- Asset Dispositions: Monitor the progress of the four communities listed for sale subsequent to the reporting period to determine if they will generate expected proceeds to fund future growth or debt reduction.
- Same-Store Performance: Track the sustainability of the 2.2% same-store rent growth in the context of slowing job formation and potential economic recession.