Mid-America Apartment Communities, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. MAA reports with its operating partnership, which holds substantially all real estate assets. MAA completed its acquisition of Colonial Properties Trust on October 1, 2013; accordingly, 2014 results include Colonial but the comparable 2013 periods do not.
Business context and operating performance
The company operates multifamily apartment communities primarily in the Sunbelt. The filing describes its portfolio as 269 communities and 83,075 apartments in one section, while MD&A reports 271 communities and 83,663 units; portfolio definitions differ and should be checked. At June 30, the company reported 514 units under construction across two development projects.
Management reported solid apartment demand. Same-store effective rent per unit increased 3.1% year over year in Q2, and same-store physical occupancy averaged above 95% during the quarter. At quarter-end, occupancy for the broader portfolio excluding lease-up and development was 95.7%, versus 96.0% a year earlier.
Financial results and key metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total operating revenue | $244.6 million | $131.8 million | $488.0 million | $259.7 million |
| Income from continuing operations | $29.3 million | $16.2 million | $36.0 million | $36.4 million |
| Net income available to MAA common shareholders | $31.6 million | $59.1 million | $46.5 million | $80.3 million |
| Basic EPS | $0.42 | $1.38 | $0.62 | $1.89 |
| FFO | $95.5 million | $50.8 million | $192.9 million | $106.1 million |
| Core FFO | $93.9 million | $56.8 million | $189.5 million | $112.0 million |
FFO and Core FFO are non-GAAP measures as defined by the company. Q2 total NOI was $146.2 million, compared with $81.7 million. Same-store Q2 revenue rose 4.0% in large markets and 1.1% in secondary markets; the company attributed growth mainly to a 4.4% increase in average rent per unit. Q2 property operating expenses increased 84.8% overall, largely reflecting Colonial, while same-store expenses rose 3.4% in large markets and 5.0% in secondary markets.
At June 30, total assets were $6.78 billion and total debt was $3.48 billion, versus approximately $3.47 billion at December 31, 2013. Debt’s weighted-average interest rate was 3.8%. Cash and cash equivalents were $26.3 million, with restricted cash of $64.7 million. Shareholders’ equity was $3.06 billion. The company reported compliance with its debt covenants.
For the first six months, operating cash flow was $224.4 million, investing cash outflow was $152.7 million, and financing cash outflow was $134.7 million. Cash declined by $63.0 million to $26.3 million. Capital expenditures included $43.2 million of normal improvements and $29.4 million of development spending. Dividends declared were $0.73 per share for Q2 and $1.46 per share for the six-month period.
Material changes versus the prior comparable period
- Revenue, NOI and FFO increased substantially, primarily because the Colonial portfolio was included in 2014 results. The company said the merger nearly doubled its size.
- Q2 income from continuing operations and continuing-operations EPS increased year over year, but reported net income and total EPS declined because Q2 2013 included a $43.1 million gain on sales of discontinued operations.
- Six-month reported net income fell to $49.1 million from $83.0 million, while continuing-operations income was broadly flat. Prior-year property-sale gains were a major comparison factor.
- Interest expense increased by $15.0 million in Q2 and $30.1 million for the six months, primarily because average debt rose by about $1.74 billion and $1.76 billion, respectively, largely following the Colonial merger.
- Merger and integration costs totaled $9.9 million for the first six months of 2014. Integration expenses were $7.0 million; merger expenses were $2.9 million.
Outlook, risks and unusual items
- Management gave no numerical earnings or FFO guidance in the supplied filing text. It expected strong physical occupancy through the summer leasing season and believed this could support pricing and occupancy in Q3.
- Management cited increased multifamily permitting as a potential source of future supply, while expressing the view that demand and household formation would help keep supply and demand balanced. Rising property taxes, utilities and landscaping costs were already pressuring expenses.
- Management said current resources were adequate for operations, property refurbishment and incremental investment. It also cautioned that sustained deterioration in operations could make current distributions unsustainable and require a reduction.
- MAALP issued $400 million of 3.75% senior notes due 2024 in June; proceeds were approximately $392.9 million. The company entered related forward swaps, resulting in a stated effective rate of 3.98%. It had $496.4 million available under its $500 million unsecured revolving facility at quarter-end.
- Interest-rate, refinancing and covenant risks remain relevant. Most debt was fixed or hedged, but the company remains exposed to variable rates, refinancing markets, Fannie Mae funding availability and derivative-counterparty risks. It estimated $8.8 million of hedge-related losses would be reclassified to interest expense over the next 12 months.
- Two South Carolina construction-deficiency lawsuits remained disclosed; for the Regatta at James Island matter, plaintiffs had not disclosed damages and the company could not estimate additional possible losses. A separate Plantation Point lawsuit was settled in Q2 2014.
- The company adopted the revised discontinued-operations accounting standard early, changing the classification of certain 2014 property disposals. It also recorded a $3.4 million joint-venture gain related to Fund II’s sale of Ansley Village and $6.2 million of gains on depreciable real estate sales outside discontinued operations for the six months.
Most important facts for investors to verify
- How much of reported growth and FFO reflects Colonial’s added scale versus underlying same-store performance, and whether integration costs and anticipated synergies develop as expected.
- Portfolio counts and unit totals: the filing gives differing figures across sections, apparently reflecting different portfolio definitions.
- Debt maturities, available borrowing capacity, covenant headroom and refinancing exposure, particularly given the increase in debt and interest expense.
- Whether rent growth and occupancy can offset operating-cost increases and sustain the current dividend.
- Potential exposure from the unresolved construction-deficiency litigation and the tax risks identified concerning Colonial’s pre-merger REIT qualification.