MID-AMERICA APARTMENT COMMUNITIES, INC. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparative periods ended June 30, 2012. Amounts are in U.S. dollars unless noted.
Business context
MAA is a Sunbelt-focused apartment REIT. At June 30, 2013, it owned or held interests in 164 multifamily communities with 49,113 apartments across 13 states, including four joint-venture communities. Two developments totaling 564 units were under construction. In June, MAA agreed to acquire Colonial Properties Trust in a stock-for-stock merger, then expected to close in Q3 2013.
Financial results and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total operating revenue | $134.1 million | $119.0 million | $264.4 million | $232.3 million |
| Income from continuing operations | $17.0 million | $15.2 million | $38.1 million | $29.7 million |
| Net income available to MAA common shareholders | $59.1 million | $28.2 million | $80.3 million | $52.1 million |
| FFO | $50.8 million | $48.3 million | $106.1 million | $94.7 million |
| Operating cash flow | Not separately presented | $109.4 million | $100.9 million |
Q2 net income included a $43.1 million gain on property sales; the comparable 2012 quarter included $13.0 million. MAA also recorded $5.7 million of merger-related expense. FFO, which excludes real estate sale gains, increased by $2.6 million in the quarter and $11.3 million for the six-month period.
Property revenue growth reflected acquisitions and stronger same-store performance. Q2 same-store revenue rose 4.4% overall, with large-market and secondary-market segment revenue up 5.3% and 3.3%, respectively. Management reported average effective rent of $876 per unit versus $828 a year earlier, and occupancy of 96.0% in both periods. These rent figures include asking rents for vacant units and are not actual rent collected.
At June 30, total assets were $2.834 billion, total liabilities $1.817 billion, and MAA shareholders’ equity $980.3 million. Total debt was $1.692 billion, compared with $1.674 billion at year-end 2012; the reported average debt rate was 3.5%. Cash and cash equivalents were $8.8 million and restricted cash was $13.0 million. The company had $206.0 million of variable-rate debt not hedged by swaps or caps.
For the six months, investing activities used $71.2 million, including acquisitions, development and capital spending, partly offset by $73.1 million of property disposition proceeds. Financing activities used $38.4 million. Common dividends declared were $0.695 per share for Q2 and $1.39 per share for the first half.
Material changes versus the prior comparable period
- Revenue and continuing income increased in both the quarter and first half, reflecting rent growth, acquisitions and related portfolio expansion.
- Net income growth was substantially affected by property-sale gains, rather than recurring operations alone. Four properties were sold in the first half; two additional properties were classified as held for sale.
- Interest expense rose $1.2 million in Q2 and $2.8 million in the first half, primarily because average debt outstanding increased; lower average interest rates partly offset the increase.
- Cash from operations increased, while net investing cash use declined year over year, in part because disposition proceeds rose and development spending fell.
- MAA issued shares through its at-the-market program, receiving approximately $24.8 million net in the first half; it had issued no ATM shares in the first half of 2012.
Outlook, commentary and risks
Management described apartment demand as strong, with same-store occupancy above 96% and rents increasing. It noted that new supply remained below historical delivery averages, although multifamily permitting was increasing. Management cited employment weakness as a constraint and cautioned that recession, increased supply or rising property taxes and insurance costs could limit rent growth or pressure results. No specific earnings or FFO guidance was provided.
The Colonial merger was expected to close in Q3 2013, subject to closing conditions. The agreement provided for 0.360 MAA shares for each Colonial common share. Risks include failure to complete the transaction, integration challenges, merger costs, and the possibility of changes to future operating results or dividends.
Subsequent to quarter-end, MAA received bank commitments to expand its unsecured revolving credit facility to $500 million, with capacity to increase to $800 million. At June 30, it reported $323.6 million available under its existing $325 million unsecured facility. Management said it believed resources were adequate for operations and planned investment, while warning that sustained operating deterioration could require a dividend reduction.
Additional financing risks include reliance on Fannie Mae and Freddie Mac credit facilities, covenant and collateral requirements, refinancing needs, interest-rate movements, and derivative-counterparty or hedge-accounting risks. MAA estimated that $10.9 million of accumulated derivative losses would be reclassified to interest expense over the next 12 months. It reported compliance with debt covenants at quarter-end and no pending legal proceedings; disclosure controls were considered effective.
Important facts for investors to verify
- Separate recurring operating performance and FFO from the $43.1 million property-sale gain included in GAAP net income.
- Confirm the Colonial merger’s closing, exchange terms, integration costs and financing arrangements; the filing’s Q3 closing expectation was not a guarantee.
- Review debt maturities, covenant headroom, agency-backed borrowing exposure, available credit and sensitivity to variable interest rates.
- Assess whether rent and occupancy growth can continue as new apartment supply and real estate taxes and insurance costs increase.
- Monitor dividend coverage from recurring cash flows, development commitments, and potential collateral or settlement requirements on derivatives.