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, 2004
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[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 22, 2004
Common Stock, $.01 par value 20,625,822
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2004 (Unaudited) and
December 31, 2003
Consolidated Statements of Operations for the three and nine months
ended September 30, 2004 and 2003 (Unaudited)
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004 and 2003 (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
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
Mid-America Apartment Communities, Inc.
Consolidated Balance Sheets
September 30, 2004 (Unaudited) and December 31, 2003
(Dollars in thousands)
September 30, 2004 December 31, 2003
--------------------- ------------------
Assets:
Real estate assets:
Land $ 148,750 $ 142,416
Buildings and improvements 1,551,039 1,481,854
Furniture, fixtures and equipment 40,187 38,812
Capital improvements in progress 5,656 7,335
- -----------------------------------------------------------------------------------------------------------------
1,745,632 1,670,417
Less accumulated depreciation (382,499) (339,704)
- -----------------------------------------------------------------------------------------------------------------
1,363,133 1,330,713
Land held for future development 1,366 1,366
Commercial properties, net 7,597 7,150
Investment in and advances to real estate joint venture 16,749 12,620
- -----------------------------------------------------------------------------------------------------------------
Real estate assets, net 1,388,845 1,351,849
Cash and cash equivalents 9,406 10,152
Restricted cash 6,491 10,728
Deferred financing costs, net 15,428 13,185
Other assets 18,050 14,857
Goodwill, net 5,762 5,762
Assets held for disposition 13,119 -
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,457,101 $ 1,406,533
=================================================================================================================
Liabilities and Shareholders' Equity:
Liabilities:
Notes payable $ 1,016,786 $ 951,941
Accounts payable 2,391 1,696
Accrued expenses and other liabilities 54,215 54,547
Security deposits 5,327 5,036
Liabilities associated with assets held for disposition 188 -
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,078,907 1,013,220
Minority interest 28,488 32,019
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized,
$176,862,500 or $25 per share liquidation preference:
9.25% Series F Cumulative Redeemable Preferred Stock,
3,000,000 shares authorized, 474,500 shares issued and outstanding 5 5
8.625% Series G Cumulative Redeemable Preferred Stock,
400,000 shares authorized, 400,000 shares issued and outstanding 4 4
8.30% Series H Cumulative Redeemable Preferred Stock,
6,200,000 shares authorized, 6,200,000 shares issued and outstanding 62 62
Common stock, $.01 par value per share, 50,000,000 shares authorized;
20,581,907 and 20,031,614 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively 206 200
Additional paid-in capital 638,417 622,406
Other (3,462) (3,711)
Accumulated distributions in excess of net income (265,730) (232,224)
Accumulated other comprehensive loss (19,796) (25,448)
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 349,706 361,294
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,457,101 $ 1,406,533
=================================================================================================================
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Consolidated Statements of Operations
Three and nine months ended September 30, 2004 and 2003
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------------- -------------------------
2004 2003 2004 2003
------------- ------------- ----------- ------------
Operating revenues:
Rental revenues $ 64,862 $ 57,000 $ 191,133 $ 166,664
Other property revenues 2,516 2,117 7,518 5,901
- ----------------------------------------------------------------------------------------------------------------------------
Total property revenues 67,378 59,117 198,651 172,565
Management and fee income, net 149 215 443 729
- ----------------------------------------------------------------------------------------------------------------------------
Total operating revenues 67,527 59,332 199,094 173,294
- ----------------------------------------------------------------------------------------------------------------------------
Property operating expenses:
Personnel 8,341 7,124 23,750 19,964
Building repairs and maintenance 2,897 2,707 7,324 6,521
Real estate taxes and insurance 8,613 7,485 26,418 22,886
Utilities 4,013 3,271 10,884 8,781
Landscaping 1,836 1,635 5,395 4,717
Other operating 3,719 3,524 9,886 8,847
Depreciation 17,181 14,599 51,061 41,973
- ----------------------------------------------------------------------------------------------------------------------------
Total property operating expenses 46,600 40,345 134,718 113,689
Property management expenses 2,401 2,217 7,968 6,768
General and administrative expenses 1,953 1,749 6,839 5,349
- ----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before non-operating items 16,573 15,021 49,569 47,488
Interest and other non-property income 155 202 434 662
Interest expense (12,868) (11,426) (37,239) (33,319)
Gain (loss) on debt extinguishment 38 101 (179) (104)
Amortization of deferred financing costs (436) (461) (1,301) (1,583)
Minority interest in operating partnership income (464) (778) (1,418) (1,117)
Loss from investments in unconsolidated entities (61) (8) (135) (316)
Net gain on insurance and other settlement proceeds 248 2,075 3,104 2,600
- ----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 3,185 4,726 12,835 14,311
Discontinued operations:
Income (loss) from discontinued operations (54) (177) 343 (331)
Gain on sale of discontinued operations - 1,921 - 1,921
- ----------------------------------------------------------------------------------------------------------------------------
Net income 3,131 6,470 13,178 15,901
Preferred dividend distribution 3,707 3,545 11,119 11,395
Premiums and original issuance costs associated with the
redemption of preferred stock - 5,987 - 5,987
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) available for common shareholders $ (576) $ (3,062) $ 2,059 $ (1,481)
============================================================================================================================
Weighted average shares outstanding (in thousands):
Basic 20,338 18,302 20,218 17,961
Effect of dilutive stock options - - 327 -
- ----------------------------------------------------------------------------------------------------------------------------
Diluted 20,338 18,302 20,545 17,961
============================================================================================================================
Net income (loss) available for common shareholders $ (576) $ (3,062) $ 2,059 $ (1,481)
Discontinued property operations 54 (1,744) (343) (1,590)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations available for
common shareholders $ (522) $ (4,806) $ 1,716 $ (3,071)
============================================================================================================================
Earnings per share (basic):
Income (loss) from continuing operations
available for common shareholders $ (0.03) $ (0.26) $ 0.08 $ (0.17)
Discontinued property operations - 0.10 0.02 0.09
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) available for common shareholders $ (0.03) $ (0.17) $ 0.10 $ (0.08)
============================================================================================================================
Earnings per share (diluted):
Income (loss) from continuing operations
available for common shareholders $ (0.03) $ (0.26) $ 0.08 $ (0.17)
Discontinued property operations - 0.10 0.02 0.09
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) available for common shareholders $ (0.03) $ (0.17) $ 0.10 $ (0.08)
============================================================================================================================
See accompanying notes to consolidated financial statements.
MID-AMERICA APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2004 and 2003
(Dollars in thousands)
Nine months ended September 30,
---------------------------------
2004 2003
----------------- -------------
Cash flows from operating activities:
Net income $ 13,178 $ 15,901
Adjustments to reconcile net income to net cash provided by operating activities:
Income (loss) from discontinued operations (343) 331
Depreciation and amortization 52,362 43,556
Amortization of unearned stock compensation 412 597
Amortization of debt premium (1,298) -
Equity in loss of real estate joint venture 135 316
Minority interest in operating partnership income 1,418 1,117
Gain on the sale of discontinued operations - (1,921)
Loss on debt extinguishment 179 104
Net gain on insurance and other settlement proceeds (3,104) (2,600)
Changes in assets and liabilities:
Restricted cash 4,237 (2,901)
Other assets (2,489) 303
Accounts payable 695 1,312
Accrued expenses and other 5,885 1,411
Security deposits 291 5,403
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 71,558 62,929
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of real estate and other assets (75,735) (73,954)
Improvements to existing real estate assets (22,833) (15,713)
Distributions from real estate joint venture 958 368
Contributions to real estate joint ventures (5,222) (4,726)
Proceeds from disposition of real estate assets 4,573 25,150
Purchase of Blacksone Joint Venture - (21,853)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (98,259) (90,728)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in credit lines 161,584 179,321
Proceeds from notes payable 36,380 14,729
Principal payments on notes payable (132,601) (166,019)
Payment of deferred financing costs (3,629) (4,289)
Proceeds from issuances of common shares and units 15,213 44,496
Distributions to unitholders (4,671) (4,773)
Dividends paid on common shares (35,202) (30,912)
Dividends paid on preferred shares (11,119) (11,392)
Proceeds from isssuance of preferred stock - 150,119
Redemption of preferred stock - (148,499)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 25,955 22,781
- --------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (746) (5,018)
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 10,152 10,594
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 9,406 $ 5,576
- --------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 38,226 $ 33,729
Supplemental disclosure of noncash investing and financing activities:
Conversion of units to common shares $ 256 $ 347
Issuance of restricted common shares $ 163 $ 335
Marked-to-market adjustment on derivative instruments $ 5,652 $ (1,002)
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Notes to Consolidated Financial Statements
September 30, 2004 and 2003 (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, 2003, as
set forth in the annual consolidated financial statements of Mid-America
Apartment Communities, Inc. (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, 2004 are not
necessarily indicative of the results to be expected for the full year.
STOCK BASED COMPENSATION
Upon shareholder approval at the May 24, 2004 Annual Meeting of Shareholders,
the Company adopted the 2004 Stock Plan to provide incentives to attract and
retain independent directors, executive officers and key employees. This plan
replaced the 1994 Restricted Stock and Stock Option Plan under which no further
awards may be granted as of January 31, 2004.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation",
which requires either the (i) fair value of employee stock-based compensation
plans be recorded as a component of compensation expense in the statement of
operations as of the date of grant of awards related to such plans, or (ii)
impact of such fair value on net income and earnings per share be disclosed on a
pro forma basis in a note to financial statements for awards granted after
December 15, 1994, if the accounting for such awards continues to be in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25"). The Company will continue such
accounting for employee stock options under the provisions of APB 25.
The following table reflects the effect on net income if the fair value method
of accounting allowed under SFAS No. 123 had been used by the Company along with
the applicable assumptions utilized in the Black-Scholes option pricing model
calculation for those periods in which grants were issued (dollars and shares in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------- ------------
Net income $ 3,131 $ 6,470 $13,178 $15,901
Premiums and original issuance costs associated
with the redemption of preferred stock - 5,987 - 5,987
Preferred dividend distribution 3,707 3,545 11,119 11,395
------------- ------------- ------------- ------------
Net income (loss) available for
common shareholders (576) (3,062) 2,059 (1,481)
Add: Stock-based employee
compensation expense included
in reported net income (loss) - - - -
Less: Stock-based employee
compensation expense determined
under fair value method of accounting 34 55 111 170
------------- ------------- ------------- ------------
Pro forma net income (loss) available for
common shareholders $ (610) $(3,117) $ 1,948 $(1,651)
============= ============= ============= ============
Average common shares outstanding - Basic 20,338 18,302 20,218 17,961
Average common shares outstanding - Diluted 20,338 18,302 20,545 17,961
Net income (loss) available per common share:
Basic as reported $ (0.03) $ (0.17) $ 0.10 $ (0.08)
Basic pro forma $ (0.03) $ (0.17) $ 0.10 $ (0.09)
Diluted as reported $ (0.03) $ (0.17) $ 0.10 $ (0.08)
Diluted pro forma $ (0.03) $ (0.17) $ 0.09 $ (0.09)
Assumptions:(1)
Risk free interest rate N/A N/A N/A N/A
Expected life - Years N/A N/A N/A N/A
Expected volatility N/A N/A N/A N/A
Expected dividends N/A N/A N/A N/A
(1) No grants were issued in the periods shown.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to 2004
presentation. The reclassifications had no effect on net income available for
common shareholders.
2. REAL ESTATE ACQUISITIONS
On August 24, 2004, the Company acquired the Prescott apartments, a 384-unit
community located in the Atlanta metro sub-market of South Gwinnett County,
Georgia.
3. SHARE AND UNIT INFORMATION
At September 30, 2004, 20,581,907 common shares and 2,658,504 operating
partnership units were outstanding, a total of 23,240,411 shares and units.
Additionally, the Company had outstanding options for 686,831 shares of common
stock at September 30, 2004, of which 436,911 were anti-dilutive. At September
30, 2003, 19,503,086 common shares and 2,700,922 operating partnership units
were outstanding, a total of 22,204,008 shares and units. Additionally, the
Company had outstanding options for 1,160,865 shares of common stock at
September 30, 2003, of which 969,771 were anti-dilutive.
4. SEGMENT INFORMATION
At September 30, 2004, the Company owned or had an ownership interest in 131
multifamily apartment communities, including the apartment communities owned by
the Company's joint ventures, 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. The
Company's chief operating decision maker evaluates the performance of each
individual property based on its contribution to net operating income in order
to ensure that the individual property continues to meet the Company's return
criteria and long term investment goals. The Company defines each of its
multifamily communities as an individual operating segment. It has also
determined that all of its communities have similar economic characteristics and
also meet the other criteria which permit the communities to be aggregated into
one reportable segment, which is acquisition and operation of the multifamily
communities owned.
The revenues, profits and assets for the aggregated communities are summarized
as follows (dollars in thousands):
Three months Nine months
ended September 30, ended September 30,
-------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------ ------------- -------------
Multifamily rental revenues $ 67,715 $ 61,423 $199,692 $182,078
Other multifamily revenues 2,605 2,297 7,806 6,578
------------- ------------ ------------- -------------
Segment revenues 70,320 63,720 207,498 188,656
Reconciling items to consolidated revenues:
Joint venture revenues (2,942) (4,603) (8,847) (16,091)
Management and fee income, net 149 215 443 729
------------- ------------ ------------- -------------
Total revenues $ 67,527 $ 59,332 $199,094 $173,294
============= ============ ============= =============
Multifamily net operating income $ 39,396 $ 35,277 $119,521 $108,455
Reconciling items to net income available for common shareholders:
Joint venture net operating income (1,437) (1,906) (4,527) (7,606)
Management and fee income, net 149 215 443 729
Depreciation (17,181) (14,599) (51,061) (41,973)
Property management expenses (2,401) (2,217) (7,968) (6,768)
General and administrative expenses (1,953) (1,749) (6,839) (5,349)
Interest and other non-property income 155 202 434 662
Interest expense (12,868) (11,426) (37,239) (33,319)
Gain (loss) on debt extinguishment 38 101 (179) (104)
Amortization of deferred financing costs (436) (461) (1,301) (1,583)
Minority interest in operating partnership income (464) (778) (1,418) (1,117)
Loss from investments in unconsolidated entities (61) (8) (135) (316)
Net gain on insurance and other settlement proceeds 248 2,075 3,104 2,600
Discontinued operations:
Income (loss) from discontinued operations (54) (177) 343 (331)
Gain on sale of discontinued operations - 1,921 - 1,921
Preferred dividend distribution (3,707) (3,545) (11,119) (11,395)
Premiums and original issuance costs associated
with the redemption of preferred stock - (5,987) - (5,987)
------------- ------------ ------------- -------------
Net income available for common shareholders $ (576) $ (3,062) $ 2,059 $ (1,481)
============= ============ ============= =============
September 30, 2004 December 31, 2003
----------------------- -----------------------
Assets:
Multifamily real estate assets $ 1,844,970 $ 1,747,154
Accumulated depreciation - multifamily assets (388,896) (343,968)
----------------------- -----------------------
Segment assets 1,456,074 1,403,186
Reconciling items to total assets:
Joint venture multifamily real estate assets, net (92,941) (72,473)
Land held for future development 1,366 1,366
Commercial properties, net 7,597 7,150
Investment in and advances to real estate joint venture 16,749 12,620
Cash and restricted cash 15,897 20,880
Other assets, net 39,240 33,804
Assets held for disposition 13,119 -
----------------------- -----------------------
Total assets $ 1,457,101 $ 1,406,533
======================= =======================
5. PROPERTIES HELD FOR SALE AND DISPOSITIONS
On July 10, 2003, the Company sold the Crossings apartments, an 80-unit
community in Memphis, Tennessee. As a result of this sale, the Company
recognized a gain of approximately $1,921,000. As part of the Company's
disposition strategy to selectively dispose of mature assets that no longer meet
the Company's investment criteria and long-term strategic objectives, as of
September 30, 2004, the Company was in negotiations to sell both the Island
Retreat apartments, a 112-unit community located in St. Simons Island, Georgia,
and the Eastview apartments, a 432-unit community located in Memphis, Tennessee.
Both of these communities were considered held for sale for the accompanying
consolidated financial statements. The Island Retreat apartments subsequently
sold on October 1, 2004. The Company expects the sale of Eastview apartments to
occur in early 2005.
The revenues and net income (loss) reported in discontinued operations in the
accompanying consolidated financial statements for the above transactions were
as follows (dollars in thousands):
Three months Nine months
ended September 30, ended September 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------- ------------
Revenues $ 768 $ 803 $ 2,422 $ 2,604
Net income (loss) $ (54) $ (177) $ 343 $ (331)
The major classes of assets and liabilities reported in assets held for
disposition and in liabilities associated with assets held for disposition in
the accompanying consolidated financial statements for the above transactions
were as follows (dollars in thousands):
September 30, 2004
---------------------------
Land $ 1,210
Buildings and improvements 17,341
Furniture, fixtures and equipment 1,314
Capital improvements in progress 77
Accumulated depreciation (6,901)
Other assets 78
---------------------------
Assets held for disposition $ 13,119
===========================
Notes payable $ -
Accounts payable 41
Accrued expenses and other liabilities 99
Security deposits 48
---------------------------
Liabilities associated with
assets held for disposition $ 188
===========================
6. 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 derivative financial instruments designated as cash
flow hedges be 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 the hedging criteria are formally
designated as hedging instruments 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
hedging relationship 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 has ceased to be a highly
effective hedge, the Company discontinues hedge accounting prospectively.
All of the Company's derivative financial instruments are reported at fair value
and represented on the balance sheet, and are 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 and
interest rate caps that limit the exposure to rising interest rates. The
unrealized gains/losses in the fair value of these hedging instruments are
reported on the balance sheet with a corresponding adjustment to accumulated
other comprehensive income, with any ineffective portion of the hedging
transactions reclassified to earnings. During the three and nine month periods
ended September 30, 2004 and 2003, the ineffective portion of the hedging
transactions was not significant.
7. COMPREHENSIVE INCOME
Total comprehensive income and its components for the three and nine month
periods ended September 30, 2004 and 2003 were as follows (dollars in
thousands):
Three months Nine months
ended September 30, ended September 30,
------------------------------------ ------------------------------------
2004 2003 2004 2003
----------------- ------------------ ------------------ -----------------
Net income $ 3,131 $ 6,470 $ 13,178 $ 15,901
Marked-to-market adjustment
on derivative instruments (6,638) 5,440 5,652 (1,002)
----------------- ------------------ ------------------ -----------------
Total comprehensive income $ (3,507) $ 11,910 $ 18,830 $ 14,899
================= ================== ================== =================
8. SUBSEQUENT EVENTS
REAL ESTATE DISPOSITION
On October 1, 2004, the Company sold the Island Retreat apartments, a 112-unit
community located in St. Simons Island, Georgia. Proceeds from the sale were
used to pay down debt.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, and
the notes thereto, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these consolidated financial statements requires the Company to make a number
of estimates and assumptions that affect the reported amounts and disclosures in
the consolidated financial statements. On an ongoing basis, the Company
evaluates its estimates and assumptions based upon historical experience and
various other factors and circumstances. The Company believes that its estimates
and assumptions are reasonable in the circumstances; however, actual results may
differ from these estimates and assumptions under different future conditions.
The Company believes that the estimates and assumptions that are most important
to the portrayal of its financial condition and results of operations, in that
they require the most subjective judgments, form the basis of accounting
policies deemed to be most critical. These critical accounting policies include
capitalization of expenditures and depreciation of assets, impairment of
long-lived assets, including goodwill, and fair value of derivative financial
instruments.
Capitalization of expenditures and depreciation of assets
The Company carries its real estate assets at their depreciated cost.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets, which range from 8 to 40 years for land
improvements and buildings, to 5 years for furniture, fixtures, and equipment,
and 3 to 5 years for computers, all of which are judgmental determinations.
Repairs and maintenance costs are expensed as incurred while significant
improvements, renovations, and replacements are capitalized. The cost to
complete any deferred repairs and maintenance at properties acquired by the
Company in order to elevate the condition of the property to the Company's
standards are capitalized as incurred.
Impairment of long-lived assets including goodwill
The Company accounts for long-lived assets in accordance with the provisions of
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("Statement 144") and evaluates its goodwill for impairment under
Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142"). The
Company evaluates its goodwill for impairment on an annual basis in the
Company's fiscal fourth quarter, or sooner if a goodwill impairment indicator is
identified. The Company periodically evaluates its long-lived assets, including
its investments in real estate and goodwill, for indicators that would suggest
that the carrying amount of the assets may not be recoverable. The judgments
regarding the existence of such indicators are based on factors such as
operating performance, market conditions, and legal factors.
In accordance with Statement 144, long-lived assets, such as real estate assets,
and equipment, and purchased intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Goodwill is tested annually for impairment, and is tested for impairment more
frequently if events and circumstances indicate that the asset might be
impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset's fair value. This determination is made at the
reporting unit level and consists of two steps. First, the Company determines
the fair value of a reporting unit and compares it to its carrying amount. In
the apartment industry, the primary method used for determining fair value is to
divide annual operating cash flows by an appropriate capitalization rate. The
Company determines the appropriate capitalization rate by reviewing the
prevailing rates in a property's market or submarket. Second, if the carrying
amount of a reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the reporting unit's
goodwill over the implied fair value of the reporting unit in a manner similar
to a purchase price allocation, in accordance with Statement No. 141, Business
Combinations. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill.
Fair value of derivative financial instruments
The Company utilizes certain derivative financial instruments, primarily
interest rate swaps and caps, during the normal course of business to manage, or
hedge, the interest rate risk associated with the Company's variable rate debt
or as hedges in anticipation of future debt transactions to manage well-defined
interest rate risk associated with the transaction. The valuation of the
derivative financial instruments under SFAS No. 133 requires the Company to make
estimates and judgments that affect the fair value of the instruments.
In order for a derivative contract to be designated as a hedging instrument, the
relationship between the hedging instrument and the hedged item must be highly
effective. The Company performs ineffectiveness tests using the change in the
variable cash flows method at the inception of the hedge and for each reporting
period thereafter, through the term of the hedging instruments. Any amounts
determined to be ineffective are recorded in earnings. The change in fair value
of the hedges are recorded to accumulated other comprehensive income.
While the Company's calculation of hedge effectiveness contains some subjective
determinations, the historical correlation of the cash flows of the hedging
instruments and the underlying hedged item are measured by the Company before
entering into the hedging relationship and have been highly related.
OVERVIEW OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004
The Company's operating results for the first nine months of 2004 benefited from
improved occupancy rates experienced by the Company's same store portfolio and
from acquisitions made throughout 2003 and 2004. These improved occupancy rates
were driven by the greater level of lease concessions granted during the current
period relative to the prior period.
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, 2004. This discussion should be read in conjunction with the
financial statements appearing elsewhere in this report. These financial
statements include all adjustments, which are, in the opinion of management,
necessary to reflect a fair statement of the results for the interim periods
presented, and all such adjustments are of a normal recurring nature.
The total number of apartment units the Company owned or had an ownership
interest in, including the properties owned by its 33.33% unconsolidated joint
ventures, at September 30, 2004 was 37,336 in 131 communities compared to 35,233
units in 126 communities owned at September 30, 2003. The average monthly rental
per apartment unit for the Company's 100% owned apartment units not in lease-up
was $671 at September 30, 2004 compared to $661 at September 30, 2003. Occupancy
for these same apartment units at September 30, 2004 and 2003 was 95.0% and
94.5%, respectively.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2003
Property revenues for the three months ended September 30, 2004, increased by
approximately $8,261,000 from the three months ended September 30, 2003, due to
(i) a $3,181,000 increase in property revenues from the properties acquired in
the purchase of the limited partnership interest held by Blackstone Real Estate
Advisors in BRE/MAAC Associates, LLC in 2003 (the "BreMaac Buyout"), (ii) a
$2,314,000 increase in property revenues from the acquisitions of the Los Rios
Park and Lighthouse Court apartments during the third and fourth quarters of
2003 (the "Quarterly 2003 Acquisitions"), (iii) a $1,949,000 increase in
property revenues from the acquisitions of Monthaven Park, Watermark and
Prescott apartments in 2004 (the "2004 Acquisitions"), and (iv) a $824,000
increase in property revenues from the communities held throughout both periods.
These increases were partially offset by a decrease in property revenues of
$7,000 due to the transfer of the Seasons of Green Oaks to one of the Company's
joint ventures with Crow Holdings in 2003 (the "Green Oaks Transfer").
Property operating expenses include costs for property personnel, building
repairs and maintenance, real estate taxes and insurance, utilities, landscaping
and other property related costs. Property operating expenses for the three
months ended September 30, 2004, increased by approximately $3,673,000 from the
three months ended September 30, 2003, due primarily to increases of property
operating expenses of (i) $1,557,000 from the BreMaac Buyout, (ii) $1,082,000
from the Quarterly 2003 Acquisitions, (iii) $811,000 from the 2004 Acquisitions,
(iv) $368,000 from an accrual for expenses related to hurricane damage
experienced in Florida in 2004 (the "Hurricane Accrual"), and (v) $23,000 from
the Green Oaks Transfer. These increases were partially offset by a decrease in
property operating expenses of $168,000 from the communities held throughout
both periods.
Depreciation expense increased by approximately $2,582,000 primarily due to the
increases of depreciation expense of (i) $1,117,000 from the Quarterly 2003
Acquisitions, (ii) $1,133,000 from the 2004 Acquisitions, and (iii) $332,000
from the BreMaac Buyout.
Property management expenses increased by approximately $184,000 from the third
quarter of 2003 to the third quarter of 2004 partially due to increased
franchise and excise taxes as a result of state tax law changes. General and
administrative expenses increased by approximately $204,000 over this same
period partially related to expenses associated with the implementation of new
property management software and expenses resulting from new regulatory
requirements.
Interest expense for the three months ended September 30, 2004, increased by
approximately $1,442,000 from the same period in 2003. This increase was due to
the increase in debt balances from approximately $912,000,000 at September 30,
2003 to approximately $1,017,000,000 at September 30, 2004. The impact of the
increase in debt balances was partially offset by a decrease in the weighted
average interest rate to 5.2% at September 30, 2004 from 5.5% at September 30,
2003.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Property revenues for the nine months ended September 30, 2004, increased by
approximately $26,086,000 from the nine months ended September 30, 2003, due to
(i) a $12,684,000 increase in property revenues from the BreMaac Buyout, (ii) a
$7,010,000 increase in property revenues from the Quarterly 2003 Acquisitions
and the acquisition of Legacy Pines apartments in 2003 (together the "2003
Acquisitions"), (iii) a $3,817,000 increase in property revenues from the 2004
Acquisitions, (iv) a $2,993,000 increase in property revenues from the
communities held throughout both periods, and (v) a $183,000 increase in
property revenues from the communities in lease-up in 2003 (the "Communities in
Lease-up"). These increases were partially offset by a decrease in property
revenues of $601,000 due to the Green Oaks Transfer.
Property operating expenses include costs for property personnel, building
repairs and maintenance, real estate taxes and insurance, utilities, landscaping
and other property related costs. Property operating expenses for the nine
months ended September 30, 2004, increased by approximately $11,941,000 from the
nine months ended September 30, 2003, due primarily to increases of property
operating expenses of (i) $6,005,000 from the BreMaac Buyout, (ii) $3,579,000
from the 2003 Acquisitions, (iii) $1,547,000 from the 2004 Acquisitions, (iv)
$780,000 from the communities held throughout both periods, (v) $368,000 from
the Hurricane Accrual, and (vi) $21,000 from the Communities in Lease-up. These
increases were partially offset by a decrease in property operating expenses of
$359,000 from the Green Oaks Transfer.
Depreciation expense increased by approximately $9,088,000 primarily due to the
increases of depreciation expense of (i) $3,789,000 from the 2003 Acquisitions,
(ii) $2,471,000 from the BreMaac Buyout, (iii) $2,202,000 from the 2004
Acquisitions, and (iv) $649,000 from the communities held throughout both
periods. These increase were partially offset by a decrease in depreciation
expense of $23,000 from the Communities in Lease-up.
Property management expenses increased by approximately $1,200,000 from the
first nine months of 2003 to the first nine months of 2004 partially due to
increased personnel expense related to property acquisitions and incentive
compensation. General and administrative expenses increased by approximately
$1,490,000 over this same period partially related to expenses associated with
the implementation of new property management software, expenses resulting from
new regulatory requirements, expenses related to the settlement of litigation
and incentive compensation.
Interest expense for the nine months ended September 30, 2004, increased by
approximately $3,920,000 from the same period in 2003. This increase was due to
the increase in debt balances from approximately $912,000,000 at September 30,
2003 to approximately $1,017,000,000 at September 30, 2004. The impact of the
increase in debt balances was partially offset by a decrease in the weighted
average interest rate to 5.2% at September 30, 2004 from 5.5% at September 30,
2003.
FUNDS FROM OPERATIONS AND NET INCOME
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 on disposition of real estate assets, plus depreciation
of real estate, and adjustments for joint ventures to reflect FFO on the same
basis. This definition of FFO is in accordance with the National Association of
Real Estate Investment Trust's ("NAREIT") recommended definition. Disposition of
real estate assets includes sales of discontinued operations as well as proceeds
received from insurance and other settlements from property damage.
The Company's policy is to expense the cost of interior painting, vinyl
flooring, and blinds as incurred for stabilized properties. During the
stabilization period for acquisition properties, these items are capitalized as
part of the total repositioning program of newly acquired properties, and, thus
are not deducted in calculating FFO.
FFO should not be considered as an alternative to net income or any other GAAP
measurement of performance, as an indicator of operating performance or as an
alternative to cash flow from operating, investing, and financing activities as
a measure of liquidity. The Company believes that FFO is helpful in
understanding the Company's operating performance in that such calculation
excludes depreciation expense on real estate assets. The Company believes that
GAAP historical cost depreciation of real estate assets is generally not
correlated with changes in the value of those assets, whose value does not
diminish predictably over time, as historical cost depreciation implies. The
Company's calculation of FFO may differ from the methodology for calculating FFO
utilized by other REITs and, accordingly, may not be comparable to such other
REITs.
The following table is a reconciliation of FFO to net income for the three and
nine months ended September 30, 2004 and 2003 (dollars and shares in thousands):
Three months Nine months
ended September 30, ended September 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------- ------------- ------------
Net income $ 3,131 $ 6,470 $ 13,178 $ 15,901
Depreciation of real estate assets 16,830 14,259 50,040 40,944
Net gain on insurance and other settlement proceeds (248) (2,075) (3,104) (2,600)
Net gain on insurance and other settlement proceeds
of discontinued operations - - (526) (82)
Depreciation real estate assets of discontinued
operations 230 228 681 790
Gain on sale of discontinued operations - (1,921) - (1,921)
Depreciation real estate assets of unconsolidated
entities 435 448 1,333 1,481
Preferred dividend distribution (3,707) (3,545) (11,119) (11,395)
Minority interest in operating partnership income 464 778 1,418 1,117
--------------------------------------------------------
Funds from operations before premiums and
original issuance costs associated with the
redemption of preferred stock 17,135 14,642 51,901 44,235
Premiums and original issuance costs associated
with the redemption of preferred stock - (5,987) - (5,987)
--------------------------------------------------------
Funds from operations $ 17,135 $ 8,655 $ 51,901 $ 38,248
========================================================
Weighted average shares and units:
Basic 23,003 21,020 22,889 20,690
Diluted 23,350 21,324 23,217 20,922
Net income for the three months ended September 30, 2004 was approximately
$3,339,000 below the three months ended September 30, 2003 mainly as a result of
gains experienced in the third quarter of 2003 from both insurance settlement
proceeds and the sale of the Crossings apartments. FFO for the same period
increased approximately $8,480,000, due mainly to the subtraction of the
premiums and original issuance costs associated with the redemption of preferred
stock in 2003.
Net income decreased by approximately $2,723,000 for the nine months ended
September 30, 2004 from the same period in 2003 mainly as a result of an
increase in interest expense and the gain from the sale of the Crossings
apartments in 2003. FFO increased by approximately $13,653,000 over this same
period partially due to the subtraction of the premiums and original issuance
costs associated with the redemption of preferred stock in 2003.
TRENDS
Property performance over the past two years has been pressured by an imbalance
between supply and demand for apartment units in many of the Company's markets.
The economic downturn and the related low interest rate environment have
combined to contribute to a temporary decline in demand for apartment units,
while allowing delivery levels of newly constructed apartment units to remain
consistent with and in some cases above historical averages.
The recent economic environment has impacted demand in two main ways: 1)
producing lower job growth, which reduced the number of potential renters in
most of the Company's markets, and 2) producing lower interest rates which has
increased the affordability of single family housing, prompting more renters to
purchase homes.
On the supply side, the declining interest rates have provided an incentive to
developers to construct new apartment units in many of the Company's markets,
especially in the larger metropolitan markets. Delivery of these new units
during this period of weakened apartment demand has increased competition,
adding pressure to apartment occupancy levels and pricing in a number of the
Company's markets.
As part of its strategy to create continued stable and growing performance, the
Company maintains a portfolio of properties diversified across large
metropolitan markets, mid-sized markets, and smaller tier markets, as defined by
population levels. During the economic downturn, the Company's smaller-tier and
mid-sized markets produced more stable performance, while its larger
metropolitan markets proved more susceptible to declining job formation and
apartment supply imbalances.
The Company is beginning to see indications of stronger job growth in many of
its markets, which could indicate an improvement in the general economic
environment. As (and if) the economic environment improves, the Company expects
to see more household formations and increasing interest rates, which should
combine to increase the number of apartment renters.
While increasing interest rates will increase the Company's cost of borrowing,
the Company expects that this increase in demand will generate stronger property
performance across the Company's portfolio. The Company's large-tier markets,
which have been under the most pressure during the economic downturn, should
begin to absorb the oversupply of new apartment units and return to historical
occupancy and pricing levels, while the Company's smaller-tier and mid-sized
markets would benefit from improving market fundamentals which support continued
stable growth.
Over the long term, general demographic trends are expected to favor apartment
owners, as immigration growth, combined with the increasing demand for rental
housing from the "echo boomers" (children of the "baby boomers") is expected to
produce more apartment renters over the next ten years. The Company believes its
portfolio location throughout the Southeast and South central regions of the
country position it well to take advantage of these improving demographic
trends.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities increased to approximately $71.6
million for the first nine months of 2004 from $62.9 million for the first nine
months of 2003 mainly due to more favorable deposit and escrow terms from debt
refinanced during the period.
Net cash used in investing activities increased during the first nine months of
2004 from the first nine months of 2003 to approximately $98.3 million from
$90.7 million mainly related to the decrease in proceeds from dispositions of
real estate assets and increase in improvements in existing real estate assets
in 2004 which were partially offset by the BreMaac Buyout in 2003. The Company
received $25 million of disposition proceeds in the first nine months of 2003 of
which $19 million was related to the transfer of the Seasons of Green Oaks
apartments to one of the Company's joint ventures with Crow Holdings and $4.6
million related to the sale of the Crossings apartments in July 2003. The
Company received $4.6 million in proceeds during the first nine months of 2004
which was mainly related to insurance settlements for property fires and other
casualty losses at six of the Company's properties. In 2003 the company paid
$21.9 million for the BreMaac Buyout.
Capital improvements to existing properties during the first nine months of 2004
and 2003 totaled approximately $22.8 million and $15.7 million, respectively.
Actual capital expenditures are summarized below (dollars in thousands):
September 30, 2004 September 30, 2003
------------------ ------------------
Recurring capital expenditures at existing properties $10,691 $ 8,912
Revenue enhancing capital expenditures at existing properties 6,105 5,150
Building replacement from fire and other loss 5,124 1,296
Corporate/commercial capital improvements 913 355
------------------ ------------------
$22,833 $15,713
================== ==================
Net cash provided by financing activities was approximately $26.0 million for
the first nine months ended September 30, 2004 compared to $22.8 million during
the same period in 2003. During the first nine months of 2004 the Company
decreased its borrowings under its credit lines by approximately $17.7 million.
The Company obtained $36.4 million of new notes payable in the first nine months
of 2004 compared to $14.7 million of new notes payable for the same period in
2003. The Company refinanced $130.7 million in the first nine months of 2004
compared to $163.5 million for the same period in 2003. The Company received
proceeds from issuances of common shares and units of $15.2 million in the first
nine months of 2004 as the Company's stock price in 2004 prompted the exercise
of a higher than historical amount of options and the Company issued $6 million
of common stock through its direct stock purchase plan. This compared to
proceeds from issuances of common shares of $44.5 million for the same period in
2003. The Company received $150.1 million from issuances of new series of
preferred stock in the first nine months of 2003 which was predominantly offset
by $148.5 million used to retire outstanding issues of preferred stock. No
preferred shares were issued or redeemed in the first nine months of 2004.
In the first three months of 2004, the Company refinanced $2.3 million of bonds
using its secured credit facility with a group of banks led by AmSouth Bank (the
"AmSouth Facility"). The Company refinanced an additional $14.3 million of bonds
using its tax-free bond facility, credit enhanced by the Federal National
Mortgage Association ("FNMA") (the "Tax-Free Bond Facility"). The Company also
refinanced six of the properties it acquired through its partnership buyout of
Bre/Maac Associates, LLC in 2003 using a renegotiated secured credit facility
with Prudential Mortgage Capital, credit enhanced by FNMA (the "FNMA Facility").
During the three month period ended June 30, 2004, the Company refinanced an
$11.2 million mortgage using its existing FNMA Facility. The Company amended the
AmSouth Facility to extend the maturity by one year and increased the loan to
value from 57% to 65%, effectively increasing the borrowing base from $31.7
million to $37.9 million. The Company also paid off the mortgages of five
properties. The five properties were then used to collateralize a loan under a
new credit agreement with Financial Federal Savings Bank, which was subsequently
purchased and credit enhanced by Freddie Mac (the "Freddie Mac Facility"). The
Freddie Mac Facility has a commitment amount of $100 million and a maturity date
of July 1, 2011.
During the three month period ended September 30, 2004, the Company refinanced
the remaining four properties it acquired through its partnership buyout of
Bre/Maac Associates, LLC in 2003 using the FNMA Facility. The Company also
borrowed a total of $31 million from its Freddie Mac Facility in the third
quarter of 2004 which is collateralized by the Watermark and Prescott apartments
purchased in 2004.
The FNMA Facility has a line limit of $850 million, $680 million of which is
available to borrow. Various traunches of the facility mature from 2010 through
2014. The FNMA Facility provides for both fixed and variable rate borrowings.
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
0.07%, plus a credit enhancement fee between 0.60% and 0.72%, based on the
outstanding borrowings.
Each of the Company's credit facilities is subject to various covenants and
conditions on usage. If the Company were to fail to satisfy a condition to
borrowing, the available credit under one or more of the facilities could not be
drawn, which could adversely affect the Company's liquidity. Moreover, if the
Company were to fail to make a payment or violate a covenant under a credit
facility, after applicable cure periods one or more of its lenders could declare
a default, accelerate the due date for repayment of all amounts outstanding
and/or foreclose on properties securing such facilities. Any such event could
have a material adverse effect on the Company.
The Company uses interest rate swaps to manage its current and future interest
rate risk. As of September 30, 2004, the Company had 22 interest rate swaps in
effect. These swaps have to date proven to be highly effective hedges. The
Company has also entered into a future interest rate swap which will go into
effect in the fourth quarter of 2004. The Company had three interest rate cap
agreements in effect as of September 30, 2004.
The weighted average interest rate at September 30, 2004, for the $1,017 million
of debt outstanding was 5.2% compared to 5.5% on $912 million of debt
outstanding at September 30, 2003. Summary details of the debt outstanding at
September 30, 2004 follows in the table below:
Outstanding
Balance/
Line Line Notional Interest Rate Contract
Limit Availability Amount Rate Maturity Maturity
--------------- ---------------- -------------------- ---------- --------------- --------------
- ------------------------------------------------------------------------------------------------------------------------------
COMBINED DEBT
- ------------------------------------------------------------------------------------------------------------------------------
Fixed Rate or Swapped
Conventional $ 684,481,141 6.1% 07/17/2009 10/10/2009
Tax Exempt 108,531,071 5.1% 08/29/2017 08/29/2017
--------------------------------------------------------------
Subtotal Fixed Rate or Swapped 793,012,212 6.0% 08/26/2010 11/08/2010
--------------------------------------------------------------
Variable Rate
Conventional 190,344,140 2.5% 09/15/2004 09/29/2012
Tax Exempt 10,855,004 2.5% 07/02/2000 12/22/2020
Capped 22,575,000 2.2% 10/03/2008 04/07/2011
--------------------------------------------------------------
Subtotal Variable Rate 223,774,144 2.5% 11/28/2004 12/29/2012
--------------------------------------------------------------
Total Combined Debt Outstanding $1,016,786,356 5.2% 05/22/2009 04/29/2011
==============================================================
- ------------------------------------------------------------------------------------------------------------------------------
UNDERLYING DEBT
- ------------------------------------------------------------------------------------------------------------------------------
Individual Property Mortgages/Bonds
Conventional Fixed Rate $ 109,219,141 6.6% 12/04/2013 12/04/2013
Tax Exempt Fixed Rate 55,566,071 5.9% 07/05/2026 07/05/2026
Tax Exempt Variable Rate 4,760,004 2.5% 10/31/2004 06/01/2028
FNMA Credit Facilities
Tax Free Bond Facility
Tax Free Borrowings $ 88,280,000 $ 69,915,000 69,915,000 2.5% 10/31/2004 03/01/2014
Taxable Borrowings 11,720,000 11,720,000 11,720,000 2.5% 10/31/2004 03/01/2014
Facility I
Fixed Rate Borrowings 110,000,000 110,000,000 110,000,000 7.2% 01/10/2009 01/10/2009
Extended Fixed Rate Borrowings 24,262,000 2.8% 05/01/2005 12/01/2011
Variable Rate Borrowings 140,000,000 73,769,000 14,367,000 2.5% 11/28/2004 12/01/2011
Facility II
Variable Rate Borrowings 600,000,000 495,991,000 479,753,000 2.5% 12/07/2004 04/01/2013
-----------------------------------------------------------------------------------------------
Subtotal FNMA Facilities 950,000,000 761,395,000 710,017,000 3.2% 07/27/2005 10/20/2008
-----------------------------------------------------------------------------------------------
Freddie Mac Credit Facility 100,000,000 65,374,000 65,374,000 2.4% 12/15/2004 07/01/2011
AmSouth Credit Facility 40,000,000 31,872,240 11,850,140 3.5% 10/31/2004 05/24/2006
Union Planters Mortgage 40,000,000 2.8% 10/31/2004 04/01/2009
Compass Bank Unsecured Note 20,000,000 2.3% 10/31/2004 11/10/2004
--------------------------------------------------------------
Total Underlying Debt Outstanding $1,016,786,356 3.7% 07/08/2007 07/01/2010
==============================================================
- ------------------------------------------------------------------------------------------------------------------------------
HEDGING INSTRUMENTS IN EFFECT
- ------------------------------------------------------------------------------------------------------------------------------
Taxable Interest Rate Swaps
FNMA Facility $ 365,000,000 6.0% 06/07/2008 06/07/2008
Freddie Mac Facility 51,000,000 5.3% 06/01/2011 06/01/2011
Union Planters Mortgage 25,000,000 4.0% 03/01/2009 03/01/2009
Tax Exempt Interest Rate Swaps
FNMA Tax Free Bond Facility 52,965,000 4.1% 05/17/2008 05/17/2008
--------------------------------------------------------------
Total Swaps $ 493,965,000 5.6% 10/08/2008 10/08/2008
==============================================================
Interest Rate Caps
FNMA Tax Free Bond Facility $ 22,575,000 6.0% 10/03/2008 10/03/2008
- ------------------------------------------------------------------------------------------------------------------------------
HEDGING INSTRUMENTS NOT IN EFFECT
- ------------------------------------------------------------------------------------------------------------------------------
Future Interest Rate Swaps
FNMA Facility $ 25,000,000 4.5% 03/01/2012 03/01/2012
The Company believes that it has adequate resources to fund its current
operations, annual refurbishment of its properties, and incremental investment
in new apartment properties. The Company is relying on the efficient operation
of the financial markets to finance debt maturities, and also is heavily reliant
on the creditworthiness of FNMA, which provides credit enhancement for
approximately $710 million of the Company's debt. The interest rate market for
FNMA Discount Mortgage Backed Securities ("DMBS"), which in the Company's
experience is highly correlated with three-month LIBOR interest rates, is also
an important component of the Company's liquidity and swap effectiveness. In the
event that the FNMA DMBS market becomes less efficient, or the credit of FNMA
becomes impaired, the Company would seek alternative sources of debt financing.
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 based on the Company's current range of forecast of operating
performance. The Company expects to meet its long-term liquidity requirements,
such as scheduled mortgage debt maturities, property acquisitions, expansions,
and non-recurring capital expenditures, through long and medium term
collateralized fixed rate borrowings, potential joint venture transactions and
the Company's existing and new credit facilities.
For the nine months ended September 30, 2004, the Company's net cash provided by
operating activities was approximately $2.3 million short of funding
improvements to existing real estate assets, distributions to unitholders,
dividends paid on common shares and dividends paid on preferred shares. This
compared to a coverage of approximately $139 thousand for the same period in
2003. While the Company has sufficient liquidity to permit distributions at
current rates through additional borrowings, if necessary, any significant
deterioration in operations could result in the Company's financial resources to
be insufficient to pay distributions to shareholders at the current rate, in
which event the Company would be required to reduce the distribution rate.
At September 30, 2004 and 2003, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance, special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. The Company's joint ventures
with Crow Holdings were established to acquire multifamily properties. In
addition, the Company does not engage in trading activities involving
non-exchange traded contracts. As such, the Company is not materially exposed to
any financing, liquidity, market, or credit risk that could arise if it had
engaged in such relationships. The Company does not have any relationships or
transactions with persons or entities that derive benefits from their
non-independent relationships with the Company or its related parties other than
what is disclosed in Item 8. Financial Statements and Supplementary Data - Notes
to Consolidated Financial Statements Note 11 in the Company's 2003 Annual Report
on Form 10-K.
INSURANCE
In the opinion of management, property and casualty insurance is in place that
provides adequate coverage to provide financial protection against normal
insurable risks such that it believes that any loss experienced would not have a
significant impact on the Company's liquidity, financial position, or results of
operations.
INFLATION
Substantially all of the resident leases at the Communities allow, at the time
of renewal, for adjustments in the rent payable there under, and thus may enable
the Company to seek rent increases. Almost all leases are for one year or less.
The short-term nature of these leases generally serves to reduce the risk to the
Company of the adverse effects of inflation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities ("FIN46R"). FIN46R replaces
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which
was issued in January 2003, and addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and how, accordingly, it should consolidate the
entity. The Company was required to comply with the requirements of FIN46R
effective March 31, 2004. The adoption of FIN46R had no impact on the Company's
consolidated financial condition or results of operations taken as a whole.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. These statements include, but are not limited
to, statements about anticipated growth rate of revenues and expenses,
anticipated rental concessions, planned asset dispositions, disposition pricing,
and planned 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 2003 Annual Report on Form 10-K except
for changes as discussed in the Liquidity and Capital resources section in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Item 4.
Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and procedures which, by their
nature, can provide only reasonable assurance regarding management's control
objectives. The Company also has an investment in two unconsolidated entities
which are not under its control. Consequently, the Company's disclosure controls
and procedures with respect to these entities are necessarily more limited than
those it maintains with respect to its consolidated subsidiaries.
As of the end of the period covered by this report, an evaluation was carried
out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) that is required to be included in the Company's
Exchange Act filings.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended September 30, 2004, there were no significant
changes in the Company's internal control over financial reporting that
materially affected, or that are reasonably likely to affect, the registrant's
internal control over financial reporting.
Special Note Regarding Analyst Reports
Investors should also be aware that while the Company's management does, from
time to time, communicate with securities analysts, it is against the Company's
policy to disclose to them any material non-public information or other
confidential commercial information. Accordingly, shareholders should not assume
that the Company agrees with any statement or report issued by any analyst
irrespective of the content of the statement or report. Furthermore, the Company
has a policy against issuing or confirming financial forecasts or projections
issued by others. Thus, to the extent that reports issued by securities analysts
contain any projections, forecasts or opinions, such reports are not the
responsibility of Mid-America Apartment Communities, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
(a) The following exhibits are filed as part of this report.
Exhibit No
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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: November 2, 2004 /s/Simon R.C. Wadsworth
Simon R.C. Wadsworth
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)