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 March 31, 2002
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 April 15, 2002
Common Stock, $.01 par value 17,499,745
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (Unaudited)
and December 31, 2001
Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001 (Unaudited)
Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2001 (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
March 31, 2002 (Unaudited) and December 31, 2001
(Dollars in thousands)
2002 2001
------------ -------------
Assets:
Real estate assets:
Land $ 124,993 $ 124,993
Buildings and improvements 1,265,796 1,265,327
Furniture, fixtures and equipment 33,869 32,290
Construction in progress 13,284 10,915
- ---------------------------------------------------------------------------------------------------------
1,437,942 1,433,525
Less accumulated depreciation (243,227) (229,913)
- ---------------------------------------------------------------------------------------------------------
1,194,715 1,203,612
Land held for future development 1,366 1,366
Commercial properties, net 3,593 4,910
Investment in and advances to real estate joint venture 7,056 7,045
- ---------------------------------------------------------------------------------------------------------
Real estate assets, net 1,206,730 1,216,933
Cash and cash equivalents 12,521 12,192
Restricted cash 8,489 11,240
Deferred financing costs, net 9,901 10,415
Other assets 14,955 12,708
- ---------------------------------------------------------------------------------------------------------
Total assets $ 1,252,596 $ 1,263,488
=========================================================================================================
Liabilities and Shareholders' Equity:
Liabilities:
Notes payable $ 783,607 $ 779,664
Accounts payable 1,356 1,219
Accrued expenses and other liabilities 23,767 31,691
Security deposits 4,589 4,514
Deferred gain on disposition of properties 4,091 4,140
- ---------------------------------------------------------------------------------------------------------
Total liabilities and deferred gain 817,410 821,228
Minority interest 44,760 46,431
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 17,483,893 and 17,452,678 shares at
March 31, 2002 and December 31, 2001, respectively) 175 175
Additional paid-in capital 550,908 550,176
Other (764) (774)
Accumulated distributions in excess of net income (154,994) (145,061)
Accumulated other comprehensive loss (4,968) (8,756)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 390,426 395,829
- ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,252,596 $ 1,263,488
=========================================================================================================
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Consolidated Statements of Operations
Three months ended March 31, 2002 and 2001
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended
March 31,
-------------------------
2002 2001
------------ -----------
Revenues:
Rental revenues $ 55,024 $ 55,535
Other property revenues 635 746
- -------------------------------------------------------------------------------------------
Total property revenues 55,659 56,281
Interest and other non-property income 134 287
Management and fee income, net 186 188
Equity in loss of real estate joint venture (23) (145)
- -------------------------------------------------------------------------------------------
Total revenues 55,956 56,611
- -------------------------------------------------------------------------------------------
Expenses:
Property operating expenses:
Personnel 6,485 6,042
Building repairs and maintenance 2,175 2,035
Real estate taxes and insurance 7,002 6,650
Utilities 1,572 2,008
Landscaping 1,543 1,526
Other operating 2,410 2,541
Depreciation and amortization 13,509 12,997
- -------------------------------------------------------------------------------------------
34,696 33,799
Property management expenses 2,472 2,589
General and administrative expenses 1,446 1,441
Interest expense 12,362 13,459
Amortization of deferred financing costs 657 529
- -------------------------------------------------------------------------------------------
Total expenses 51,633 51,817
- -------------------------------------------------------------------------------------------
Income before gain on dispositions and
minority interest in operating partnership
income 4,323 4,794
Gain on dispositions, net 64 169
- -------------------------------------------------------------------------------------------
Income before minority interest in operating
partnership income 4,387 4,963
Minority interest in operating partnership income 87 102
- -------------------------------------------------------------------------------------------
Net income 4,300 4,861
Preferred dividend distribution 4,028 4,028
- -------------------------------------------------------------------------------------------
Net income available for common shareholders $ 272 $ 833
===========================================================================================
(Continued)
Mid-America Apartment Communities, Inc.
Consolidated Statements of Operations (Continued)
Three months ended March 31, 2002 and 2001
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended
March 31,
------------------------
2002 2001
----------- -----------
Net income available per common share:
Basic (in thousands):
Average common shares outstanding 17,455 17,479
===========================================================================================
Basic earnings per share:
Net income available per common share $ 0.02 $ 0.05
===========================================================================================
Diluted (in thousands):
Average common shares outstanding 17,455 17,479
Effect of dilutive stock options 141 31
- -------------------------------------------------------------------------------------------
Average dilutive common shares outstanding 17,596 17,510
===========================================================================================
Diluted earnings per share:
Net income available per common share $ 0.02 $ 0.05
===========================================================================================
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and 2001
(Dollars in thousands)
2002 2001
---------- -----------
Cash flows from operating activities:
Net income $ 4,300 $ 4,861
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 14,166 13,526
Amortization of unearned stock compensation 124 131
Equity in loss of real estate joint venture 23 145
Minority interest in operating partnership income 87 102
Gain on dispositions, net (64) (169)
Changes in assets and liabilities:
Restricted cash 2,751 4,529
Other assets (2,247) 2,228
Accounts payable 137 (691)
Accrued expenses and other (4,006) (5,694)
Security deposits 75 10
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,346 18,978
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Improvements to properties (2,865) (4,163)
Construction of units in progress and future development (545) (4,949)
Proceeds from disposition of real estate assets - 600
Distributions from real estate joint venture (34) 166
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,444) (8,346)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in credit lines 5,000 11,417
Principal payments on notes payable (1,057) (1,261)
Payment of deferred financing costs (143) (28)
Repurchase of common stock - (2,418)
Proceeds from issuances of common shares and units 565 420
Distributions to unitholders (1,705) (1,718)
Dividends paid on common shares (10,205) (10,248)
Dividends paid on preferred shares (4,028) (4,028)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (11,573) (7,864)
- ----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 329 2,768
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 12,192 16,095
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 12,521 $ 18,863
================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 12,222 $ 13,478
Supplemental disclosure of noncash investing and financing activities:
Conversion of units for common shares $ 53 $ 149
Issuance of restricted common shares $ 114 $ 120
Interest capitalized $ 127 $ 476
See accompanying notes to consolidated financial statements.
MID-AMERICA APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 and 2001 (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, 2001, 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 month period ended March 31, 2002 is not necessarily indicative of
the results to be expected for the full year.
2. Share and Unit Information
At March 31, 2002, 17,483,893 common shares and 2,914,837 operating partnership
units were outstanding, a total of 20,398,730 shares and units. Additionally,
MAAC had outstanding options for 1,463,744 shares of common stock at March 31,
2002.
3. Segment Information
At March 31, 2002, 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 (Dollars in thousands):
Three months
ended March 31,
-------------------------
2002 2001
------------ ------------
Multifamily rental revenues $ 59,641 $ 60,245
Other multifamily revenues 671 784
----------- ------------
Segment revenues 60,312 61,029
Reconciling items to consolidated revenues:
Joint venture revenues (4,653) (4,748)
Interest and other non-property income 134 188
Management fee income, net 186 (145)
Equity in loss of real estate joint venture (23) 287
----------- ------------
Total revenues $ 55,956 $ 56,611
=========== ============
Multifamily net operating income $ 37,117 $ 38,167
Reconciling items to net income available for common shareholders:
Joint venture net operating income (2,645) (2,688)
Interest and other non-property income 134 287
Management and fee income, net 186 188
Equity in loss of real estate joint venture (23) (145)
Property management expenses (2,472) (2,589)
General and administrative expenses (1,446) (1,441)
Depreciation and amortization (13,509) (12,997)
Interest expense (12,362) (13,459)
Amortization of deferred financing costs (657) (529)
Gain on dispositions, net 64 169
Minority interest in operating partnership (87) (102)
Dividends on preferred shares (4,028) (4,028)
----------- ------------
Net income available for common shareholders $ 272 $ 833
=========== ============
March 31, 2002 December 31, 2001
----------------------- -----------------------
Assets:
Multifamily real estate assets $ 1,542,352 $ 1,537,625
Accumulated depreciation - multifamily assets (253,930) (239,586)
----------------------- -----------------------
Segment assets 1,288,422 1,298,039
----------------------- -----------------------
Reconciling items to total assets:
Joint venture multifamily real estate assets, net (93,707) (94,427)
Land held for future development 1,366 1,366
Commercial properties, net 3,593 4,910
Investment in and advances to real estate joint venture 7,056 7,045
Cash and restricted cash 21,010 23,432
Other assets 24,856 23,123
----------------------- -----------------------
Total assets $ 1,252,596 $ 1,263,488
======================= =======================
4. 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.
The Company requires that hedging derivatives 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 hedges inception and on an ongoing basis, whether the derivatives
used are highly effective in offsetting changes in fair values or cash flows of
hedged items. When it is determined that a derivative is not highly effective as
a hedge or that it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively.
All of the Company's derivative financial instruments that are reported at fair
value and are represented on the balance sheet were characterized as cash flow
hedges. These transactions hedge the future cash flows of debt transactions
through interest rate swaps that convert variable payments to fixed payments.
The unrealized gains/losses in the fair value of these hedges 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 months ended March 31, 2002, 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.
5. Goodwill and Intangible Asset - Adoption of Statement 142
Statement 142 requires disclosure of what net income would have been in all
periods presented exclusive of amortization expense recognized in those periods
related to goodwill. Below is a reconciliation of reported net income to
adjusted net income and earnings per share (Dollars in thousands, except
earnings per share):
Three months ended March 31,
---------------------------------------------------------
2001
-------------------------------------------
2002 Adjusted Adjustment Reported
------------ ------------- -------------- ------------
Net income $ 4,300 $ 4,927 $ 66 $ 4,861
Preferred dividend distribution 4,028 4,028 - 4,028
------------ ------------- -------------- ------------
Net income available for common shareholders $ 272 $ 899 $ 66 $ 833
============ ============= ============== ============
Basic earnings per share
------------ ------------- -------------- ------------
Net income available per common share $ 0.02 $ 0.05 $ 0.00 $ 0.05
============ ============= ============== ============
Diluted earnings per share
------------ ------------- -------------- ------------
Net income available per common share $ 0.02 $ 0.05 $ 0.00 $ 0.05
============ ============= ============== ============
At March 31, 2002, the amount of unamortized goodwill was $5.8 million.
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 months ended March 31, 2002
and 2001. 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 March 31, 2002 was 33,434 in 122
communities compared to 33,778 units in 124 communities owned at March 31, 2001.
The average monthly rental per apartment unit for the Company's non-development,
100% owned apartment units increased to $660 at March 31, 2002 from $646 at
March 31, 2001. Occupancy for these same apartment units at March 31, 2002 and
2001 was 94.1% and 94.9%, respectively.
FUNDS FROM OPERATIONS
Funds from operations ("FFO') represents net income (computed in accordance with
accounting principles generally accepted in the United States of America, or
"GAAP") excluding extraordinary items, minority interest in Operating
Partnership income, gain or loss on disposition of real estate assets, plus
depreciation related to real estate, and adjustments for the Joint Venture 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") recommended
definition.
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 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 REITs and,
accordingly, may not be comparable to such other REITs. Depreciation expense
includes approximately $270,000 and $167,000 for the three months ended March
31, 2002 and 2001, 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 months ended March 31, 2002 and 2001 is
calculated as follows (in thousands):
Three months
ended March 31,
---------------------------
2002 2001
------------- -------------
Net income available for common shareholders $ 272 $ 833
Depreciation and amortization - real property 13,239 12,830
Adjustment for joint venture depreciation 343 313
Minority interest in operating partnership 87 102
Gain (loss) on dispositions of real property 64 (65)
---------------------------
Funds from operations $ 13,877 $ 14,143
===========================
Weighted average shares and units:
Basic 20,371 20,416
Diluted 20,512 20,446
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2002 TO THE THREE MONTHS ENDED MARCH
31, 2001
Property revenues for 2002 decreased by approximately $622,000 due to decreases
of (i) $921,000 from the sale of the Advantages and Canyon Creek apartments in
2001 (the "2001 Dispositions"), and (ii) $510,000 from the communities held
throughout both periods. These decreases were partially offset by an increase in
property revenues of $809,000 from the communities in development that were in
lease-up (the "Development Communities").
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 2002 increased
by approximately $385,000 due primarily to increases of (i) $183,000 from the
Development Communities, and (ii) $513,000 from the communities held throughout
both periods. These increases were partially offset by a decrease in operating
expense of $311,000 from the 2001 Dispositions.
Property management expenses decreased approximately $117,000 over the same
period last year mainly related to decreases in certain health benefits and
incentives. General and administrative expenses remained relatively flat over
the first quarter of last year.
Depreciation and amortization expense increased by approximately $512,000
primarily due to the increases of (i) $300,000 from the Development Communities,
and (ii) $367,000 from the communities held throughout both periods. These
increases were partially offset by the depreciation and amortization expense
decrease of $155,000 from the 2001 Dispositions.
Interest expense over the three months ended March 31, 2001, decreased by
approximately $1,097,000 as refinancings of debt in 2001 and the drop in
variable rates decreased the Company's average interest rate from 7.1% at March
31, 2001 to 6.3% at March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities decreased to $15,346,000 for the
first quarter of 2002 from $18,978,000 for the first quarter of 2001 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 three months of 2002, the Company invested $545,000 in
construction of new assets, reduced from $4,949,000 during the same period in
2001. The Company expects to fund an additional $128,000 during 2002 to finish
the construction of Reserve at Dexter Lake III to complete the entire $300
million development program begun in 1997.
The following table summarizes the Company's remaining communities in various
stages of lease-up and construction, as of March 31, 2002 (Dollars in
thousands):
Anticipated
Total Costs to Finish Initial Stabil-
Location Units Date Date Occupancy ization
------------- ----- -------- -------- --------- -----------
Completed Communities
In Lease-up:
Grand Reserve Lexington Lexington, KY 370 $ 31,024 3Q 2000 4Q 1999 2Q 2002
Reserve at Dexter Lake II Memphis, TN 244 16,032 2Q 2001 1Q 2000 3Q 2002
Grand View Nashville Nashville, TN 433 35,998 2Q 2001 3Q 2000 2Q 2002
Anticipated Anticipated
Total Forecasted Costs to Finish Initial Stabil-
Location Units Cost Date Date Occupancy ization
------------ ----- ---------- -------- ----------- --------- -----------
Development Communities
Under Construction:
Reserve at Dexter Lake III Memphis, TN 244 $ 15,677 $ 15,549 2Q 2002 2Q 2001 4Q 2002
The Company's projections assume that the three properties completed but still
under lease-up will substantially stabilize during 2002. At March 31, 2002, 903
of the 1,047 apartments were leased, and the Company believes that the
completion of stabilization of these properties in 2002 is highly likely. The
Company does not anticipate that its liquidity will be impacted should these
properties fail to stabilize in 2002.
The one remaining property that was still under construction at March 31, 2002
had 68 of 244 units leased. The Company has forecast that this property will
stabilize late in 2002. Again, the Company does not anticipate any material lack
of liquidity should the property fail to stabilize in 2002.
Capital improvements to existing properties during the first quarter of 2002 and
2001 totaled $2,865,000 and $4,163,000, respectively. Actual capital
expenditures are summarized below (Dollars in thousands):
March 31, 2002 March 31, 2001
-------------- --------------
Recurring capital expenditures at stabilized properties $ 1,800 $ 2,948
Revenue enhancing capital expenditures at stabilized properties 649 801
Capital improvements to pre-stabilized properties 405 -
Corporate/commercial capital improvements 11 414
-------------- --------------
$ 2,865 $ 4,163
Net cash used in financing activities increased from $7,864,000 for the first
three months ended March 31, 2001 to $11,573,000 during the same period in 2002.
During the first quarter of 2002 the Company increased its credit lines by
$5,000,000 as compared to $11,417,000 in the first quarter of 2001. During the
first quarter of 2001, the Company used a net of $2,418,000 to repurchase shares
of its common stock. No shares were repurchased during the first quarter of
2002.
At March 31, 2002, the Company had $291,719,000 outstanding of a $295,000,000
secured credit facility with Prudential Mortgage Capital, credit-enhanced by
FNMA ("FNMA Facility"), which matures in 2009. The FNMA facility provides for
both fixed and variable rate borrowings, and at March 31, 2002 was fully drawn
under the terms of the borrowing base calculations in effect. The interest rate
on 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 0.09%, plus a
credit enhancement fee of 0.67% based on the outstanding borrowings. The
variable interest rate at March 31, 2002 was 2.49%. Fixed rate borrowings under
the facility totaled $110 million at March 31, 2002, at interest rates
(inclusive of credit-enhancement fees) from 5.77% to 7.71%, and maturities from
2006 to 2009.
Compass Bank provides an unsecured credit facility to the Company. There was $10
million outstanding under this facility at March 31, 2002.
The Company uses interest rate swaps to manage its current and future interest
rate risk. The Company has $100 million of interest rate swaps outstanding of
three-month Libor fixed leg and $25 million of interest rate swaps outstanding
of one-month Libor fixed leg, with expirations between 2003 and 2007, and which
have to date proven to be highly effective hedges of the Company's variable rate
debt. Through the use of these swaps the Company believes it has effectively
fixed the rate during these periods of $125 million of variable rate borrowings
issued through the FNMA Facility and Compass Bank, leaving only $66,719,000 of
the FNMA Facility of which the interest rate has not been hedged. The Company
has also issued a $16,990,000 swap of the BMA Municipal index, expiring in June,
2008, effectively fixing the rate of the Tax-Free Bond Facility at 5.15% through
this period, which is a highly effective hedge. In 2001, the Company executed
two $25 million forward interest rate swaps of three-month Libor fixed leg: a
two-year swap effective March 2003, and a four-year swap effective September,
2003. These are intended to reduce the interest rate risk of future planned
refinancings.
The weighted average interest rate and the weighted average maturity at March
31, 2002, for the $783.6 million of debt outstanding were 6.3% and 9.7 years,
compared to 7.1% and 10.5 years at March 31, 2001.
In 2002, the Company has two individual mortgages that mature totaling $11.6
million. The Company plans to refinance these mortgages, and in the event of a
sudden lack of liquidity in the debt markets, would pay off the mortgages using
its bank credit facility.
In 2003, the Company has debt maturities approximating $151 million, which it
anticipates will be funded by replacement debt issued at comparable interest
rates. There is both interest rate and financing risk associated with these
refinancings; however, the Company believes it to be extremely unlikely that
there will be a refinancing problem due to the large amount of collateral
available to support the amount of debt. In the highly unlikely event of a
complete collapse of the debt markets, the Company could be faced with liquidity
concerns.
Beginning in December 2003, with six months' notice, the holder of the Series E
Preferred, (totaling $25 million), has the option of redeeming all or part of
the shares for cash or an equivalent value in the Company's common stock (at the
Company's choice). The Company anticipates that the Series "E" Preferred will
not be redeemed for common stock, and plans to maintain credit facilities and
balance sheet capacity sufficient to redeem the entire series for cash should
the opportunity for repurchase be presented.
The Company believes that it has adequate resources to fund both its current
operations, regular annual refurbishment of its properties, and incremental
investment in new apartment properties. The Company believes that the income
from the full lease-up and stabilization of its development properties and its
growth of same-store NOI will create greater asset values, which enables it to
increase its borrowing capacity while lowering or maintaining its loan to value
ratio. 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 over $300
million of its debt. The market for FNMA DMBS, which in the Company's experience
is highly effective with three-month Libor fixed leg, is also an important
component of the Company's liquidity and swap effectiveness. In the event that
these markets became less efficient, or the credit of FNMA became impaired, the
Company would seek alternative sources of debt financing.
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
communities) and payment of distributions by the Company in accordance with REIT
requirements under the Internal Revenue Code. The Company has loan covenants
that limit the total amount of distributions, but believes that it is unlikely
that these will be a limiting factor on the Company's future levels of
distributions. The Company expects to meet its long-term liquidity requirements,
such as scheduled mortgage debt maturities, property acquisitions, preferred
stock redemptions, expansions, and non-recurring capital expenditures, through
long and medium term collateralized fixed rate borrowings, issuance of debt,
potential joint venture transactions and the Company's credit facilities.
At March 31, 2002 and 2001, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or 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 Blackstone was established in order to sell assets to fund development
while acquiring management fees to help offset the reduction in revenues from
the sale. 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 2001
Annual Report on Form 10-K.
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 requires 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 also requires 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 adopted the provisions of Statement 141 as of July 1, 2001, except
with regard to business combinations initiated prior to July 1, 2001. The
Company adopted the provisions of 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 requires 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 had unamortized goodwill of
approximately $5,800,000, which will be subject to the transition provisions of
Statements 141 and 142. The Company ceased amortizing goodwill as of January 1,
2002. The amortization expense related to goodwill for the three months ended
March 31, 2001 was $66,000. 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.
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 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 2001 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
Date of
Form Event Reported Report Date Filed
8-K Taxable composition of 1-22-2002 1-23-2002
2001 distributions
8-K 4Q01 conference call 2-15-2002 2-15-2002
transcript and press
release
8-K 4Q01 press release 2-14-2002 2-26-2002
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: May 14, 2002 /s/ Simon R.C. Wadsworth
Simon R.C. Wadsworth
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)