MAA

Business Context and Reporting Period

Company: Mid-America Apartment Communities, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2005
Business Overview: The Company owns and operates 130 multifamily apartment communities across 12 states, comprising approximately 37,365 units. Operations are organized as a single reportable segment focused on the acquisition and operation of multifamily communities.

Key Financial Metrics

All figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by approximately $6.8 million (10.3%) for the three months and $12.8 million (9.7%) for the six months ended June 30, 2005, compared to 2004. Growth was driven by acquisitions in 2004 and 2005 and organic revenue increases in same-store properties.
• Profitability: Net income available to common shareholders rose significantly to $4.56 million for the quarter and $5.17 million for the six months, compared to $1.29 million and $2.64 million in the prior year periods. This improvement was largely due to a $3.0 million gain on disposition within unconsolidated entities and a $1.7 million incentive fee from a joint venture.
• Interest Expense: Interest expense increased by $2.4 million for the quarter and $3.8 million for the six months due to higher debt balances ($1.09 billion vs. $1.02 billion) and rising average interest rates (5.3% vs. 4.8%).
• Discontinued Operations: The Company sold the Eastview apartments in April 2005, recording impairment charges of $149,000 in the second quarter. The Island Retreat apartments were sold in late 2004, resulting in a gain recognized in the prior year.

Guidance, Outlook, and Risks

• Market Outlook: Management notes that property performance has been pressured by supply/demand imbalances and lower job growth. However, indications of stronger job growth suggest an improving economic environment. The Company expects increasing interest rates to eventually reduce new construction and increase apartment demand.
• Liquidity: The Company maintains $945 million in available borrowing capacity across secured credit facilities (primarily FNMA). Net cash from operations exceeded capital improvements and distributions by approximately $9.3 million for the six months ended June 30, 2005.
• Debt Management: Approximately 71% of debt is credit-enhanced by FNMA. The Company utilizes interest rate swaps ($559 million notional) and caps ($23 million notional) to manage variable rate risk.
• Accounting Changes: The 8.625% Series G Preferred Stock was reclassified from equity to a liability (Notes Payable) in May 2005 following a notice of redemption, requiring subsequent dividends to be treated as interest expense.
• Risks: Key risks include interest rate fluctuations, potential overbuilding in metropolitan markets, and reliance on the creditworthiness of FNMA for a significant portion of debt financing.

Investor Verification Checklist

• Debt Concentration: Verify the stability of the FNMA credit enhancement covering ~71% of the debt portfolio and the impact of potential market inefficiencies in the FNMA DMBS market.
• One-Time Gains: Assess the sustainability of earnings by excluding the $4.8 million in gains and fees from the joint venture disposition (CH/Realty) when evaluating core operating performance.
• Interest Rate Exposure: Review the effectiveness of the $559 million in interest rate swaps and the maturity profile of the $1.09 billion debt load, noting the average rate increase to 5.3%.
• Preferred Stock Liability: Confirm the impact of the Series G Preferred Stock reclassification on leverage ratios and interest expense coverage.
• Capital Expenditures: Monitor the trend in capital improvements, which decreased to $11.0 million in the first half of 2005 compared to $16.9 million in 2004 (partially due to lower casualty-related spending).