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MAA > SEC Filings for MAA > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for MID AMERICA APARTMENT COMMUNITIES INC

Form 10-Q for MID AMERICA APARTMENT COMMUNITIES INC


1-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion analyzes the financial condition and results of operations of both MAA and the Operating Partnership, of which MAA is the sole general partner and in which MAA owned a 94.7% limited partner interest as of June 30, 2014. MAA conducts all of its business through the Operating Partnership and the Operating Partnership's various subsidiaries.

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes appearing elsewhere in this Quarterly Report. Historical results and trends that might appear in the condensed consolidated financial statements should not be interpreted as being indicative of future operations.

Risk Associated with Forward Looking Statements

We consider this and other sections of this Quarterly Report on Form 10-Q to contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with respect to our expectations for future periods. The factors described in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2013, as updated in Part II, Item 1A in this Quarterly Report on Form 10-Q, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q, in the documents incorporated by reference into this Quarterly Report on Form 10-Q or presented elsewhere by our management from time to time. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items related to the future. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, joint venture activity, development and renovation activity as well as other capital expenditures, capital raising activities, rent and expense growth, occupancy, financing activities and interest rate and other economic expectations and statements about the benefits of our merger with Colonial Properties Trust, or Colonial. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from the results of operations, financial conditions or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unanticipated adverse business developments affecting us, or our properties, adverse changes in the real estate markets and general and local economies and business conditions. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such forward-looking statements included in this report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.

The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:

inability to generate sufficient cash flows due to market conditions, changes in supply and/or demand, competition, uninsured losses, changes in tax and housing laws, or other factors;


exposure, as a multifamily focused REIT, to risks inherent in investments in a single industry;

difficulty in completing the integration of Colonial's operations, systems and personnel with ours and certain uncertainties associated with our ability to sell our commercial asset portfolio;

adverse changes in real estate markets, including, but not limited to, the extent of future demand for multifamily units in our primary markets, barriers of entry into new markets which we may seek to enter in the future, limitations on our ability to increase rental rates, competition, our ability to identify and consummate attractive acquisitions or development projects on favorable terms, our ability to consummate any planned dispositions in a timely manner on acceptable terms, and our ability to reinvest sale proceeds in a manner that generates favorable returns;

failure of new acquisitions to achieve anticipated results or be efficiently integrated;

failure of development communities to be completed, if at all, within budget and on a timely basis or to lease-up as anticipated;

unexpected capital needs;

changes in operating costs, including real estate taxes, utilities and insurance costs;

losses from catastrophes in excess of our insurance coverage;

ability to obtain financing at favorable rates, if at all, and refinance existing debt as it matures;

level and volatility of interest or capitalization rates or capital market conditions;

loss of hedge accounting treatment for interest rate swaps or interest rate caps;

the continuation of the good credit of our interest rate swap and cap providers;

price volatility, dislocations and liquidity disruptions in the financial markets and the resulting impact on financing;

the effect of any rating agency actions on the cost and availability of new debt financing;

significant decline in market value of real estate serving as collateral for mortgage obligations;

significant change in the mortgage financing market that would cause single-family housing, either as an owned or rental product, to become a more significant competitive product;

our ability to continue to satisfy complex rules in order to maintain our status as a REIT for federal income tax purposes, the ability of the Operating Partnership to satisfy the rules to maintain its status as a partnership for federal income tax purposes, the ability of our taxable REIT subsidiaries to maintain their status as such for federal income tax purposes, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

inability to attract and retain qualified personnel;

potential liability for environmental contamination;

adverse legislative or regulatory tax changes;

litigation and compliance costs associated with laws requiring access for disabled persons; and

other risks identified in this Quarterly Report on Form 10-Q and, from time to time, in other reports we file with the Securities and Exchange Commission, or the SEC, or in other documents that we publicly disseminate.

We undertake no obligation to publicly update or revise these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.

Critical Accounting Policies and Estimates

Please refer to the 2013 Form 10-K for discussions of our critical accounting policies. During the three months ended June 30, 2014, there were no material changes to these policies.

Overview of the Three Months Ended June 30, 2014

As noted earlier, on October 1, 2013, we consummated the merger and acquired all of Colonial's net assets. Our June 30, 2014 and December 31, 2013 balance sheets include the combined assets and liabilities of MAA and Colonial. All properties acquired from Colonial have been placed in our Non-Same Store operating segment, as the properties are recent acquisitions and have not been owned and stabilized for at least 12 months.

We experienced an increase in income from continuing operations for the three months ended June 30, 2014 over the three months ended June 30, 2013 as increases in revenues outpaced increases in expenses. The increases in revenues came from a 4.0% increase in our large market same store segment, a 1.1% increase in our secondary market same store segment and a 1,052.7% increase in our non-same store and other segment, which was primarily a result of the merger. The increase in expense came from a 3.4% increase in our large market same store segment, a 5.0% increase in our secondary market same store segment and a 1,047.7% increase in our non-same store and other segment, which was primarily the result of the merger. Our same store portfolio represents those communities that have been held and have been stabilized for at least 12 months. Communities excluded from the same store portfolio would include recent acquisitions, communities being developed or in


lease-up, communities undergoing extensive renovations, and communities identified as discontinued operations. The drivers of these increases are discussed below in the results of operations section.

The following table shows our multifamily real estate assets as of June 30, 2014 and 2013:

                                                           June 30, 2014   June 30, 2013
Properties                                                      271             164
Units                                                         83,663          49,113
Development Units                                               514             564
Average Effective Monthly Rent/Unit, excluding lease-up
and development                                               $914.52         $875.88
Occupancy, excluding lease-up and development                  95.7%           96.0%

See discussion of same store average rent per unit and occupancy comparisons in the Trends section below.

In addition to the multi-family assets detailed above, we also owned or owned an interest in four commercial properties totaling 317,000 square feet of leasable space.

Average effective monthly rent per unit is equal to the average of gross rent amounts after the effect of leasing concessions for occupied units plus prevalent market rates asked for unoccupied units, divided by the total number of units. Leasing concessions represent discounts to the current market rate. We believe average effective monthly rent is a helpful measurement in evaluating average pricing. It does not represent actual rental revenue collected per unit.

The following is a discussion of our consolidated financial condition and results of operations for the three and six-month periods ended June 30, 2014 and 2013. This discussion should be read in conjunction with all of the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Results of Operations

Comparison of the three months ended June 30, 2014, to the three months ended June 30, 2013

Property Revenues

The following table shows our property revenues by segment for the three months
ended June 30, 2014 and June 30, 2013 (dollars in thousands):

                                Three months ended June 30,
                                  2014               2013            Increase        Percentage Increase
Large Market Same Store     $        62,351     $      59,936     $       2,415                   4.0 %
Secondary Market Same Store          61,971            61,298               673                   1.1 %
Non-Same Store and Other            120,171            10,425           109,746               1,052.7 %
Total                       $       244,493     $     131,659     $     112,834                  85.7 %

The increases in property revenues from our large market same store and secondary market same store groups are primarily a result of increased average rent per unit of 4.4%. The increase in property revenues from our non-same store and other group is primarily due to the addition of the Colonial portfolio as a result of the merger.


Property Operating Expenses

Property operating expenses include costs for property personnel, building
repairs and maintenance, real estate taxes and insurance, utilities, landscaping
and depreciation and amortization. The following table shows our property
operating expenses by segment for the three months ended June 30, 2014 and
June 30, 2013 (dollars in thousands):

                               Three months ended June 30,
                                  2014              2013             Increase        Percentage Increase
Large Market Same Store     $       25,277     $      24,448     $          829                   3.4 %
Secondary Market Same Store         25,506            24,292              1,214                   5.0 %
Non-Same Store and Other            46,839             4,081             42,758               1,047.7 %
Total                       $       97,622     $      52,821     $       44,801                  84.8 %

The increase in property operating expenses from our large market same store group is primarily a result of increases in real estate taxes, water and sewer utilities, and landscaping expenses, with real estate taxes being the largest component. The increase in property operating expenses from our secondary market same store group is primarily a result of increases in real estate taxes, mulch landscaping expenses, and water and sewer utilities, with real estate taxes being the largest component. The increase in property operating expenses from our non-same store and other group is primarily due to the addition of the Colonial portfolio as a result of the merger.

Depreciation and Amortization

The following table shows our depreciation and amortization expense by segment
for the three months ended June 30, 2014 and June 30, 2013 (dollars in
thousands):

                               Three months ended June 30,
                                  2014              2013             Increase        Percentage Increase
Large Market Same Store     $       14,512     $      14,391     $          121                   0.8 %
Secondary Market Same Store         14,955            14,725                230                   1.6 %
Non-Same Store and Other            40,164             3,106             37,058               1,193.1 %
Total                       $       69,631     $      32,222     $       37,409                 116.1 %

The increase in depreciation and amortization expense from our non-same store and other group is primarily due to the addition of the Colonial portfolio as a result of the merger.

Property Management Expense

Property management expense for the three months ended June 30, 2014 was approximately $9.6 million, an increase of $4.4 million from the three months ended June 30, 2013. The majority of the increase was related to increases in payroll expenses and software maintenance fees primarily as a result of the merger.

General and Administrative Expense

General and Administrative expense for the three months ended June 30, 2014 was approximately $5.2 million, an increase of $1.8 million from the three months ended June 30, 2013. The majority of the increase was related to increases in stock incentives and payroll expenses primarily as a result of the merger.

Merger and Integration Costs

Merger related expenses, primarily severance, legal, and professional costs for the acquisition of Colonial were approximately $0.8 million for the three months ended June 30, 2014. We also incurred integration related expenses of $3.2 million, primarily related to temporary systems, staffing, and facilities costs for the three months ended June 30, 2014. There were $5.7 million of merger related expenses for the three months ended June 30, 2013. We did not incur any integration related expenses for the three months ended June 30, 2013.


Interest Expense

Interest expense for the three months ended June 30, 2014 was approximately $30.2 million, an increase of $15.0 million from the three months ended June 30, 2013. The increase was primarily the result of an increase in our average debt outstanding from the three months ended June 30, 2013 to the three months ended June 30, 2014 of approximately $1.74 billion, due primarily to the assumption of Colonial's debt as a result of the merger.

Gain from Real Estate Joint Ventures

Gain from real estate joint ventures for the three months ended June 30, 2014 was approximately $2.9 million, an increase of $2.9 million from the three months ended June 30, 2013. The increase was primarily a result of recording a $3.4 million gain for the disposition of Ansley Village by Fund II during the three months ended June 30, 2014. There was no such gain recorded during the three months ended June 30, 2013.

Discontinued Operations

Income from discontinued operations before gain on sale for the three months ended June 30, 2014 was approximately $0.4 million, a decrease of $1.2 million from the three months ended June 30, 2013. The decrease is driven by the fact that the properties included in discontinued operations had lower net income during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 and there were two fewer properties included in discontinued operations.

We recorded a gain on sale of discontinued operations of $43.1 million for the three months ended June 30, 2013. We did not record a gain on sale of discontinued operations for the three months ended June 30, 2014 because we did not dispose of any properties which were classified as discontinued operations.

Dispositions of Depreciable Real Estate Assets Excluded from Discontinued Operations

We recorded a gain on sale of depreciable assets excluded from discontinued operations of $3.7 million for the three months ended June 30, 2014. We did not record a gain on sale of discontinued operations for the three months ended June 30, 2013 because we did not dispose of any properties which were excluded from discontinued operations.

Net Income Attributable to MAA

Primarily as a result of the foregoing, net income attributable to MAA decreased by approximately $27.5 million for the three months ended June 30, 2014 from the three months ended June 30, 2013.

Comparison of the six months ended June 30, 2014, to the six months ended June 30, 2013

Property Revenues

The following table shows our property revenues by segment for the six months
ended June 30, 2014 and June 30, 2013 (dollars in thousands):

                                Six months ended June 30,
                                  2014              2013            Increase        Percentage Increase
Large Market Same Store     $      123,695     $     118,878     $       4,817                   4.1 %
Secondary Market Same Store        123,502           121,697             1,805                   1.5 %
Non-Same Store and Other           240,686            18,827           221,859               1,178.4 %
Total                       $      487,883     $     259,402     $     228,481                  88.1 %

The increases in property revenues from our large market same store and secondary market same store groups are primarily a result of increased average rent per unit of 4.4%. The increase in property revenues from our non-same store and other group is primarily due to the addition of the Colonial portfolio as a result of the merger.


Property Operating Expenses

Property operating expenses include costs for property personnel, building
repairs and maintenance, real estate taxes and insurance, utilities, landscaping
and depreciation and amortization. The following table shows our property
operating expenses by segment for the six months ended June 30, 2014 and
June 30, 2013 (dollars in thousands):

                                Six months ended June 30,
                                  2014              2013             Increase        Percentage Increase
Large Market Same Store     $       50,342     $      48,249     $        2,093                   4.3 %
Secondary Market Same Store         49,460            47,618              1,842                   3.9 %
Non-Same Store and Other            95,183             7,475             87,708               1,173.4 %
Total                       $      194,985     $     103,342     $       91,643                  88.7 %

The increase in property operating expenses from our large market same store group is primarily a result of increases in real estate taxes, water and sewer utilities, and mulch landscaping expenses, with real estate taxes being the largest component. The increase in property operating expenses from our secondary market same store group is primarily a result of increases in real estate taxes, mulch landscaping expenses, and water and sewer utilities, with real estate taxes being the largest component. The increase in property operating expenses from our non-same store and other group is primarily due to the addition of the Colonial portfolio as a result of the merger.

Depreciation and Amortization

The following table shows our depreciation and amortization expense by segment
for the six months ended June 30, 2014 and June 30, 2013 (dollars in thousands):

                                Six months ended June 30,
                                  2014              2013             Increase        Percentage Increase
Large Market Same Store     $       28,964     $      28,926     $           38                   0.1 %
Secondary Market Same Store         29,886            29,776                110                   0.4 %
Non-Same Store and Other           100,794             5,715             95,079               1,663.7 %
Total                       $      159,644     $      64,417     $       95,227                 147.8 %

The increase in depreciation and amortization expense from our non-same store and other group is primarily due to the addition of the Colonial portfolio as a result of the merger.

Property Management Expense

Property management expense for the six months ended June 30, 2014 was approximately $16.6 million, an increase of $6.3 million from the six months ended June 30, 2013. The majority of the increase was related to increases in payroll expenses and software maintenance fees primarily as a result of the merger.

General and Administrative Expense

General and Administrative expense for the six months ended June 30, 2014 was approximately $9.6 million, an increase of $2.9 million from the six months ended June 30, 2013. The majority of the increase was related to increases in payroll expenses and stock incentives primarily as a result of the merger.

Merger and Integration Costs

Merger related expenses, primarily severance, legal, and professional costs for the acquisition of Colonial were approximately $2.9 million for the six months ended June 30, 2014. We also incurred integration related expenses, primarily related to temporary systems, staffing, and facilities costs of $7.0 million for the six months ended June 30, 2014. There were $5.7 million of merger related expenses for the six months ended June 30, 2013. We did not incur any integration related expenses for the six months ended June 30, 2013.


Interest Expense

Interest expense for the six months ended June 30, 2014 was approximately $60.8 million, an increase of $30.1 million from the six months ended June 30, 2013. The increase was primarily the result of an increase in our average debt outstanding from the six months ended June 30, 2013 to the six months ended June 30, 2014 of approximately $1.76 billion, due primarily to the assumption of Colonial's debt as a result of the merger.

Gain from Real Estate Joint Ventures

Gain from real estate joint ventures for the six months ended June 30, 2014 was approximately $2.9 million, an increase of $2.8 million from the six months ended June 30, 2013. The increase was primarily a result of recording a $3.4 million gain for the disposition of Ansley Village by Fund II during the six months ended June 30, 2014. There was no such gain recorded during the six months ended June 30, 2013.

Discontinued Operations

Income from discontinued operations before gain on sale for the six months ended June 30, 2014 was approximately $0.9 million, a decrease of $2.6 million from the six months ended June 30, 2013. The decrease is driven by the fact that the properties included in discontinued operations had lower net income during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 and there were two fewer properties included in discontinued operations.

We recorded a gain on sale of discontinued operations of $5.5 million for the six months ended June 30, 2014 as compared to a $43.1 million gain for the six months ended June 30, 2013. The decrease in the gain is caused by the proceeds received in 2014 being less than the proceeds received in 2013 in relation to the net book value of the properties sold.

Dispositions of Depreciable Real Estate Assets Excluded from Discontinued Operations

We recorded a gain on sale of depreciable assets excluded from discontinued operations of $6.2 million for the six months ended June 30, 2014. We did not record a gain on sale of discontinued operations for the six months ended June 30, 2013 because we did not dispose of any properties which were excluded from discontinued operations.

Net Income Attributable to MAA

Primarily as a result of the foregoing, net income attributable to MAA decreased by approximately $33.8 million for the six months ended June 30, 2014 from the six months ended June 30, 2013.

Funds from Operations

Funds from operations, or FFO, represents net income (computed in accordance with GAAP) excluding extraordinary items, asset impairment, gains or losses on disposition of depreciable real estate assets, plus net income attributable to noncontrolling interest, depreciation and amortization of real estate, and adjustments for joint ventures to reflect FFO on the same basis. Disposition of real estate assets includes sales of discontinued operations.

FFO should not be considered as an alternative to net income or any other GAAP measurement of performance, as an indicator of operating performance or as an alternative to cash flow from operating, investing, and financing activities as a measure of liquidity. We believe that FFO is helpful to investors in understanding our operating performance because its calculation excludes depreciation and amortization expense on real estate assets. We believe that GAAP historical cost depreciation of real estate assets is generally not correlated with changes in the value of those assets, whose value does not diminish predictably over time, as historical cost depreciation implies. Our calculation of FFO may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs.

Core FFO represents FFO excluding certain non-cash or non-routine items such as . . .

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