MAA

Business Context and Reporting Period

Company: Mid-America Apartment Communities, Inc. (MAA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: MAA is a self-administered and self-managed Real Estate Investment Trust (REIT) focused on acquiring, owning, and operating apartment communities in the Sunbelt region of the United States. As of December 31, 2009, the company owned 100% of 144 properties (42,684 units) and held 33.33% ownership interests in two joint ventures containing 920 additional units. The portfolio spans 13 states, with approximately 76% of units located in Georgia, Florida, Tennessee, and Texas.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by approximately $8.5 million (2.3%) compared to 2008. This growth was driven by revenues from properties acquired in 2009 and 2008, as well as development communities. However, this was partially offset by a 1.2% decrease in revenues from the "same store" portfolio (properties held and stabilized for at least 12 months), primarily due to a 2.2% decrease in average effective rent per unit.
• Profitability: Net income attributable to MAA increased by approximately $7.0 million. This improvement was largely due to a decrease in interest expense of approximately $4.9 million, as the average annual borrowing cost dropped from 4.9% in 2008 to 4.3% in 2009.
• Portfolio Activity:
  • Acquisitions: Acquired four 100% owned properties (1,550 units) and one joint venture property (294 units) in 2009.
  • Dispositions: Sold three 100% owned properties (840 units) in 2009, generating approximately $4.6 million in gains.
• Occupancy: Overall occupancy for 100% owned units was 95.2% at year-end 2009, an increase from 93.4% in 2008.

Guidance, Outlook, and Risks

Management Commentary & Outlook: Management noted that rental demand was weaker in 2009 due to job losses, though relative job losses in their markets were less than the national average. They anticipate that same-store revenue declines may continue into 2010 due to lower rents on leases signed in late 2009. However, they expect revenue growth to resume as the economy improves and job growth returns, potentially by the middle to latter part of 2010. Management expects reduced availability of financing for new construction to limit new supply, favoring rental demand.

Key Risks and Contingencies:

• Capital Market Dependence: Approximately 93% of outstanding debt is provided by or credit-enhanced by Fannie Mae (FNMA) and Freddie Mac, which are under U.S. government conservatorship. Changes in government policy or the financial condition of these agencies could impact liquidity and interest costs.
• Interest Rate Risk: While 81% of debt is fixed or capped via swaps, the company remains exposed to variable rates on the remaining portion. Volatility in the spread between LIBOR and agency rates could impact interest expense.
• Economic Conditions: Continued economic slowdown, job losses, and high unemployment could lead to increased tenant defaults and reduced ability to lease properties at favorable rates.
• Insurance and Catastrophes: Significant portions of assets are in areas exposed to windstorms and seismic activity. Catastrophic losses could exceed insurance coverage, potentially breaching loan covenants.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, noting that various tranches of FNMA facilities mature from 2011 through 2018, requiring refinancing in a potentially volatile market.
• Interest Rate Hedging: Review the effectiveness of interest rate swaps and caps, specifically the exposure to counterparty risk (JP Morgan Chase, Royal Bank of Canada, Deutsche Bank) and the potential for hedge ineffectiveness due to market volatility.
• Same-Store Performance: Monitor the trend of same-store effective rent and occupancy, as these metrics declined in 2009 and are expected to face headwinds in early 2010.
• REIT Compliance: Confirm that distributions continue to meet the 90% taxable income requirement to maintain REIT status and avoid corporate taxation.
• Joint Venture Exposure: Assess the performance and capital requirements of the two joint ventures (Fund I and Fund II), where MAA holds a 33.33% interest.