Mid-America Apartment Communities, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The company is a Sunbelt apartment REIT; it owned or had interests in 150 communities with 44,462 apartments across 13 states. Dollar amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total operating revenue | $98.9 | $94.6 | $196.4 | $188.2 |
| Property NOI | $56.1 | $55.9 | $111.9 | $111.7 |
| Net income attributable to MAA | $6.7 | $10.1 | $16.1 | $21.3 |
| Net income available to common shareholders | $1.4 | $6.9 | $7.6 | $14.9 |
| Basic and diluted EPS | $0.04 | $0.25 | $0.25 | $0.53 |
| FFO | $26.4 | $29.8 | $57.5 | $60.5 |
- Revenue increased 4.6% in Q2 and 4.3% for the half year. Reported property NOI was nearly flat year over year in both periods.
- For the six months, operating cash flow was $66.9, down from $73.9. Investing used $51.6, including $69.7 of real estate and other asset purchases, partly offset by disposition proceeds. Financing used $3.9; cash ended at $25.2.
- At June 30, notes payable totaled $1,363.2, down from $1,399.6 at year-end 2009. Weighted-average debt rate was 4.0%; disclosed debt-to-undepreciated-book-value ratio was approximately 48%. The company reported about $1.5 billion of total line limits, $1.5 billion collateralized, and $1,363.2 million borrowed in its debt schedule.
- Total equity was $497.9. Common dividends declared were $0.615 per share for the quarter and $1.23 for the half year.
Material changes versus comparable periods
- Q2 net income attributable to MAA fell about $3.5 million; half-year net income fell about $5.2 million. Common EPS declined to $0.04 for Q2 and $0.25 for the half year.
- Results included a $1.59 million impairment charge for Cedar Mill, following a purchase offer and reassessment of the property’s prospects. The prior-year periods included gains on sales of discontinued properties: approximately $1.2 million in Q2 and $2.6 million for the half year.
- Q2 FFO declined $3.4 million and six-month FFO declined $3.1 million. The company cited the impairment and a $2.6 million noncash charge for premiums and original issuance costs on the partial preferred-stock redemption.
- Reported revenue and expenses were lifted by a new bulk cable program that requires gross presentation. Management said same-store revenue, with cable expense netted against cable revenue, declined 1.4% in Q2 year over year.
- MAA issued 3.075 million shares through its at-the-market program during the half year for approximately $161.5 million net proceeds. It used $77.5 million to redeem 3.1 million Series H preferred shares in June; it subsequently redeemed the remaining 3.1 million shares on August 5, 2010.
Outlook, management commentary, and risks
- Management reported stronger rental demand, higher occupancy, and improved new-lease pricing versus the prior quarter. Same-store occupancy at June 30 was 70 basis points above June 30, 2009, while effective rent per unit was roughly level with the prior quarter.
- Management expected same-store revenue to remain pressured through 2010, principally due to lower rents on leases signed in late 2009. It anticipated positive apartment absorption in most markets later in 2010, but cautioned that weak employment growth could constrain demand and rent growth. No quantified earnings or FFO guidance was provided.
- Management expected near-term interest rates to remain favorable, with rates potentially rising as the economy improved. About 92% of debt was borrowed through or credit-enhanced by FNMA, Freddie Mac, and a bank facility; the filing emphasizes agency support, refinancing, covenant, collateral-value, and interest-rate-spread risks.
- Interest-rate swaps and caps covered approximately $793 million and $262 million of notional debt, respectively. Derivative liabilities were $56.9 million; the company estimated $28.1 million would be reclassified to interest expense over the next 12 months. Derivative contract provisions could require collateral or settlement in specified default or credit-downgrade scenarios.
- Management said operating cash flow for the half year fell about $1.3 million short of funding property improvements, unitholder distributions, and common and preferred dividends. It said current distributions could be supported with additional borrowing if necessary, but sustained operating deterioration could require a reduction.
- Other disclosed risks include property operating-cost increases, acquisition performance, catastrophic losses and insurance limits, REIT qualification and distribution requirements, and joint-venture performance. The filing reported no legal proceedings and no material change in internal controls.
Key facts for investors to verify
- Whether same-store revenue and rent trends improve after accounting for the cable-program gross-up, and whether occupancy gains translate into pricing growth.
- The sustainability of cash distributions given operating cash flow, capital needs, and management’s disclosed $1.3 million funding shortfall for the first half.
- Debt maturities and available borrowing capacity, including dependence on agency-supported financing and compliance with collateral and covenant requirements.
- The realized operating and valuation performance of the new acquisitions, joint ventures, and Cedar Mill following its impairment.
- The effect of the share issuance and completed Series H redemptions on common-share dilution, interest expense, and future distributions.