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, 1998
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 340
MEMPHIS, TENNESSEE 38138
(Address of principal executive offices)
(901) 682-6600
Registrant's telephone number, including area code
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at October 31, 1998
- ---------------------------- ----------------------------
Common Stock, $.01 par value 18,839,998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997
Consolidated Statements of Operations for the three and nine
months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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
PART I. Financial Information
ITEM 1.
Mid-America Apartment Communities, Inc.
Consolidated Balance Sheets
September 30, 1998 (Unaudited) and December 31, 1997
(Dollars in thousands)
1998 1997
Assets: --------- ---------
Real estate assets:
Land $ 121,320 $ 109,800
Buildings and improvements 1,142,973 1,027,853
Furniture, fixtures and equipment 24,876 21,886
- --------------------------------------------------------------------------------
1,289,169 1,159,539
Less accumulated depreciation (107,647) (76,129)
- --------------------------------------------------------------------------------
1,181,522 1,083,410
Construction in progress 71,794 33,717
Land held for future development 3,209 8,849
Commercial properties, net 9,044 8,728
- --------------------------------------------------------------------------------
Real estate assets, net 1,265,569 1,134,704
Cash and cash equivalents 11,532 14,805
Restricted cash 10,735 13,397
Deferred financing costs, net 8,830 5,700
Other assets 25,238 25,264
- --------------------------------------------------------------------------------
Total assets $1,321,904 $1,193,870
- --------------------------------------------------------------------------------
Liabilities and Shareholders' equity:
Liabilities:
Notes payable $722,948 $632,213
Accounts payable 7,304 10,098
Accrued expenses and other liabilities 27,069 22,885
Security deposits 4,882 4,509
- --------------------------------------------------------------------------------
Total liabilities 762,203 669,705
Minority interest 61,613 62,865
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares
authorized, $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 -
Common stock, $.01 par value (authorized
50,000,000 shares; issued and outstanding
18,815,854 and 18,476,046 shares at September 30,
1998 and December 31, 1997, respectively) 188 185
Additional paid-in capital 555,647 500,492
Other (2,318) (1,045)
Accumulated deficit (55,488) (38,371)
- --------------------------------------------------------------------------------
Total shareholders' equity 498,088 461,300
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,321,904 $1,193,870
================================================================================
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Consolidated Statements of Operations
Three and nine months ended September 30, 1998 and 1997
(Dollars in thousands except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------- ---------------------
1998 1997 1998 1997
-------- -------- --------- ---------
Revenues:
Rental $ 54,363 $ 33,759 $ 155,406 $ 95,388
Other 909 636 2,367 1,566
Management and development
income, net 814 - 1,461 -
- -------------------------------------------------------------------------------
Total revenues 56,086 34,395 159,234 96,954
- -------------------------------------------------------------------------------
Expenses:
Personnel 6,255 3,703 17,800 10,279
Building repairs and
maintenance 2,866 1,949 7,294 4,746
Real estate taxes and
insurance 5,504 3,662 16,270 10,199
Utilities 2,610 1,658 7,038 4,536
Landscaping 1,304 892 3,733 2,688
Other operating 2,480 1,628 6,648 4,480
Depreciation and amortization 11,657 6,785 33,741 19,220
General and administrative 3,423 1,691 8,416 4,707
Interest 11,630 7,174 34,294 20,271
Amortization of deferred
financing costs 593 168 1,732 578
- -------------------------------------------------------------------------------
Total expenses 48,322 29,310 136,966 81,704
- -------------------------------------------------------------------------------
Income before gain on disposition of
properties, minority interest in
operating partnership income and
extraordinary item 7,764 5,085 22,268 15,250
- -------------------------------------------------------------------------------
Gain on disposition of properties - - 422 -
- -------------------------------------------------------------------------------
Income before minority interest in
operating partnership income and
extraordinary item 7,764 5,085 22,690 15,250
- -------------------------------------------------------------------------------
Minority interest in operating
partnership income 610 620 1,777 1,798
- -------------------------------------------------------------------------------
Net income before extraordinary item 7,154 4,465 20,913 13,452
- -------------------------------------------------------------------------------
Extraordinary item - loss on debt
extinguishment - - (990) -
- -------------------------------------------------------------------------------
Net income 7,154 4,465 19,923 13,452
Dividends on preferred shares 3,435 1,187 7,974 3,562
- -------------------------------------------------------------------------------
Net income available for common
shareholders $ 3,719 $ 3,278 $ 11,949 $ 9,890
===============================================================================
(Continued)
Mid-America Apartment Communities, Inc.
Consolidated Statements of Operations (Continued)
Three and nine months ended September 30, 1998 and 1997
(Dollars in thousands except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
-------- ------- ------- --------
Net income available per common share:
- ------------------------------------------------------------------------------
Basic (in thousands):
Average common shares
outstanding 18,802 13,389 18,684 12,728
- ------------------------------------------------------------------------------
Basic earnings per share:
Net income available per
common share before
extraordinary item $ 0.20 $ 0.24 $ 0.69 $ 0.78
Extraordinary item - - (0.05) -
- ------------------------------------------------------------------------------
Net income available per
common share $ 0.20 $ 0.24 $ 0.64 $ 0.78
- ------------------------------------------------------------------------------
Diluted (in thousands):
Average common shares
outstanding 18,802 13,389 18,684 12,728
Effect of dilutive stock
options 40 64 50 63
- ------------------------------------------------------------------------------
Average dilutive common
shares outstanding 18,842 13,453 18,734 12,791
- ------------------------------------------------------------------------------
Diluted earnings per share:
Net income available per
common share before
extraordinary item $ 0.20 $ 0.24 $ 0.69 $ 0.77
Extraordinary item - - (0.05) -
- ------------------------------------------------------------------------------
Net income available
per common share $ 0.20 $ 0.24 $ 0.64 $ 0.77
==============================================================================
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Consolidated Statements of Cash Flow
Nine months ended September 30, 1998 and 1997
(Dollars in thousands)
(Unaudited)
1998 1997
Cash flows from operating activities: -------- --------
Net income $ 19,923 $ 13,452
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 35,473 19,875
Unearned stock compensation 356 105
Minority interest in operating
partnership income 1,777 1,798
Extraordinary item 990 -
Gain on disposition of properties (422) -
Changes in assets and liabilities:
Restricted cash 2,662 (649)
Other assets (1,079) (1,597)
Accounts payable (2,794) 643
Accrued expenses and other liabilities 4,184 2,951
Security deposits 373 419
- -------------------------------------------------------------------------------
Net cash provided by operating activities 61,443 36,997
Cash flows from investing activities:
Purchases of real estate assets (61,294) (72,737)
Proceeds from disposition of real
estate assets 5,438 -
Improvements to properties (19,333) (14,207)
Construction of units in progress
and future development (70,587) (9,644)
- -------------------------------------------------------------------------------
Net cash used in investing activities (145,776) (96,588)
Cash flows from financing activities:
Net change in credit line 58,394 41,064
Proceeds from notes payable 218,759 -
Principal payments on notes payable (204,349) (18,441)
Deferred financing costs (5,068) (237)
Proceeds from issuances of common
shares and units 8,588 66,627
Proceeds from issuance of preferred shares 47,974 -
Redemption of unitholder interests (150) (8)
Distributions to unitholders (4,775) (3,994)
Dividends paid on common shares (30,339) (20,129)
Dividends paid on preferred shares (7,974) (3,562)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 81,060 61,320
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (3,273) 1,729
- -------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 14,805 4,053
- -------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 11,532 $ 5,782
===============================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 34,453 $ 20,519
Supplemental disclosure of noncash investing
and financing activities:
Assumption of debt related to property
acquisitions $ 16,965 $ 44,196
Conversion of units to common shares $ 1,119 $ 870
Issuance of units related to property
acquisitions $ 338 $ 880
Issuance of advances in exchange for
common shares and units $ 1,952 $ 720
See accompanying notes to consolidated financial statements.
MID-AMERICA APARTMENT COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS
(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, 1997, 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 nine-month period ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. The Company occasionally utilizes
derivative financial instruments as hedges in anticipation of future debt
transactions to manage well-defined interest rate risk or as interest rate
protection that hedges the interest rate risk of the Companys variable rate
debt by locking the effective rate on portions of the outstanding line of credit
(Credit Line).
During the fourth quarter of 1997, the Company amended the Operating Partnership
agreement, retroactive to January 1, 1997, which eliminated the allocation of
certain additional net income from the Company to the Operating Partnership. As
a result of this amendment, minority interest in the Operating Partnership for
the prior year has been restated.
2. Borrowing Transactions
On March 6, 1998 the Company, through one of its subsidiaries, issued $142
million aggregate principal amount of 6.376% Bonds due 2003 (the "Bonds"). The
Bonds are secured by a first priority deed of trust, security agreement and
assignment of rents and leases in respect of the mortgaged properties. The net
proceeds from the sale of the Bonds were applied to the bridge notes payable and
utilized to fund costs of the issuance.
In anticipation of the March 6, 1998 Bond issuance discussed above, the Company
entered into four separate interest rate contracts in 1997 with notional amounts
aggregating $140 million, the effect of which was to lock the interest rate on
$140 million of the Bonds at an average interest rate of 6.62%. On March 6, 1998
the Company realized a $1.4 million loss on the interest rate contracts. The
realized loss resulting from the change in the market value of these contracts
is being amortized into interest expense over the life of the related debt
issuance.
3. Capital Transactions
During March 1998, the Company issued 50,000 shares of common stock and 100,000
umbrella partnership units ("UPREIT" units) to certain executive officers of the
Company at the then current market price of $28.0625 per share and $28.125 per
share, respectively. The Company received approximately $3,583,000 cash and
advanced the employees approximately $632,000 secured by the common stock and
UPREIT units of the Company. The advances bear interest at 5.59% per annum, have
annual principal payments of approximately $126,000 and have been classified as
a reduction to shareholders' equity in the accompanying consolidated balance
sheet.
Additionally in May 1998, the Company issued 60,000 shares of common stock to
certain other officers of the Company at the then current market price of $27.25
per share. The Company received approximately $817,500 cash and advanced the
employees approximately $817,500. The advances bear interest at 7.5% and 8.25%
per annum and are secured by the stock of the Company. The advances have annual
principal payments of approximately $49,050 and have been classified as a
reduction to shareholders' equity in the accompanying consolidated balance
sheet.
In addition, the Company has agreed to pay a bonus to the executive officers for
as long as they remain employed by the Company in an amount equal to the debt
service on the advances from the Company. The advances will become due and
payable and the bonus agreement will terminate if the employees voluntarily
terminate their employment with the Company. The Company has agreed to pay a
bonus to the other officers amounting to a total of $49,050 annually for five
years. The advances will become due and payable if the employees terminate their
employment with the Company.
During May 1998, the Company issued an additional 100,000 shares of common stock
to certain other executive officers of the Company at the then current market
price of $27.25. The Company received approximately $2,316,250 cash and advanced
the employees approximately $408,750 secured by the common stock of the Company.
The advances bear interest at 5.69% per annum, and have been classified as a
reduction to shareholder's equity in the accompanying consolidated balance
sheet.
In a public offering completed June 30, 1998, the company issued 2.0 million
shares of its Series C Cumulative Preferred Stock ("Series C Preferred Stock")
at $25 per share for net proceeds of approximately $48.0 million. The issue
bears a dividend payable quarterly at the annual rate of 9.375%, and is
redeemable after June 30, 2003 at a liquidation preference of $25 per share. The
securities have no stated maturity date and will not be subject to any sinking
fund or other mandatory redemption by the Company. The Series C Preferred Stock
is not convertible into the Company's common stock or any other security of the
Company, and is listed in the New York Stock Exchange under the symbol "MAA
PrC". The Company used the net proceeds to pay down its Credit Line and to
provide funds to acquire and develop additional apartment units.
4. Real Estate Transactions
Property Acquisitions
On February 5, 1998, the Company acquired the 240-unit Walden Run apartment
community located in McDonough, Georgia for $13.4 million in cash funded by
borrowings under the Company's Credit Line.
On February 26, 1998 the Company acquired the 152-unit Abbington Place (formerly
named Van Mark) apartment community located in Huntsville, Alabama for $5.1
million in cash funded borrowings under the Company's Credit Line.
On May 6, 1998, the Company acquired the 200-unit Eagle Ridge apartment
community located in Birmingham, Alabama for $8.4 million less $6.4 million of
assumed debt. The remaining $2.0 million was paid in UPREIT units and cash
funded by the Company's Credit Line.
On May 29, 1998, the Company acquired the 220-unit Georgetown Grove apartment
community located in Savannah, Georgia. The property was purchased for $12.8
million consisting of the assumption of existing debt of $10.5 million and cash
of $2.3 million funded by the Company's Credit Line.
On July 21, 1998, the Company acquired the 1,001-unit L&B Apartment Portfolio
for approximately $38.3 million, which included Courtyards at Campbell and Deer
Run in Dallas, Texas, Highwood in Plano, Texas, and Northwood Place in
Arlington, Texas. The transaction was all cash, which was funded through the
Company's Credit Line.
Property Disposition
On June 9, 1998, the Company sold the 212-unit Redford Park apartment community
located in Conroe, Texas for a total sales price of $5.8 million. For financial
reporting purposes, the transaction involved a gain on disposition of
approximately $422,000 and a loss on early extinguishment of debt of
approximately $455,000, included in the accompanying financial statements as an
extraordinary item, net of minority interest.
5. Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share", effective for financial
statements for periods ending after December 31, 1997. All prior period earnings
per share data has been restated to conform with the provisions of this
statement.
At September 30 1998, 18,815,854 common shares and 2,990,257 operating
partnership units were outstanding, a total of 21,806,111 shares and units.
Additionally, MAAC has outstanding options for 833,337 and 519,400 shares of
common stock at September 30, 1998 and 1997.
6. Reclassification
Certain prior year amounts have been reclassified to conform with 1998
presentation. The reclassifications had no effect on net income available for
common shareholders.
7. Recent Accounting Pronouncements
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information" was issued. This statement requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company intends to comply with this statement in
1998.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activity," was issued effective for years beginning after June 15, 1999. This
new accounting statement is not expected to have a material impact on the
Company's consolidated financial statements. The Company will adopt this
accounting standard in 2000.
8. Subsequent Events
On October 19, 1998, the Company purchased the 204-unit Village of Carrollwood
Apartments in Tampa, Florida for approximately $8 million. The transaction
included a loan assumption of approximately $5.8 million, with a portion of the
equity paid in the form of UPREIT units.
PART I. Financial Information
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three and nine months ended
September 30, 1998 and 1997. 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 owned at September 30, 1998 was 33,009 in
125 apartment communities, compared to 22,085 in 82 communities at September 30,
1997. Through the November 25, 1997 merger with Flournoy Development Company
("FDC"), the Company acquired 30 communities containing 8,641 apartment units
including 950 apartment units under development. The FDC Merger was accounted
for using the purchase method of accounting. Accordingly, the operating results
for these 30 communities are included in the Company's financial statements for
periods subsequent to November 25, 1997.
Average monthly rental per apartment unit increased to $587 at September 30,
1998 from $547 at September 30, 1997. Overall occupancy at September 30, 1998
and 1997 was 94.3% and 95.8%, respectively. For the properties acquired through
the FDC merger, average monthly rental per apartment unit was $623 and average
occupancy was 93.8% at September 30, 1998.
FUNDS FROM OPERATIONS
Funds from operations ("FFO") represents net income (computed in accordance with
GAAP) excluding extraordinary items, minority interest in Operating Partnership
income, gain or loss on disposition of real estate assets, and certain non-cash
items, primarily depreciation and amortization, less preferred stock dividends.
The Company computes FFO in accordance with NAREIT's current definition, which
eliminates amortization of deferred financing costs and depreciation of non-real
estate assets as items added back to net income when computing 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 flows 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 cash flow from
operating activities and 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 $221,000 and $130,000 at September 30, 1998 and 1997, 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 funds from operations computations, as expenses in the calculation
of net income.
For the three months ended September 30, 1998, FFO increased by approximately
$5,300,000 or 50%, when compared to the three months ended September 30, 1997.
The increase was primarily attributable to an approximate $21,691,000 increase
in revenues, which was partially offset by additional expenses mainly associated
with the increase in the number of apartment units owned by the Company.
For the nine months ended September 30, 1998, FFO increased by approximately
$17,037,000 or 55%, when compared to the nine months ended September 30, 1997.
The increase was primarily attributable to an approximate $62,280,000 increase
in revenues, which was partially offset by additional expenses mainly associated
with the increase in the number of apartment units owned by the Company.
Funds from operations (FFO) for the three and nine months ending September 30,
1998 and 1997 are calculated as follows (dollars in thousands):
Three months ending Nine months ending
September 30, September 30,
---------------------- ---------------------
---------- ----------- ---------- ----------
1998 1997 1998 1997
---------- ----------- ---------- ----------
Net income available for common
shareholders $ 3,719 $ 3,278 $ 11,949 $ 9,890
Depreciation and amortization of
real estate assets 11,608 6,739 33,520 19,089
Minority interest 610 620 1,777 1,798
Gain on disposition of properties - - (422) -
Extraordinary items - - 990 -
---------- ----------- ---------- ----------
Funds from Operations $ 15,937 $ 10,637 $ 47,814 $ 30,777
========== =========== ========== ==========
Weighted average shares and units:
Basic 21,803 15,904 21,673 15,199
Diluted 21,842 15,969 21,723 15,262
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues for 1998 increased by approximately $21,691,000 due primarily to
(i) approximately $1,646,000 from the 12 communities acquired in 1997, (ii)
approximately $13,125,000 from the 30 completed communities acquired through the
FDC Merger, (iii) approximately $2,835,000 from the 8 communities acquired in
1998, (iv) approximately $1,584,000 from the communities owned at December 31,
1996, (v) approximately $1,687,000 from the development units completed in 1998
and (vi) approximately $814,000 from management and development income, net.
Property operating expenses for 1998 increased by approximately $7,527,000, due
primarily to (i) approximately $574,000 from the 12 communities acquired in
1997, (ii) approximately $4,673,000 from the 30 completed communities acquired
through the FDC merger, (iii) approximately $1,028,000 from the 8 communities
acquired in 1998, (iv) approximately $677,000 from the communities owned at
December 31, 1996, and (v) approximately $577,000 from the development units
completed in 1998. As a percentage of revenues, operating expenses decreased to
37.5% for the three months ended September 30, 1998 from 39.2% for the same
period last year.
General and administrative expense increased by approximately $1,732,000 for the
three months ended September 30, 1998. The increase in cost is primarily due to
the extension of standard company benefits ranging from 401k and ESOP to
incentive bonuses and comprehensive insurance benefits for twice as many
employee associates as we had formerly, before the Flournoy merger. The Company
has also added some new functions and expanded others to improve the management
and quality of our business. These additions are a one-time step up to increase
productivity for continued growth.
Depreciation and amortization expense increased by approximately $5,297,000
primarily due to (i) approximately $408,000 from the 12 communities acquired in
1997, (ii) approximately $2,831,000 from the 30 completed communities acquired
through the FDC Merger, (iii) approximately $451,000 from the 8 communities
acquired in 1998, (iv) approximately $1,331,000 from additional capital
expenditures on communities owned at December 31, 1996, and (v) approximately
$276,000 from development units completed during the 1998. Amortization of costs
in excess of fair value of net assets acquired for the three months ended
September 30, 1998 was approximately $365,000.
Interest expense increased approximately $4,456,000 during the three months
ended September 30, 1998 due primarily to property acquisitions and new
financing transactions related to the FDC merger.
As a result of the foregoing, income before minority interest in operating
partnership income and extraordinary item for the three months ended September
30, 1998 increased approximately $2,679,000 or 53% over the same period a year
earlier.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues for 1998 increased by approximately $62,280,000, due primarily to
(i) approximately $9,514,000 from the 12 communities acquired in 1997, (ii)
approximately $39,911,000 from the 30 completed communities acquired through the
FDC Merger, (iii) approximately $4,241,000 from the 8 communities acquired in
1998, (iv) approximately $3,616,000 from the communities owned at December 31,
1996, (v) approximately $3,537,000 from the development units completed in 1998
and (vi) approximately $1,461,000 from management and development income, net.
Property operating expenses for 1998 increased by approximately $21,855,000, due
primarily to (i) approximately $3,386,000 from the 12 communities acquired in
1997, (ii) approximately $14,141,000 from the 30 completed communities acquired
through the FDC merger, (iii) approximately $1,538,000 from the 8 communities
acquired in 1998, (iv) approximately $1,378,000 from the communities owned at
December 31, 1996, and (v) approximately $1,412,000 from the development units
completed in 1998. As a percentage of revenues, operating expenses decreased to
36.9% for the nine months ended September 30, 1998 from 38.1% for the same
period last year.
General and administrative expense increased by approximately $3,709,000 for the
nine months ended September 30, 1998. The increase in cost is primarily due to
the extension of standard company benefits ranging from 401k and ESOP to
incentive bonuses and comprehensive insurance benefits for twice as many
employee associates as we had formerly, before the Flournoy merger. The Company
has also added some new functions and expanded others to improve the management
and quality of our business. These additions are a one-time step up to increase
productivity for continued growth.
Depreciation and amortization expense increased by approximately $15,675,000
primarily due to (i) approximately $2,205,000 from the 12 communities acquired
in 1997, (ii) approximately $9,050,000 from the 30 completed communities
acquired through the FDC Merger, (iii) approximately $766,000 from the 8
communities acquired in 1998, (iv) approximately $2,925,000 from additional
capital expenditures on communities owned at December 31, 1996, and (v)
approximately $729,000 from development units completed during the 1998.
Amortization of costs in excess of fair value of net assets acquired for the
nine months ended September 30, 1998 was approximately $1,096,000.
Interest expense increased approximately $14,023,000 during the nine months
ended September 30, 1998 due primarily to property acquisitions and new
financing transactions related to the FDC merger.
The gain on disposition of assets for the nine months ended September 30, 1998,
is related to the sale of Redford Park Apartments, which was offset by a loss on
early extinguishment of the related debt. For the nine months ended September
30, 1998 the Company recorded a total extraordinary loss of approximately
$990,000 on the early extinguishment of debt, net of minority interest, related
primarily to repayment of the mortgage for Redford Park Apartments and certain
other debt.
As a result of the foregoing, income before minority interest in operating
partnership income and extraordinary item for the nine months ended September
30, 1998 increased approximately $7,440,000 or 49% over the same period a year
earlier.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased from approximately
$36,906,000 for the nine months ended September 30, 1997 to approximately
$61,087,000 for the nine months ended September 30, 1998. The increase in net
cash flow was primarily related to growth in net income and depreciation and
amortization due to the FDC merger and other property acquisitions.
Net cash used in investing activities increased from approximately $96,588,000
for the nine months ended September 30, 1997 to approximately $145,776,000 for
the nine months ended September 30, 1998. The increase was primarily related to
an additional $60,943,000 in spending on development and construction of
apartment units, as compared to the same period last year, due to the increased
capacity and activity gained with the FDC merger. The Company currently has
under construction or in initial lease-up 9 new communities and additions to 7
existing communities that will contain an aggregate of 3,819 units, of which
1,240 units have been completed and are in lease-up.
As of September 30, 1998, the Company's communities in various stages of
development and lease-up are summarized as follows ($'s in 000's):
Total Units Budgeted Costs to
Property Location Units Compl Cost Date
- ---------------------- ---------------- ----- ----- ------- -------
Completed developments:
Paddock Club III Jacksonville, FL 120 120 $6,347 $6,347
Lincoln on Green II Memphis, TN 234 234 13,890 13,890
Paddock Club Mandarin, FL 288 288 16,450 16,450
Enclave Whisperwood Columbus, GA 154 154 8,681 8,431
Paddock Club II Huntsville, AL 192 192 10,875 10,825
Completing, leasing:
Terraces at Fieldstone Conyers, GA 316 188 17,492 15,744
Paddock Club Gainesville, FL 264 64 17,766 12,121
Under Construction:
Reserve at Dexter Lake Memphis, TN 252 - 16,867 10,644
Terraces at T. Lake II Cherokee, GA 238 - 14,252 6,684
Paddock Club II Brandon, FL 132 - 8,227 2,957
Paddock Club Montgomery, AL 208 - 13,670 4,108
Paddock Club Panama City, FL 254 - 15,509 5,624
Paddock Club Murfreesboro, TN 240 - 15,253 1,532
Pre-development:
St. Augustine at the
Lake II Jacksonville, FL 124 - 7,226 391
Grand View Nashville, TN 433 - 33,328 3,137
Grand Reserve Lexington, KY 370 - 29,957 2,415
- --------------------------------------------------------------------------------
3,819 1,240 $245,790 $121,300
================================================================================
Capital improvements to existing properties totaled approximately $19,359,000
for the nine months ended September 30, 1998, compared to approximately
$14,207,000 for the same period last year. The increase was mainly due to the
additional units acquired through the FDC merger and other acquisitions.
Recurring capital expenditures for the nine months ended September 30, 1998
averaged 24 cents per share, compared to 39 cents per share for the same period
in 1997 and compared to 1997's full year of 47 cents per share.
Actual capital expenditures for development of communities, acquisition of
assets and community improvements for 1998 are summarized below:
Actual
(in 000's) To Date
----------
New apartment development $70,586
Property acquisitions 78,597
Recurring capital at stabilized properties 5,124
Revenue enhancing projects at stabilized properties 4,907
Capital improvements to pre-stabilized properties
(includes $3,940,000 for former FDC properties)
8,075
Corporate additions and improvements 1,253
----------
$168,542
==========
Net cash provided by financing activities increased from approximately
$61,411,000 during the nine months ended September 30, 1997 to approximately
$81,416,000 for the nine months ended September 30, 1998. On March 6, 1998 the
Partnership issued $142,000,000 aggregate principal amount of 6.376% Bonds due
2003 (the Bonds). The net proceeds from the sale of the Bonds were applied to
the bridge notes payable and utilized to fund costs of the offering.
Additionally, the Company refinanced approximately $29,100,000 of various rate
notes payable with a new $36,200,000 seven year amortizing note payable at 7.0%,
and acquired a new short-term note payable for $25,000,000 at 6.4% which was
used to pay down the Credit Line. The Company also refunded $4,760,000 of bonds
secured by Sterling Ridge Apartments. The new thirty year bonds have a variable
interest rate (currently 5.25%) compared to the previous fixed rate of 8.75%.
The Company received approximately $17,330,000 of additional funding from the
Credit Line during the nine months ended September 30, 1998 as compared to the
same period last year, which was primarily used to fund the additional
development and construction.
During the nine months ended September 30, 1998, the Company received total net
proceeds of approximately $56,918,000 from equity transactions, comprised of an
issuance of its Series C Preferred shares on June 30, 1998 (approximately
$47,974,000) and issuance of common shares and units (approximately $8,944,000),
a decrease from the proceeds of approximately $66,718,000 from issuance of
common shares and units during the nine months ended September 30, 1997.
Additionally, total distributions for dividends on common shares, units and
preferred shares increased to approximately $43,088,000 for the nine months
ended September 30, 1998, from approximately $27,685,000, primarily related to
i) the additional common shares and units outstanding related to the FDC merger,
ii) an increase in dividends declared on common shares from $.535 per share to
$.55 per share beginning in the third quarter of 1997, and iii) the additional
Series B and Series C Cumulative Preferred shares outstanding during the nine
months ended September 30, 1998.
At September 30, 1998, the Company had approximately $103,619,000 outstanding on
the Credit Line and approximately $160,741,000 (including the Credit Line) of
floating rate debt at an average interest rate of 6.3%; all other debt was fixed
rate term debt at an average interest rate of 7.3%. The weighted average
interest rate and weighted average maturity at September 30, 1998 for the
approximately $722,948,000 of notes payable were 7.1% and 10.8 years,
respectively, as compared to 7.8% and 8.0 years at September 30, 1997. In March
1998, the Company increased its credit limit under the Credit Line from
$110,000,000 to $200,000,000. The Company expects to use the Credit Line for
future acquisitions, development, and to provide letters of credit as credit
enhancements for tax-exempt bonds. The Credit Line is secured and is subject to
borrowing base calculations that effectively reduce the maximum amount that may
be borrowed under the Credit Line to approximately $176,372,000 as of September
30, 1998.
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 expects to meet its long term liquidity requirements, such as
scheduled mortgage debt maturities, property developments and acquisitions,
expansions and non-recurring capital expenditures, through long and medium-term
collateralized and uncollateralized fixed rate borrowings, issuance of debt or
additional equity securities in the Company, and the Credit Line.
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.
YEAR 2000
The Company has conducted a review of its computer operating systems and has
identified those areas that could be affected by the "Year 2000" issue and has
developed a plan to resolve this issue. The Company believes that by modifying
certain existing hardware and software and, in other cases, converting to new
application systems, the Year 2000 problem can be resolved without significant
operational difficulties. The Company has initiated formal communications with
all of its significant suppliers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. Management has assessed the Year 2000 compliance
expense and believe that the related potential effect on the Company's business,
financial condition and results of operations should be immaterial. The Company
is expensing all costs associated with the Year 2000 issue as the costs are
incurred.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
The 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 the plans and
objectives of management for future operations, including plans and objectives
relating to capital expenditures and rehabilitation costs on the apartment
communities. 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.
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 form:
(27.1) Financial Data Schedule for the period ended 9/30/98
(27.2) Financial Data Schedule for the period ended 9/30/97
(b) Reports on Form 8-K
Date of
Form Events Reported Financial Statements Report Date Filed
- ----- --------------------------- -------------------- -------- ----------
8-K Purchase consummation
of Village at Carrollwood Not applicable. 10-19-98 11-02-98
Apartments.
8-K(A)Filing of audited statements Historical Summary 7-20-98 9-29-98
related to purchase of of Gross Revenues
Deer Run, Courtyards at and Direct Operating
Campbell, Highwood, Expenses.
and Northwood Place
Apartments.
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 14, 1998 /s/ Simon R.C. Wadsworth
----------------------- --------------------------------
Simon R.C. Wadsworth
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)