UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-12762
MID-AMERICA APARTMENT COMMUNITIES, INC.
(Exact Name of Registrant as Specified in Charter)
TENNESSEE 62-1543819
(State of Incorporation) (I.R.S. Employer Identification Number)
6584 POPLAR AVENUE, SUITE 300
MEMPHIS, TENNESSEE 38138
(Address of principal executive offices)
(901) 682-6600
Registrant's telephone number, including area code
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at October 29, 2001
Common Stock, $.01 par value 17,435,924
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 (Unaudited)
and December 31, 2000
Consolidated Statements of Operations for the three and nine
months ended September 30, 2001 and 2000 (Unaudited)
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Mid-America Apartment Communities, Inc.
Consolidated Balance Sheets
September 30, 2001 (Unaudited) and December 31, 2000
(Dollars in thousands)
2001 2000
- ----------------------------------------------------------------------------------------------
Assets:
Real estate assets:
Land $ 124,644 $ 124,867
Buildings and improvements 1,236,277 1,231,628
Furniture, fixtures and equipment 30,807 30,127
Construction in progress 35,280 28,592
- ----------------------------------------------------------------------------------------------
1,427,008 1,415,214
Less accumulated depreciation (217,543) (183,769)
- ----------------------------------------------------------------------------------------------
1,209,465 1,231,445
Land held for future development 1,366 1,366
Commercial properties, net 4,179 4,034
Investment in and advances to real estate joint venture 7,142 7,630
- ----------------------------------------------------------------------------------------------
Real estate assets, net 1,222,152 1,244,475
Cash and cash equivalents 10,646 16,095
Restricted cash 14,401 17,472
Deferred financing costs, net 10,444 9,700
Other assets 15,878 16,029
- ----------------------------------------------------------------------------------------------
Total assets $ 1,273,521 $ 1,303,771
- ----------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Liabilities:
Notes payable $ 775,467 $ 781,089
Accounts payable 1,997 1,740
Accrued expenses and other liabilities 37,283 26,589
Security deposits 4,599 4,611
Deferred gain on disposition of properties 4,186 4,366
- ----------------------------------------------------------------------------------------------
Total liabilities and deferred gain 823,532 818,395
Minority interest 47,926 51,383
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized,
$173,470,750 or $25 per share liquidation preference:
2,000,000 shares at 9.5% Series A Cumulative 20 20
1,938,830 shares at 8.875% Series B Cumulative 19 19
2,000,000 shares at 9.375% Series C Cumulative 20 20
1,000,000 shares at 9.5% Series E Cumulative 10 10
Common stock, $.01 par value (authorized 50,000,000 shares;
issued 17,422,769 and 17,506,968 shares at
September 30, 2001 and December 31, 2000, respectively) 174 175
Additional paid-in capital 549,562 551,809
Other (927) (1,171)
Accumulated distributions in excess of net income (136,986) (116,889)
Accumulated other comprehensive income (9,829) -
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 402,063 433,993
- ----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,273,521 $ 1,303,771
- ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Consolidated Statements of Operations
Three and nine months ended September 30, 2001 and 2000
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
- -------------------------------------------------------------------------------------------- ------------------------------
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Revenues:
Rental revenues $ 56,046 $ 55,495 $ 168,280 $ 163,969
Other property revenues 733 975 2,233 2,584
- ----------------------------------------------------------------------------------------------------------------------------
Total property revenues 56,779 56,470 170,513 166,553
Interest and other income 271 309 987 1,023
Management fee income, net 190 187 569 549
Equity in loss of real estate joint venture (63) (29) (174) (179)
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues 57,177 56,937 171,895 167,946
- ----------------------------------------------------------------------------------------------------------------------------
Expenses:
Property operating expenses:
Personnel 6,275 6,319 18,434 18,177
Building repairs and maintenance 2,720 2,780 7,129 7,350
Real estate taxes and insurance 6,647 6,387 20,005 19,017
Utilities 1,944 2,108 5,663 5,743
Landscaping 1,576 1,531 4,677 4,448
Other operating 2,564 2,904 7,790 7,867
Depreciation and amortization 12,916 12,737 39,007 38,854
- ----------------------------------------------------------------------------------------------------------------------------
34,642 34,766 102,705 101,456
Property management expenses 2,241 2,402 7,523 7,211
General and administrative expenses 1,514 1,298 4,427 4,015
Interest expense 13,024 13,006 40,326 37,544
Amortization of deferred financing costs 530 620 1,695 2,153
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 51,951 52,092 156,676 152,379
- ----------------------------------------------------------------------------------------------------------------------------
Income before gain on dispositions,
minority interest in operating partnership
income and extraordinary items 5,226 4,845 15,219 15,567
Gain on dispositions, net 9,900 1,119 10,064 10,504
- ----------------------------------------------------------------------------------------------------------------------------
Income before minority interest in operating
partnership income and extraordinary items 15,126 5,964 25,283 26,071
Minority interest in operating partnership income 1,853 337 2,104 2,280
- ----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items 13,273 5,627 23,179 23,791
Extraordinary items - loss on debt extinguishment,
net of minority interest (183) - (626) (204)
- ----------------------------------------------------------------------------------------------------------------------------
Net income 13,090 5,627 22,553 23,587
Dividends on preferred shares 4,028 4,028 12,085 12,087
- ----------------------------------------------------------------------------------------------------------------------------
Net income available for common shareholders $ 9,062 $ 1,599 $ 10,468 $ 11,500
- ----------------------------------------------------------------------------------------------------------------------------
Net income available per common share:
Basic (in thousands):
Average common shares outstanding 17,406 17,483 17,427 17,565
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net income available per common share $ 0.53 $ 0.09 $ 0.64 $ 0.67
before extraordinary item
Extraordinary item (0.01) - (0.04) (0.02)
- ----------------------------------------------------------------------------------------------------------------------------
Net income available per common share $ 0.52 $ 0.09 $ 0.60 $ 0.65
- ----------------------------------------------------------------------------------------------------------------------------
Diluted (in thousands):
Average common shares outstanding 17,406 17,483 17,427 17,565
Effect of dilutive stock options 163 85 93 60
- ----------------------------------------------------------------------------------------------------------------------------
Average dilutive common shares outstanding 17,569 17,568 17,520 17,625
- ----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Net income available per common share $ 0.53 $ 0.09 $ 0.63 $ 0.67
before extraordinary item
Extraordinary item (0.01) - (0.03) (0.02)
- ----------------------------------------------------------------------------------------------------------------------------
Net income available per common share $ 0.52 $ 0.09 $ 0.60 $ 0.65
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 and 2000
(Dollars in thousands)
2001 2000
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 22,553 $ 23,587
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 40,702 41,007
Amortization of unearned stock compensation 364 338
Equity in loss of real estate joint venture 174 179
Minority interest in operating partnership income 2,104 2,280
Extraordinary items 626 204
Gain on dispositions, net (10,064) (10,504)
Changes in assets and liabilities:
Restricted cash 3,071 (3,240)
Other assets 521 (3,943)
Accounts payable 257 26
Accrued expenses and other 10,709 5,531
Security deposits (12) 2
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 71,005 55,467
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of real estate assets (251) (14,858)
Improvements to properties (14,066) (12,530)
Construction of units in progress and future development (15,440) (43,461)
Proceeds from disposition of real estate assets 12,255 50,634
Distributions from real estate joint venture 314 187
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,188) (20,028)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in credit lines (5,433) (49,312)
Proceeds from notes payable 88,363 85,742
Principal payments on notes payable (89,297) (13,965)
Payment of deferred financing costs (2,439) (1,751)
Repurchase of common stock (3,549) (6,084)
Proceeds from issuances of common shares and units 966 2,039
Distributions to unitholders (5,227) (5,184)
Dividends paid on common shares (30,565) (30,556)
Dividends paid on preferred shares (12,085) (12,087)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (59,266) (31,158)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,449) 4,281
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 16,095 14,092
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 10,646 $ 18,373
- --------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 40,316 $ 40,017
Supplemental disclosure of noncash investing and financing activities:
Conversion of units for common shares $ 215 $ 232
Issuance of advances in exchange for common shares $ 120 $ 173
Interest capitalized $ 1,067 $ 2,950
Assumption of debt related to property acquisition $ - $ 9,559
See accompanying notes to consolidated financial statements.
MID-AMERICA APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and 2000 (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the accounting policies in effect as of December 31, 2000, as
set forth in the annual consolidated financial statements of Mid-America
Apartment Communities, Inc. ("MAAC" or the "Company"), as of such date. In the
opinion of management, all adjustments necessary for a fair presentation of the
consolidated financial statements have been included and all such adjustments
were of a normal recurring nature. All significant intercompany accounts and
transactions have been eliminated in consolidation. The results of operations
for the three and nine month periods ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year.
Certain prior year amounts have been reclassified to conform with the 2001
presentation. The reclassifications had no effect on net income available for
common shareholders.
2. Real Estate Transactions
Dispositions
On July 2, 2001, the Company sold the 320-unit Canyon Creek Apartments, located
in St. Louis, Missouri, for approximately $15.6 million. On August 22, 2001, the
Company sold the 252-unit Advantages Apartments, located in Jackson, MS, for
$6.9 million. The proceeds from both dispositions were used to pay down the
Company's outstanding lines of credit.
3. Share and Unit Information
At September 30, 2001, 17,422,769 common shares and 2,931,612 operating
partnership units were outstanding, a total of 20,354,381 shares and units.
Additionally, MAAC had outstanding options for 1,401,769 shares of common stock
at September 30, 2001.
4. Segment Information
At September 30, 2001, the Company owned or had ownership interest in, and
operated 122 apartment communities in 12 different states from which it derives
all significant sources of earnings and operating cash flows. The Company's
operational structure is organized on a decentralized basis, with individual
property managers having overall responsibility and authority regarding the
operations of their respective properties. Each property manager individually
monitors local and area trends in rental rates, occupancy percentages, and
operating costs. Property managers are given the on-site responsibility and
discretion to react to such trends in the best interest of the Company.
Management evaluates the performance of each individual property based on its
contribution of revenues and net operating income ("NOI"), which is composed of
property revenues less all operating costs including insurance and real estate
taxes. The Company's reportable segments are its individual properties because
each is managed separately and requires different operating strategy and
expertise based on the geographic location, community structure and quality,
population mix, and numerous other factors unique to each community.
The revenues, profits and assets for the aggregated communities are summarized
as follows for the three and nine months ended as of September 30 (Dollars in
thousands):
Three months Nine months
ended September 30, ended September 30,
------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------- -------------
Multifamily rental revenues $ 60,760 $ 60,174 $ 182,434 $ 177,601
Other multifamily revenues 772 1,022 2,349 2,721
------------------------- ---------------------------
Segment revenues 61,532 61,196 184,783 180,322
Reconciling items to consolidated revenues:
Joint venture revenues (4,753) (4,726) (14,270) (13,769)
Interest income and other revenues 271 309 987 1,023
Management fee income, net 190 187 569 549
Equity in loss of real estate joint venture (63) (29) (174) (179)
------------------------- ---------------------------
Total revenues $ 57,177 $ 56,937 $ 171,895 $ 167,946
========================= ===========================
Multifamily net operating income $ 37,594 $ 37,047 $ 114,798 $ 111,487
Reconciling items to net income available for common shareholders:
Joint venture net operating income (2,541) (2,606) (7,983) (7,536)
Management fee income, net 190 187 569 549
Equity in loss of real estate joint venture (63) (29) (174) (179)
Interest and other income 271 309 987 1,023
Interest expense (13,024) (13,006) (40,326) (37,544)
Property management expenses (2,241) (2,402) (7,523) (7,211)
General and administrative expenses (1,514) (1,298) (4,427) (4,015)
Depreciation and amortization (12,916) (12,737) (39,007) (38,854)
Amortization of deferred financing costs (530) (620) (1,695) (2,153)
Gain on dispositions, net 9,900 1,119 10,064 10,504
Extraordinary items, net (183) - (626) (204)
Minority interest in operating partnership (1,853) (337) (2,104) (2,280)
Dividends on preferred shares (4,028) (4,028) (12,085) (12,087)
------------------------- ---------------------------
Net income available for common shareholders $ 9,062 $ 1,599 $ 10,468 $ 11,500
========================= ===========================
September 30, 2001 September 30, 2000
----------------------- -----------------------
Assets:
Multifamily real estate assets $ 1,530,618 $ 1,510,682
Accumulated depreciation - multifamily assets (226,241) (177,708)
------------------------------------------------
Segment assets 1,304,377 1,332,974
------------------------------------------------
Reconciling items to total assets:
Joint venture multifamily real estate assets, net (94,912) (96,610)
Land held for future development 1,366 1,366
Commercial properties, net 4,179 3,928
Investment in and advances to real estate joint venture 7,142 7,688
Cash and restricted cash 25,047 34,150
Deferred financing costs 10,444 9,870
Other assets 15,878 17,577
------------------------------------------------
Total assets $ 1,273,521 $ 1,310,943
================================================
5. Derivative Financial Instruments
In the normal course of business, the Company uses certain derivative financial
instruments 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 Company does not use derivative financial instruments for speculative or
trading purposes. Further, the Company has a policy of entering into contracts
with major financial institutions based upon their credit rating and other
factors. When viewed in conjunction with the underlying and offsetting exposure
that the derivatives are designated to hedge, the Company has not sustained any
material loss from those instruments nor does it anticipate any material adverse
effect on its net income or financial position in the future from the use of
derivatives.
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities." SFAS 133, as amended, established
accounting and reporting standards for derivative instruments. Specifically,
SFAS No. 133 requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and to measure those instruments at fair value.
Additionally, the fair value adjustments will affect either shareholders' equity
or net income depending on whether the derivative instrument qualifies as a
hedge for accounting purposes and, if so, the nature of the hedging activity.
As of January 1, 2001, the adoption of the new standard resulted in derivative
instruments reported on the balance sheet as liabilities of $2,184,000 and an
increase of $2,184,000 to "Accumulated Other Comprehensive Income." The adoption
did not impact the Company's results of operations or cash flows for any period
presented in the accompanying financial statements.
The Company requires that hedging derivative instruments are effective in
reducing the interest rate risk exposure that they are designated to hedge. This
effectiveness is essential for qualifying for hedge accounting. Instruments that
meet these hedging criteria are formally designated as hedges at the inception
of the derivative contract. The Company formally documents all relationships
between hedging instruments and hedged items, as well as its risk-management
objective and strategy for undertaking the hedge transaction. This process
includes linking all derivatives that are designated as fair-value or cash flow
hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also formally assesses,
both at the inception of the hedge and on an ongoing basis, whether the
derivatives used are highly effective in offsetting changes in fair values or
cash flows of hedged items. If it is determined that a derivative is not highly
effective as a hedge or if there is a discontinuation of the hedging
relationship, the Company discontinues hedge accounting prospectively.
On September 30, 2001, the derivative instruments were reported at their fair
value as other liabilities of $9,829,000. The offsetting adjustments were
represented as losses in accumulated other comprehensive income.
The Company utilizes interest rate swaps as cash flow hedges to hedge the
variability in future cash flows of debt transactions. The interest rate swaps
convert the variable payments on debt obligations to fixed payments. The
unrealized gains/losses in the fair value of these interest rate swaps are
reported on the balance sheet with a corresponding adjustment to accumulated
other comprehensive income, with any ineffective portion of the hedging
transaction reclassified to earnings. During the three and nine month periods
ended September 30, 2001, the ineffective portion of the hedging transaction was
not significant. Within the next twelve months, the Company expects to
reclassify to earnings an estimated $100,000 of the current balance held in
accumulated other comprehensive income.
PART I. Financial Information
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three and nine months ended
September 30, 2001 and 2000. 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 10 properties containing 2,793 apartment units owned
by its 33.3% unconsolidated joint venture, at September 30, 2001 was 33,291 in
122 communities compared to 33,727 units in 127 communities owned at September
30, 2000. The average monthly rental per apartment unit for the Company's
non-development, owned units increased to $657 at September 30, 2001 from $637
at September 30, 2000. Occupancy for these same units at September 30, 2001 and
2000 was 94.4% and 95.4%, respectively.
FUNDS FROM OPERATIONS
Funds from operations ("FFO") represents net income (computed in accordance with
generally accepted accounting principles "GAAP") excluding extraordinary items,
minority interest in operating partnership income (loss), gain or loss on
disposition of depreciable real estate assets, and certain non-cash and other
items, (primarily real estate depreciation and amortization), less preferred
stock dividends. Adjustments for the unconsolidated joint venture are made to
include the Company's portion of FFO in the calculation. The Company computes
FFO in accordance with NAREIT's definition which reflects the recommendations of
NAREIT's Best Financial Practices Council that FFO should include all operating
results, both recurring and non-recurring, except those defined as
"extraordinary" under GAAP. The Company's FFO calculation reflects this
definition for all periods presented. 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 because they are part of the general post acquisition
redevelopment upgrade of a property, 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 in
understanding the Company's results of operations in that such calculation
reflects the Company's ability to support interest payments and general
operating expenses before the impact of certain activities such as changes in
other assets and accounts payable. The Company's calculation of FFO may differ
from the methodology for calculating FFO utilized by other real estate
investment trusts ("REITs") and, accordingly, may not be comparable to such
other REITs. Depreciation expense includes approximately $481,000 and $358,000
for the nine months ended September 30, 2001 and 2000, respectively, which
relates to computer software, office furniture and fixtures and other assets
found in other industries and which is required to be recognized, for purposes
of computing funds from operations.
Funds from operations for the three and nine months ended September 30, 2001 and
2000 is calculated as follows (in thousands):
Three months Nine months
ended September 30, ended September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net income available for common shareholders $ 9,062 $ 1,599 $ 10,468 $ 11,500
Depreciation and amortization - real property 12,760 12,570 38,526 38,496
Adjustment for joint venture depreciation 316 303 943 902
Minority interest in operating partnership 1,853 337 2,104 2,280
Gain on dispositions of real property (9,900) (1,119) (9,835) (10,504)
Extraordinary items 183 - 626 204
--------------------------------------------------------
Funds from operations $ 14,274 $ 13,690 $ 42,832 $ 42,878
========================================================
Weighted average shares and units:
Basic 20,340 20,435 20,362 20,522
Diluted 20,503 20,520 20,455 20,582
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2001 TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Property revenues for 2001 increased by approximately $309,000 due primarily to
the increase of $1,688,000 from the communities in development that were in
lease-up ("Development Communities"). This increase was partially offset by
decreases in property revenues of (i) $594,000 from the sale of the Whispering
Oaks, 2000 Wynnton, Riverwind and Hollybrook apartments in the third and fourth
quarters of 2000 ("Third and Fourth Quarter 2000 Dispositions"), (ii) $689,000
from the sale of the Canyon Creek and Advantages apartments in 2001 ("2001
Dispositions"), and (iii) $96,000 from the communities held throughout both
periods.
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 2001 decreased
by approximately $303,000 due primarily to decreases of (i) $271,000 from the
Third and Fourth Quarter 2000 Dispositions, (ii) $146,000 from the 2001
Dispositions, and (iii) $572,000 from the communities owned throughout both
periods. These decreases were partially offset by an increase in operating
expense of $686,000 due to Development Communities.
During the current year, the Company began separating total overhead costs into
two captions on the accompanying financial statements, property management
expenses and general and administrative expenses, to more accurately present
costs directly attributable to property operations and general administration.
The changes in presentation have no impact on the results of operations or cash
flows of the Company, and have been reflected in all periods presented.
Management believes the change was necessary to make the Company's presentation
more comparable with its peer companies.
Property management expenses decreased approximately $161,000 over the same
period last year mainly related to decreases in certain health benefits and the
summer intern program. General and administrative expenses increased
approximately $216,000 over the third quarter last year mainly related to
increased transportation costs.
Depreciation and amortization expense increased by approximately $179,000
primarily due to the increase of $472,000 from the Development Communities. This
increase was partially offset by the depreciation and amortization expense
decreases of (i) $130,000 from the Third and Fourth Quarter 2000 Dispositions,
(ii) $141,000 from the 2001 Dispositions, and (iii) $22,000 from the communities
held throughout both periods.
Interest expense over the three months ended September 30, 2000, remained
relatively flat as the lower interest rates obtained from the refinancings of
fixed rate debt and the drop in variable rates were offset by the reduction of
interest capitalized as the development pipeline nears completion.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
Property revenues for 2001 increased by approximately $3,960,000 due primarily
to increases of (i) $1,169,000 from the 2000 Acquisitions, (ii) $5,921,000 from
the Development Communities and (iii) $1,659,000 from the communities owned
throughout both periods. These increases were partially offset by decreases in
property revenues of (i) $4,218,000 from the Third and Fourth Quarter 2000
Dispositions along with the sales of the Winchester Square, McKellar Woods,
Clearbrook Village, MacArthur Ridge and Pine Trails apartments in the first and
second quarters of 2000 ("2000 Dispositions"), and (ii) $571,000 from the 2001
Dispositions.
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 2001 increased
approximately $1,096,000 due primarily to increases of (i) $419,000 from the
2000 Acquisitions, (ii) $2,081,000 from the Development Communities and (iii)
$579,000 from communities owned throughout both periods. These increases were
partially offset by the decreases in operating expenses of (i) $1,865,000 due to
2000 Dispositions, and (ii) $118,000 due to 2001 Dispositions.
During the current year, the Company began separating total overhead costs into
two captions on the accompanying financial statements, property management
expenses and general and administrative expenses, to more accurately present
costs directly attributable to property operations and general administration.
The changes in presentation have no impact on the results of operations or cash
flows of the Company, and have been reflected in all periods presented.
Management believes the change was necessary to make the Company's presentation
more comparable with its peer companies.
During the nine months ended September 30, 2001, property management expense
increased approximately $312,000 over the same period during 2000. This increase
was mainly related to increased franchise taxes. General and administrative
costs increased approximately $412,000 over the first three quarters of 2000
primarily related to increased transportation costs. Management remains focused
on maintaining the efficiency of the support functions, and based on current
plans expects property management and general and administrative costs to
approximate inflationary level increases over the next year.
Depreciation and amortization expense increased by approximately $153,000
primarily due to increases of (i) $267,000 from the 2000 Acquisitions, (ii)
$1,006,000 from the Development Communities, and (iii) $83,000 from the
communities held throughout both periods. These increases were partially offset
by the depreciation and amortization expense decreases of (i) $1,062,000 from
the 2000 Dispositions, and (ii) $141,000 form the 2001 Dispositions.
Interest expense increased $2,782,000 over the nine months ended September 30,
2000 primarily related to additional funding required for new development.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine months ended September 30,
2001 increased $15,538,000 compared to the same period a year earlier mainly due
to changes in operating assets and liabilities related to the release of certain
cash escrow amounts due to debt refinancings and the timing of cash payments for
certain prepaid items.
During the first nine months of 2001 the Company invested $15,440,000 in
development properties, reduced from $43,461,000 from the same period in 2000.
The Company is nearing the completion of the approximately $300,000,000
development program begun in 1997, and anticipates that approximately another
$6,562,000 funding will be required during 2001 and the first quarter of 2002 to
complete the entire program.
The following table summarizes the Company's remaining communities in various
stages of lease-up and construction, as of September 30, 2001 (Dollars in
thousands):
Current
Total Estimated Cost to Apartment Units
---------------------------
Location Units Cost Date Completed Occupied
-------- ------------- ------------ ------------- -----------
Completed Communities
In Lease-up:
Grand Reserve Lexington Lexington, KY 370 $ 33,176 $ 31,529 370 301
Reserve at Dexter Lake Phase II Memphis, TN 244 16,898 16,035 223 192
Grande View Nashville Nashville, TN 433 37,746 36,537 432 337
-----------------------------------------------------------------
1,047 $ 87,820 $ 84,101 1,025 830
-----------------------------------------------------------------
Under Construction:
Reserve at Dexter Lake Phase III Memphis, TN 244 $ 16,869 $ 14,026 98 10
-----------------------------------------------------------------
Total Units in Lease-up/Development 1,291 $104,689 $ 98,127 1,123 840
=================================================================
Total capital expenditures for development of communities and capital
improvements for the nine months ended September 30, 2001 are summarized below
(Dollars in thousands):
New construction $ 15,440
Recurring capital expenditures at stabilized properties 10,160
Revenue enhancing projects at stabilized properties 3,116
Corporate additions and improvements 790
-------------
$ 29,506
=============
Net cash used in financing activities increased $28,108,000 during the first
nine months of 2001 as compared to the same period during 2000. During the first
nine months of 2001, the Company paid down $5,433,000 of its credit facilities,
$43,879,000 less than during the same period a year earlier. The Company had
$89,297,000 of principal payments on notes payable mostly related to payoffs
associated with debt refinancings during the first nine months of 2001. Also
during the first nine months ended September 30, 2001, the Company distributed a
total of $47,877,000 to operating partnership unit holders, common shareholders
and preferred shareholders.
In July 2001, using the Company's Fannie Mae credit facility, the Company
refinanced $14.5 million of individual mortgages and a $39.6 million loan with
Prudential. The Company also fixed the interest rate on an additional $25
million of its Fannie Mae credit facility for seven years at a rate of 6.3%. As
a result of these refinancings, the Company was also able to reduce the required
cash escrows, previously included in restricted cash in the accompanying
financial statements.
Borrowings under the FNMA Facility totaled $269,441,000 at September 30, 2001,
consisting of $90,000,000 under the fixed rate portion at a combined rate of
7.5% and the remaining $179,441,000 under the variable rate portion of the
facility. The proceeds from borrowings under the FNMA Facility were primarily
used to pay down other credit lines and fund development.
Additionally, the Company currently maintains a $70,000,000 secured credit
facility with a group of banks led by AmSouth Bank, and a $20,000,000 unsecured
credit facility with Compass Bank. As of September 30, 2001, the Company had
$2,000,000 and $10,000,000 outstanding under these credit facilities,
respectively. At September 30, 2001 the Company also had letters of credit
outstanding totaling $24,403,000 which were secured by the AmSouth credit
facility.
The two secured credit facilities are subject to borrowing base calculations
that effectively reduce the maximum amount that may be borrowed. At September
30, 2001, the Company had an additional $37,700,000 available to be borrowed
under these facilities.
At September 30, 2001, the Company had six interest rate swap agreements
outstanding totaling $142 million to effectively lock the interest rate on a
portion of the Company's variable rate debt. At September 30, 2001, the Company
had $66.4 million (after considering the interest rate swaps) of conventional
floating rate debt at an average interest rate of 4.2% and an additional $22.6
million of tax-free variable rate debt at an average rate of 3.6%; all other
debt was fixed rate term debt at an average interest rate of 6.9%.
The weighted average interest rate and weighted average maturity at September
30, 2001 for the $775.5 million of total notes payable were 6.6% and 11.3 years,
respectively.
The Company believes that cash provided by operations is adequate and
anticipates that it will continue to be adequate in both the short and long-term
to meet operating requirements (including recurring capital expenditures at the
apartment communities) and payment of distributions by the Company in accordance
with REIT requirements under the applicable tax code.
The Company expects to meet its long term liquidity requirements, such as
scheduled mortgage debt maturities, property developments and acquisitions,
expansions and non-recurring capital expenditures, through long and medium-term
collateralized and uncollateralized fixed rate borrowings, fundings from the
Company's credit facilities, potential asset sales, and joint venture
transactions.
INSURANCE
In the opinion of management, property and casualty insurance is in place which
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. The substantial majority of these 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 July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FAS
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001,
which it expects to account for using the pooling-of-interests method, and
Statement 142 effective January 1, 2002. Furthermore, goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before Statement 142 is
adopted in full will not be amortized, but will continue to be evaluated for
impairment in accordance with the appropriate pre-Statement 142 accounting
literature. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 will continue to be amortized and tested for
impairment in accordance with the appropriate pre-Statement 142 accounting
requirements prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
Statement 142 within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of a
change in accounting principle in the first interim period.
As of the date of adoption, the Company expects to have unamortized goodwill of
approximately $5,800,000, which will be subject to the transition provisions of
Statements 141 and 142. Amortization expense related to goodwill was $317,000
and $198,000 for the year ended December 31, 2000 and the nine months ended
September 30, 2001, respectively. Because of the extensive effort needed to
comply with adopting Statements 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on the Company's financial
statements at the date of this report, including whether it will be required to
recognize any transitional impairment losses as the cumulative effect of a
change in accounting principle.
In August 2001, FASB issued Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (Statement 144), which supersedes both FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (Statement 121) and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
(Opinion 30), for the disposal of a segment of a business (as previously defined
in that Opinion). Statement 144 retains the fundamental provisions in Statement
121 for recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with Statement 121. For example,
Statement 144 provides guidance on how a long-lived asset that is used as part
of a group should be evaluated for impairment, establishes criteria for when a
long-lived asset is held for sale, and prescribes the accounting for a
long-lived asset that will be disposed of other than by sale. Statement 144
retains the basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). Unlike Statement
121, an impairment assessment under Statement 144 will not result in a
write-down of goodwill. Rather, goodwill is evaluated for impairment under
Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
Statement 144 will have on the Company's financial statements.
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, 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 lease-up (and rental concessions) at development properties, costs
remaining to complete development properties, planned asset dispositions,
disposition pricing, and planned acquisition and developments. 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 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, construction delays that could cause additional
apartment units to reach the market later than anticipated, 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 2000 Annual Report on Form 10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
None.
(b) Reports on Form 8-K
Form Event Reported Date of Report Date Filed
8-K Sale of Canyon Creek 7-2-2001 7-2-2001
8-K 2Q01 conference call 8-3-2001 8-3-2001
transcript and press release
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: 11/14/2001 /s/Simon R.C. Wadsworth
Simon R.C. Wadsworth
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)