The Company utilizes certain derivative financial instruments, primarily interest rate swaps and caps, during the normal course of business to manage, or hedge, the interest rate risk associated with the Company’s variable rate debt or as hedges in anticipation of future debt transactions to manage well-defined interest rate risk associated with the transaction. The valuation of the derivative financial instruments under Statement No. 133, as amended, requires the Company to make estimates and judgments that affect the fair value of the instruments.
In order for a derivative contract to be designated as a hedging instrument, the relationship between the hedging instrument and the hedged item must be highly effective. While the Company’s calculation of hedge effectiveness contains some subjective determinations, the historical correlation of the cash flows of the hedging instruments and the underlying hedged item are measured by the Company before entering into the hedging relationship and have been found to be highly correlated.
The Company performs ineffectiveness tests using the change in the variable cash flows method at the inception of the hedge and for each reporting period thereafter, through the term of the hedging instruments. Any amounts determined to be ineffective are recorded in earnings. The change in fair value of the interest rate swaps and caps designated as cash flow hedges are recorded to accumulated other comprehensive income in the statement of shareholders’ equity.
The Company’s operating results for the first six months of 2005 benefited from strengthened property performance by the Company’s same store portfolio from increased revenues and from acquisitions made throughout 2004 and 2005. Property performance was somewhat offset by an increase in interest expense caused by larger debt balances due to the expanding portfolio and an increase in interest rates. The Company also benefited from the sale of the remaining two properties in one of its joint ventures with Crow Holdings, the Company’s share of which resulted in gain on sale and incentive fees totaling approximately $4.8 million.
The following is a discussion of the consolidated financial condition and results of operations of the Company for the three and six months ended June 30, 2005. This discussion should be read in conjunction with the financial statements appearing elsewhere in this report. These financial statements include all adjustments, which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods presented, and all such adjustments are of a normal recurring nature.
The total number of apartment units the Company owned or had an ownership interest in, including the properties owned by its 33.33% unconsolidated joint venture, at June 30, 2005 was 37,365 in 130 communities compared to 36,952 units in 130 communities owned at June 30, 2004. The average monthly rental per apartment unit for the Company’s 100% owned apartment units not in lease-up was $688 at June 30, 2005 compared to $667 at June 30, 2004. Occupancy for these same apartment units at June 30, 2005 and 2004 was 94.2% and 93.0%, respectively.
Property revenues for the three months ended June 30, 2005, increased by approximately $6,842,000 from the three months ended June 30, 2004, due to (i) a $3,970,000 increase in property revenues from the five properties acquired in the last three quarters of 2004 (the “Partial 2004 Acquisitions”), (ii) a $1,480,000 increase in property revenues from the communities held throughout both periods, and (iii) a $1,392,000 increase in property revenues from the two properties acquired in the first two quarters of 2005 (the “2005 Acquisitions”).
Property operating expenses include costs for property personnel, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and other property related costs. Property operating expenses for the three months ended June 30, 2005, increased by approximately $3,058,000 from the three months ended June 30, 2004, due primarily to increases of property operating expenses of (i) $1,596,000 from the Partial 2004 Acquisitions, (ii) $875,000 from the communities held throughout both periods, and (iii) $587,000 from the 2005 Acquisitions.
Depreciation expense increased by approximately $1,530,000 primarily due to the increases of depreciation expense of (i) $1,786,000 from the Partial 2004 Acquisitions, (ii) $638,000 from the 2005 Acquisitions, and (iii) $137,000 from
the communities held throughout both periods. These increases were partially offset by a decrease in depreciation expense of $1,031,000 from the expiration of the amortization of fair market value of leases of 13 communities acquired by the Company in 2003.
Property management expenses decreased by approximately $122,000 from the second quarter of 2004 to the second quarter of 2005 partially due to decreased property employee incentives. General and administrative expenses decreased by approximately $352,000 over this same period partially due to decreased management incentives.
Interest expense for the three months ended June 30, 2005, increased by approximately $2,443,000 from the same period in 2004. This increase was due to the increase in debt balances and average interest rates from the second quarter of 2004 to the second quarter of 2005. Debt outstanding at June 30, 2004 was approximately $1,018,000,000 at an average interest rate of 4.8%. Debt outstanding at June 30, 2005 was approximately $1,087,000,000 with an average interest rate of 5.3%.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2005 TO THE SIX MONTHS ENDED JUNE 30, 2004
Property revenues for the six months ended June 30, 2005, increased by approximately $12,809,000 from the six months ended June 30, 2004, due to (i) a $8,278,000 increase in property revenues from the six properties acquired in 2004 (the “2004 Acquisitions”), (ii) a $2,469,000 increase in property revenues from the communities held throughout both periods, and (iii) a $2,062,000 increase in property revenues from the 2005 Acquisitions.
Property operating expenses include costs for property personnel, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and other property related costs. Property operating expenses for the six months ended June 30, 2005, increased by approximately $5,401,000 from the six months ended June 30, 2004, due primarily to increases of property operating expenses of (i) $3,354,000 from the 2004 Acquisitions, (ii) $1,253,000 from the communities held throughout both periods, and (iii) $794,000 from the 2005 Acquisitions.
Depreciation expense increased by approximately $2,573,000 primarily due to the increases of depreciation expense of (i) $3,593,000 from the 2004 Acquisitions, (ii) $935,000 from the 2005 Acquisitions, and (iii) $218,000 from the communities held throughout both periods. These increases were partially offset by a decrease in depreciation expense of $2,173,000 from the expiration of the amortization of fair market value of leases of 13 communities acquired by the Company in 2003.
Property management expenses increased by approximately $133,000 from the first half of 2004 to the first half of 2005 partially due to increased personnel expense related to property acquisitions. General and administrative expenses remained relatively flat, decreasing approximately $67,000 over this same period as decreases in management incentives in the second quarter of 2005 from the second quarter of 2004 more than offset the increase in the first quarter of 2005 from the first quarter of 2004 from timing differences in the funding of the Company’s corporate charity, The Open Arms Foundation.
Interest expense for the six months ended June 30, 2005, increased by approximately $3,834,000 from the same period in 2004. This increase was due to the increase in debt balances and average interest rates from the first half of 2004 to the first half of 2005. Debt outstanding at June 30, 2004 was approximately $1,018,000,000 at an average interest rate of 4.8%. Debt outstanding at June 30, 2005 was approximately $1,087,000,000 with an average interest rate of 5.3%.
FUNDS FROM OPERATIONS AND NET INCOME
Funds from operations (“FFO”) represents net income (computed in accordance with U.S. generally accepted accounting principles, or “GAAP”) excluding extraordinary items, minority interest in operating partnership income, gain on disposition of real estate assets, plus depreciation of real estate, and adjustments for joint ventures to reflect FFO on the same basis. This definition of FFO is in accordance with the National Association of Real Estate Investment Trust’s (“NAREIT”) definition. Disposition of real estate assets includes sales of real estate included in discontinued operations as well as proceeds received from insurance and other settlements from property damage.
The Company's policy is to expense the cost of interior painting, vinyl flooring, and blinds as incurred for stabilized properties. During the stabilization period for acquisition properties, these items are capitalized as part of the total repositioning program of newly acquired properties, and, thus are not deducted in calculating FFO.
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. The Company believes that FFO is helpful to investors in understanding the Company's operating performance in that such calculation excludes depreciation expense on real estate assets. The Company believes 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. The Company’s 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.
The following table is a reconciliation of FFO to net income for the three and six months ended June 30, 2005 and 2004 (dollars and shares in thousands):
| | Three months | | Six months |
| | ended June 30, | | ended June 30, |
| | 2005 | | 2004 | | 2005 | | 2004 |
Net income | | $ 8,193 | | $ 4,992 | | $ 12,519 | | $ 10,047 |
Depreciation of real estate assets | | 18,069 | | 16,538 | | 35,787 | | 33,210 |
Net gain on insurance and other settlement proceeds | | 16 | | (1,228) | | 9 | | (2,856) |
Gain on dispositions within unconsolidated entities | | (3,034) | | - | | (3,034) | | - |
Net (gain)loss on insurance and other settlement | | | | | | | | |
proceeds of discontinued operations | | - | | (526) | | 25 | | (526) |
Depreciation of real estate assets of discontinued | | | | | | | | |
operations (1) | | - | | 224 | | - | | 451 |
Depreciation of real estate assets of unconsolidated | | | | | | | | |
entities | | 115 | | 447 | | 247 | | 898 |
Preferred dividend distribution | | (3,635) | | (3,706) | | (7,348) | | (7,412) |
Minority interest in operating partnership income | | 778 | | 534 | | 1,038 | | 954 |
Funds from operations | | $ 20,502 | | $ 17,275 | | $ 39,243 | | $ 34,766 |
| | | | | | | | |
Weighted average shares and units: | | | | | | | | |
Basic | | 23,984 | | 22,946 | | 23,774 | | 22,832 |
Diluted | | 24,258 | | 23,256 | | 24,053 | | 23,150 |
| | | | | | | | |
(1) Amounts represent depreciation taken before communities classified as discontinued operations. |
Net income for the three and six months ended June 30, 2005, was approximately $3,201,000 and $2,472,000, respectively above the three and six months ended June 30, 2004 mainly due to the gain on sale and incentive fee related to the disposition of properties in the Company’s joint venture with Crow Holdings and increases in property operations which were only partially offset by increases in interest expense over both periods.
FFO over the same periods increased approximately $3,227,000 and $4,477,000 for the second quarter and half year periods, respectively mainly related to increases in property operations which were only partially offset by increases in interest expense over both periods.
TRENDS
Property performance over the past two years has been pressured by an imbalance between supply and demand for apartment units in many of the Company’s markets. The economic downturn and the related low interest rate environment have combined to contribute to a temporary decline in demand for apartment units, while allowing delivery levels of newly constructed apartment units to remain consistent with, and in some cases above, historical averages.
The recent economic environment has impacted demand in two main ways: first by producing lower job growth, which reduced the number of potential renters in most of the Company’s markets, and second by producing lower interest rates which has increased the affordability of single family housing, prompting more renters to purchase homes.
On the supply side, the declining interest rates have provided an incentive to developers to construct new apartment units in many of the Company’s markets, especially in the larger metropolitan markets. Delivery of these new units during this period of weakened apartment demand has increased competition, adding pressure to apartment occupancy levels and pricing in a number of the Company’s markets.
As part of its strategy to create continued stable and growing performance, the Company maintains a portfolio of properties diversified across large metropolitan markets, mid-sized markets, and smaller tier markets, as defined by population levels. During the economic downturn, the Company’s smaller-tier and mid-sized markets produced more stable performance while its larger metropolitan markets proved more susceptible to declining job formation and apartment supply imbalances.
The Company is beginning to see indications of stronger job growth in many of its markets, which could indicate an improvement in the general economic environment. As (and if) the economic environment improves, the Company expects to see more household formations and increasing interest rates, which the Company believes will combine to increase the number of apartment renters and decrease the construction of new apartment units.
While increasing interest rates will increase the Company’s cost of borrowing, the Company expects that this increase in demand will also generate stronger property performance across the Company’s portfolio. The Company’s large-tier markets, which have been under the most pressure during the economic downturn, should begin to absorb the oversupply of new apartment units and return to historical occupancy and pricing levels, while the Company’s smaller-tier and mid-sized markets will also benefit from improving market fundamentals which support continued stable growth.
Over the long term, general demographic trends are expected to favor apartment owners, as immigration growth, combined with the increasing demand for rental housing from the “echo boomers” (children of the “baby boomers”) is expected to produce more apartment renters over the next ten years. The Company believes its portfolio location throughout the Southeast and South central regions of the country position it well to take advantage of these improving demographic trends.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities remained relatively flat at $55.5 million for the first six months of 2005 from $55.2 million for the first six months of 2004.
Net cash used in investing activities decreased during the first six months of 2005 from the first six months of 2004 to approximately $35.2 million from $64.1 million mainly related to distributions of cash from a joint venture with Crow Holdings following the sale of two properties in the second quarter of 2005.
Capital improvements to existing real estate assets during the six months ended June 30, 2005 and 2004 totaled approximately $11.0 million and $16.9 million, respectively. Improvements for the first six months of 2004 include approximately $4.8 million of capital expenditures resulting from casualty losses while the comparable period in 2005 contains only approximately $630,000 of capital expenditures resulting from casualty losses. Excluding the impact of casualty losses, the Company expects to increase capital improvements to existing real estate assets for the full year of 2005 over 2004 by 6.9%.
Net cash used by financing activities was approximately $22.9 million for the six months ended June 30, 2005 compared to net cash provided by financing activities of approximately $37.7 million during the same period in 2004. During the first six months of 2005 the Company decreased its borrowings from credit lines and individual mortgages by approximately $6.9 million compared to an increase of approximately $171.7 million for the same period in 2004. The Company made principal payments on notes payable of approximately $1.3 million in the first six months of 2005 compared to approximately $105.8 million for the same period of 2004, mainly due to $104.3 million of debt pay-offs. The Company received proceeds from issuances of common shares and units of approximately $21.0 million in the first six months of 2005 compared to approximately $8.5 million for the same period in 2004 mainly due to an increase in shares issued through the Company’s Direct Stock Purchase Plan.
The weighted average interest rate at June 30, 2005, for the $1.1 billion of debt outstanding was 5.3% compared to 4.8% on $1.0 billion of debt outstanding at June 30, 2004. The Company utilizes both conventional and tax exempt debt to help finance its activities. Borrowings are made through individual property mortgages and secured credit facilities. The Company utilizes fixed rate borrowings, interest rate swaps and interest rate caps to manage its current and future interest rate risk.
At June 30, 2005, the Company had secured credit facilities relationships with Prudential Mortgage Capital which is credit enhanced by the Federal National Mortgage Association (“FNMA”), FNMA, Federal Home Loan Mortgage Corporation (“Freddie MAC”), and a group of banks led by AmSouth Bank. Together, these credit facilities provided a total borrowing capacity of $1.1 billion at June 30, 2005, with an availability to borrow of $945 million. At June 30, 2005, the Company had total borrowings outstanding under these credit facilities of $856 million.
Each of the Company’s secured credit facilities is subject to various covenants and conditions on usage, and are subject to periodic revaluation of collateral. If the Company were to fail to satisfy a condition to borrowing, the available credit under one or more of the facilities could not be drawn, which could adversely affect the Company’s liquidity. In the event of a reduction in real estate values the amount of available credit could be reduced. Moreover, if the Company were to fail to make a payment or violate a covenant under a credit facility, after applicable cure periods one or more of its lenders could declare a default, accelerate the due date for repayment of all amounts outstanding and/or foreclose on properties securing such facilities. Any such event could have a material adverse effect on the Company.
Approximately 71% of the Company’s outstanding obligations at June 30, 2005 were borrowed through facilities with/or credit enhanced by FNMA (the “FNMA Facilities”). The FNMA Facilities have a combined line limit of $950 million, $834 million of which was available to borrow at June 30, 2005. Various traunches of the facilities mature from 2010 through 2014. The FNMA Facilities provide for both fixed and variable rate borrowings. The interest rate on the majority of the variable portion renews every 90 days and is based on the FNMA Discount Mortgage Backed Security (“DMBS”) rate on the date of renewal, which has typically approximated three-month LIBOR less an average spread of 0.04% over the life of the FNMA Facilities, plus a credit enhancement fee of 0.62%.
The Company also had secured borrowings with Union Planters Bank at June 30, 2005 totaling $40 million.
The Company had $10 million of unsecured borrowings with Compass Bank that expired on May 5, 2005, which the Company did not renew.
On May 26, 2005, the Company gave the required one year notice to redeem all of the issued and outstanding shares of its 8 5/8% Series G Cumulative Redeemable Preferred Stock (“Series G”) on May 26, 2006. As a result, in accordance with Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, the Company has classified the Series G as a liability within notes payable as of May 26, 2005, on the accompanying consolidated financial statements.
As of June 30, 2005, the Company had interest rate swaps in effect totaling a notional amount of approximately $559 million. To date, these swaps have proven to be highly effective hedges. The Company also had entered into future interest rate swaps totaling a notional amount of $150 million. These swaps go into effect in the fourth quarter of 2005 and the first quarter of 2006. The Company also had interest rate cap agreements totaling a notional amount of approximately $23 million in effect as of June 30, 2005.
Summary details of the debt outstanding at June 30, 2005, follows in the table below:
| | | | | | | | Outstanding | | | | | | |
| | | | | | | | Balance/ | | Average | Average | | Average |
| | | | Line | | Line | | Notional | | Interest | Rate | | Contract |
| | | | Limit | | Availability | | Amount | | Rate | | Maturity | | Maturity |
| | | | | | | | | | | | | | |
COMBINED DEBT | | | | | | | | | | | | |
Fixed Rate or Swapped | | | | | | | | | | |
| Conventional | | | | | | $ 781,387,528 | | 5.7% | | 12/05/2010 | | 01/26/2011 |
| Tax Exempt | | | | | | 87,410,000 | | 4.7% | | 06/06/2015 | | 06/06/2015 |
| Preferred Series G | | | | 10,000,000 | | 8.6% | | 05/26/2006 | | 05/26/2006 |
| | Subtotal Fixed Rate or Swapped | | | | 878,797,528 | | 5.6% | | 04/28/2011 | | 06/13/2011 |
Variable Rate | | | | | | | | | | | | |
| Conventional | | | | | | 174,419,380 | | 3.9% | | 08/18/2005 | | 09/26/2012 |
| Tax Exempt | | | | | | 10,855,004 | | 3.3% | | 07/22/2005 | | 05/30/2020 |
| Conventional - Capped | | | | 11,720,000 | | 3.9% | | 03/01/2009 | | 03/01/2009 |
| Tax Exempt - Capped | | | | 10,855,000 | | 3.2% | | 04/25/2008 | | 04/25/2008 |
| | Subtotal Variable Rate | | | | | | 207,849,384 | | 3.8% | | 08/15/2005 | | 03/28/2013 |
Total Combined Debt Outstanding | $ 1,086,646,912 | | 5.3% | | 03/26/2010 | | 10/16/2011 |
| | | | | | | | | | | | | | |
UNDERLYING DEBT | | | | | | | | | | |
Individual Property Mortgages/Bonds | | | | | | |
| Conventional Fixed Rate | | | $ 141,125,528 | | 5.0% | | 10/12/2014 | | 10/12/2014 |
| Tax Exempt Fixed Rate | | | | 34,445,000 | | 5.7% | | 04/12/2026 | | 04/12/2026 |
| Tax Exempt Variable Rate | | 4,760,004 | | 3.5% | | 07/31/2005 | | 06/01/2028 |
Preferred Series G | | | | 10,000,000 | | 8.6% | | 05/26/2006 | | 05/26/2006 |
FNMA Credit Facilities | | | | | | | | | | |
| Tax Free Borrowings | $ 88,280,000 | | $ 69,915,000 | | 69,915,000 | | 3.2% | | 07/15/2005 | | 03/01/2014 |
| Conventional Borrowings | | | | | | | | | |
| | Fixed Rate Borrowings | | 110,000,000 | | 110,000,000 | | 110,000,000 | | 7.2% | | 01/10/2009 | | 01/10/2009 |
| | Variable Rate Borrowings | 751,720,000 | | 654,175,000 | | 595,102,000 | | 3.9% | | 08/24/2005 | | 03/27/2013 |
Subtotal FNMA Facilities | 950,000,000 | | 834,090,000 | | 775,017,000 | | 4.3% | | 02/11/2006 | | 09/20/2012 |
Freddie Mac Credit Facility | 100,000,000 | | 81,144,000 | | 81,144,000 | | 3.7% | | 07/17/2005 | | 07/01/2011 |
AmSouth Credit Facility | 40,000,000 | | 29,904,725 | | 155,380 | | 5.3% | | 07/31/2005 | | 05/24/2007 |
Union Planters Bank | | | | 40,000,000 | | 4.4% | | 07/30/2005 | | 04/01/2009 |
Total Underlying Debt Outstanding | $ 1,086,646,912 | | 4.4% | | 10/26/2007 | | 03/17/2013 |
| | | | | | | | | | | | | | |
HEDGING INSTRUMENTS | | | | | | | | | | |
Interest Rate Swaps | | | | | | | | | | |
| LIBOR indexed | | | | | | $ 506,000,000 | | 5.8% | | 05/03/2010 | | |
| LIBOR indexed - Forward Interest Rate Swap | 150,000,000 | | 5.1% | | 11/10/2012 | | |
| BMA indexed | | | | | | 52,965,000 | | 4.1% | | 05/17/2008 | | |
Total Interest Rate Swaps | | | | $ 708,965,000 | | 5.5% | | 09/21/2010 | | |
| | | | | | | | | | | | | | |
Interest Rate Caps | | | | | | | | | | |
| LIBOR indexed | | | | | | $ 11,720,000 | | 6.0% | | 10/03/2008 | | |
| BMA indexed | | | | | | 10,855,000 | | 6.0% | | 10/03/2008 | | |
Total Interest Rate Caps | | | | $ 22,575,000 | | 6.0% | | 10/03/2008 | | |
The Company believes that it has adequate resources to fund its current operations, annual refurbishment of its properties, and incremental investment in new apartment properties. The Company is relying on the efficient operation of the financial markets to finance debt maturities, and also is heavily reliant on the creditworthiness of FNMA, which provides credit enhancement for approximately $775 million of the Company’s debt. The interest rate market for FNMA DMBS, which in the Company’s experience is highly correlated with three-month LIBOR interest rates, is also an important component of the Company’s liquidity and interest rate swap effectiveness. In the event that the FNMA DMBS market becomes less efficient, or the credit of FNMA becomes impaired, the Company would seek alternative sources of debt financing.
For the six months ended June 30, 2005, the Company’s net cash provided by operating activities exceeded improvements to existing real estate assets, distributions to unitholders, and dividends paid on common and preferred shares by approximately $9.3 million. This compares to coverage of approximately $4.5 million for the same period in 2004. While the Company has sufficient liquidity to permit distributions at current rates through additional borrowings, if necessary, any significant deterioration in operations could result in the Company’s financial resources to be insufficient to pay distributions to shareholders at the current rate, in which event the Company would be required to reduce the distribution rate.
OFF-BALANCE SHEET ARRANGEMENTS
At June 30, 2005 and 2004, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. The Company’s joint venture with Crow Holdings was established to acquire multifamily properties. In addition, the Company does not engage in trading activities involving non-exchange traded contracts. As such, the Company is not materially exposed to any financing, liquidity, market, or credit risk that could arise if it had engaged in such relationships. The Company does not have any relationships or transactions with persons or entities that derive benefits from their non-independent relationships with the Company or its related parties other than what is disclosed in Item 8 Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements Note 11 in the Company’s 2004 Annual Report on Form 10-K/A.
The Company’s investment in its real estate joint venture is unconsolidated and is recorded on the equity method as the Company does not have a controlling interest.
INSURANCE
In the opinion of management, property and casualty insurance is in place that provides adequate coverage to provide financial protection against normal insurable risks such that it believes that any loss experienced would not have a significant impact on the Company’s liquidity, financial position, or results of operations.
INFLATION
Substantially all of the resident leases at the communities allow, at the time of renewal, for adjustments in the rent payable thereunder, and thus may enable the Company to seek rent increases. Almost all leases are for one year or less. The short-term nature of these leases generally serves to reduce the risk to the Company of the adverse effects of inflation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (“Statement 153”). Statement 153 was a result of a joint effort by the FASB and the IASB to improve financial reporting by eliminating certain narrow differences between their existing accounting standards. Statement 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Statement 153 shall be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of Statement 153 will have a material impact on the Company’s consolidated financial condition or results of operations taken as a whole.
In December 2004, the FASB issued Statement No. 123 (revised December 2004), Share-Based Payment (“Statement 123(R)”). Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or the liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. Statement 123(R) is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company will adopt Statement 123(R) effective January 1, 2006 and does not believe it will have a material impact on the Company’s consolidated financial condition or results of operations taken as a whole.
In March 2005, the SEC issued SAB 107 to provide public companies additional guidance in applying the provisions of Statement 123(R). Among other things, SAB 107 describes the SEC staff's expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of Statement 123(R) with certain existing SEC guidance. The guidance is also beneficial to users of financial statements in analyzing the information provided under statement (123)R. SAB 107 will be applied upon the adoption of Statement 123(R).
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations-an interpretation of FASB Statement No. 143 (“Interpretation 47”). Interpretation 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, (“Statement 143”) refers to a legal obligation to perform an asset retirement activity in which the timing and/or
method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred-generally upon acquisition, construction, or development and/or through the normal operation of the asset. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. Interpretation 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Interpretation 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises). Retrospective application for interim financial information is permitted but is not required. The Company does not believe the adoption of Interpretation 47 will have a material impact on the Company's consolidated financial condition or results of operations taken as a whole.
In June 2005, the FASB ratified EITF 04-5: Consolidating Limited Partnerships (“EITF 04-5”). EITF 04-5 provides a framework for determining whether a general partner is required to consolidate limited partners. The new framework is significantly different than the guidance in SOP 78-9 and would make it more difficult for a general partner to overcome the presumption that it controls the limited partnership, requiring the limited partner to have substantive “kick-out” or “participating” rights. Kick-out rights are the right to dissolve or liquidate the partnership or to otherwise remove the general partner without cause and participating rights is the right to effectively participate in significant decisions made in the ordinary course of the partnership’s business. EITF 04-5 became effective immediately for all newly formed limited partnerships and existing limited partnerships which are modified. The guidance will become effective for existing limited partnerships which are not modified the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The Company does not believe the adoption of EITF 04-5 will have a material impact on the Company’s consolidated financial condition or results of operations taken as a whole.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain 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 (the “Exchange Act”), which are intended to be covered by the safe harbors created thereby. These statements include, but are not limited to, statements about anticipated growth rate of revenues and expenses, anticipated rental concessions, planned asset dispositions, disposition pricing, and planned acquisitions. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including a continued downturn in general economic conditions or the capital markets, competitive factors including overbuilding or other supply/demand imbalances in some or all of our markets, changes in interest rates, and other items that are difficult to control such as insurance rates, increases in real estate taxes, and other general risks inherent in the apartment business. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report on Form 10-Q will 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 the Company or any other person that the objectives and plans of the Company will be achieved.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
This information has been omitted as there have been no material changes in the Company’s market risk as disclosed in the 2004 Annual Report on Form 10-K/A except for changes as discussed in the Liquidity and Capital resources section in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. | Controls and Procedures |
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management's control objectives. The Company also has an investment in an unconsolidated entity which is not under its control. Consequently, the Company’s disclosure controls and procedures with respect to this entity are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Exchange. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005 in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company’s Exchange Act filings.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended June 30, 2005, there were no significant changes in the Company’s internal control over financial reporting that materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Special Note Regarding Analyst Reports
Investors should also be aware that while the Company’s management does, from time to time, communicate with securities analysts, it is against the Company’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of, nor are they endorsed by Mid-America Apartment Communities, Inc.
PART II – OTHER INFORMATION
Item 1. | Legal Proceedings |
| None. | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| None. | |
Item 3. | Defaults Upon Senior Securities |
| None. | |
Item 4. | Submission of Matters to a Vote of Security Holders |
The annual meeting of the shareholders of the Company was held on May 19, 2005.
Messrs. H. Eric Bolton, Jr., Alan B. Graf, Jr. and Ralph Horn were elected to serve as directors by a plurality of votes cast at the meeting. Shares on this proposal were voted as follows:
| | For | | Withheld |
H. Eric Bolton, Jr. | | 19,413,292 | | 179,078 |
Alan B. Graf, Jr. | | 19,052,138 | | 540,232 |
Ralph Horn | | 19,314,393 | | 277,977 |
KPMG LLP was ratified as the Company’s independent public accountants for the 2005 fiscal year by a majority of the shares represented at the meeting. Shares on this proposal were voted as follows:
| | For | | Against | | Abstain |
KPMG LLP | | 19,017,508 | | 535,363 | | 39,498 |
Item 5. | Other Information |
| None. | |
(a) | The following exhibits are filed as part of this report. |
Exhibit Numbers | | Exhibit Description |
3.1+ | | Amended and Restated Charter of Mid-America Apartment Communities, Inc. dated as of January 10, 1994, as filed with the Tennessee Secretary of State on January 25, 1994 |
| |
3.2****** | | Articles of Amendment to the Charter of Mid-America Apartment Communities, Inc. dated as of January 28, 1994, as filed with the Tennessee Secretary of State on January 28, 1994 |
| |
3.3** | | Mid-America Apartment Communities, Inc. Articles of Amendment to the Amended and Restated Charter Designating and Fixing the Rights and Preferences of a Series of Preferred Stock dated as of October 9, 1996, as filed with the Tennessee Secretary of State on October 10, 1996 |
| |
3.4****** | | Mid-America Apartment Communities, Inc. Articles of Amendment to the Amended and Restated Charter dated November 17, 1997, as filed with the Tennessee Secretary of State on November 18, 1997 |
| |
3.5*** | | Mid-America Apartment Communities, Inc. Articles of Amendment to the Amended and Restated Charter Designating and Fixing the Rights and Preferences of a Series of Shares of Preferred Stock dated as of November 17, 1997, as filed with the Tennessee Secretary of State on November 18, 1997 |
| |
3.6**** | | Mid-America Apartment Communities, Inc. Articles of Amendment to the Amended and Restated Charter Designating and Fixing the Rights and Preferences of a Series of Shares of Preferred Stock dated as of June 26, 1998, as filed with the Tennessee Secretary of State on June 30, 1998 |
| |
3.7@ | | Mid-America Apartment Communities, Inc. Articles of Amendment to the Amended and Restated Charter Designating and Fixing the Rights and Preferences of A Series of Shares of Preferred Stock dated as of December 24, 1998, as filed with the Tennessee Secretary of State on December 30, 1998 |
| |
3.8***** | | Mid-America Apartment Communities, Inc. Articles of Amendment to the Amended and Restated Charter Designating and Fixing the Rights and Preferences of a Series of Shares of Preferred Stock dated as of October 11, 2002, as filed with the Tennessee Secretary of State on October 14, 2002 |
| |
3.9@ | | Mid-America Apartment Communities, Inc. Articles of Amendment to the Amended and Restated Charter Designating and Fixing the Rights and Preferences of a Series of Shares of Preferred Stock dated as of October 28, 2002, as filed with the Tennessee Secretary of State on October 28, 2002 |
| |
3.10@ | | Mid-America Apartment Communities, Inc. Articles of Amendment to the Amended and Restated Charter Designating and Fixing the Rights and Preferences of a Series of Shares of Preferred Stock dated as of August 7, 2003, as filed with the Tennessee Secretary of State on August 7, 2003 |
| |
3.11* | | Bylaws of Mid-America Apartment Communities, Inc. |
| |
4.1+ | | Form of Common Share Certificate |
| |
4.2** | | Form of 9.5% Series A Cumulative Preferred Stock Certificate |
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4.3*** | | Form of 8 7/8% Series B Cumulative Preferred Stock Certificate |
| |
4.4**** | | Form of 9 3/8% Series C Cumulative Preferred Stock Certificate |
| |
4.5@ | | Form of 9.5% Series E Cumulative Preferred Stock Certificate |
| |
4.6***** | | Form of 9 ¼% Series F Cumulative Preferred Stock Certificate |
| |
4.7@ | | Form of 8.30% Series G Cumulative Preferred Stock Certificate |
| |
4.8@ | | Form of 8.30% Series H Cumulative Preferred Stock Certificate |
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4.9+++ | | Shareholder Protection Rights Agreement dated March 1, 1999 |
| |
10.1### | | Second Amended and Restated Agreement of Limited Partnership of Mid-America Apartments, L.P., a Tennessee limited partnership |
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10.2+++ | | Employment Agreement between the Registrant and H. Eric Bolton, Jr. |
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10.3+++ | | Employment Agreement between the Registrant and Simon R.C. Wadsworth |
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10.4# | | Fourth Amended and Restated 1994 Restricted Stock and Stock Option Plan |
| |
10.5+++ | | Revolving Credit Agreement (Amended and Restated) between the Registrant and AmSouth Bank dated March 16, 1998 |
| |
10.6+++ | | Sixth Amendment to Revolving Credit Agreement between the Registrant and AmSouth Bank dated November 12, 1999 |
| |
10.7## | | Seventh Amendment to Revolving Credit Agreement between the Registrant and AmSouth Bank dated July 21, 2000 |
| |
10.8### | | Eighth Amendment to Revolving Credit Agreement between the Registrant and AmSouth Bank dated April 19, 200l |
| |
10.9@ | | AmSouth Revolving Credit Agreement (Amended and Restated) dated July 17, 2003 |
| |
10.10@@@ | | First Amendment to Amended and Restated Revolving Credit Agreement dated May 19, 2004 |
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10.11+++ | | Master Credit Facility Agreement between the Registrant and WMF Washington Mortgage Corp. dated November 10, 1999 |
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10.12@ | | Second Amended and Restated Master Credit Facility Agreement by and among Prudential Multifamily Mortgage, Inc., Mid-America Apartment Communities, Inc. and Mid-America Apartments, L.P., dated March 30, 2004 |
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10.13@@@ | | First Amendment to Second Amended and Restated Master Credit Facility Agreement dated March 31, 2004 |
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10.14@@@ | | Second Amendment to Second Amended and Restated Master Credit Facility Agreement dated April 30, 2004 |
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10.15@@@ | | Third Amendment to Second Amended and Restated Master Credit Facility Agreement dated August 3, 2004 |
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10.16@@@ | | Fourth Amendment to Second Amended and Restated Master Credit Facility Agreement dated August 31, 2004 |
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10.17@@@ | | Fifth Amendment to Second Amended and Restated Master Credit Facility Agreement dated October 1, 2004 |
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10.18@@@ | | Sixth Amendment to Second Amended and Restated Master Credit Facility Agreement dated December 1, 2004 |
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10.19@@@ | | Seventh Amendment to Second Amended and Restated Master Credit Facility Agreement dated December 15, 2004 |
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10.20@ | | Third Amended and Restated Master Credit Facility Agreement by and among Prudential Multifamily Mortgage, Inc., Mid-America Apartment Communities, Inc., Mid-America Apartments, L.P. and Mid-America Apartments of Texas, L.P., dated March 31, 2004 |
| |
10.21@@@ | | Second Amendment to the Third Amended and Restated Master Credit Facility Agreement dated as of August 3, 2004 |
| |
10.22@@@ | | Third Amendment to the Third Amended and Restated Master Credit Facility Agreement dated as of December 1, 2004 |
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10.23+ | | Note Purchase Agreement of the Operating Partnership and the Registrant and Prudential Insurance Company of America |
| |
10.24+ | | Amendment 1 to Note Purchase Agreement of the Operating Partnership and the Registrant and Prudential Insurance Company of America |
| |
10.25@ | | Master Reimbursement Agreement by and among Fannie Mae, Mid-America Apartments, L.P. and Fairways-Columbia, L.P. dated June 1, 2001 |
| |
10.26@ | | Amendment No. 1 to Master Reimbursement Agreement by and among Fannie Mae, Mid-America Apartments, L.P. and Fairways-Columbia, L.P. dated December 24, 2002 |
| |
10.27@ | | Amendment No. 2 to Master Reimbursement Agreement by and among Fannie Mae, Mid-America Apartments, L.P. and Fairways-Columbia, L.P. dated May 30, 2003 |
| |
10.28@@@ | | Consent, Modification, Assumption of Indemnity Obligations and Release Agreement dated November 4, 2004 (Sunset Valley Apartments, Texas) |
| |
10.29@@@ | | Consent, Modification, Assumption of Indemnity Obligations and Release Agreement dated November 4, 2004 (Village Apartments, Texas) |
| |
10.30@@@ | | Consent, Modification, Assumption of Indemnity Obligations and Release Agreement dated November 4, 2004 (Coral Springs Apartments, Florida) |
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10.31@@@ | | Credit Agreement dated September 28, 1998 by and among Jefferson Village, L.P., Jefferson at Sunset Valley, L.P. and JPI Coral Springs, L.P. |
| |
10.32@@ | | Credit Agreement by and among Mid-America Apartment Communities, Inc., Mid-America Apartments L.P. and Mid-America Apartments of Texas, L.P. and Financial Federal Savings Bank dated June 29, 2004 |
| |
10.33@@@ | | Mid-America Apartment Communities, Inc. Non-Qualified Deferred Compensation Plan for Outside Company Directors as Amended Effective March 16, 2005 |
| | |
10.34@@@ | | Mid-America Apartment Communities Non-Qualified Deferred Compensation Retirement Plan as Amended Effective March 16, 2005 |
| | |
11.1 | | Statement re: computation of per share earnings (included within the Form 10-Q) |
| |
31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
| |
@ | | Filed as Exhibit to the Registrant’s Registration Statement on Form S-3 (333-112469) filed with the Commission on February 4, 2004 |
| |
@@ | | Filed as an Exhibit to the 2003 Annual Report of the Registrant on Form 10-K for the year ended December 31, 2003 |
| |
@@@ | | Filed as an Exhibit to the 2004 Annual Report of the Registrant on Form 10-K/A for the year ended December 31, 2004 |
| |
* | | Filed as an exhibit to the Registrant’s Registration Statement on Form S-11/A (SEC File No. 33-69434) filed on January 21, 1994 |
| |
** | | Filed as Exhibit 1 to the Registrant’s Registration Statement on Form 8-A filed with the Commission on October 11, 1996 |
| |
*** | | Filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form 8-A/A filed with the Commission on November 19, 1997 |
| |
**** | | Filed as Exhibit 4.3 to the Registrant’s Registration Statement on Form 8-A filed with the Commission on June 26, 1998 |
| |
***** | | Filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form 8-A/A filed with the Commission on October 11, 2002 |
| |
****** | | Filed as an exhibit to the 1996 Annual Report of the Registrant on Form 10-K for the year ended December 31, 1996 |
| |
+ | | Filed as an exhibit to the 1997 Annual Report of the Registrant on Form 10-K for the year ended December 31, 1997 |
| |
+++ | | Filed as an exhibit to the 1999 Annual Report of the Registrant on Form 10-K for the year ended December 31, 1999 |
| |
# | | Filed as an exhibit to the Registrant’s Proxy Statement filed on April 24, 2002 |
| |
## | | Filed as an exhibit to the 2000 Annual Report of the Registrant on Form 10-K for the year ended December 31, 2000 |
| |
### | | Filed as an exhibit to the 2001 Annual Report of the Registrant on Form 10-K for the year ended December 31, 2001 |
| |
#### | | Filed as an exhibit to the Quarterly Report of the Registrant on Form 10-Q for the quarterly period ended June 30, 2004 |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MID-AMERICA APARTMENT COMMUNITIES, INC. |
Date: August 4, 2005 | /s/Simon R.C. Wadsworth | |
| Simon R.C. Wadsworth | |
| Executive Vice President and | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
| | | | | | |